A wake-up call for Europe

The following is a summary of a recent report, produced by KPMGs Information, Communications and Entertainment practice, in co-operation with the Economist Intelligence Unit. Europes IT firms face very difficult challenges - only a handful currently enjoy the scale of their North American rivals, while lower cost Asian firms are improving their performance in areas such as innovation. European suppliers traditional strengths, the technical excellence of their products and services, and their ability to build strong customer and partner relationships, will stand them well in the global competition to come. This report makes clear, however, that addressing their lack of competitiveness in pricing is a matter of urgency. Europes technology sector enjoys another potential advantage concerted policymaker attention at the EU level. The strategies developed by the European Union to foster the development of an information society, if followed through, have the promise of strengthening the sectors long-term competitiveness Executives of European information technology firms have reason for optimism as demand for IT products and services worldwide continues to recover from the post-bubble downturn. But securing the future will be no easy task: in the eyes of IT managers and CIOs, the buyers of their products, European IT firms are less competitive than their North American and Asian rivals and appear to be losing ground. This analysis of Europes IT sector finds that, when compared against firms from North America and AsiaPacific, the competitive weaknesses of European technology firms outweigh their strengths. These, and other findings, are based on a survey of 126 IT managers from around the globe conducted in September 2005. Their responses underpin KPMG Firms IT Sector Competitiveness Index, which compares IT suppliers from all three regions against a range of attributes. Asia-Pacifics IT sector scores 6.7 out of a maximum of 10 in the IT Sector Competitiveness Index, with North America close behind at 6.6 and Europe trailing with 5.9. Other key findings from our analysis include the following: High prices and a perception of less value for money are the major weaknesses in European IT firms competitive armor. They perform well, on the other hand, in the areas of technical excellence and strength of customer and partner relationships. If price and value for money are factored out, Europe performs on a par with Asia and reduces the gap with North America. But of course price cannot be ignored. IT managers will expect continued concessions on pricing from their suppliers, as well as greater flexibility in structuring contracts, but a large number doubt the ability of European suppliers to deliver in these areas. It is here that European IT firms can be most vulnerable to Asian competitors, not only in international markets but potentially also at home. All parts of Europes IT industry are not equal. Suppliers of IT services, hardware, desktop software and microelectronics are seen to be losing ground in competition with firms from other regions. Producers of mobile devices, applications and enterprise software, however, score high marks, and IT managers believe these firms are becoming more competitive vis--vis their American and Asian rivals. Europes technology firms have clear options to help improve competitiveness. Some will innovate with pricing strategies, or make better use of off-shoring to help reduce costs and improve service delivery. Others may also acquire rivals in order to broaden portfolios and gain economies of scale. All will have to address perceived value for money. In its i2010 strategy, the European Commission aims to redress the weaknesses in Europes technology sector by, among other things, focusing national efforts to expand IT research and development and fostering other components of the digital economy. Reaching these objectives will be welcome: the EU

currently devotes three percent of its annual budget to supporting research and innovation, compared to 37 percent that goes to supporting agriculture. But in the final analysis, the fortunes of Europes IT sector will hinge on the business acumen that its firms leaders, employees and owners are able to muster for the challenge ahead. The 2005 survey on Europes IT competitiveness methodology In September 2005, KPMG and the Economist Intelligence Unit polled 126 CIOs, IT managers and directors for their views on IT sector competitiveness. The survey was cosmopolitan, covering more than 20 countries in three regions. A range of industries was represented, with manufacturing, healthcare, financial services, telecoms and IT accounting for the majority of respondents. The companies represented in the survey were of substantial scale: 58 percent earn more than US$500 million in annual revenue, and 44 percent earn over US$1 billion. For more information on this report, or to obtain a copy of the survey, please contact Sheila Allen ( sheilaallen@eiu.com )at the Economist Intelligence Unit, London.