Falling Back in a Critical Race

By Alexander L. Taylor III

Old roadblocks and rivalries brake Europe in the high-technology field

Spawned in the mid-18th century, the first Industrial Revolution was fueled by the steam power and coal of Britain. The second, around 1900, got its push from chemical and electrical developments in Germany. Now there is a third industrial revolution under way, propelled by microchips. This time, however, the driving force is in the U.S. and Japan, and Western Europe is being left far behind.

Today the Continent is flooded with IBM computers, Matsushita video recorders and Boeing jetliners. Here and there, innovative Europeans armed with breakthrough discoveries and marketing savvy have elbowed their way into lucrative new fields. But those modest inroads have failed to hide a painful reality: Western Europe has been caught unprepared for the accelerating high-technology revolution beyond its shores.

The gap, though difficult to measure with precision, appears to be widening. In 1978 Western Europe had a $500 million trade surplus in such high-technology exports as computers, digital telecommunications systems, robotics and computer-controlled industrial machinery. Two years later the surplus had evaporated; in its stead was a $5 billion shortfall. By 1982 the high-tech trade deficit had doubled to $10 billion, with U.S. and Japanese exports to Western Europe growing rapidly. In the crucial field of electronic microprocessing, the industry on which much of this new revolution rests, Europeans hold only 10% of the world market. Together, the U.S. and Japan have 80%.

To be sure, there are exceptions. Switzerland is a world leader in pharmaceuticals and electric-generation equipment, Britain in precision instruments, West Germany in engine technology and machine tools, and Sweden in robots. In many fields of scientific achievement, Western Europe remains close to the U.S. and ahead of Japan. But Europe has not been able to turn laboratory research into commercial products.

The obstacles to high-technology progress are formidable. Despite the unifying efforts of the European Community, economic nationalism thrives, fragmenting the West European market and isolating consumers behind political boundaries. Even some of the biggest companies--The Netherlands' Philips, West Germany's Siemens and Italy's Olivetti--do not have access to large enough markets or the resulting economies of scale to justify the cost of independent high-tech research and product development.

Trade has been stifled within the ten-nation Community by a thicket of visible and not so visible barriers, like preferential government buying, which were erected to protect national industries. For example, Western Europe has nine different telecommunications switching systems. Says a senior Community trade official: "You can imagine what would have happened to Apple Computer if it had to fight such barriers in different American states." Economists estimate that Western Europe's patchwork of safety, design and technical standards represents the equivalent of an 8% to 12% tariff on all goods traded within the Community.

Attempts at industrial cooperation have generally fared badly. There have been a few partnerships like Airbus Industrie, but they were conceived on the basis of carefully plotted, specialized divisions of labor rather than cost-effectiveness. Since the Community was founded in 1957, not a single transnational company has been formed in Western Europe.

Rather than develop joint ventures, European firms prefer to hook up with U.S. or Japanese companies, where the chances of success are greater. The largest and most controversial deal was struck last December by Olivetti and AT&T. The U.S. telecommunications giant agreed to pay Olivetti $260 million for a 25% share of the company, plus an option to increase this to 40% by 1988. As part of the deal, Olivetti got access to AT&T research facilities, as well as a shot at the $80 billion global market for office-automation technology for the next decade.

Until now, innovation has been plagued by competitive national programs that are wasteful and duplicative. Some 90% of official funding for research in Western Europe has been concentrated in four areas: computers, electrical engineering, aerospace and telecommunications. As a result, new fields like robotics and biogenetics receive either too little money or too much.

Corporate connections with universities that provide scientific support and skilled researchers, which have been an important factor in developing U.S. technology, are underdeveloped in Western Europe. Too many academic institutions still tend to view commercial ventures with distaste. Such sentiments are changing, but slowly. In Britain, the Thatcher government has slashed grants to university-based researchers, forcing them to seek support from the private sector.

Western Europe has also been hampered by the slow growth of entrepreneurship, the spark that propelled the semiconductor and personal computer industries. Says Albert Zylbersztejn, director of technology at Groupe Bull, a French-owned computer firm: "There is not a positive attitude toward risk taking. If you take a risk and fail, you are finished." Young engineers and managers are often unwilling to give up secure positions and start their own businesses. Also, venture capital is scarce, and financing for infant firms is difficult to come by.

With the failure of past policies evident, stimulating industrial innovation now stands near the top of the political and economic agenda in most West European capitals. At last June's London economic summit, the Big Four of the West European nations came out for a broad policy that implicitly recognizes the U.S. example of individual enterprise and official deregulation. They endorsed programs to promote technological change through small and medium-size businesses, more flexible wages and work practices, and the running down of "obsolescent production and technology."

Many stumbling blocks remain. As Eduard Pannenborg, Philips' vice president for research, points out, "Much of what we have in Europe works out as an Uncommon Market. A lot of our thinking is still nationalistic." Some entrepreneurs and government officials are hopeful about a Community initiative called the European Strategic Program for Research and Development in Information Technologies (ESPRIT). Its proponents believe that the $1.3 billion five-year plan for cooperative research in microelectronics and data processing could lead to at least a partial, Europe-wide standardization in products of the future. Twelve participating ESPRIT companies agreed in March to adopt common specifications for computers and office equipment, and telecommunications officials have begun to discuss common guidelines for buying new equipment. Last March, French President Franc,ois Mitterrand visited California's Silicon Valley and liked what he saw. "We know that our country is late in undertaking this phase of its evolution," he told an audience of U.S. entrepreneurs. "We are making a considerable effort to overcome this lag." Yet for France and Western Europe to succeed, there will have to be a consensus for change, a renewed belief in technology and a new willingness to take the great risks that often lead to equally great payoffs. --By Alexander L. Taylor III. Reported by Lawrence Malkin/Paris, with other bureaus

With reporting by Lawrence Malkin