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Jim Hagemann Snabe (former Co-CEO SAP): A better Europe is a digital Europe

According to the latest Global Competitiveness Report from the World Economic Forum many countries in Europe show relatively strong competitiveness. Among the 20 most competitive countries in the world, 10 are European countries. Does this mean that Europe is in good shape? There is no doubt that the standard of living in Europe is high today. But as a former business leader I know that the short-term performance in a given quarter or year is not a guarantee for a strong performance in the future. Sometimes it is even the opposite…

Independent of the financial crisis, Europe is facing a number of challenges that will impact the future of Europe. One of the most fundamental challenges for the future of Europe is the lack of growth combined with a demographic outlook of an aging population. The fact that we currently have high unemployment among young people makes the situation even more worrying. Unless we do something radical now, we will not be able to maintain the high standard of living in Europe – nor will we be competitive in the future.

The Industrial Revolution

The industrial revolution began in Europe – in Great Britain – around 1800 and spread to Western Europe and to the United States within a few decades. The industrial revolution was the transition to new and more efficient manufacturing processes through the use of technology. The logic of the industrial revolution was largely based on the logic of “economics of scale” whereby companies gain competitive price advantage through mass production. With relatively high costs of labor in Europe “economics of scale” was achieved by adding energy consuming technologies to replace labor. After many years of productivity improvements through technology, the last phase of labor optimization was achieved by outsourcing the remaining labor intense activities to low cost locations such as China and India. As a result Europe is today left with a high dependency on energy and a relatively limited manufacturing capacity. With high costs of energy compared to the rest of the world (due to the shell-gas revolution in the US, and the geopolitical situation in Russia and Ukraine), the benefits of optimizing labor is coming to an end for Europe. It is time for Europe to find new opportunities growth and employment – to re-invent Europe like we did in the Industrial Revolution and look for the next technological revolution to drive competiveness and prosperity.

The Digitization Revolution

Through digital technology we have a unique opportunity to predict demands, deliver individualized offerings, track and re-use materials and eliminate waste across all value chains.A familiar example of this transformation is the music industry – one of the first industries to undergo such a highly visible transformation driven by digital technology. The combination of new mobile devices (mp3 players), the connectivity between people (broadband internet and cloud computing) and the digitization of the product (mp3 file format), drove a radical change by which supply chain costs plummeted while consumers gained unprecedented individualized access to music through digital services. The mass production, shipment, distribution, and sale of music in physical formats such as records, cassettes or compact discs, which had been the focus of the industry for over 60 years, became largely irrelevant in less than a decade. Opportunities for optimization shifted dramatically from the value chain of the physical product to the digital assets of customer data and loyalty, with a radical reduction of costs and resource consumption as a consequence.

A Digital Vision for Europe

The digital technologies invented during the last 40 years give us an opportunity to re-think and reinvent all industries – like we saw it in the music industry.

Imagine the future of Banking in a digitalworld: Traditionally, consumer banking centered on brick-and-mortar banks. Customers visited their local bank to deposit and withdraw money. Expansion required investments of capital and resources to build more physical branches and employ staff to operate them. Today, the Internet and mobile technology are radically changing the consumer banking experience. In less than one generation, consumers have shifted their behavior to now expect a virtual, mobile banking experience, which is significantly more convenient than the traditional banking experience – and significantly cheaper. In emerging markets, such as Africa and India, banks are adding thousands of customers a month who have no access to a traditional bank. With little more than a basic mobile phone and ID card, clients can open an account in under ten minutes and transact using mobile payments. The marginal cost of opening a new account is close to zero. “Banking outlets” in the form of corner grocery stores that can provide basic banking services replace brick-and-mortar banks. Traditional labor can be redirected to high-value services and the generation of new business and innovation.

But lets go beyond industries with digital products: Imagine the future of Retail in a digital world: In traditional retailing, the products and the shelves were the assets. With digital technology retailers are rapidly digitizing the shopping experience. They are becoming digital enterprises, where the assets are now customer data and loyalty – just like in the music industry. Point of sales data and social sentiment analysis are creating the opportunity to predict future demands, personalize relevant offers in real-time and rethink supply chains. Rather than optimizing the operations of their stores, retailers suddenly have the option to remove physical stores altogether, reducing their environmental footprint, and putting people into new jobs in areas such as transportation and customer service. Even in manufacturing based industries, alternatives to mass production are emerging due to digitization.

