A Test Of Europe's Artificial Intelligence

by Matthew Bey

As a tech war shapes up between China and the United States, European powers fear they may get left out. French President Emmanuel Macron recently unveiled an ambitious plan for France - and the European Union as a whole - to develop an artificial intelligence ecosystem that could compete with those of China and the United States. Germany, meanwhile, worries that the wave of U.S. and Chinese tech innovation will wash away its critical automotive and industrial robotics sectors. To prevent that outcome, the country has been pushing for more AI development; in fact, Industry 4.0 - a movement to bring emerging information technology innovations to the manufacturing industry - is a German concept. The seemingly unstoppable rise of tech giants in the United States and China has forced entrepreneurs and leaders in Europe to react. But solutions such as Industry 4.0 and Macron's initiative won't be enough to bring European tech into the competition.

The Big Picture 

The world is becoming more dependent on information technology, and the United States and China are now at the start of the next great war of tech innovation. Artificial intelligence, robotics, distributed ledger technology, smart tech, augmented reality and many other emerging technologies will define the way economies operate and economic value is created in the future. And Europe is worried that it may be falling behind the revolution, because it has struggled to create as vibrant as a sector as its two rivals. 

Europe has struggled to foster technology giants. German enterprise software company SAP SE is the only European technology company valued at $100 billion or more, and its closest rival on the Continent, the Dutch firm ASML Holding, stands at just over $80 billion. To put this in perspective, two Chinese tech firms and five U.S. tech companies have market capitalizations over $400 billion - Apple Inc. alone is valued at more than $800 billion. The numbers aren't much prettier in Europe's startup scene. According to CB Insights, the European Union is home to just 25 unicorn companies - private startups worth at least $1 billion. The EU unicorns together are worth $49 billion, but nearly half of that valuation comes from British firms such as Global Switch, the most valuable European tech startup. After Brexit, the European Union will be home to only a dozen unicorns worth $25 billion collectively. The largest of the United States' 114 unicorns, Uber, is worth more than those 12 companies combined, as is China's biggest unicorn, Didi Chuxing.

The result of this discrepancy is that U.S. tech giants reign supreme in Europe. The European Commission estimates that U.S.-based online companies supply more than half of the EU digital market. And in the future, the threat may extend beyond digital services. Many U.S. and Chinese IT companies are expanding into cloud computing, robotics, artificial intelligence and autonomous vehicles. To accelerate their progress in these fields, the firms sometimes acquire European startups and established tech companies. China's Midea Group, for example, bought German industrial automation firm Kuka Robotics in 2016; similarly, Google acquired a London-based AI company, DeepMind, in 2014. Thanks to their manifold applications, emerging technologies such as robotics and AI are starting to transform industries well outside IT and the internet. U.S. consulting firm McKinsey & Co. estimates that software will account for nearly one-third of a vehicle's value by 2030.

In response to the steady foreign dominance in tech, the European Union has tried various legal and financial interventions. Several U.S. tech firms, including Apple, Google, Facebook and Amazon, have been embroiled in legal disputes over data privacy and personal data use with various European countries. In addition, the European Commission unveiled a new proposal in March to levy a 3 percent tax on digital companies based on where their users - not their headquarters - are located. The commission also proposed new ways to scrutinize prospective foreign acquisition deals in strategic sectors.

What Europe's Tech Firms Are Up Against

But these measures have done little to close the gap between European tech firms and their U.S. and Chinese competitors. The European IT sector's struggles highlight the difficulties the Continental bloc and its members will face in trying to challenge the dominance of tech juggernauts in the United States and, soon enough, in China. And like so many of the European Union's problems, these difficulties start with geography.

From a regulatory standpoint, the European Union is not a single market. The bloc allows for the free movement of physical goods across its borders, but data laws often vary from one member state to the next. Germany, for example, passed a law in 2015 requiring internet companies to store user data in the country. Similarly, EU members license digital services, such as the use of electronic audio and video recordings, at the national level, not at the EU level. Numerous member states, moreover, have passed stringent laws over privacy and access to personal data - the fuel on which technologies like AI and robotics run. (The EU General Data Protection Regulation will strengthen these laws and apply them across the bloc when it takes effect next month.) With so many different laws governing the digital market, adopting new rules to solve problems in the tech world can be difficult for the European Union. It's a challenge the United States and China, as sovereign states, don't have.

The European Union's cultural divisions are no less daunting. Though English, German and French function as common languages across the bloc, linguistic and cultural variation makes adapting a voice-based AI platform such as Amazon's Alexa or Google Home for each member state's domestic market an enormous task. The language barrier is even harder to navigate for smaller companies trying to grow quickly throughout the Continent. In addition, many European countries are sensitive to foreign competitors undermining local cultural industries, and the result is a prohibitive environment for up-and-coming tech companies. Local content and ownership requirements often keep growing firms from elsewhere in Europe from breaking into a particular national market. The Balkanization of the EU digital market stifles rapid growth in the tech sector.

