Companies throughout Europe are building on the region’s rich heritage of innovation across a wide range of industries.
Compared with the large technology companies such as the famous FANGs of Facebook, Amazon, Netflix and Google, Europe’s tech companies are out of the spotlight. It’s an unusual situation because Europe is home to many world-leading companies in their respective fields. For example, seven of the world’s largest 11 industrial software companies are European, and Europe gathers almost 60% of global industrial software revenue.1
Many investors are underexposed to European tech companies because this sector is under-represented in both global and domestic equity indices, particularly those comprising larger capitalisation companies. Yet when we expand the universe across sectors and seek companies that are using technology to drive growth, we find plenty of opportunities in Europe.
According to Forbes2, Europe hosts 20 of the world’s most innovative 100 companies. Whether it’s in retail, industrials or consumer-related activities, Europe offers attractive secular growth opportunities, particularly in areas that combine technology with other industries. Indeed, technology, and specifically digital technology, is so intertwined with many businesses, as well as our social and economic lives, that trying to separate ‘tech’ from ‘non-tech’ is becoming increasingly redundant.
Many of the firms in small-cap indices are exposed to themes that blur the boundaries between tech and non-tech. Opportunities exist that allow investors to gain more exposure than a passive allocation to broad European stock markets would achieve.
We’ve identified two areas of interest where technology and industry come together through the concept of ‘Industry 4.0’ and the transition towards the next generation of automobiles.
Industry 4.0 is a part of the Internet of Things (IoT) that focuses on manufacturing. IoT refers to objects that are connected to the internet. They have electronics, sensors, software, actuators and network connectivity embedded in them, which allow them to:
According to the CBI3, Europe accounts for more than a third of global Industry 4.0 investments. Western and northern countries are its main markets, especially Germany, where the definition originated. European initiatives at a national and regional level are facilitating Industry 4.0 developments and lowering barriers to entry.
There are many examples of these innovations, such as4:
Cars, industrial machinery and tooling, pumps and circuit breakers – these can all be rendered living products by adding intelligent software. Companies are increasingly seeking to manage their Industry 4.0 transformations by outsourcing. Indeed, the large volumes of data Industry 4.0 systems generate are especially suited for outsourcing, and the cloud is ideal for managing Industry 4.0 data, which requires considerable scalable resources.
Big data skills and solutions are needed to analyse, interpret and base predictions on Industry 4.0 information. Although progress has already been impressive, Europe’s adoption of these technologies is about to accelerate.
The Industry 4.0 market is expected to grow at an impressive average annual growth rate of 22%, and reach a value of €287 billion in 2020. European companies are applying Industry 4.0 techniques in many different ways, such as:
Many of these new Industry 4.0 technologies are rapidly becoming industry standards in a similar way to cloud computing. There are several catalysts powering this growth.
1. New technologies in SMEs
Companies that use Industry 4.0 technologies can outperform their peers5 significantly by being more effective and efficient. For example, some are using smart devices, connected objects and sensors as well as cloud and big data analytics to improve their processes. However, more than 41% of European small and medium-sized enterprises (SMEs) do not yet use these techniques.6 This situation presents an opportunity for Industry 4.0 service providers.
2. European standards
For European companies to implement Industry 4.0 technologies successfully, standardisation is crucial. Objects will be able to communicate regardless of manufacturer or operating system only when there is consistency between systems, platforms, protocols, connections and interfaces. Although the European Commission is developing them, the current absence of standards is a considerable barrier for companies.7 These should make it easier for companies to connect their devices, regardless of service provider, and drive Industry 4.0 in the years ahead.
3. Policies for developing new technologies
A number of European countries have launched initiatives designed to encourage next-generation industries, including France, Germany, Italy and the Netherlands.8 These programmes often invite companies to help the transition to Industry 4.0 services. One example is to hold workshops with stakeholders, including scientists, associations, trade unions and federal ministries. In addition to the efforts at the national level, the European Commission9 is seeking to enhance cooperation on a regional basis.
4. Industry upgrades for demographic changes
The CBI identifies several countries at the leading edge of Industry 4.0, including Germany, Ireland, Sweden and Austria. This leaves the bulk of the European economy as a source of growth for technology investors and service providers. This trend is likely to be encouraged by the impending labour shortages in most European countries, seen most acutely in the Czech Republic, Hungary, Slovakia, Slovenia and Lithuania.10
Europe’s heritage in manufacturing automobiles is without question. From Italy’s racing-focused firms to Germany’s luxury car market and the proud history of British marques, Europe has been at the forefront of the industry for decades. Today the world is moving rapidly towards a revolution in transport. The simultaneous innovations of ride-sharing, autonomous driving and electrification promise to transform our streets, factories and showrooms.
