Why Europe’s Corporations Have Been Left Behind By Big Tech And Is A Fightback Already Too Late?

by Jonathan Adams

Tesla is currently worth over $130 billion. Volkswagen, Europe’s largest car maker and until recently the world’s second most valuable behind Japan’s Toyota, is worth a little over $86 billion. Tesla is, then, currently worth over 50% more than Volkswagen.

Over the first nine months of 2019, Volkswagen 186.6 billion euros in sales for an adjusted operating profit before special items of 14.8 billion euros. The company’s full year results have not yet been published. Tesla’s, however, have. The U.S. electric car maker earned $24.6 billion over the whole of 2019. That’s about 22.35 billion euros. It lost $4.92 a share for the year, or $862 million.

In nine months, Volkswagen earned over eight times more than Tesla did in twelve. Volkswagen also registered a near $15 billion adjusted operating profit over those nine months to the almost $1 billion loss Tesla fell to for the whole year. But financial markets value Tesla at over 50% more than they do Volkswagen.

In 1997, when Steve Jobs came back to Apple as CEO, the company was worth $3 billion. At the time, that was less than a tenth of the value of Europe’s largest industrial group – Siemens. 23 years later and Siemens still is Europe’s largest industrial group. It’s worth just shy of $100 billion.

Apple’s current market capitalisation is $1.4 trillion. Not only does its value dwarf that of Siemens, Apple is today worth more than the thirty largest companies in Germany combined. The UK’s largest public company is Shell. The oil and gas giant is valued at around $207 billion. Not far off seven times less than Apple.

The fact that a single U.S. tech company is worth more than the combined value of the thirty largest companies from Europe’s largest economy, the fourth largest in the world, and more than the top 15-ish most valuable companies listed on the London Stock Exchange, Europe’s biggest, illuminates a stark reality. Europe, and most of the rest of the world (Apple’s market value is roughly the same as the combined value of Australia’s biggest 200 public companies), is in danger of being left behind by the technology advancements of the 21st century.

The only genuine challenge the USA’s big tech companies face today in their quest for world domination comes from China.

Why Has Europe And Most Of The Rest Of The World Been Left Behind By Big Tech Out Of The USA?

The largest tech companies from the USA, and to a slightly lesser extent China, are producing software that is, as venture capitalist Marc Andreessen put it “eating the world”. They are rapidly expanding horizontally, and sometimes vertically, from their core businesses to the extent that they threaten the traditional powers in almost every conceivable sector of industry and services.

It’s not even that European businesses are doing badly. Over the past twelve months Germany’s DAX 30 index of the country’s 30 largest companies has gained 22% and today sits close to record highs. The UK’s FTSE 100 gained 12%, despite Brexit, and is also close to record highs, set in early 2020.

But Apple’s value has more than doubled over the same period. A similar story has unfolded for Tesla, Microsoft, Amazon, Alphabet and many of the other giant tech companies listed on Wall Street exchanges. And with the next couple of decades set to be dominated by AI, Internet of Things and ecommerce, the U.S. tech giants, with their Chinese peers on their tails, seem far better positioned for growth than companies in Europe and elsewhere. The gap could, very conceivably, get much bigger. There is a feeling that Europe may have “missed the train on technology – the sector that is dominating the 21st century”.

The impact AI is forecast to have on almost every conceivable sector over the next few decades could also see the hardware-orientated engineering, high quality manufacturing and materials industries that Germany’s economy excels at disrupted by digital technology. The UK and its service-sector dominated economy isn’t necessarily better protected.

What’s The Key To Big Tech’s Success?

The success of the biggest digital technology companies stems from the fact that they have not only created popular products consumers are prepared to pay for. That would simply have seen the evolution of large tech companies making digital products. Not the vast, sprawling empires with the cash mountains to fund the extension of their tentacles into almost every sector conceivable.

As German chancellor Angela Merkel put it last year:

“It’s no longer enough to merely sell a product. One also needs to develop new products from the data on these products.”

Big tech has harnessed the data gathered by their core products to not only develop new products. The most successful, those that are beginning to dominate whole swathes of the economy in a way no single company ever has, are those that have succeeded in establishing habits in users that keep them in near constant connection. Like iPhone users who check their phone every several minutes, or social media that keep dragging users back into their ecosystem through notification-fuelled FOMO.

Alphabet and Facebook are profiting from their huge databases on scraped user behaviour in ways most barely begin to understand. And they are getting ever deeper and more sophisticated in how to monetise that data.

What the biggest tech companies also have in common is that they all also fit the description of “net states”, coined by Columbia University’s Alexis Wichowski. The term is defined as “digital non-state actors unrestrained by borders which, in some cases, have more influence than major governments”.

She goes on to describe how:

“Once you purchase a product, that’s sort of the end of the transaction, whereas with net states there’s an ongoing relationship on a daily, even hourly basis — as we upload data or use their service”.

