Recommendations for a successful digital transformation in Europe Markus J Beyrer is Director General of BUSINESSEUROPE The ongoing fourth industrial revolution is radically modifying the global economy, particularly manufacturing and industry-related services. Europe needs a true digital transformation to regain competitiveness and deliver growth and jobs. If we succeed, Europe could see an added gross value worth €1.25 trillion by 2025 in manufacturing alone. With a fully functioning Digital Single Market (DSM), Europe will gain an estimated 4% of GDP by 2020. But if not, the potential losses can be up to €600 billion by 2025 – ie. losing over 10% of Europe’s industrial base, meaning that the EU's stated aim of increasing manufacturing's share of European GDP to 20% by 2020 will be out of reach. In order to tap into the full advantage of digital transformation, the EU must swiftly complete its DSM, ensuring free movement of goods, people, services, capital and data. Digital technologies are already delivering cross-sectoral efficiencies to business. The market for the Internet of Things (IoT) is also a reality: it has grown 160% in 2013 and 2014, and is still expected to grow more than 30% in the next ten years. Digital is also supporting and advancing the increasingly integrated services elements throughout the industrial value chains. For most modern industrial companies, the manufacturing and services elements are so highly intertwined that categorising them into different sectors is not possible anymore. In order to allow businesses and citizens to take full advantage of digitalisation, policy makers not only must address the challenges appropriately, but also encode digitalisation in EU policy and in the European economic DNA. We need the right conditions for innovation, accompanying change and avoiding focusing primarily on possible risks. The gap between Europe and other regions (eg. US and Asia) in crucial aspects like technology and innovation investment, as well as in the proliferation to regulation, has to be narrowed. Legislators also need to consider the digital economy’s global nature and the consequent increase European business’ global integration. This requires more global convergence of rules and standards. Key challenges ahead Europe is a world first class manufacturer, but is less advanced in ICT and business services. The EU is the only major economy where investment in broadband has declined. Only eight of the world’s top 100 high-tech companies have their headquarters in Europe and we are still lagging behind our major competitors in R&D investments; the EU’s target to reach 3% R&D investments is hardly on track. It is key that Europe encourages digitisation and develops a comprehensive and holistic strategy. To ensure the best opportunities for growth, jobs and innovation, such a strategy has to be well coordinated between member states and at European level. While national best practices should be looked at, avoiding fragmented national approaches is essential to ensure compatibility internationally. Turning industry digital is not only about technology investment. Companies need to rethink their value chains and way of doing business. This process will need massive knowledge input particularly for SMEs. Business services, universities and research centres will have a fundamental role in providing this critical knowledge to manufacturing companies. Statistics show that only a very limited number of companies have developed a comprehensive investment strategy to grasp the potential of digitalisation, with as few as 1.7% of EU enterprises making full use of it, and 41% not at all. Digitalisation is still insufficient in particular in the case of SMEs and in the less technologically advanced regions of Europe. Increased digitalisation could actually result in a more inclusive environment, in which SMEs can benefit from huge growth opportunities, regardless of their location. Approach to data, labour markets and skills Digitalisation of industry is mainly based on connectivity, collection and analysis of data, not only personal data, but also non-personal/industrial data, for example data produced by machines. Currently, there is legal uncertainty in this field. Clarity in roles and liabilities for the treatment of these data is crucial. The European legislative framework must allow European companies to compete globally. It is important to analyse the current legal situation identifying where the gaps are. However, policy makers must refrain from rushing into legislation, but rather carefully assess if and where intervention at European level is needed. Digitalisation offers opportunities both for companies as well as for workers, with more flexibility and possibilities to improve work-life balance, and more learning and work opportunities. Some existing jobs and areas of activity will evolve; some will disappear, but new activities will appear, leading to overall employment gains. Using the example of Germany, the Boston Consulting Group forecasts that by 2025 the introduction of digital industrial technologies will lead to a 5% net increase of jobs. One of the key challenges is to adapt EU and national skills policies to better meet the rapidly evolving labour market needs generated by the digital economy. BUSINESSEUROPE and the other EU social partners agreed to work on digital skills as part of the EU social dialogue work programme 2015-2017. Business recommendations to enable digital transformation Our regulatory framework, in particular concerning collection, use and analysis of personal and non-personal data, must empower the digitalisation process. Legislation must enable data-driven innovation, with appropriate rules striking the right balance between protecting EU citizens’ rights and facilitating the free flow of data in the single market. New rules should also ensure clarity between the role of data controllers and processors. While companies should freely decide where their data is stored, there should not be forced data localisation policies, as free flow of data within the EU is crucial to their functioning. While openness is essential for the digital economy’s development, it is also important to consider negative developments potentially resulting from unlimited third-party access to data. Standards, investment and digital infrastructure Standards are extremely important to enable digital industrial processes, as well as the integration into worldwide information and communication networks. Interoperability is therefore key. The ability of connected machines to work together is absolutely critical to unleash the potential of digitalisation – without it, 40% of potential benefits of Internet of Things cannot be realised. To be competitive, digital products and processes should be supported by globally relevant standards. In addition, regulators should not set technical