The EU is prosperous, technologically advanced and has a well-educated but aging workforce. Europe is the second largest economy after China, coming in ahead of the U.S., and its domestic market is providing a powerful launching pad for world-changing technologies and companies. However, the digital world seems to gravitate towards a Chinese and an American pole, where Europe is stuck in the middle. On the one hand, big U.S. companies like Google, Apple, Facebook, Amazon, or Microsoft dominate in Europe. On the other hand, China is challenging Europe’s industrial strength and innovative industries. Europe could be potentially the biggest loser of a successful strategy „China 2025“, when its leadership in research and development of high technology is challenged.Accordingly, a competitive Europe has to address how prosperity for both citizens and companies can be produced to an extent that companies operating in the EU are able to compete successfully in the global digital economy while supporting high living standards for the average European: a global digital player and a better place to work and live.
What are necessary steps to become competitive? Three major issues which hinder European excellence have to be addressed: Digital infrastructure, a Digital Single Market and a digital educated mindset.
Improving the Backbone: Investing in Digital Infrastructure
A big bottleneck for a more competitive Europe is the slow expansion of digital infrastructure in the EU. Politically intended was a fast broadband coverage (more than 30 mega- bits per second) for all Europeans by 2020. But this seems to be out of reach, because in 2017, only 79% of all households had access to such connections (up from 55.8% in 2013).
In the EU, 4G mobile is almost universal at 98%. However, rural areas remain challenging, as 8% of homes are not covered by any fixed network, and 53% are not covered by any NGA technology (VDSL, Cable Docsis 3.0 and FTTP).Upgrading the digital infrastructure is an expensive endeavour and depending on the time horizon and the planned investments, their costs often reach three billion figures. The European Commission estimated that EUR 515 billion will be invested over ten years to achieve a European Gigabit Society by 2025.
Increasing data volumes, more cloud storage capacities and a demand for real-time communication between physical and virtual „things“ as a precondition for Industry 4.0 amplify the need for an improved digital infrastructure. Today’s European capacities are insufficient to meet increasing demand by European industries, innovators and scientists who process their data outside the EU because their needs are not matched by the computation time or computer performance available in the EU. Tim Hoettges, CEO of Telekom, recently stated that just five percent of German data are hosted by SAP or Telekom in Germany. The other 95 percent are with the hyperscaler Amazon, Microsoft or Google.If data is a prerequisite for machine learning and AI, EU has to find better ways to reduce this disproportion. However, the EU has none of the 10 most powerful supercomputers worldwide and only 4 of the top 20 supercomputers. This situation has constantly deteriorated since 2012, when the EU possessed 4 of the top 10 supercomputers. Moreover, the best supercomputers in Europe are supplied by non-EU vendors and are based on non-EU technology. At the moment, EU industry provides about 5% of supercomputing resources worldwide, but consumes one third of them.
Digital infrastructure becomes critical to achieve the goal of a Gigabit Society in 2025.Europe has to improve significantly in order to keep up with China and the U.S..
For different scenarios see Bertelsmann Stiftung. 2016.China 2030. Szenarien und Strategien für Deutschland. However, in a Bruegel study Alicia Garcia Herrero sees a paradigm shift in terms of U.S.-China economic relations which could potentially benefit the European Union, http://bruegel.org/2018/08/us-china-trade-war-whats-in-it-for-europe/, see also: Alicia Garcia Herrero and Jianwei Xu, How Big Is China’s Digital Economy?, Working Paper, 2018.
European Commission. Commission Staff Working Document SWD (2016) 300 final. For yearly improvements the EU’s Digital Economy and Society Index (DESI) indexes relevant indicators on Europe’s digital performance and tracks the evolution of EU member states in digital competitiveness, see: https://ec.europa.eu/digital-single-market/en/desi.Accessed 18.12.2018.
Tim Höttgesat the Digital Summit of the German Federal Government 2018, Nuremberg on 4.12.2018.
 European Parliamentary Research Service. 2017. Developing supercomputers in Europe. Brussels.
In 2016, the European Commission updated and extended its digital infrastructure goals:
— By 2025, all major socio-economic drivers (such as schools, transport hubs, the main providers of public services or highly digitalised companies) should have access to connectivity of at least 1 gigabit/second.
— all urban areas and all major terrestrial transport paths should have uninterrupted 5G coverage by 2025.