The internal combustion engine (ICE) is beginning a global structural decline and is expected to be largely replaced by electric vehicles (EVs) over the next two decades. EV sales in 2017 were around 4 million units. 2030 EV sales are expected to be 62 million units.11 Global demand is expected to increase at a 23% compound annual growth rate (CAGR) from 2020 to 2025.12 There are four trends driving this change.
1. Electric battery costs are falling rapidly
EV battery costs are falling rapidly and represent a large percentage of the EV price (approximately 25–35%). Battery cell/pack costs fell 67% from 2011 to 2015. Costs are expected to fall further –estimates show an additional 75% reduction in the future.13 As costs continue to fall, EV and ICE vehicles are expected to reach parity in 2023–24.14
2. Investment in the auto industry is robust
Car manufacturers are investing in their businesses as they work to electrify their fleets, including Toyota, GM, Ford, Chrysler, BWM, Volvo and Mercedes. Consumer choices have increased and are expected to grow as these companies expand their ranges of EVs.
3. Governments around the world are introducing new regulations
Both developed and emerging countries are proposing policies to protect the environment, reflecting a global trend. By 2025, Europe, America and China have committed to reduce CO2 emissions by around 50% and 30–40%, respectively.15
4. Consumers are adopting EVs as it becomes easier
Concerns around the average ranges for EVs should fade as batteries improve and cars are able to drive for longer distances. For example, the new Tesla Model 3, Nissan Leaf and Chevy Bolt offer significant improvements from earlier models.16 EVs on average are four to five times cheaper to run than ICE vehicles. Consumers are increasingly likely to focus on lower running and maintenance costs.17
Europe is a leading player in technology and technology-enabled industries, with Industry 4.0 and EVs just two of the exciting themes set to drive innovation. Falling costs, government regulations and demographic changes are combining to accelerate the adoption of these technologies by both businesses and consumers.
Given the limited representation of some of these firms in benchmark equity indices, investors looking to gain exposure to these themes may need to seek out an active manager with expertise in the area.
Please speak to your J.P. Morgan investment adviser to explore the investment opportunities in Europe’s innovative technology sector.
1 Bank of American Merrill Lynch Research, August 2018.
2 The World’s Most Innovative Companies, Forbes. www.forbes.com/innovative-companies/#5b731a331d65
3 Centre for the Promotion of Imports, Netherlands Enterprise Agency. www.cbi.eu/node/2666/pdf/
4 All examples cited in www.cbi.eu/node/2666/pdf/
5 Final report Strategic Policy Forum Digital Entrepreneurship. http://ec.europa.eu/docsroom/documents/9462
6 Strategic Policy Forum on Digital Entre: Accelerating the digital transformation of European industry. http://ec.europa.eu/docsroom/documents/15856
8 France – La Nouvelle France Industrielle Germany – Industrie 4.0 Italy – Intelligent Factories the Netherlands – Smart Industry Slovakia – Smart Industry.
9 For example, a map of national Industry 4.0 initiatives for programmes in target countries.
10 The CBI report labels these countries as ‘traditionalists’, with a thriving manufacturing industry, which could make them promising Industry 4.0 markets. But so far they have continued to focus on traditional manufacturing and are not ready for digitisation.
11 HSBC as of August 2018. EV sales include Mild Hybrid Electric Vehicles, Plugin Hybrid Electric Vehicles(“PHEV”), Full Hybrid Electric Vehicle and Battery Electric Vehicles (BEVs). ICE sales include gasoline, diesel and other vehicles. EV penetration includes BEVs, EVs and Hybrids.
12 HSBC as of August 2018. Global EV demand includes PHEV and EV demand. Europe consists of European Union and European Free Trade Association. Compounded annual growth rate (CAGR).
13 Bank of America Merrill Lynch Global Research as of October 2017.
14 Sanford C. Bernstein (Hong Kong) Limited as of July 2018. Powertrain cost comparison for 60kWh/500km range (without subsidy). According to Bernstein, the BEV leaders comprise five companies that have the most advanced technology, largest customer bases and most cost competitiveness based on their research. The mainstream BEVs are comprised of the remaining companies in the battery manufacturing universe.
15 The International Council on Clean Transportation as of April 2018.
16 Bank of America Merrill Lynch Global Research as of October 2017.
17 Wellington as of August 2018.
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