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Copyright © 2016 McKinsey & Company. All rights reserved.
June 30, 2016
Digital Europe: Pushing the frontier, capturing the benefits
2McKinsey & Company
Change is accelerating exponentially Europe must capture the momentum
Europe’s digitisation lags behind the USAnd varies between countries and sectors
Adapt and winA united Europe can grab these opportunities
A new digital divide is opening upBetween the ‘haves’ and the ‘have-mores’
3McKinsey & Company
Waves of digital innovation are accelerating
1960s 1970s 1980s 1990s 2000s 2010s
~3 years
15 years
Desktopsand 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
4McKinsey & Company
Used cross-border bandwidth Size of bubble representsintraregional used bandwidth
Data flows are surging, redrawing the world’s borders
45xcross border bandwidth
between 2005-2014
EUROPE
ASIA
LATINAMERICA
NORTH AMERICA
AFRICA
MIDDLEEAST
OCEANIA
Bandwidth (gigabits per second (Gbps)
>20,000
20,000-5,000
5,000-1,000
1,000–500
<500
5McKinsey & Company5McKinsey & Company
Connectedness scoreData flows
7
10
15
19
21
25
35
43
56
100
8 of the 10 most connected countries are in Europe
6McKinsey & Company6McKinsey & 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
7McKinsey & Company
Change is accelerating exponentially Europe must capture the momentum
Europe’s digitisation lags behind the USAnd varies between countries and sectors
Adapt and winA united Europe can grab these opportunities
A new digital divide is opening upBetween the ‘haves’ and the ‘have-mores’
8McKinsey & Company8McKinsey & 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%
9McKinsey & Company9McKinsey & Company
21%
74%5%
60%
8%
32%
…reflected in a low presence of European internet companies compared to the US…
IOT compani
esBig data
companies1
1 Top 10 companies
Europe
US
Asia
Market capitalisationTop 20 companies, Percent, 2015
RevenueTop 20 companies, Percent, 2015
55%
5%
40%64%36%Internet compani
esUnicorns
10McKinsey & Company
…partly because Europe is still reliant on US digital imports…
Digital trade balance with the USPercent
-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
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 HighRelative digitisation
ICTMediaFinance and insuranceProfessional servicesWholesale 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
ConstructionAgriculture
Selected sectors
Knowledge-intensive sectors that are highly digitised across most dimensions
1
Capital-intensivesectors with the potential to further digitise their physical assets
2
Highly localisedsectors that lag across most dimensions
3
Assets Labour
Usage
12McKinsey & Company
Country effects explain one-third of the variation in digital capability across Europe, sector effects the other two-thirdsMGI Sector Digitization Index, 2015 or latest available Europe data Low High
Relative digitisation
ICTMediaFinance and insuranceProfessional servicesWholesale 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
ConstructionAgriculture
Selected sectors
13McKinsey & Company
Captured digital potential by countryPercent
Tremendous upside remains to be captured
18%
10%
12%
15%
17%
10%
15%
12%
14McKinsey & Company
€2.5 trillion
15McKinsey & Company
Change is accelerating exponentially Europe must capture the momentum
Europe’s digitisation lags behind the USAnd varies between countries and sectors
Adapt and winA united Europe can grab these opportunities
A new digital divide is opening upBetween the ‘haves’ and the ‘have-mores’
16McKinsey & Company
ConsumersMore consumer surplus
CompaniesFaster revenue growth
WorkersMore automation
Digitisation creates a divide between ‘haves’ and ‘have mores’
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 mediain 2014
Social media usage
100 mn unique monthly US visitors in 2014
Wikipedia article count
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%
19McKinsey & Company19McKinsey & Company
More highly digitised companies perform better financially…
Digitisation score
4%
10%
18%
5 year revenue growth, CAGRPercent
+14pp15%
18%
42%
+27pp
3-year Total Return to Shareholders Percent
High
Low
Medium
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
ProductivityCompound annual growth rate, %
Digitisation indexComposite score measuring digitsation level across sectors
21McKinsey & Company
Ability to technically automatePercentage 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%
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 dueto automation could accelerate from
8% today to 15% in the next decade
Advanced robotics
Artificial intelligence
23McKinsey & Company
Change is accelerating exponentially Europe must capture the momentum
Europe’s digitisation lags behind the USAnd varies between countries and sectors
Adapt and winA united Europe can grab these opportunities
A new digital divide is opening upBetween the ‘haves’ and the ‘have-mores’
24McKinsey & Company24McKinsey & Company
VivaTechnology’s Partners are already grappling with the toughest digital challenges
Big DataHow to manage the public data generated by individuals on smartphones?
Artificial IntelligenceHow to leverage AI to improve in-store operations (inventory, replenishment)?
Environmental footprintHow to reduce the environmental impact in train stations?
PersonalisationHow can customer data enrich personalisation features?
Customer experienceHow to improve guest experience by digitally empowering hotel employees?
Themes Technologies
Internet of ThingsHow to effectively analyse and process sensor data collected in-store?
Open innovation
BlockchainWhat services and value proposition can be added to the blockchain ecosystem?
EfficiencyHow to improve the generation of distributed energy?
25McKinsey & Company25McKinsey & 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 models4 Bring the customer along
5 Build ─ or buy ─ the right digital capabilities6 Adapt your workforce
Company digitisatio
n
26McKinsey & Company26McKinsey & 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
4Unlock R&D investment and access to capital for entrepreneursThe 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 marketGermany developed an app to support citizens looking for a job
1Digitise government operations
Estonia's eID scheme allows online authentication
Facilitating the
transition
27McKinsey & Company
The best time to plant a tree was 20 years
ago.The second best time is
now.