In a post-crisis European economy characterised by falling productivity and a shrinking workforce, digitisation represents huge potential for growth. Below, John Bates argues that the implications of this will not only create millions of jobs but will positively impact all industries, revolutionising both products and services. However, for this to succeed the EU must do more to nurture innovation and create a more integrated digital market.
No matter how you slice and dice the issues surrounding viable economic growth and global development, the obstacles seem insurmountable. From the unsustainable consumption of natural resources and falling industrial productivity to a shrinking workforce that, in many western countries, must fund spiralling healthcare and pension costs, the picture looks bleak. But closer examination shows a myriad of innovative solutions being developed and a common thread running through them: Digitisation.
Digitisation, through the Internet of Things (or the Industrial Internet), will offer governments, scientific institutes and enterprises the ability to measure, and therefore optimally manage, almost everything. And to do so at a profit.
This is not a zero sum game. However, the number of zeroes involved in the digitisation paradigm shift is staggering. Here are some random snippets: $15 trillion – the value of financial transactions in the US per day; $2 trillion – the annual value-add from the Internet of Things; $1 billion – the number of lines of embedded software code in each Airbus A380 engine, generating more data on every Frankfurt to Sydney return flight than the entire Library of Congress in Washington.
The amount of data being generated each day is hard to imagine, but the $2 trillion value-add from the IoT is not. Nor are the numerous benefits digitisation provides to world economies. According to the World Economic Forum, a 10 percentage point increase in a countries digitisation index can result in a 0.75% rise in GDP and 1.02% drop in unemployment.
More tangibly, the same report shows that digitisation boosted world economic output by $200 million and created six million jobs globally in 2011. Addressing the business opportunities provided by the analysis of big data alone will provide 4.4 million software industry jobs by 2015. This is just one area in which “Digitisation” can drive long-term, viable economic success and it is particularly relevant to Europe.
European Software & Economic Growth
The European software market is the second largest in the world – slightly smaller than the US market and growing faster. But European software companies only account for 15% of global software sales. The reasons for this are many but the hard facts are that the US software industry – with access to nearly five times as much venture capital as Europe: €46 billion more between 2005 and 2012 – dwarfs Europe’s.
The largest 50 European software companies together are smaller than Microsoft. The soft facts are that software doesn’t receive the political, or public, attention in Europe that it should. One telling example is the reaction to the 2008 economic crisis. While US President Obama called in the CEOs of high-tech companies to map out a program of national IT infrastructure improvements to preserve jobs and the national IT skills base and to improve US productivity and competiveness, European countries were more likely to introduce road maintenance or historical building cleaning programs.
Government realisation of the national importance of a strong software industry, along with access to capital, makes a huge difference in the comparative success of the respective industries. The previously mentioned 4.4 million new software industry jobs by 2015 should stop anyone in their tracks. Europe, as a whole, is struggling with chronic youth unemployment and here is an industry crying out for millions of qualified people and for government action. Digitisation could not only provide millions of highly paid jobs, but could also be the chance for Europe to finally pull its weight in the software market.
Can Industry 4.0 Save Europe’s Day?
Industry 4.0 can propel Europe’s engineering industries into the digital world and into the 21st century. Industry 4.0 combines the Internet of Things with software-intensive embedded systems and engineering innovation. It utilises big data, generated by billions of online devices, sensors and people, to drive real-time business analysis and real-time operational decisions. Operational big data, the new oil, is fast becoming the most important raw material for every industrial sector and is driving Industry 4.0 adoption.
This machine-to-machine communication allows for the analysis of huge amounts of data – for example, identifying or predicting aircraft, ship or truck engine component defects in real-time, estimating the wider impact of the fault, automatically scheduling maintenance and optimally managing the fleet to minimise disruption.
It will facilitate the use of renewable energy sources, such as wind and solar power, through an intelligent energy distribution network, the basis for real-time matching of energy demand and supply and for dynamic, customer friendly energy pricing. This advent of smart energy production, smart logistics and optimal consumption will have a positive impact on global warming, one of the most pressing issues of our times.
At the other end of the Industry 4.0 spectrum is mass personalisation – integrating production systems, the full supply chain and product design with individual customer choices. The result is personalised products, or services, made to specification, but at the price of mass-produced goods. This opens huge new markets built on the knowledge of the individual consumer, giving accurate estimates of consumer demand and eliminating waste and over-production.
Industry 4.0 brings together two of Europe’s biggest industrial capabilities: precision engineering and the management of mission critical data. Add to this initiatives such as the German government’s focus on renewable energy, dependent on flexible power generation and a smart distribution network, and it is clear that Europe is in an ideal situation to further the development of Industry 4.0 and make a huge impact on the future direction of the software industry.