Imagine the future of manufacturing in a digital world: With digital technology such as 3D printing the re-location of mass production to low cost locations far away from the consumer may become less attractive. With 3D printing the optimal lot-size in manufacturing is reduced to one product. This will eventually allow for individualized products to be produced at the price point of mass production at the location of the consumer – no plant, no store and no distribution required. Or imagine a world where every physical product carries a digital “product passport”, which captures all relevant information associated with the product from its initial design to the moment of recycling – cradle-to-cradle – including its consumption of energy, waste, CO² emissions, environmental footprint etc. This would allow resource optimization and re-use across the entire value chain – and transparency towards the final consumer. These new opportunities could bring manufacturing back to Europe, much closer to the consumer and reduce the costs and environmental impact of manufacturing significantly at the same time.

Even resource-intensive industries such as utilities can be re-invented. Imagine the future of utilities in a digital world: Today with solar panels installed on private homes and integrated to smart grids and smart meters, every household becomes also a producer of energy. Using the technology of big data analytics, we can predict demands, predict capacities, and calculate dynamic prices. If we add the electric car to the grid, as a storage mechanism for energy, we have an opportunity to take out the peaks in such a system. It is estimated that in Europe alone, removing such peaks could reduce the need for polluting raw material like coal by up to 15%, without reducing the access to energy. Imagine the impact on the economy and the environment when technology is used to optimize entire supply chains and make energy affordable and clean because it is economically attractive to do so.

And maybe the most important re-intention of all is the re-invention of Healthcare. Imagine the future of Healthcare in a digital world: With modern technology we have a unique opportunity to leverage DNA information of individual patients, and molecular health and diagnosis databases, in order to diagnose with higher accuracy. Combined with the significant progress in the field of biotechnology we have an opportunity to individualize therapy for maximum relevance and impact. With real-time data collection from sensors on clothes and on the body we may even be able to predict and avoid health problems – helping people to stay healthy. The consequences in terms of increased productivity in Healthcare would be significant – not to mention the impact on improving peoples lives.

Digitization is now happening in all industries and will drive a similar radical transformation of most businesses as we saw in the music industry. For the first time in history, businesses can have direct interaction with individual consumers at a massive scale, enabling them to understand and cater to individual needs more accurately than ever before. As a result, the fundamental principles of mass production as defined by the industrial revolution are being challenged. Rather than mass production and shipment of generic products in the hope that they will fit a broad market need, businesses can now tailor to individual preferences, predict demands in real time and track materials for re-use across entire value chains. As a consequence, entire value chains can be optimized to deliver better outcomes with significantly less waste – if any.

For the first time in history we can rethink value chains to optimize what is scare (raw materials) rather than what is overly abundant (labor). We can even design value chains without any waste, based on cradle-to-cradle design principles.

Need for a Trusted Digital Infrastructure for everyone

While the digital opportunity is significant, so are the challenges. Digitalizing individual preferences, behaviors, relationships, health, products and services is not easy and has some significant risks. The digital footprint we collect in the digital world is on one side a very valuable asset in order to predict, target and optimize products and services around individual needs. However at the same time this information can be misused or even altered if the data is not kept safe and digital infrastructure in not secure. The challenges are however not different from the physical infrastructure we use today. Transportation of people and goods on physical roads is enabled by infrastructure such as roads and technologies such as cars and trucks. The benefits are obvious, but so are the risks. In order to manage the risks we have agreed global standards on traffic regulation and border controls, introduced global trading and shipping rules and we have innovated safety technologies for cars and trucks. A similar effort is needed for the future digital infrastructure. In order for the digital infrastructure to deliver significant benefits, we need a trusted global digital infrastructure available for everyone everywhere. We need secure infrastructure and devices, strict data protection rules, principles for protection of privacy, common technology standards and global affordable infrastructures. While many of the technologies to deliver a trusted digital infrastructure are available today, the needed level of standardization across technology layers and countries is not. This currently inhibits us from leveraging the digital opportunity beyond consumer entertainment scenarios.

Europe needs to catch up

In Europe the challenges to unlock the opportunities of the digital technologies are even more significant. In spite of efforts to create a single open market in Europe, the digital market and infrastructure is lagging behind. The digital infrastructure in Europe today is fragmented country by country. The fragmentation is resulting in insufficient investments in next generation infrastructures and very high costs, in particular when users are crossing boarders. Cloud services in Europe are missing scale due to country specific rules and regulations. As a result most global Cloud Services are delivered from the US today. Data protection rules in Europe are often outdated. In addition the data protection rules are different in each country, leading to very high compliance costs and administrative efforts for infrastructure providers. And most importantly the massive innovation opportunity driven by the digital technology is primarily happening outside of Europe. Only very few European companies – like SAP – are global digital leaders.

