Special Report -- The 21st Century Economy -- Global Challenge
A HIGH-TECH EUROPE IS FINALLY IN SIGHT
Deregulation, the euro, and a flood of venture capital will help companies soup up lagging innovation
Hasso Plattner has good reason to feel lonely. From his perch in the middle of Europe, the billionaire co-founder and joint chairman of German software titan SAP sees few success stories like his in the Old World. Outside of SAP and Scandinavian telephone powers L.M. Ericsson and Nokia Corp., Europe's high-tech galaxy is painfully short of bright stars. And Plattner thinks he knows why. "We're not good at hype," he grouses. "While the Europeans wait for a product, the American market throws money at hype. That's how companies get started."
Hype alone may not dictate high-tech success. But if money is the true measure, Europe finally appears to be catching on. Venture capital in search of less saturated markets is pouring in from America. And on new small-company exchanges in Germany and France, American and European investors alike are tossing money at fledgling high-tech businesses. Germany's Neuer Markt, one such exchange, is up 150% this year and has tripled its listings, to 43.
Continentwide deregulation and the movement toward a single currency by 2002 are driving this spending. Equally important, though, are massive investments in new pan-European communications networks. They could trip off an explosion in everything from tech startups to Internet services. This process is well under way in Britain and Scandinavia, which pioneered deregulation in the 1980s. Now, the rest of "Europe is about to follow suit," says Luc L. Soete, director of the University of Maastricht's Maastricht Economic Research Institute on Innovation & Technology. Adds James Richardson, president of European operations for switching-equipment maker Cisco Systems Inc.: "Market liberalization is going to free up investment in Europe, and the money's going to go into high tech. A new economy is going to be built as a result."
Indeed, it's far from fanciful to think that by say, 2005, Europe may have significantly closed its technology gap with the U.S.--an incredible prospect, given that as recently as a decade ago it took six months or more to get a new phone installed in places like Belgium. Now, for one thing, Europe is well-positioned to pioneer the next generation of Internet appliances. Dutch consumer-electronics giant Philips and France's Thomson Multimedia, along with Alcatel, are leading development of Web-surfing alternatives to PCs, such as television set-top boxes.WIRED SOCIETIES. And in mobile telephony, Europe holds a wide lead over the U.S. because it has created a unified digital market allowing callers to roam from nation to nation using the same phone. This gives Nokia and Ericsson a vast laboratory for developing next-generation cell phones that can surf the Net. While the U.S. debates technical standards, Europe, like Japan, is racing to build up infrastructure that should be ready soon. Europeans could be videoconferencing and even downloading movies over their mobile phones within three years.
Tiny Finland, with a population of just 5.1 million, shows just how quickly the transformation can occur once the right elements are in place. Powered by the 34% sales growth at $9.8 billion Nokia and by continuing telecom deregulation that began in the 1980s, Finland is rapidly becoming one of the world's most wired societies. Some 40 phone companies are now slugging it out in the telephone market, building a world-class infrastructure in Finland and leading to some of the lowest phone rates in Europe. Now, cheap calls are increasing the Internet's popularity, and rock-bottom cell-phone rates have boosted usage to 48%, one of the highest levels in the world. One result: For the first time in history, Finland is exporting more electronics than forestry products.
A similar transformation could occur in the rest of Europe. The overall European economy grew only about 2.7% last year, but spending on telecommunications services jumped at 9%, according to International Data Corp. Investments on information technology rose yet faster, at 11%, to $196 billion. That's less than in the U.S., where spending jumped 12.4%, to $320 billion. But as recently as 1994, European IT spending grew by only 6% annually.
