Digital Europe: Pushing the frontier, capturing the benefits

1. June 30, 2016 Digital Europe: Pushing the frontier, capturing the benefits

2. 2McKinsey & Company Change is accelerating exponentially Europe must capture the momentum Europe’s digitisation lags behind the US And varies between countries and sectors Adapt and win A united Europe can grab these opportunities A new digital divide is opening up Between the ‘haves’ and the ‘have-mores’

3. 3McKinsey & Company Waves of digital innovation are accelerating 1960s 1970s 1980s 1990s 2000s 2010s ~3 years15 years Desktops and PCs Basic office software Games and visual graphics Enterprise software Internet technologies Personal computing GPS Wi-Fi, 2G/3G Laptops Mobile phones Social media Smartphones and apps Smart devices and sensors Predictive algorithms, machine learning, robotics Modern programming languages Algorithmic advancement Mainframes and databases Desktop and personal computing Business software Internet and e-commerce Mobile broadband Social media Big data

4. 4McKinsey & Company Used cross-border bandwidth Size of bubble represents intraregional used bandwidth Data flows are surging, redrawing the world’s borders 45xcross border bandwidth between 2005-2014 EUROPE ASIA LATIN AMERICA NORTH AMERICA AFRICA MIDDLE EAST OCEANIA Bandwidth (gigabits per second (Gbps) >20,000 20,000-5,000 5,000-1,000 1,000–500 <500

5. 5McKinsey & Company 5McKinsey & Company Connectedness score Data flows 7 10 15 19 21 25 35 43 56 100 8 of the 10 most connected countries are in Europe

6. 6McKinsey & Company 6McKinsey & Company The European startup ecosystem is developing at a rapid pace Number of unicorns in Europe Number of accelerators and incubators between 2008 and 2013 x3 Growth in venture capital funding between 2013 and 2015 x2 Of European unicorns are profitable 60% 47 2016 30 2014

8. 8McKinsey & Company 8McKinsey & Company Today the contribution of digital to European GDP lags behind the US… Share of digital contribution to GDP, % 4.0% 5.4%5.5% 6.6%6.9% 8.0% 10.0% 5.0%

9. 9McKinsey & Company 9McKinsey & Company 21% 74% 5% 60% 8% 32% …reflected in a low presence of European internet companies compared to the US… IOT companies Big data companies1 1 Top 10 companies Europe US Asia Market capitalisation Top 20 companies, Percent, 2015 Revenue Top 20 companies, Percent, 2015 55% 5% 40%64%36% Internet companies Unicorns

10. 10McKinsey & Company …partly because Europe is still reliant on US digital imports… Digital trade balance with the US Percent -4.2% -11.4%-3.8% -5.6%-5.2%-3.6%-2.8% 0% 1.0% -0.2% 1.3% 0.2% -0.4% 1.6% Digital trade balance with EU28 Percent

11. 11McKinsey & Company MGI Sector Digitization Index, 2015 or latest available Europe data …and partly because companies across sectors have not taken the digital turn yet Low High Relative digitisation ICT Media Finance and insurance Professional services Wholesale trade Entertainment and recreation Personal and local services Advanced manufacturing Transportation and warehousing Utilities Retail trade Education Chemicals and pharmaceuticals Hospitality Real estate Government Health care Basic goods manufacturing Construction Agriculture Selected sectors Knowledge-intensive sectors that are highly digitised across most dimensions 1 Capital-intensive sectors with the potential to further digitise their physical assets 2 Highly localised sectors that lag across most dimensions 3 Assets Labour Usage

12. 12McKinsey & Company Country effects explain one-third of the variation in digital capability across Europe, sector effects the other two-thirds MGI Sector Digitization Index, 2015 or latest available Europe data Low High Relative digitisation ICT Media Finance and insurance Professional services Wholesale trade Entertainment and recreation Personal and local services Advanced manufacturing Transportation and warehousing Utilities Retail trade Education Chemicals and pharmaceuticals Hospitality Real estate Government Health care Basic goods manufacturing Construction Agriculture Selected sectors

13. 13McKinsey & Company Captured digital potential by country Percent Tremendous upside remains to be captured 18% 10% 12% 15% 17% 10% 15% 12%

14. 14McKinsey & Company €2.5 trillion

16. 16McKinsey & Company Consumers More consumer surplus Companies Faster revenue growth Workers More automation Digitisation creates a divide between ‘haves’ and ‘have mores’

17. 17McKinsey & Company 2000 2014 Annual Google searches 178 mn unique monthly US visitors in 2014 International call volumes with Skype $37 bn savings for consumers just in 2013 Consumer surplus through free internet search has accumulated rapidly in the past decade… 74% of online US adults are on social media in 2014 Social media usage 100 mn unique monthly US visitors in 2014 Wikipedia article count

18. 18McKinsey & Company …though the ‘have more’ minority captures most of the surplus 80% Have mores Captured value from Web services Haves 40% Internet users 20% 60%

19. 19McKinsey & Company 19McKinsey & Company More highly digitised companies perform better financially… Digitisation score 4% 10% 18% 5 year revenue growth, CAGR Percent +14pp15% 18% 42% +27pp 3-year Total Return to Shareholders Percent High Low Medium

20. 20McKinsey & Company …and more digitised sectors experience faster productivity growth Germany Netherlands Italy Sweden France 0.900.70 0.800.600.400.30 0.500.200.10 Productivity Compound annual growth rate, % Digitisation index Composite score measuring digitsation level across sectors

21. 21McKinsey & Company Ability to technically automate Percentage of time on activities that can be automated Hourly wage, $ per hour No activity is immune to automation, but some jobs are more impacted than others… 0 20 40 60 80 100 120 File clerks Landscaping workers Chief executives 0% 100%

22. 22McKinsey & Company …and the phenomenon could accelerate in the coming years 44% of all activities likely to be automated in the next 10 years Displacement of middle-skill jobs due to automation could accelerate from 8% today to 15% in the next decade Advanced robotics Artificial intelligence

24. 24McKinsey & Company 24McKinsey & Company VivaTechnology’s Partners are already grappling with the toughest digital challenges Big Data How to manage the public data generated by individuals on smartphones? Artificial Intelligence How to leverage AI to improve in- store operations (inventory, replenishment)? Environmental footprint How to reduce the environmental impact in train stations? Personalisation How can customer data enrich personalisation features? Customer experience How to improve guest experience by digitally empowering hotel employees? Themes Technologies Internet of Things How to effectively analyse and process sensor data collected in-store? Open innovation Blockchain What services and value proposition can be added to the blockchain ecosystem? Efficiency How to improve the generation of distributed energy?

25. 25McKinsey & Company 25McKinsey & Company For companies, digital transformations should be performed along 6 strategic priorities 2 Become agile and learning-focused 1 Evolve existing business models 3 Take advantage of new innovation models 4 Bring the customer along 5 Build ─ or buy ─ the right digital capabilities 6 Adapt your workforce Company digitisation

26. 26McKinsey & Company 26McKinsey & Company Policymakers must act to create a more dynamic digital ecosystem 3Deepen Europe’s partici- pation in global dataflows France launched the etalab program to open public data 4 Unlock R&D investment and access to capital for entrepreneurs The UK offers up to 50% in tax benefits for investors in early stage digital businesses 2Create a more seamless digital market The EU will invest more than €50B by 2020 in digital initiatives 5 Address issues surrounding skills in the labour market Germany developed an app to support citizens looking for a job 1 Digitise government operations Estonia's eID scheme allows online authentication Facilitating the transition

27. 27McKinsey & Company The best time to plant a tree was 20 years ago. The second best time is now.