Digital Europe: Pushing the frontier, capturing the benefits
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What is the speed at which digital is and will change our world? How is Europe performing in digital compared to the United States? Where is the progress? And where is the paralysis? What some of the challenges and risks of digital – its potential to divide business and society – between the highly digitized: the “have-mores,” and the “haves:” those who are not able or willing to adapt fast enough. And what is our share our vision with you for how Europe needs to capture the huge digital prize. What can start-ups, companies, public authorities – everyone in this room – do, to make it happen?
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Digital Europe: Pushing the frontier, capturing the benefits
- 1. June 30, 2016 Digital Europe: Pushing the frontier, capturing the benefits
- 2. 2McKinsey & Company Change is accelerating exponentially Europe must capture the momentum Europe’s digitisation lags behind the US And varies between countries and sectors Adapt and win A united Europe can grab these opportunities A new digital divide is opening up Between the ‘haves’ and the ‘have-mores’
- 3. 3McKinsey & Company Waves of digital innovation are accelerating 1960s 1970s 1980s 1990s 2000s 2010s ~3 years15 years Desktops and PCs Basic office software Games and visual graphics Enterprise software Internet technologies Personal computing GPS Wi-Fi, 2G/3G Laptops Mobile phones Social media Smartphones and apps Smart devices and sensors Predictive algorithms, machine learning, robotics Modern programming languages Algorithmic advancement Mainframes and databases Desktop and personal computing Business software Internet and e-commerce Mobile broadband Social media Big data
- 4. 4McKinsey & Company Used cross-border bandwidth Size of bubble represents intraregional used bandwidth Data flows are surging, redrawing the world’s borders 45xcross border bandwidth between 2005-2014 EUROPE ASIA LATIN AMERICA NORTH AMERICA AFRICA MIDDLE EAST OCEANIA Bandwidth (gigabits per second (Gbps) >20,000 20,000-5,000 5,000-1,000 1,000–500 <500
- 5. 5McKinsey & Company 5McKinsey & Company Connectedness score Data flows 7 10 15 19 21 25 35 43 56 100 8 of the 10 most connected countries are in Europe
- 6. 6McKinsey & Company 6McKinsey & Company The European startup ecosystem is developing at a rapid pace Number of unicorns in Europe Number of accelerators and incubators between 2008 and 2013 x3 Growth in venture capital funding between 2013 and 2015 x2 Of European unicorns are profitable 60% 47 2016 30 2014
- 7. 7McKinsey & Company Change is accelerating exponentially Europe must capture the momentum Europe’s digitisation lags behind the US And varies between countries and sectors Adapt and win A united Europe can grab these opportunities A new digital divide is opening up Between the ‘haves’ and the ‘have-mores’
- 8. 8McKinsey & Company 8McKinsey & Company Today the contribution of digital to European GDP lags behind the US… Share of digital contribution to GDP, % 4.0% 5.4%5.5% 6.6%6.9% 8.0% 10.0% 5.0%
- 9. 9McKinsey & Company 9McKinsey & Company 21% 74% 5% 60% 8% 32% …reflected in a low presence of European internet companies compared to the US… IOT companies Big data companies1 1 Top 10 companies Europe US Asia Market capitalisation Top 20 companies, Percent, 2015 Revenue Top 20 companies, Percent, 2015 55% 5% 40%64%36% Internet companies Unicorns
- 10. 10McKinsey & Company …partly because Europe is still reliant on US digital imports… Digital trade balance with the US Percent -4.2% -11.4%-3.8% -5.6%-5.2%-3.6%-2.8% 0% 1.0% -0.2% 1.3% 0.2% -0.4% 1.6% Digital trade balance with EU28 Percent
- 11. 11McKinsey & Company MGI Sector Digitization Index, 2015 or latest available Europe data …and partly because companies across sectors have not taken the digital turn yet Low High Relative digitisation ICT Media Finance and insurance Professional services Wholesale trade Entertainment and recreation Personal and local services Advanced manufacturing Transportation and warehousing Utilities Retail trade Education Chemicals and pharmaceuticals Hospitality Real estate Government Health care Basic goods manufacturing Construction Agriculture Selected sectors Knowledge-intensive sectors that are highly digitised across most dimensions 1 Capital-intensive sectors with the potential to further digitise their physical assets 2 Highly localised sectors that lag across most dimensions 3 Assets Labour Usage
- 12. 12McKinsey & Company Country effects explain one-third of the variation in digital capability across Europe, sector effects the other two-thirds MGI Sector Digitization Index, 2015 or latest available Europe data Low High Relative digitisation ICT Media Finance and insurance Professional services Wholesale trade Entertainment and recreation Personal and local services Advanced manufacturing Transportation and warehousing Utilities Retail trade Education Chemicals and pharmaceuticals Hospitality Real estate Government Health care Basic goods manufacturing Construction Agriculture Selected sectors