Look at the German figures alone: software development is a major cause of employment, with 740,000 jobs and estimates of over 1,000,000 by 2030, overtaking both the machine and car industries. This number could be significantly raised by Industry 4.0, both in Germany and the rest of Europe, with millions more jobs paying over 50% more than the average wage. This could be the major initiative in preserving living standards in an ageing population – but there is much to be done.
When attempting to bring ideas to market, European Union (EU) firms face the lack of a single digital market, fragmented intellectual property regimes, lack of access to risk capital and a dearth of strong ICT clusters. Fragmentation, or the lack of a large integrated digital market, in Europe is an impediment to the commercialisation of digital innovation, in stark contrast to the US. There is an urgent need for public investment in key innovative technologies, in line with ICT public procurement policies in the US.
The EU should emulate these to nurture early-stage innovation, at least in those sectors in which the public sector can act as a pivotal adopter. Procurement policies should be designed not to replace private markets but to help develop them, stimulating the diffusion of digital innovation. These are just two areas in which EU policy can give a major boost to the European software industry.
Economic Growth & The Ticking Bomb!
Digitisation is more than an opportunity for boosting European employment; it is a necessity if the western world is to successfully overcome unprecedented changes in demographics as the baby-boomers age. The size of the potential workforce is shrinking, while, post-crisis, fewer people are returning to the workforce. At the same time, the growth in the average worker’s output per hour, already slowing before the 2008 crisis, has fallen further since. European, and other western, economies and Governments will have to do more with less. Or in this case fewer.
Digitisation makes this possible. The governments of developed European countries could save more than €100 billion in operational efficiency by using Big Data. The Centre for Economics and Business Research has identified ₤216 billion of potential UK benefits from efficiency gains, innovation and creation by insights unlocked from Big Data. Addressed on a continental level, the potential benefits from the growth in employment, productivity, cost savings and lean resource usage are huge.
Look at future healthcare funding and it becomes clear that cost-cutting alone is not enough. Savings of €100 billion a year are more than nice but that is less than half of Germany’s annual health bill, currently nearly 12% of GDP and still growing fast. Healthcare costs in OECD countries have risen from an average of 5% of GDP in 1970 to around 11% now, and are forecast to almost double by 2050. It is in tackling these burgeoning costs that the multi-faceted nature of digitisation and the need for targeted public procurement as a policy instrument become apparent.
Long-term, viable economic success is based on the streamlined use of resources. Healthcare is one of the largest consumers of resources, in terms of GDP, and a good place to start building a digital and smart economy and society. To keep modern healthcare affordable, resources must be streamlined – and that requires streaming analytics that can monitor, analyse and act on real-time health data. The next consequential step is in financially supporting a healthier and longer-living population.
According to the OECD: “The ongoing financial crisis has dealt a heavy blow to private pension systems. Between January and October this year (2008), private pensions in the OECD area have registered losses of nearly 20% of their assets (equivalent to USD 5 trillion)”. This is at a time when governments are encouraging citizens to supplement, or replace, public pensions with private schemes. Market risk and volatility are not only playing with our present but also playing with our future. How to mitigate both? A little financial stability would go a long way.
Financial Stability is all about preventing bad people doing bad things and ensuring that “the financial system” can cope with shocks. Financial shocks can be caused by relatively slow, premeditated wrongdoing, real-time market manipulation or automated trading algorithms that have run amok. Uncovering potential shocks must be based on real-time data, predictive analysis of that data and real-time action to either avoid or nip problems in the bud. This is where streaming analytics come to play.
Streaming analytics can:
- For compliance – identify wrongdoing such as manipulation of Capital Markets.
- For financial transactions – identify large scale fraud, money laundering and rogue trading.
- For risk management (market, credit or operational) – provide a robust and companywide view of exposure and risk in real-time, ensuring that more accurate capital adequacy requirements are maintained and that banks can more readily absorb shocks.
Implementing all of the above means our pension funds are more profitable and less money is lost to outright illegal behaviour. It means financial firms can better understand and manage the risks they face and the speed with which they react to “Black Swan Events”.
These are just two examples of how digitisation is contributing to long-term economic success, but there is a positive impact on all industries. The impact is on many fronts, in both supply and demand, in security and risk mitigation, in employment and GDP growth and in providing critical services such as healthcare and pensions to an ageing population supported by a shrinking workforce. Is that all? Of course not. Saving the planet is a big, big issue with millions of small solutions and there is more to address than just the economy.