— all European households should have access to internet connectivity of at least 100 Mbit/s, which is upgradable to gigabit speed, see: European Commission (2016). Connectivity for a Competitive Digital Single Market – Towards a European Gigabit Society. Brussels.
The world is in a New Moon Race. Looking at the digital economy, today’s world is organized around two centers of gravity: the U.S. and China. They are home to nine of the top 10, and 18 of the top 20 internet companies as measured by market capitalization. All the leading companies in online search, social media, and e-commerce are based there. But as the digital transformation continues, other industries like automotive, manufacturing, financial services or health care are following, new technological developments in AI, IoT or Big Data spark an even faster and widespread disruption.
In an age of a growing digital economy, Europe’s prosperity is created, not inherited. The future of Europe depends on a competitive mindset and a willingness to gain advantage against the world’s best competitors in the U.S. and China. Hence, Europe’s competitiveness depends on the capacity of its society, politics and economy to innovate and upgrade. As European companies and governments consider their own stakes in the game, a critical question remains: Are Europeans defying the two centers of gravity?
Technology advances quickly and in order to measure future potential, one has to look at innovation and start-up ecosystems, investment in new technologies or market capitalization in the digital economy between in the U.S., China and Europe.
Advanced Technology: Put a Stamp on Artificial Intelligence
Developments in Artificial Intelligence and robotics are generally recognized as a main driver of future growth, competitiveness and job creation by increasing productivity and efficiency, and lowering costs. But AI also triggers far-reaching societal and economic changes, which will transform all aspects of life from employment, the social contract to warfare. The impact of AI leadership has been summed up by Russia’s President Vladimir Putin: „whoever becomes the leader in this sphere will become the ruler of the world “.
In Artificial Intelligence, the U.S. and China are in an arms race for global leadership. Rapid improvements in information storage capacity, high computing power, and considerable advancements of Artificial Intelligence technology in end-use industries are driving economic growth. The global artificial intelligence market size was valued at 641.9 million USD in 2017 on the basis of its direct revenue sources and at 5,970 million USD in 2017 on the basis on AI based gross value addition (GVA) prognoses. The market is projected to reach 35,870 million USD by 2025 by its direct revenue sources, growing at a CAGR of 57.2% from 2018 to 2025.
While taking an either more state-driven (China) or a more private-sector-driven (U.S.) approach, in their entrepreneurial frenzy China and the U.S. are outshining other countries. In 2017, China’s artificial intelligence start-ups took 48% of all dollars going to AI start-ups globally in, more than that of the U.S. (38%). Both combined made up for almost 90 percent.
In July 2017, China outlined a bold multi-billion national strategic plan to catch up with global AI research by 2020 and to deliver major breakthroughs and become the world leader by 2030. On the other side however, the U.S. still leads in both the total number of AI start-ups and total funding overall. Both countries can draw from a wealth of data and opportunities for companies to scale quickly.
For some, Europe’s role in this arms race is defined as a colony in the American tech empire.Indeed, Europe still lacks a comparable AI ecosystem. Even the European Commission admits Europe is behind in private investments in AI: „2.4-3.2 billion EUR in 2016, compared to 6.5-9.7 billion EUR in Asia and 12.1-18.6 billion EUR in North America“.
A lack of a strategic plan at EU level, a low level of public and external investment, a cautious adoption from companies and the general public and no EU-wide liability rules on AI and robotics are credited for the underperformance.This has led European countries to lay down AI specific and comprehensive AI strategies (e.g. the UK, France), integrating AI technologies within national technology or digital roadmaps (e.g. Denmark) or developing a national AI R&D or Work strategy (e.g. Finland).
In April 2018, 25 EU countries signed a declaration to join forces and to engage in a collective „European approach” to AI. This push includes funding for research to harvest the potential of artificial intelligence.Under the research programme „Horizon 2020” public funding will be 1.5 billion EUR for the period 2018-2020 and adds up to a combined public and private investment in the same period of 20 billion EUR.
German Minister for Economy, Peter Altmaier, has called for a „European Airbus for AI“ as an IPCI (Important Project for Common Interest), which fits Germany’s AI Strategy to create a joint French-German AI research center.In such an endeavour, European institutions will play a key role in coordinating, „filling in policy gaps that cannot be addressed solely at the national level and support the widespread development of competitive AI ecosystems throughout Europe” as well as aim for „a common, internationally recognised ethical and legal framework for the design, production and use of AI, robotics, and their increasingly autonomous systems”.Protecting the privacy of the user would be a distinct different approach as the commercial quest for data and analytics of the American and Chinese ones.