- 13. 13McKinsey & Company Captured digital potential by country Percent Tremendous upside remains to be captured 18% 10% 12% 15% 17% 10% 15% 12%
- 14. 14McKinsey & Company €2.5 trillion
- 15. 15McKinsey & Company Change is accelerating exponentially Europe must capture the momentum Europe’s digitisation lags behind the US And varies between countries and sectors Adapt and win A united Europe can grab these opportunities A new digital divide is opening up Between the ‘haves’ and the ‘have-mores’
- 16. 16McKinsey & Company Consumers More consumer surplus Companies Faster revenue growth Workers More automation Digitisation creates a divide between ‘haves’ and ‘have mores’
- 17. 17McKinsey & Company 2000 2014 Annual Google searches 178 mn unique monthly US visitors in 2014 International call volumes with Skype $37 bn savings for consumers just in 2013 Consumer surplus through free internet search has accumulated rapidly in the past decade… 74% of online US adults are on social media in 2014 Social media usage 100 mn unique monthly US visitors in 2014 Wikipedia article count
- 18. 18McKinsey & Company …though the ‘have more’ minority captures most of the surplus 80% Have mores Captured value from Web services Haves 40% Internet users 20% 60%
- 19. 19McKinsey & Company 19McKinsey & Company More highly digitised companies perform better financially… Digitisation score 4% 10% 18% 5 year revenue growth, CAGR Percent +14pp15% 18% 42% +27pp 3-year Total Return to Shareholders Percent High Low Medium
- 20. 20McKinsey & Company …and more digitised sectors experience faster productivity growth Germany Netherlands Italy Sweden France 0.900.70 0.800.600.400.30 0.500.200.10 Productivity Compound annual growth rate, % Digitisation index Composite score measuring digitsation level across sectors
- 21. 21McKinsey & Company Ability to technically automate Percentage of time on activities that can be automated Hourly wage, $ per hour No activity is immune to automation, but some jobs are more impacted than others… 0 20 40 60 80 100 120 File clerks Landscaping workers Chief executives 0% 100%
- 22. 22McKinsey & Company …and the phenomenon could accelerate in the coming years 44% of all activities likely to be automated in the next 10 years Displacement of middle-skill jobs due to automation could accelerate from 8% today to 15% in the next decade Advanced robotics Artificial intelligence
- 23. 23McKinsey & Company Change is accelerating exponentially Europe must capture the momentum Europe’s digitisation lags behind the US And varies between countries and sectors Adapt and win A united Europe can grab these opportunities A new digital divide is opening up Between the ‘haves’ and the ‘have-mores’
- 24. 24McKinsey & Company 24McKinsey & Company VivaTechnology’s Partners are already grappling with the toughest digital challenges Big Data How to manage the public data generated by individuals on smartphones? Artificial Intelligence How to leverage AI to improve in- store operations (inventory, replenishment)? Environmental footprint How to reduce the environmental impact in train stations? Personalisation How can customer data enrich personalisation features? Customer experience How to improve guest experience by digitally empowering hotel employees? Themes Technologies Internet of Things How to effectively analyse and process sensor data collected in-store? Open innovation Blockchain What services and value proposition can be added to the blockchain ecosystem? Efficiency How to improve the generation of distributed energy?
- 25. 25McKinsey & Company 25McKinsey & Company For companies, digital transformations should be performed along 6 strategic priorities 2 Become agile and learning-focused 1 Evolve existing business models 3 Take advantage of new innovation models 4 Bring the customer along 5 Build ─ or buy ─ the right digital capabilities 6 Adapt your workforce Company digitisation
- 26. 26McKinsey & Company 26McKinsey & Company Policymakers must act to create a more dynamic digital ecosystem 3Deepen Europe’s partici- pation in global dataflows France launched the etalab program to open public data 4 Unlock R&D investment and access to capital for entrepreneurs The UK offers up to 50% in tax benefits for investors in early stage digital businesses 2Create a more seamless digital market The EU will invest more than €50B by 2020 in digital initiatives 5 Address issues surrounding skills in the labour market Germany developed an app to support citizens looking for a job 1 Digitise government operations Estonia's eID scheme allows online authentication Facilitating the transition
- 27. 27McKinsey & Company The best time to plant a tree was 20 years ago. The second best time is now.