Oprah Winfrey astutely and succinctly reflected on why the platform of Apple’s new video content streaming service had attracted her as an executive producer with a sentence that will almost certainly only gather weight with time:

They’re in a billion pockets, y’all. A billion pockets.”

The reach the iPhone and other Apple hardware devices from iPads to Apple Watches have is being leveraged to promote and deliver additional services, from Apple TV+ to Arcade, its new video game streaming service and even a new credit card offered in partnership with Goldman Sachs.

Tesla’s current valuation may prove to be a bubble but it’s also based on faith that its electric and one-day driverless vehicles will be mobile platforms selling many more services than simply transport. Entertainment, rest and even health and beauty services will almost certainly be sold through Tesla vehicles in coming years. BMW, on the other hand, sells cars and that’s pretty much it.

As Ms Wichowski says:

“We are looking at a different kind of entity altogether. Their ambition, their scale, the sector jumping they are doing — we are only beginning to understand the reach of these organisations in our lives.”

Healthcare is also now in the sights of big tech companies including Alphabet, Apple and Amazon. Within the next decade or two, technology will develop medication that is specific to an individual’s genetics and current physicality. Generic treatments are likely to become a thing of the past. Stefan Oschmann, chief executive of German pharmaceuticals and life sciences giant Merck, explains how he expects the trend to unfold:

“That will change the entire pharma model. And it could end up in a situation where ‘he who owns the data’ for this, is much more powerful than ‘he or she who administers it’, or who has actually made the active compound . . . So it could well be that in the future the Googles become the competitors of the pharmaceutical industry.”

The biggest tech companies now also have the financial power to sweep in and change business models, wiping out legacy competition. They can do so because they are able to sustain heavy losses over extended periods to corner a new market. Global logistics company Schenker’s CEO Jochen Thewes comments on the investment Amazon is making in building up its own transport and fulfilment capacity:

“It’s an absolutely cash-burning machine. They are losing an arm and a leg, but they are of course building an unrivalled capability, they are building market share”.

On free and one-day delivery, he remarks: “they are giving consumers heroin — because once you’re a user you don’t really want to let go of that”.

Can Europe Regain Ground On Big Tech From The USA and China?

The big question is, is it already too late for Europe or can it produce its own technology companies on a level similar to the dominant companies from the USA and China in coming years? Or are we destined to spend the foreseeable future as consumers, sending a steady flow of cash to “free state” tech companies that repatriate profits back across the Atlantic and gradually, or quickly, continue to consolidate their dominance?

The good news is that many analysts and observers believe the rise of Big Tech in the USA is not the result of a market that is fundamentally different to those in Europe. Or a question of culture or education. Rather, it seems it can be traced back to the funding available to U.S. technology start-ups.

Alexander Rinke, co-chief executive of $2.5 billion German software company Celonis explains how he believes U.S.-based venture capital has shaped the emergence of big tech:

“That financial infrastructure — the way people invest capital and allocate capital — is probably the main reason why Apple, Google and Facebook are all American, and none of these companies is German or European.”

The same can be said of China, which has also produced several mammoth tech companies in recent years. Their growth has been either supported by government funding and support, such as in the case of telecoms tech giant Huawei, or already huge tech companies buying up stakes and then funding any start-up that looks like it might have the potential to scale to a level it would start to represent competition. It’s not competition if it’s all or partly owned already.

Europe’s start-up scene, particularly in the UK and Germany, is showing signs of attracting more capital. But the level is still far behind what is happening in Silicon Valley and beyond. CB Insights’ “Global Unicorn Club” report, which lists the private companies internationally that have achieved valuations of $1 billion or above, shows that 217 of the 445 members internationally are based in the USA. 106 come from China. The UK is next with just 24. Just 12% of the unicorns in CB Insights’ list hail from Europe.

What Needs To Change In Europe?

The consensus view is that institutional finance in Europe needs to fundamentally change its approach if the Old Continent is to start to catch up with the 21st century digital economy. In the USA, pension funds have been investing in tech start-ups, usually through VC funds but sometimes even directly in later stage start-ups, for a long time now. European pension funds tend to operate very conservatively and put the large majority of their capital in low-yield blue chip and sovereign debt.

But that is starting to change. Firstly because it is beginning to be recognised that the risk to reward ratio of investing in low-yield debt is potentially significantly poorer than investing in venture capital.

What is Europe good at? Europe is good at making physical things that are differentiated.” In the US, big pension funds have long invested in technology start-ups via venture capital, whereas in Germany pension funds tend to be ultra-conservative and place the bulk of their investments in low-yielding sovereign debt — a tactic Mr Oschmann considers absurd.

The amount of cash being directed towards venture capital has almost doubled in Europe over the past two years. That will have to keep on doubling regularly over the coming years if the tide is to be turned and for Europe to again become home to some of the most influential and wealthy companies in the world.

This article is for information purposes only.
Please remember that financial investments may rise or fall and past performance does not guarantee future performance in respect of income or capital growth; you may not get back the amount you invested.
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