Pre-pandemic, large European companies were keeping up with US and Chinese competitors in most industries.
Then COVID-19 dealt its global blow.
Now, as economies focus on recovery, we see companies in China and the US expecting to rebound faster than their European peers. But European industries aren’t doomed to lag behind.
It will take more than a return to pre-pandemic growth trajectories and strategies, however, to lead in the post-pandemic world. As pandemic effects continue, a new paradigm for growth leadership is emerging—one that European companies are well positioned to leverage.
This new paradigm is built on business resilience, regionalization, and emerging industries in the areas of Smart Manufacturing, Digital Health, Smart Mobility and Energy Transition—areas where Europe is already investing heavily. It also relies on blending digital acceleration and sustainability efforts; while European companies trail on digital adoption, they have long led on sustainability.
This emerging approach to growth leadership can power the much-needed reboot for certain European industries, opening opportunities for them to move ahead of global peers. It can also clear new paths to competitive advantages as industries converge. And in doing so, it can foster widespread net job creation.
How industries are faring
Pre-pandemic, most European industries held their ground in terms of market position versus Chinese and US peers. Now Europe is facing significant challenges across varied industries, such as Tech and Software & Platforms.
On average, European companies are maintaining their presence in the innovation competition, with 24% of the top 2500 R&D companies contributing to 28% of their R&D investment. But competition has been tough as Europe has lost ground in the past decade, especially against China: In 2013, Europe was co-leading with the US, with 35% of R&D spending. At the time, just 4% of R&D spending came from China.
European companies in Energy and Industrial Equipment industries also need to accelerate to catch up to global peers.
Among the 2500 global top R&D spending companies in 2019
24% are European companies (vs. 31% US, 21% China)
28% of the R&D spending comes from European companies (vs. 38% US, 13% China)
Europe’s start-ups sector also has room to grow. By 2019, there were 43,000+ funded start-ups in Europe, which raised over €38Bn in investment capital. Yet those figures remain far behind the United States, which has more than twice as many start-ups, benefitting from three times more funding.
Our recent survey of C-level executives representing 700 large European companies found that a majority are strongly confident about their company’s economic growth in the next two years. C-levels in Pharma are the most confident (with 92% expressing confidence), and those in Travel, Communications and Media, are the least, at 68% and 70% respectively.
However, this positive outlook contrasts with their short-term view, given the various challenges currently facing many companies and industries. There is a clear need for European companies to move at speed to embrace new paths to growth.
A look at "Tomorrow’s Leaders"
A small group of companies will reap most of the profits within the next 12 months.
Our recent report, "The European Double Up," has identified a group of businesses—we call them Tomorrow’s Leaders—that are on track to deliver profitable growth in 2021.
Tomorrow’s Leaders represent 35% of all companies globally but are expected to generate up to 78% of total profit by the end of 2021
To date, European companies are under-represented among Tomorrow’s Leaders versus their North American and APAC peers, but the new paradigm for growth leadership opens opportunities for European companies and industries.
The elements of this growth model can play to Europe's strengths, leading to rewarding outcomes.
Resilience: On average European companies are slower than peers to rebound from the pandemic. Still, Europe has 32% of Tomorrow’s Leaders, and these companies are driving the region’s recovery and positioning for future growth.
Regionalization: The response to the pandemic may indicate a new era of economic cooperation among European countries, collectively as part of the EU.
Industry Convergence: Many European leaders have already broadened their horizons through increased collaboration and growing ecosystems. They are also exploring how to collaborate to build and scale supporting infrastructure across the EU.
Digital Acceleration: While Europe has trailed the US and China in digital adoption, we see ambitious plans to accelerate. The EU expects to double the number of unicorns, with 75% of EU companies using Cloud/AI/Big Data, by 2030.
Sustainability: European C-levels are leading the pack: 58% of C-levels agree that pursuing their sustainability transformation is key to remain competitive, and one out of two of the most sustainable companies globally are European.
From crisis to opportunity
This emerging approach to growth leadership presents three key positive potential outcomes for Europe:
New High-Growth Cross-Industry Plays
Net Job Creation
How can organizations seize these opportunities? By taking three decisive actions.