It seems Europe seizes the opportunity by fostering a continent-wide collaboration to put its distinct stamp on AI as a different path than the U.S. or China. Or in the words of Emmanuel Macron: „to be an acting part of this AI revolution “.
Innovation: Flourishing a Digital Start Up Ecosystem
Such an aggressive competition for innovation and new technologies spills over in the venture capital market and start-up ecosystem. The U.S. and China have the most active digital-investment ecosystems in the world. In fact, the so-called „Global Unicorn Club “, private companies in the tech sector whose value exceeds 1 billion USD, speak predominantly American-English or Chinese-Mandarin.
For the 274 companies founded in 2003 or later that have reached unicorn status, half are in the U.S. and China with its 69 has more than twice as many unicorns as Europe with 33.More striking, American companies in the Silicon Valley tend to scoop up the promising digital start-ups from Europe. From 2011 to 2017, the GAFAM companieshave acquired more than 65 leading-edge European technology companies like Skype and AI pioneer DeepMind. And no wonder, in most cases the size of the European operation shrank after the acquisition.
In China, the „Great Firewall“ of legislative actions and technologies hinders competition and helps the three Internet giants to nurture a homegrown digital ecosystem that is now spreading beyond them. Baidu, Alibaba, and Tencenthave been developing a multi-industry digital ecosystem that touches almost every aspect of consumers’ lives. How important Chinese digital companies are for the venture capital market are, becomes obvious by looking at the numbers. In 2016, Baidu, Alibaba, and Tencent (BAT) provided 42 percent of all venture-capital investment in China. They have a far more prominent role than Amazon, Facebook, Google, and Netflix that together contributed only 5 percent to the U.S. venture-capital investment in that same year.
In contrast, European companies make up about 11% of the total number in the „Global Unicorn Club “, that is only 30 companies. These European start-ups have an aggregate valuation of about 64 billion USD, and operate across industries including fintech, e-commerce, or healthcare.Europe’s tech community seem to be still „Balkanized“ along national borders, while connections between local venture capitalists and start-up founders across the continent is needed if Europe ever wants to play in the big leagues.The lack of a competitive Venture Capital market is described by the most recent numbers of 2017. From the 57 start-ups which became unicorns in 2017, 32 are from the U.S., 18 from China and just four from Europe, interestingly from UK.The lack of appropriate and swift funding of new ideas to make them a product or a company is a major weakness of Europe.
Market Share: Competing in Platform Economy and E-Commerce
Even in a digital world, size matters. In a digital economy, Napoleon Bonaparte’s old saying becomes reality: „China is a sleeping lion. Let her sleep, for when she wakes she will shake the world.” In e-commerce, China is the world’s largest e-commerce market and accounts already for more than 40 percent of the value of worldwide transactions compared to less than 1 percent only about a decade ago. The current value of China’s e-commerce transactions is estimated to be larger than in France, Germany, Japan, the United Kingdom, and the United States combined. One explanation for China’s dominance is the explosion in use of mobile payments, which grew from just 25 percent in 2013 to 68 percent in 2016. In 2016, the value of mobile payments related to individuals’ consumption was 790 billion USD, 11 times that of the United States.
Two factors drive this quick digital transformation of the Chinese Dragon. Firstly, China is benefiting from a large domestic market to achieve scale and to surround itself with rich ecosystems of start-ups, suppliers and customers. In 2016, 731 Million of China’s 1.4 billion citizens use the internet, more than the European Union and the United States combined. Beyond scale, it is the enthusiasm for digital tools among China’s much younger consumer base, which accelerates growth and quick adoption.
Such an imbalance can also be found in the platform economy. According to the Center for Global Enterprise, the Asia-Pacific has seen the creation of 82 digital platforms with close to 350,000 employees and combined market capitalization of 930 billion USD. Europe is trailing behind both the United States and the Asia-Pacific region in encouraging successful platform enterprises. Only 27 digital platforms were created in Europe, with 109,000 employees and a combined market capitalization of 181 billion USD. However, Europe and China do not come close to the combined market capitalization of U.S.-based digital platforms – about 3 trillion USD.