standards or mandate specific technologies. Involvement by authorities should be exceptional rather than routine. A bottom-up approach to digital standardisation is needed to keep up with the pace of technology. A robust infrastructure is the backbone of the digital economy. Ensuring the right incentives for private investment is a fundamental prerequisite to EU industry’s digitalisation. The upcoming review of the EU telecom rules will be an opportunity to achieve these objectives. Competition and strong incentives for continued investment in the EU on broadband infrastructure will be essential to meet the exponential connectivity and quality demands of digitalisation with particular attention to industrial areas located outside urban areas. As foreseen in Juncker’s investment plan, investments must be particularly directed towards the development of high speed networks and the adoption of digital technologies by SMEs. Greater harmonisation in spectrum allocation is also important to meet the increasing demand for connectivity. The application of various national policies across the EU creates fragmentation hindering the completion of the single market for wireless broadband communications. Greater coordination and consistency would also enhance the predictability of the network investment environment. At the same time, implementation of the recent net neutrality rules must ensure the best effort principle and guaranteed quality classes. Ensuring open and accessible internet to all is crucial to sustain further growth and increased usage. Cybersecurity and privacy In a connected world, machines and units of organised supply chains will exchange data. In order to ensure the reliability of these systems and to protect data, a high degree of cybersecurity is indispensable. With regard to privacy issues in particular, the announcement of an agreement between the EU and the US on a revised framework for international data flows (the ‘EU-US Privacy Shield’) at the beginning of February 2016 was of utmost importance for businesses and citizens in Europe and the US. Since the invalidation of the Safe Harbour framework by the European Court of Justice (ECJ) on 6 October 2015, the ability for companies to transfer data from the EU to the US has been undermined. The new framework should benefit innovation, job-creation, and economic growth in both regions. In a letter to European Commission President Juncker and to US President Obama, BUSINESSEUROPE, together with US Chamber, DIGITALEUROPE and ITI, stressed the urgent need for a reliable framework for international data transfers. It is now important to swiftly finalise the details of the newly reached agreement, granting companies, especially SMEs, a reasonable transition period to adapt. BUSINESSEUROPE called on national authorities to contribute constructively to the functioning of the new arrangement and ensure a consistent European approach to transatlantic data transfers. This will help to have common rules in place in the DSM to the benefit of Europe’s economy. Opportunities of digitalisation at the workplace Europe also needs to assess how best to adapt labour markets and work organisation to fully benefit from the digital transformation. A process of adaptation to the increased work flexibility required by digital industries is essential. Working time and employment regulations should be sufficiently flexible and support EU businesses competitiveness in the digital age. This will increasingly depend on the ability to react quickly and flexibly to customer requirements and to supply ‘on demand’. Ensuring people have appropriate skills to come to grips with the complexity of the digitalised industry is also crucial. Skills needed for SME entrepreneurs deserve special focus, to enable them to digitalise and grow their business online. According to the European Commission, 40% of EU citizens only have a basic level of digital skills. Simultaneously, the need for digital skills is becoming increasingly pronounced - by 2025 90% of jobs are predicted to require some level of digital skills. The EU must ensure that education and training systems are adapted to the ever evolving labour market needs, focusing in particular on STEM skills and digital literacy. The upcoming European Commission 2016 European skills strategy must strongly emphasise digital skills. The development of e-apprenticeships could also help to better meet the new labour market needs. Training and re-training workers and jobseekers is also essential to help them keep pace with technology advancements and develop their employability, which is particularly challenging for an ageing workforce. This calls for inter-generational approaches and a coherent EU strategy for digital learning and open educational resources to be mainstreamed across all education and training sectors. Encourage investment, support R&D and raise awareness Facilitating financing and investment in the productive sectors and their digital transformation is crucial. In many cases the digital transformation must be carried out in parallel with ongoing routine operation of companies. This implies an increased complexity and a need for funding. With this in mind, financial instruments should not only allow tech companies to develop new products but also allow the productive sectors to test and refine them prior to their adoption. The imperative of digital transformation does not only concern infrastructure and hardware – support to digital content, e-commerce and services is also key, especially in relation to early adopters, thus ensuring that the new technologies’ lifecycle accelerates and achieves critical mass. It is also essential to generate fertile ground for transferring technology to the market, something which remains challenging in Europe. In addition to encouraging private and public R&D, research institutes and universities should regard the needs of the productive sectors as one of their priorities in industrial research. The use of existing financial instruments, eg. Horizon 2020 and the Juncker Plan, should ensure that this objective can be achieved. Finally, awareness-raising actions should target financial institutions to make them more responsive to the potential return on investment in Europe’s digital transformation and more inclined to finance the material and immaterial investments needed. Also, companies - especially SMEs - should be offered information and guidance at national and EU level to enable them to embrace digitalisation.
It is key that Europe encourages digitisation and develops a comprehensive and holistic strategy


Figure 1. If Europe misses out on the digital transformation it could forfeit €605 billion in lost value added Source: Roland Berger Figure 2. Horizon 2020 is giving rise to important ICT research Source: websites (Horizon 2020, FP7, CIP, EIT, EIT ICT Labs), news reports, AT Kearney analysis