ANDY Grove, Intel's ever anxious chief executive and author of Only The Paronoid Survive, is now worrying on behalf of Europe. In a speech last week at the World Economic Forum at Davos in Switzerland, he warned that European companies risk losing competitiveness because they are unenthusiastic about information technology.
"My biggest concern for Europe is that its companies operate like oldline US companies did 10 years ago," says the man behind the world's dominant manufacturer of the semiconductor chips at the heart of computers.
Crucially, Grove claims, the Europeans lag behind in adopting Internet applications such as email. "These applications let you react in minutes and hours instead of days. In that sense, Europe is way behind."
There may be an element of self interest in Grove's concern: Europe has been slower than the US to buy Intel's newest Pentium chips. But complaints over Europe's slow IT growth have been voiced by other large companies, including software company Computer Associates, and IBM, the world's largest computer maker. Europe's IT producers appear to lag behind as much as consumers: a report presented to the EU Council of Ministers earlier this month warned of a "disturbing" competitiveness gap between Europe's IT players and those of the US and Japan.
However, while Europe has undoubtedly trailed the US in the use and production of information technology, there are signs that it is beginning to catch up. In sectors such as financial services, large companies are putting their computer systems at the heart of their businesses. And for European developers of IT hardware and software, conditions are improving in three crucial respects: better access to funding, a reduction in barriers to marketing, and the emergence of a new entrepreneurial culture.
The raw statistics certainly seem to back Grove's case:
. sales of PCs in Europe have slipped for the first time below those to the Asia Pacific region, according to market research company IDC;
. European sales, which grew only five per cent last year according to IDC, appear to be faltering, even though the proportion of households with PCs is still only half the US level of 40 per cent;
. the US has four times as many households online as Europe, and will still have more than twice as many in 2000 if present trends continue.
Meanwhile, Olivetti of Italy, Europe's last mass producer of PCs, sold off that business last month. Software developers and other IT companies in Israel attracted more finance last year through initial share offerings than their counterparts in countries such as France or Britain with 10 times the population.
Siemens Nixdorf of Germany believes low IT spending reflects Europe's heavily regulated labour market, which makes it difficult to shed staff. "Europe is still much more reluctant to substitute technology for labour and in that sense is behind the US," says Robert Gogel, a board member.
Such unflattering comparisons miss revealing detail - as can be seen from the financial services industry. US companies such as stockbrokers Charles Schwab and retail bank Wells Fargo have taken a lead in their fields by giving customers access to accounts - over the Internet. But some European groups are at the forefront in other technologies.
The Halifax Building Society uses neural network technology, which mimics the action of the brain to judge the profitability of individual lending decisions.
Direct Line, the British direct selling insurer, uses advanced database marketing software to pinpoint potential customers and identify ones that might be about to defect. And even the high tech Wells Fargo has visited Lloyds TSB, the largest retail bank in Britain, to learn from its modernisation of old mainframe systems.
Europe has also produced some exceptional IT companies. Software developed by SAP of Germany is used by most of the world's largest oil, chemicals and pharmaceuticals companies for functions such as the control of stock. The smartcard technology developed by Mondex, the British venture developing an electronic equivalent to cash, was sufficiently advanced for Mastercard to buy into the consortium. And mobile telephony has produced world class equipment manufacturers in Nokia of Finland and Ericsson of Sweden.
Indeed, there are signs that successes such as these are making it easier for European IT companies to raise venture capital - a perennial problem in the past. In the US, venture capital firms financed the explosion of IT companies in places such as Silicon Valley - investing $1.8 billion last year in California alone.
The venture capital industry in Britain, which represents about half of European venture investment, invests a similar proportion of gross domestic product to its US equivalent - about 0.8 per cent a year. But just 40 per cent of the British finance went into high tech companies in 1995 compared with 78 per cent in the US.
Hermann Hauser, who has founded or backed about 20 start ups in Britain, explains how difficult it was to raise finance for one venture: "The recommendation of UK venture capitalists was to go to the US and find US investors alongside whom they would be prepared to invest."
In fact, the US venture capitalists have already begun to arrive in Europe - attracted by the success of investments such as that in 1993 by General Atlantic Partners in Baan, a Dutch business that develops software used by companies such as Boeing and Hitachi to control stock and project sales. Baan's market capitalisation has since risen thirtyfold.
Venture capital firms such as Advent, Warburg Pincus, New Enterprise Associates and Oak Investment Partners have brought not just money but also the networking skills that have helped small start ups in the US find managers, publicity and customers. And several west coast investment banks such as Robertson Stephens arrived in 1996 offering to take European IT companies to Nasdaq, New York's exchange for growing businesses.
"Obviously we did not move here for the weather," says Josh Rafner, head of investment banking for Hambrecht & Quist. "There were more and better companies than we could adequately service from California. I got tired commuting over Greenland."
The creation of new European stock markets such as the Alternative Investment Market in London and Easdaq, which is based in Brussels and modelled on Nasdaq, will make it easier for homegrown venture capitalists to sell their stakes and realise gains. And European fund managers are becoming more willing to invest in local high tech shares.
One reason for earlier caution among European venture capitalists over investments in high tech companies was the low rate of return compared with finance for alternatives such as management buy outs. In many cases, this tow rate of return reflected the difficulties in selling in the fragmented European market.
European bankers, far from being laggards, are just as smart as their US counterparts," says Marcus Lovell Smith of Ramar, a European maker of chips which read electricity meters. "The issue is the sheer size of the US market." Ramar had to tailor its product to satisfy differing regulations in each European country; US competitors can address a huge home market with one standard product.
But the Internet is making it much easier to reach the scale of production that leads to adequate rates of return. By making it easier to distribute news and software (see Computimes, February 3rd), it is creating a seamless global market for many IT products.
"What the Internet has solved is the problem of getting the products into the shop," says Michael Lynch of Neurodynamics. His British company develops "intelligent agent" software which can, for example, be used for searching for information on the Internet.
Opportunities such as these are changing the European IT business culture. Managers at large companies have previously been unwilling to risk their careers on a new start up, while technologists have been reluctant to give up control in exchange for expansion finance.
But the power of example is weakening these aversions, observes Warburg Pincus, the US venture capital firm. Europe now has at least one shining example of the rewards for being prepared to take risks, in Jan Baan. The company's success has allowed the Baan family to set up a charitable trust for the developing world with a shareholding worth more than $1 billion. That looks attractive, particularly when established companies such as Bulls of France and Olivetti no longer look like secure workplaces.
Europe still has no cluster of high technology companies that comes close to Silicon Valley or - even Israel - although Ireland continues to claim the title of its "software capital", with more than 60 per cent of all packaged PC software sold in Europe shipped from Ireland. In hardware, too, Intel Ireland is the group's sole manufacturing centre for Europe it produced the world's first eight inch wafers of pure silicon and is the biggest supplier of Pentium chips in the world.
For the moment observers at US firms such as Hambrecht & Quist believe there are profits to be made in European IT investment. "We are seeing a resurgence of European entrepreneurialism and good technical skills," says Rafner, "and we are here to finance them."