Editor's Notes
- At end of video… Eric: Now, is there anybody in the room who does not believe that digital technology will change the world? Well, neither do we! There’s an ongoing debate about how disruptive digital technologies really are. American economist , Robert J. Gordon cites “faltering innovation” as one reason to be pessimistic about growth prospects due to digital in the coming years. And Gordon is not alone in his beliefs. But others disagree including MIT economists Erik Brynjolfsson and Andrew Mcafee who believe that there is considerable disruptive power left in the digital revolution and are optimistic about its impact on growth. What does McKinsey think? It may well be that the main reason that we are not seeing enough economic impact from technology and digital is because we have not yet fully unleashed its power.
- Eric: As you may have guessed from the video, we have a lot to discuss. Today, we are going to: First, look at the speed at which digital is and will change our world. We will then share findings on how Europe is performing on digital compared to the United States, exploring variations in countries and sectors. Where is the progress? And where is the paralysis? We will then take a clear look at some of the challenges and risks of digital – its potential to divide business and society – between the highly digitised: the “have-mores,” and the “haves:” those who are not able or willing to adapt fast enough. Finally, we will share our vision with you for how Europe needs to capture the huge digital prize. What can start-ups, companies, public authorities – everyone in this room – do, to make it happen?
- Eric: Successive waves of digital innovation are becoming shorter and quicker. Rapid technological innovation is due to a proliferation of digital platforms and the ability to combine the latest technologies such as virtual reality, humanoid physical systems, and big data. Industry 4.0-related patents increased 12-fold between 2010 and 2015. There are seven times more CDOs today than there were two years ago. And by 2020, projections suggest that there will be 40 zettabytes of usable data globally.
- Eric: And global data flows are also surging, having exploded across borders by a factor of 45 in under ten years. That is a mind-boggling amount of digital connectivity firing global communities and economies, and broadening participation in the global economy. Europe is at the heart of this phenomenon.
- Eric: When looking at how countries participate in inflows and outflows of goods, services, finance, people, and data, eight out of ten of the most digitally connected economies in the world are in Europe. Interestingly, it is some of the smallest countries like the Netherlands, that are doing business with just about everyone.
- Eric: Another positive strand of Europe’s digitisation story is that our ecosystem for start-ups is picking up speed. There are major digital hubs growing in Europe that are providing fertile ground for some of the world’s most innovative start-ups. Growth in venture capital has doubled in the past two years. The number of accelerators and incubators tripled between 2008 and 2013. And this is bearing fruit in terms of success among European start-ups. The number of European unicorns – that is, start-ups with a $1 billion valuation – has grown from 30 to 47 over the past four years.
- Peter: So where exactly is Europe on its digital journey? The answer, it turns out, is near to the beginning.
- Peter: Let’s look at how much digital is contributing to GDP. The results are interesting. Overall, the EU is significantly behind the United States. But there is huge variance among Europe’s economies. Some are beginning to put digital at the centre of their economies. Examples include the United Kingdom and other economies in Northern Europe. But others, particularly in Southern Europe, lag significantly behind.
- Peter: The story on GDP share is mirrored by the state of play of Europe’s digital ecosystems and their overall health. In the dark blue, you can see the US share of the world’s internet, unicorn, Internet of Things, and big data companies. The light blue is Asia, and the turquoise is Europe. While there are there are no European firms in the 20 largest digital companies, Europe’s digitisation is moving in the right direction. When it comes to new digital technologies such as the Internet of Things and big data applications, European companies make up 20 to 30 percent of revenue among the largest firms.
- Peter: One reason why Europe is lagging behind the United States in the amount of economic value it is creating from digitisation is that Europe relies on US digital imports. The light blue columns in the bottom half of this slide show the digital trade balance of six European countries with the rest of the EU-28. The dark blue columns show the digital trade balance of the same six economies with the United States. Effectively, all that dark blue is wealth flowing to the United States as a result of US innovation. Relying on the United States for its digital capacity and capabilities is limiting the economic value Europe gets from digitisation. It also raises questions about dependency and durability.