A call for action

In order for Europe to catch up and become a leader in the Digital Era, we need strong leadership and fast, focused and orchestrated actions. In particular we need improvements in the following areas:

1) Create a Trusted Digital Infrastructure

Significant efforts are needed in order to create a Trusted Digital Infrastructure. We need to define and harmonize security standards. We need to harmonize Cloud and Data Protection rules. We need to define certification levels for digital infrastructures and ensure the needed transparency for users. We need to define Internet governance principles. And we need to invest in the next generation infrastructure – a global high-speed mobile infrastructure that is able to serve everyone everywhere at affordable costs. The good news is that there are already many best practices in these areas – like for example the European Cloud Partnershipand the Internet Governance Principles defined by the NETmundial initiative.However an orchestrated effort across countries is needed to eliminate the fragmentation.

2) Develop Digital Skills

The transition from farming to the industrialization required re-skilling of people in Europe. The same is true for the Digital Era. Due to the speed of development in the digital world the skill gap is already significant. Qualified skilled workers from the academic disciplines of science, technology, engineering and mathematics are in higher demand than ever before. One consequence of the lack of digital skills is that there are an estimated 500.000 unfilled digital jobs in Europe. This is a paradox given the high level of unemployment of young people in Europe. These jobs are likely to be filled in other parts of the world unless we rapidly re-skill people for the digital opportunity. Again the good news is that there are already many efforts driven by governments, institutions or companies to close the skill gap in Europe – like for example the Academy Cubetargeted at giving young unemployed people in Europe skills and jobs in IT. Again an orchestrated effort across countries in close cooperation with education systems is needed in order to progress fast enough.

3) Enable Digital Innovation

The digital opportunity is a unique opportunity for small and medium sized entrepreneurs (SMEs) to innovate, grow and create new job opportunities. By supporting innovative SMEs, Europe has a chance to regain innovation leadership and competitiveness – and most importantly reduce the unemployment among young people. To be successful in the Digital Era innovative SMEs need access to capital, resources and markets. This requires simplification of rules and bureaucracy in Europe, the creation of a digital open market, more flexible employment rules and a cultural shift whereby taking calculated risk is rewarded. The good news is that we don’t have a lack of great ideas in Europe. We need to strengthen the ability to scale faster. Again an orchestrated effort across countries to set the relevant frameworks and incentives is needed in order to accelerate the needed innovation.

The European dream to leverage the digital opportunity is significant. However it will only stay a dream unless we are able to progress fast on these challenges as a united Europe with a global and open approach. Government will play a critical role in defining policies that enable the innovation of the digital future, accelerate the speed of innovation and guide all stakeholders towards more sustainable business models.

It is time for action!

The Industrial Revolution started in Europe over a century ago. The industrialization drove significant productivity improvements and resulted in the high standard of living we know today. Over two generations the industrialization caused significant changes to the way people work and live in Europe.

The Digital Revolution most likely represents an even bigger opportunity for Europe than the Industrial Revolution did. For the first time in history businesses and public sector can interact directly with individual consumers and citizens based on accurate understanding or predictions of individual needs. For the first time in history we can deliver unique individualized products and services at the costs of mass production. For the first time in history we can optimize entire value chains for minimum waste and environmental impact. And for the first time since the financial crisis we can create new jobs and opportunities for innovation and growth in Europe. However the level of change to leverage the digital opportunity is likely to be higher than the changes resulting from the Industrial Revolution. And even more challenging: the speed of change will be much faster – not over two generations, but within one generation. In the digital world speed matters more than anything. In order for Europe to take advance of the significant opportunities that the Digital Revolution offers, we need to move fast. We need to define and deliver a trusted digital infrastructure in order to enable the digital opportunity in all industries. We need to rapidly close the skills gap so that everyone can participate and take advantage of the opportunity. And we need to support fast moving companies so that they can innovate and create opportunities for growth in Europe again. This will require strong and focused collaboration between public and private sector across countries in Europe and globally. If done well Europe can remain competitive and find new opportunities for growth and employment based on more sustainable business models to the benefit of future generations.

Source: European Commission

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