Market Capitalization: Financial Strength in Tech
From 2010 to 2017, the market capitalization of GAFAM companies (Google/Alphabet, Amazon, Facebook, Apple, and Microsoft) increased by 2.6 trillion USD. In contrast, the value of the 28 non-GAFAM companies that make up the Dow Jones Industrial Average rose 2.1 trillion USD. In China, Alibaba and Tencent are among the 10 most valuable companies in the world and, along with Baidu, are collectively worth more than 1 trillion USD.In today’s digital economy the U.S. and China are the two centers of gravity, where their tech giants dominate the markets. Out of the top 10 companies by market capitalization nine are based in these two countries.
There is another aspect aside from duality between the U.S. and China driven by the winner-take-all mentality of digital companies in the U.S. and China. Looking at the 20 world’s largest tech giants, there is a divide between top-tier companies and those further down the ladder. The top companies on the list like Apple, Alibaba, Alphabet, Amazon, Microsoft and Tencent are all above the 450 billion USD mark and account for over 80% of the total value of Top 20 tech companies. Not a single company hoovers between 200 and 450 billion USD. This underpins the divide. First of all, digitalization is driven by American or Chinese companies, and secondly, for tech newcomers it is pretty hard to vault into the upper echelon of the market. The only European company in the Top 20 ranks is German based SAP.
Part 2 of the article deals with European Strategies to gain better traction in the competitive race.
The article is part of proceedings of a conference in Singapore, summer 2018.
Happy new year? Germans kicked off their new year with a widespread dissemination of hacked data belonging to celebrities and prominent political figures including chancellor Angela Merkel. The stolen personal information, spreading via Twitter, included photos, chat logs, cellphone numbers, home addresses, emails, and more. The level of frequency and sophistication of cyber-attacks, from alleged Russian subversion of the US 2016 presidential campaign, to Wannacry or Petya, is growing and has an increasing impact on politics, societies and economies. Despite a growing amount of academic and practitioner’s attention, the question remains to how these kinds of activities can effectively be deterred.
Deterrence. Can it still work?
Incepting an idea is powerful. Since the end of the Second World War, in the midst of the Cold War dynamics and beyond the fall of the Soviet Empire, deterrence was seen as an appropriate strategy to prevent adversaries from taking specific actions, because the potential attacker’s would be discouraged by the other’s defense, and would be restrained by the fear of retaliation. Security was incepted and resting in the minds of the potential opponent. But does deterrence can still handle the nuances of the cyber space and the digital age?
At least, three aspects challenge the deterrence strategy.
Secondly, these state and non-state actors in cyberspace provide an asymmetric environment with unique characteristics, where concepts such as geography and sovereignty, military sphere and civilian sphere become blurry.
Number of compromised data records in selected data breaches as of Mid 2018 (in millions)
Finally, given a diverse landscape of (potential) adversaries and a very complex threat assessment, classical deterrence requirements such as defined interests and drawn redlines are under constant scrutiny. How to proceed against private agents but presumably state-sponsored? This leads to shifts in security fundamentals. In fact, deterrence seeks at its core to preserve the „status quo“ by persuading adversaries not to do something. However, in a cyber age insidious state or non-state actors continue to leverage all facets of the cyberspace in dynamic, proactive fashion to achieve a fundamental shift in global power toward their advantage.
Given the disparate actor and threat environment, where private and public spheres mingle, sovereignty and domains become blurry, democracies have to innovated their strategic thinking when it comes to cyber deterrence and think bigger. A more holistic approach is needed, which recognizes cyberspace as a strategic environment with distinct dynamics. Three dimensions come to mind.
Moreover, a comprehensive approach of cyber security emphasizing resilience will include private and public actors in unique way. In most democracies the private sector owns infrastructure and data, has the biggest cross-national interdependence and is conceptional better equipped for the cyber age. Building resilience and focusing on the cyber ecosystem is part of a deterrence by denial, which includes capacity building, shared incident reporting and response, expanding quantity and quality of digitally literate people, technological research and development. Hence, collaboration has to be expanded and partnerships with the private sector strengthened.
Old habits die hard, and outdated thinking harder still. Deterrence in a cyber age means an operational environment and strategy of constant action, permanent contact and ongoing contests with adversaries. Hence, the global digital ecosystem demands not just a pure military response. Recent attacks like in Germany proved a more holistic, even international, approach is needed including a range of political, social, economic, technological and legal responses. Security is achieved through imposed norms, clear expectations of state behavior, cooperation with non-state-actors, on an international level, but also a cyber initiative mindset. Deterrence, yes but different.
Der Artikel erscheint in den Proceedings zu einer Cybersecurity-Konferenz in Canberra, Sommer 2018.