Rising market forces could make Europe's tech market more efficient. One catalyst is likely to be the new 11-member single-currency union. Monetary union will pull together the Continent's fragmented consumer market and make small credit-card transactions--crucial for Internet commerce--less costly than they are with currency exchanges. It also should dramatically boost the size of Europe's anemic stock markets, giving tech companies another avenue for funding rapid growth. That could help solve one of Europe's nagging problems: By one estimate, only 13.3% of European small companies are in high tech, vs. 22.7% in the U.S.PRICE WARS. Another key to boosting Europe's tech future will be the ongoing revolution in European telecommunications. Most big Continental nations deregulated telecommunications on Jan. 1; Germany's and France's markets are now among the most open in the world. In Germany, for instance, more than 200 upstarts have jumped in, forcing prices for many long-distance calls down as much as 40%. Germany and other nations also have awarded multiple licenses for selling cellular-phone service--a change that has touched off torrid competition. As the price wars spread, domestic long-distance rates, which are often double or more U.S. levels, should fall dramatically, fostering a huge increase in traffic and new services.
In the PC business, prices already have plunged below U.S. levels since last fall. In Germany, late-model Pentium PCs go for as little as $830, with a monitor and including taxes, at mass retail outlets. Such price-slashing is one reason Europe is becoming the world's fastest-growing major PC market, with purchases up 17.8% in the first half of 1999, vs. the same period a year earlier.
At the same time, Europe is shifting almost as quickly as the U.S. to high-speed data networks. Powering the change is the estimated $125 billion that European companies are spending to prepare their computers for the coming euro. While they're at it, they're also revamping for the Internet and networks that allow simultaneous transmission of voice and data messages. These investments should
push down telecom costs to a fraction of those in conventional phone networks.
A raft of companies, including the U.S.'s WorldCom Inc. and Viatel Inc. and such European entrants as Britain's Colt Telegram Group PLC, are pouring billions into pan-European voice-data networks. Europe's info-tech spending will skyrocket as cheap, high-speed communication becomes ever more common, predicts Cisco's Richardson. "For Europe to be globally competitive, it has to provide more telecom services at better prices," contends Glenn Potter, president of Britain's Esprit Telecom Group PLC, which also is building a pan-European network.
Still, it will be a long time before Europe's high-tech economy reaches the U.S.'s level of vibrancy. One measure of weakness: Only 24% of European households have computers, vs. 46% in the U.S., IDC figures. That's one reason the proportion of Internet-connected households stands at just 11% in Scandinavia, 8% in Britain, 6% in Germany, and 2% in France--vs. 18% in the U.S. "Effectively, Europe is still very weak in high tech," admits Alexis Jacquemin, chief economic adviser to the European Commission.
Europe still must boost its relative paucity of high-tech manufacturing and R&D, areas still dominated by American and Japanese companies such as IBM, Cisco, and Sony. High tech accounted for just 20.4% of value added in European manufacturing in 1995, compared with 24.7% in the U.S. And last year, Germany, Italy, and France all spent less of their GDP on R&D than did the U.S. Those gaps may narrow as local powers such as SAP and Nokia explode, and as Internet development, late out of the gates, catches fire. Even in the online world, however, "it matters a lot that much of the R&D spending and other important activities are done elsewhere," says IDC analyst Carsten Hejndorf.FUNDING NEW IDEAS. The bigger problem is that European economies remain too fragmented and rigid. Language and cultural differences are part of the problem. Indeed, change tends to happen first in Britain and in countries where English dominates, such as Scandinavia. While Europe's labor pool is highly educated, moreover, labor-market rigidities--many citizens simply won't move to take on new jobs--tend to offset this advantage by making employers reluctant to set up new operations or take on new workers. Transgene, a French biotech company, warns it will establish its new manufacturing operations in the U.S. or Britain if that bind doesn't moderate. No wonder the Continental unemployment rate remains stubbornly above 11%, vs. 4.5% in the U.S.
And, as SAP's Plattner notes, Europeans tend to be fiscally conservative. In July, Britain's Internet Bookshop had to sell out to chain-store giant W.H. Smith after hitting snags with a planned public offering. "There's still far more willingness in the U.S. to fund new ideas," gripes Internet Bookshop Chief Executive Rick Latham. Perhaps. But now market and technological forces are gathering in Europe that could break down even such deep-seated attitudes. And that's no hype.By Thane Peterson in Frankfurt and Stephen Baker in ParisReturn to top