- Peter: Another reason why Europe is lagging behind the United States – and its own digital economic potential – is that different sectors are digitising at different speeds. This slide shows the results for Europe of MGI’s Industry Digitization Model. This index measures 21 different indicators of the level to which companies are digitising. The column on the left lists the sectors, and on top we’ve ranked digitisation by three categories – assets, labour, and usage. It’s worth navigating around this slide because it contains a wealth of useful information that can help us understand where innovation has been happening and where innovation is urgently needed. What you are looking at is a traffic light system – with green representing well-digitised industries and red representing the laggards. You can immediately see that there’s a huge difference in digitisation levels between sectors. We can split different levels of digitisation and opportunity into different clusters. For example, at the top we have Cluster 1 – which is knowledge-intensive sectors like ICT, media, finance and insurance. Below that, in the assets column, you can see Cluster 2 – sectors like real estate, utilities and basic goods manufacturing, which are capital intensive and have lots of potential to digitise their physical assets. Down at the bottom, we have Cluster 3, which contains highly localised sectors that lag behind on digitisation—sectors like hospitality, agriculture, and construction.
- Peter: Now we want to show you a similar ranking of sectors, but by country. Broadly, we find that one-third of the variation in digital capability across Europe is down to countries. The rest—two-thirds—comes from sector effects and we should point out that the same sectors appear at the top of each country’s digital “heat map”. Overall, this still means that there is scope for countries to influence the extent of digitisation within their domestic economy.
- Peter: Using all the information that we have shared with you, we estimate that the United States has far only captured one-fifth of its digital potential at 18%, and Europe less than one-eighth, at 12%. The uneven digitisation of Europe means that there is still huge value still to capture.
- Peter: If its lagging sectors were to double their digital intensity, Europe could gain an additional €2.5 trillion of GDP in 2025. This would lift European GDP 10 percent above baseline projections for that year.
- Eric: Europe’s uneven digitisation has economic consequences. We are now seeing a new divide between the digital haves and the digital have-mores.
- Eric: This new digital divide affects consumers, companies, and workers. Let’s look at each in turn.
- Eric: As consumers, we gain hugely from digitisation because it provides us with more, better quality, and quicker services and products at lower cost. It is not easy to put a number on this so-called consumer surplus but the evidence suggests that it is very considerable. Take just one example: consumers saved $37 billion in 2013 just by making international calls on Skype. And this consumer surplus is not built into our estimates of the GDP boost from digitisation.
- Eric: But not all consumers are getting the same share of the digital bonanza. Look at the two columns and you see that just 20 percent of internet users are capturing 60 percent of the value of web services.
- Eric: In terms of companies, there is a gap between companies that seize the digital opportunity and those who sit back and wait. Our global research shows that companies that are highly digitized are handing almost three times the returns to their shareholders than those with low digitisation. The five-year revenue growth of digital leaders is 18 percent compared with the 4 percent we see among laggards.
- Eric: Whether there is a link between productivity and digitisation—and, if so, how strong that link is—is a matter of ongoing debate in advanced economies. Ultimately, evidence point to the fact that the most digitised sectors experience faster productivity growth compared to less digitised sectors.
- Eric: The impact of digital on individuals is rather more mixed when we look at individuals as workers rather than as consumers. This exhibit gives an idea of what activities can be automated using digital technologies. MGI research in the United States has looked at the potential impact of automation and found that medium-skilled tasks have felt the most impact so far. Jobs requiring high skill levels have been less affected thus far because they tend to require interpersonal skills, creativity, and decision-making that are difficult to replicate using machines. Low-skilled jobs, too, have been relatively insulated because they tend to be service jobs performed face-to-face with customers; examples include restaurant workers, caregivers, and security guards.
- Eric: However, all skills levels are likely to be affected in the future. As many as 44 percent of the activities individuals are paid to perform can be automated by adapting currently demonstrated technologies over the next decade. However, less than 5% of jobs will have every activity automated. We think that the displacement of middle-skill jobs due to automation could accelerate from 8 percent today to 15 percent in the next decade. This is clearly a huge shift that will have to be managed proactively by both companies and governments.
- Peter: So the question is how Europe can complete its digitisation and capture the economic benefits. Clearly we all need to adapt and win.