For technology companies hoping to scale up globally, sheer market size matters. Companies in the United States have large user bases at their disposal to turn a killer app into a household name practically overnight. In the European Union, on the other hand, firms have to jump through regulatory and cultural hoops to spread even the strongest innovations to users in other member states. Finding funding is another problem. Although the EU gross domestic product is about $17 trillion a year, European tech firms have access to a smaller pool of capital relative to their counterparts in the United States and China. Silicon Valley, for instance, attracted nearly 10 times more in venture capital in 2014 than did the two largest tech hubs in the European Union. The abundance of capital, along with better market opportunities, gives U.S. and Chinese firms a leg up on European companies.

Then there's competition law. Compared with the United States and China, the European Union has much stronger laws in place to support competition and prevent monopolies. The Chinese government, in fact, often tolerates de facto monopolies and oligopolies in the interest of supporting national firms. Antitrust laws in the United States, meanwhile, focus more on how a company attains a monopoly than on how it acts once it has achieved one. But according to EU law, ascendancy in the market comes with "a special responsibility not to distort competition." Companies found to abuse that responsibility - including many of the U.S. tech firms currently under investigation in the European Union - face heavy fines. Given the propensity among successful IT companies to dominate their specific field, Europe's competition laws are a hindrance to local tech firms.

The Challenges of Change

Aware of the challenges facing the EU tech sector, European leaders such as Macron are trying to fight the odds to get European IT companies back in the race. But the French president's new initiative is hardly the first of its kind. Perhaps the most important step for European tech so far has been the European Commission's push for a digital single market, launched in 2015.

The digital single market policy aims to revamp the European Union's rules for digital trade by boosting access to digital goods and services, creating conditions for the digital service sector to succeed, and maximizing its growth potential. The European Commission has laid out several ways to support these goals, including harmonizing EU rules on consumer protection for online purchases and proposing the free flow of data among member states. In the three years since the digital single market's proposal, lawmakers have watered down many of the program's most contentious initiatives and rejected many others, such as the proposal to weaken national licensing for audiovisual media. Still, the European Commission is holding fast to its goal of implementing the policy by the end of this year.

Once again, however, national politics may get in the way of technological progress. The European Commission can only propose policy changes; it's up to the member states, and the powerful lobbies within them, to pass the measures. And reaching consensus isn't always easy for EU members. Discussions over data localization, for example, typically pit champions of free trade, such as Belgium and the Netherlands, against more protectionist countries such as France and Italy. (Germany, too, historically supports data localization, though on most other issues it sides against Europe's protectionists.) These well-worn battle lines are already reappearing now that the European Commission has proposed new rules to prohibit the mandatory localization of non-personal data and, by extension, to allow for the free movement of most data across national borders in the European Union.

Yet Macron's presidency could change the debate. Although France is still a protectionist country relative to its fellow EU members, the current president has pushed its economic nationalism in a different direction. His goal is still to level the playing field in the European Union to France's benefit - but only after supporting the bloc against outside threats. The slight shift in priorities stands to make a big difference for Europe's tech sector.

Not only has Macron dropped France's opposition to the free flow of data, but he has also made it clear that he believes a pan-European strategy for tech is essential. Before announcing his AI strategy in March, the French president advocated a bloc-wide big data policy earlier in the year, arguing that it was the only way European companies could compete with their U.S. and Chinese rivals. Macron is in no position to reverse France's protectionism. Even so, the flexibility he has brought to his country will give the bloc more leeway on the tech issue.

Macron's goal is still to level the playing field in the European Union to France's benefit - but only after supporting the bloc against outside threats.​ 

Furthermore, despite the enduring challenges that cultural and geographic differences pose, things are looking up for Europe's tech sector. IT companies on the Continent are starting to figure out how to account for their environment and to become more competitive - in the realm of deep tech, for instance, a new technology that builds on innovation. The category includes new applications for blockchain, AI, and virtual or augmented reality, which typically don't require the large user bases that tech companies need to expand and survive.

Based on the success of deep tech companies in Europe, more and more venture capitalists have been investing in the bloc over the past few years. The pool of venture capital in Europe grew by 36 percent from 2016 to 2017, hitting $27.6 billion - still a far cry from tech investment in the United States and China but a substantial improvement nonetheless. And even in the likely event that U.S. or Chinese tech giants snap up some of Europe's deep tech companies, their very existence is a testament to the vibrancy of the Continent's technology sector.

In the long term, however, pockets of innovation won't be enough to keep the European economy moving forward. Because of Europe's geopolitical limitations, and the sheer size of the competition in the United States and China, the bloc's tech sector will be hard-pressed to catch up to its foreign rivals. The few tech hubs around the European Union where innovation is happening will remain in Silicon Valley's shadow. If Europe can't lead or at least keep up, it will be left behind.

"A Test of Europe's Artificial Intelligence" is republished with permission of Stratfor.