Action 1: Build ecosystem-based business models to foster new innovations and growth.
Technology and changing customer expectations are fueling demand for ecosystem-based models of competition. New value largely will be generated by digitally enabled platforms, which rely on ecosystems. In automotive, for example, 48% of the value created in the next decade will come from data-driven services, mobility services and financial digital services, making ecosystems critical.
Those who embrace ecosystems business models are more resilient in this crisis: 43% of Tomorrow’s Leaders, versus 18% of others, are generating more than 10% of their revenues through ecosystems.
To achieve this transformation, broadly, in Europe, we need to create an ecosystem comprising industry players, research institutes, policymakers, start-ups that can foster automation in the industry that can deal with any potential future pandemics.
Action 2: Engage in and accelerate Twin Transformations
The Twin Transformation—blending digital adoption with sustainable value creation—is a high-potential path to becoming a leader.
Most companies report that undertaking a Twin Transformation is high on their agenda. However, more than half of the companies that are already engaged in twin transformations say they are moving too slowly to realize the critical gains they need to remain competitive.
We’ve identified five concrete moves to help companies to achieve their twin transformation at speed and scale:
Set direction: Foster ecosystem-based business models driven by sustainability and enabled by technology.
Start the journey: Combine resources to scale technology applications to sustainable practice.
Deepen impact: Create organization-wide ownership by combining financial and non-financial KPIs.
Achieve scale: Align partners for sustainable product lifecycles and improved traceability.
Sustain the transformation: Lead, empower and nurture talent.
Action 3: Reskill the workforce to ensure continued employment growth across Europe.
Half of C-level executives say that workforce is their top area in need of attention, and European companies have ambitious plans for reskilling programs within a short time frame.
of companies plan to upskill/reskill between 5% to 25% of their workers this year to keep pace with their company’s need.
Enable continuous learning: Use data to anticipate future skills needs and technology for effective learning experiences.
Use technology to enable flexible work: Free workers to engage in more fulfilling and innovative tasks through greater human-machine collaboration.
Focus on leadership and culture: Promote collaborative leadership behaviors that encourage knowledge sharing, learning and risk-taking.
Improve the Digital Workforce Technology Quotient: A combination of workforce enthusiasm, skills, and comprehension of the value of technologies encourage digital adoption.
Understanding these four pillars will help companies customize skill plans and work with employees to provide a favorable learning environment within the organization.
Support from European governments is key
The EU and its members states can also help empower the reinvention of Europe’s businesses and industries. Here’s how:
Building the next generation workforce through upgrades education and training systems; financial incentives to private partners involved in reskilling/upskilling of their employees; encouraging collaboration among academic institutions, start-ups and companies to develop STEM talent; adopting pro-mobility regulation to attract foreign talent and support job mobility across Europe.
Enabling digital transformation by rolling out common technology infrastructure, including 5G, Cloud, IoT and AI; creating an innovation-friendly regulatory framework; funding R&D through initiatives like the European Innovation Council and support the digitalisation of SMEs; and maximizing collaboration among public and private institutions to develop R&D projects and rapidly scale successful ideas.
Supporting the transition to a sustainable economy and society by investing in developing energy technologies (renewables, hydrogen, others); financing the energy transition, including direct financing of industry decarbonization efforts or through financial incentives; funding R&D projects; encouraging collaboration among companies to create integrated value chains and reduce waste; ensuring responsible management of Recovery funds to support the green economy; and proposing a visionary strategy to transform Europe into a leading player in sustainability.
It’s time for Europe to lead the way
With economic expectations and societal norms fractured by COVID-19, Europe has a chance to reinvent its industries.
We’ve seen the circumstances facing our most vulnerable populations laid bare. The fragility of our supply chains. The pain of our small business owners. The effects of COVID-19 are not something to react to in the interests of returning to where we were before. We cannot resign ourselves to going back.
Instead, Europe, and its industries, companies and governments can choose to build a stronger future. We need to muster the will to think beyond our own lifetimes. The tenacity to reskill our workers. The trust to collaborate through ecosystems, with our competitors and others, across borders. The courage to invest heavily in emerging technologies, break ground with our innovations, push ourselves to lead.
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