Building European software champions – why should we all care?
Much has been said recently about reducing dependency on established tech giants, whether US or other non-European, but I believe the primary reason to consider investing in home-grown European technology is productivity growth, and the technological drivers of that productivity growth. Put simply, if we do not find new ways for the region’s workforce to drive economic growth, it will be necessary to further increase public debt, cut social services, or both to continue providing the level of public services citizens expect.
European demographics complicate this task. One estimate says working-age populations are projected to decline in 22 out of 27 European Union countries. So, how can growth be achieved with a shrinking workforce? An obvious answer is software, because as we have seen with automation and more recently artificial intelligence (AI), software has been the stand-out productivity driver of a generation, with no let-up in sight. In a recent example, Stephan Schlauss, global head of manufacturing at Siemens, said that integrating AI-enabled robots into their production lines reduced automation costs by 90%. This use of software reduced the cost of a process enabling the same or better output at less cost.
Home grown software champions are strategically important
So, if software as the stand-out productivity driver is established, do we need to care about whether it’s European or not? My view is that building European software champions has now taken on even more significance and every actor, political and private has an explicit role to play in our developing this industry in Europe. Given the economic landscape, the backdrop of an ageing population plus geopolitical instability, Europe needs its own technology solutions to maintain the region’s economic independence. It’s our home-grown talent that will drive productivity and competitive advantage that stimulates European growth. Some are saying we are better off focusing efforts elsewhere, as we’re too far behind the US and China. I disagree. I would remind critics of Europe’s decision to build Airbus in response to the need for an alternative to Boeing. A collective decision was made to define this as a strategic priority for the region, despite all the risks it entailed. As the Airbus example shows, we have been here before, and we made it happen.
It will not be straightforward to create software champions with the same global standing of our big-name European pharma companies, for example, but as a region we have actively chosen to invest in these entities in the same way as we consider life sciences, defence, automotive and aerospace as crucial to our economic security.
We should also not forget this region’s strengths. I am reminded of Michael Porter’s book ‘The Competitive Advantage of Nations’. We have a highly educated workforce, freedom of movement, attractive locations to work, a worldclass technology infrastructure and networks, and a formidable backbone of worldclass universities. These are all ingredients to build a local software champion, but collectively we must agree (and act consequentially) that our software industry is strategically vital to our long-term economic stability.
If we are committed to addressing this question, we face several challenges. The first is educating Europeans on the valuable contribution of our software and technology industry to our productivity and growth. This will help to foster a different mindset in supporting and investing in European vendors. It could start with a different approach to technology purchasing. Take public sector procurement, where quite often, purchase decisions are decided on time, cost and quality. This leads buyers down a certain path, not necessarily one where the European alternative is considered, or preferred.
The argument against this approach is that customers should be able to choose the product that best fits their requirements at the time. However, this is applying yesterday’s policy to today’s context. ‘The cheese has moved’.
Supporting local tech talent
It may sound contentious, but if organisations are comparing local technologies offerings with more established US or Asian competitors, it should not just be a question of cost. Nor should it just be about functionality. It should also be with the mindset we once showed of ‘do we need Airbus?’. We do.
Gaps in functionality present opportunities for European co-innovation and collaboration, which not only address immediate customer requirements but also enable European technology companies to accelerate and strengthen their competitive advantages. This in turn would create a virtuous circle of building expectations for more sophisticated innovation and solutions that raise the bar on quality, raise the bar on pace, and elevate local providers to compete on the world stage.
Rightly or wrongly, Europe is seen as more risk averse, so this approach may be seen as ‘naively hopeful’ by some, but let’s again return to the example of Airbus. Building an aircraft requires a vast number of components to work effectively and safely together. Europe had to decide what components to build locally, across Europe and what it could outsource. This involved taking risks and a willingness to invest in centres of aerospace excellence across the region, with no guaranteed returns. It is an obvious example of the sunk cost’s equation for innovation, deciding whether the future value and returns outweigh the expected costs.
We should take the same approach to the software industry. Different layers within the software stack allow visibility of where the biggest points of differentiation lie. For example, in the automotive industry, some commentators argue the battery is the key battleground, but equally European manufacturers have built global reputations around car design. Which layers we focus on matters – we need to focus on those layers that matter most to tomorrow’s world.
Time to seize the moment
If we want to build European technology companies that can compete globally, there are structural changes we need to address. Initiatives like EU INC, recommending a harmonised regulatory environment for startups across Europe, are a good step, but we need to be bold. Above all, there are three top priorities:
- Removing friction from fast moving environments – the pace of change in the AI industry underlines why this is key, but it requires an improved regulatory framework for employment law, setting up companies, incentivising founders, consistent tax & grant regimes etc
- Risk culture – we need to change our mindset to embrace failure as a necessary part of the evolutionary process of business success
- Accelerate investment through deeper and potentially unified capital markets – we need to be combining public and private funds, which should be possible given that together Europe (and the single market) is the world’s largest economy.
If we get this strategy right, then the potential is huge, but we need to set measurable targets. From my perspective, there are some achievable goals we can reach in the next three to five years, including:
- Not Europe first, but Europe too: tender processes to include European vendors and if there is a gap in their proposition collaborate with them to find a solution
- Public sector first funder: we should be using our tax pounds or euros and recycle them back into European companies to find innovative and more productive ways to leverage technology to deliver services
- Seize the moment: EU INC is good, but we must also make it easier to employ people and attractive overseas talent to our region
- Stronger together: bring capital markets, and attractive incentives, together to make it easier for private and public investors from angel, start up, scale up, growth, private and public investor communities to contribute to supporting local technology talent
- Play your part: everyone must embrace a slightly higher level of risk, ambition and pace. We won’t compete by watching the US and China. We should encourage competitiveness does not shy away from it.
Necessity is the mother of invention and impending extreme demographic change (and maintaining our desired ‘way of life’) should be triggers. I firmly believe nothing improves productivity like software, so if we are to avoid the burden of increased debt or cutting public services it is crucial we become greater risk takers, more ambitious and more willing to compete. Such an attitude shift is key if we are serious about building our own European software champions. I am all-in.
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