- Peter: It is vital that incumbent corporates and start-ups collaborate through open innovation to create a digital ecosystem. That is exactly what we are here for at VivaTech, which is what makes this event so exciting In terms of technology we are talking about: IoT, Blockchain, Big Data, AI And in terms of themes: Personalisation, environmental footprint, customer experience, and process efficiency
- Peter: Our experience suggests that there are six strategic priorities that all companies need to look at: 1. Evolve existing business models by prioritising initiatives to exploit the biggest opportunities such as “as a service” or “pay by usage” business models. Orange is doing just this with the launch of its mobile bank, which leverages the vast amount of customer data to move into the financial services sector. 2. Become agile and learning-focused, identifying upcoming technologies, start-ups, and disruptions. Zara consistently spots these opportunities thanks to its built-in system to collect real-time market data which informs its product development process 3. Take advantage of new innovation models such as data-sharing initiatives, crowdsourcing, and virtual collaboration. AstraZeneca’s Open Innovation platform, for example, invites academics, non-profits, and other partners to participate in drug discovery. 4. Bring the customer along by building a powerful online presence, personalising offers and services, and using cybersecurity to keep customer trust. Burberry seamlessly integrates social media and immersive experiences into its physical stores, recently launching a dedicated Snapchat channel with special content that can be unlocked by scanning Snapcodes in retail stores. 5. Build ─ or buy ─ the right digital capabilities, acquiring processes, systems, infrastructure to take data driven decision. Cygate, a leading Scandinavian IT services provider, grew its business fourfold in 3 years without increasing its cost base, thanks to the automation of 75 percent of its services. 6. Be prepared to adapt your workforce since what really sets the leading sectors and companies apart from the average is the degree to which you put digital tools in the hands of your employees to ramp up productivity. Bosch accelerates its employee onboarding and reduces the time-to-productivity of their new hires by providing them targeted content online about their new roles.
- Peter: Finally, there is a huge amount that governments and policy makers can do to accelerate Europe’s digital maturity. We see five priorities. First is digitising government operations. This is about more than simply digitising paper-based systems and establishing websites. It’s seizing the opportunity to reinvent government services with an eye towards transparency, accountability, participation, and responsiveness. This year, Estonia made its country management software platform available for other states to use. Governments can now pay back all foreign debts with just a click of a button through Transferwise. Second is creating a more seamless digital market to help companies achieve scale, standardising telecom networks, regulation standards, and e-commerce logistics. The EU is making major investments in Europe’s digital future: around €50 billion in the next four years for digital innovation of which €7 billion for the European Cloud initiative. Third is deepening Europe’s participation in global data flows. Some of the ways to do this is promoting open data initiatives, and developing high-capacity networks and large-scale data storage. France has launched the Etalab initiative to open up public data, helping the private sector access quality data. Fourth is unlocking R&D investments and access to capital for entrepreneurs. This includes increasing venture capital funding and digital investments, and strengthening ties between entrepreneurs, investors, and educators. Europe would need to spend €35 billion a year in additional VC funds to match US levels of investment. In the UK, the Seed Enterprise Investment Scheme provides 50% income tax relief for taxpayers investing in qualifying startups. And last, but by no means least, European governments need to address issues in the labour market. They need to make digital skills a core curriculum in education, address talent shortages in digital, and update regulatory frameworks to the new working models. Germany has an app to digitally support citizens in looking for a job. In March 2012, the site had 18 million unique visitors per day, compared with eight million for its leading private-sector competitor.
- Peter: We’d like to end by sharing with you a Chinese proverb: “The best time to plant a tree was 20 years ago. The second best time is now.” Digital is a little bit older than the sapling in this picture, but not very much. The future is very exciting, and we really haven’t seen anything yet. We have planted the seeds and we are starting to grow. We all have an important role for this sapling to flourish to its full potential, and there are important challenges to overcome. We need to lead and collaborate to get there. Yes, the ‘”haves” and “have mores” are divided – but the “have more” option is mostly waiting to be picked up. It’s up to us. We in this room are in the perfect position to lead and work together. Success will be down to individuals—in government, in companies, in the venture capital industry, and in start-ups. It is individual leaders, with personal drive, who will power this change together. We are the frontrunners. We need to take the rest of Europe with us. The findings we have shared with you today are one of our contributions. In the past 20 minutes, we have only started to touch on the insights from the report we are launching today. The report gives a new, detailed, substantive perspective on where and how we are developing in digital. It is a starting point for collaboration.- just as this conference is. The chance for us to lead together here is huge. Let’s look back on today in a year’s time and say, “That’s when we started something special.” Thank you.