Welcome the robots: bridging the European artificial intelligence gap

18 February 2019 Consultancy.eu

Digital transformation is well underway in international businesses and economies. The problem? Europe is lagging behind its global competitors.

A new study by the McKinsey Global Institute (MGI), the research arm of McKinsey & Company, has found the continent’s “digital gap with the world’s leaders is now being compounded by an emerging gap in artificial intelligence.” It’s a game of catch-up, in other words, with technological leaders such as the US and China. “Europe needs more AI, different AI, and all of it more quickly,” the study states. 

This is an issue with which Europe has been battling for years. Now, however, is the time to “double down” on its efforts to successfully undergo a digital transformation, especially as new tech such as artificial intelligene (AI) becomes more ubiquitous, user-friendly, and expected by consumers. 

“If Europe on average develops and diffuses AI according to its current assets and digital position relative to the world, it could add some €2.7 trillion, or 20%, to its combined economic output by 2030. If Europe were to catch up with the US AI frontier, a total of €3.6 trillion could be added to collective GDP in this period,” the study found. This is a staggering number, but compared with other continents or nations, it is hardly surprising. Digitisation, for example, could approximately add €210 billion to Mexico’s GDP by 2025. 

Economic potential of AI to Europe’s economy

The good news is that European tech doesn’t necessarily have to compete head-to-head with its superiors. The continent can instead home in on areas in which it has advantageous footholds within the industry, such as B2B and advanced robotics. From there, Europe could begin to scale up, eventually becoming one of the “world’s largest bases of technology developers into a more connected, Europe-wide web of AI-based innovation hubs.” 

In its discussion paper, “Notes from the AI frontier: Tackling Europe’s gap in digital and AI” McKinsey reveals six major findings to better predict how AI might roll out on the continent.

Gaps on gaps on gaps

A recent study showed that nearly two-thirds of digital transformation projects fail – meaning companies worldwide are wasting billions on projects that fail to deliver what they had initially promised. Research conducted by McKinsey in 2016, meanwhile, found that European countries were capturing only 12% of their digital potential (defined as “weighted deployment of digital assets, labour, and practices across all sectors, compared with the most digitised sector.”) 

The game isn’t easy, and Europe doesn’t seem to be becoming a better player — that 12% is only two-thirds of the potential captured by the US. Information and communications technology (ICT) accounts for only 1.7% of Europe’s GDP, while it accounts for 2.1% in China, and 3.3% in the US. These GDPs are comparable, creating a bad look for Europe, especially considering it is home to 6 million professional developers – more than the US – who could be positioned in the AI industry, many of whom are millennials. Additionally, approximately a quarter of the world’s AI start-ups are headquartered in Europe, but many are in early stages – again reinforcing the international lag.

The list goes on, but the point is short, sharp, and somewhat bitter: Europe has the resources to be an international AI competitor, but it is not capitalising on them.

Firms adopting AI at scale“In the most advanced industry – high-tech – 93% of adopters are capturing AI for 10% of its potential use, but still only 17% of European companies (compared with about 22% in the United States) are using AI technologies at 75% of potential. At the other extreme, only 2% of European firms in healthcare systems and services are using those technologies at 80% of potential,” the study finds. 

Play fast, play hard, scale up

European companies must focus on three areas that greatly boost productivity within the AI industry: competition, innovation, and new skills. More than half of European companies see both AI-native and early adopter organisations as business threats. Non-adopters, however, should be keen to take a slice of the pie. “The primary objective for 15% of European companies investing in AI is taking market share from competitors,” the study states. Simultaneously, “digitally savvy European companies are 15-20% more likely to use AI.”

As an innovation-led technology, AI holds vast potential for revenue growth. In the retail sector alone, the technology stands to save companies approximately €300 billion in the coming years. As such, European businesses are salivating to tap into that literal wealth, with approximately 30% of companies adopting AI using it to expand or explore new revenue streams. There also seems to be an exponential effect in how companies view the technology. “Companies with less experience in AI tend to focus on its ability to help cut costs, but the more companies use and become familiar with AI, the more potential for growth they see in it.” 

Skill is an area where things get tricky. Simply put, some companies are not capable of implementing and scaling AI in a reasonable and effective ways. “The two biggest barriers to AI adoption in European companies are linked to having the right workforce in place. The first barrier relates to the ability to use ICT tools in work. The second barrier relates to companies’ need for skills to provide new AI applications and services, such as AI coding and analytic expertise.” As the technology continues its progression, it will almost certainly become more accessible for companies to find ways in which to leverage AI in their operations, helping to close the international gap. 

Europe is already in short supply of AI skills

Automated economic superpowers

Besides adding the previously stated €2.7 trillion to the continent’s GDP, “if Europe further improves on its assets and competences sufficiently to catch up with the United States’ AI frontier, the potential could be even higher. GDP growth could accelerate, adding an extra €900 billion to GDP and bringing the total potential AI boost to €3.6 trillion by 2030.” 

The study names seven economic enablers that could help usher in AI technology: automation potential, investment capacity, connectedness on the macro level, and digital legacy, innovation foundation, human capital, and the maturity of AI ecosystems on the micro level. “In general, Europe fares well with regards to its automation potential and in the stock of cognitive skills, but has not, on average, been able to increase its innovative capacity, and faces challenges in developing a large AI start-up ecosystem," the study finds. 

The advancement of automated technology rides side by side with fears of the replacement of human jobs. When the robots come, where do the humans go? The answer is surprisingly good news: AI can provide a significant boost in productivity without costing human jobs in the long term. “Throughout history, technology has eliminated some types of jobs, but it also always created new ones,” the study states. “Powerful development of AI may be the best hedge and may even be the catalyst for new jobs in the future.” 

Performance varies, yet the show must go on

The development, implementation, and scaling of AI will differ depending on the country where it is used. Nations have varying levels of industry ability and enablers — when averaged, these affect the overall image of the Europe’s AI gap. Southern and Eastern European countries are the slowest to adopt AI, with lower available skilled employees and fewer firms using AI innovatively and advantageously. 

Northern European and Anglo-Saxon countries somewhat obviously lead Europe in AI, but they also come in ahead of China. The US is a strong leader in the field overall, and China has the unique ability to reinvest its gains into the economies and is already deploying AI ecosystems, but “in general, automation potential is lower in China than Europe because of lower incentive to arbitrage salaries.”

AI maturity per European country

To continue striding forward, European countries must rely on one another to create a greater whole. “For instance, Ireland tops the index on ICT connectedness, Finland on human capital, and the United Kingdom on innovation,” the study states. “The dispersion of strengths indicates that countries can borrow best practice from each other to create a more favourable and more enabling environment for AI.”

Prioritise, light the fire, automate

To work toward closing the AI gap, the study found several priorities on which Europe should focus. First, the continent must continue the development of a “vibrant ecosystem” of firms that will leverage AI technology. Veteran firms must also move ahead with digital transformations, rather than relying on their younger counterparts. Focus should also remain on the digital single market, which covers marketing, e-commerce, and telecommunications. Finally, by searching for and cultivating a talented and skilled workforce – be it through education or retraining – as well as finding paths on which to “guide societies through the potential disruption” (such as unease about potential unemployment), Europe can and will position itself more advantageously among the automation industry’s international leaders.

Related: Talent shortage is more pressing than job losses by robotisation.