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Accelerating European industry digitalisation: challenges ahead

7 Oct 2022

Insights
Accelerating European industry digitalisation: challenges ahead

By Barbora KudzmanaitėRūta Gabaliņa, Oleksandra Yevdokymova  

In this turbulent time for the European industry, digitalisation has been hailed as a key contributor to resilience, growth, and competitiveness. Yet, some companies risk falling behind in their digitalisation journeys. Significant differences in digital technology uptake can be seen between different countries, sectors, and enterprise size classes. 

PPMI is currently implementing a study titled Smart Industrial Remoting: remote working in non-digitalised industries’. In this article, we build on the key takeaways of the first output of the study: the Gap Analysis report that sheds light on digitalisation gaps in five European industries: 

  • agrifood, 
  • automotive, 
  • construction, 
  • retail and 
  • textile. 

PPMI, together with five Digital Innovation Hubs and experts analysed the policy, social and economic factors that may influence the uptake of digitalisation. The report’s findings help uncover the main gaps that slow down the adoption of digital technologies. 

It is a turbulent time for European industry 

This study is taking place at a time when Europe’s industrial landscape faces significant challenges. The COVID-19 pandemic triggered a period of economic turbulence. A supply chain crisis followed, which is now worsened by Russia’s invasion of Ukraine. These developments have made digitalisation simultaneously more essential and more challenging.  

COVID-19 accelerated digitalisation, but not for everyone 

The COVID-19 pandemic is widely perceived as a catalyst for digital transformation. The crisis has had a profound effect on the role, perception, and pace of digitalisation in the EU. During the pandemic, digital technologies became a key driver of competitiveness and resilience.  

While it is true that in response to COVID-19 digital transformation accelerated in Europe, our analysis shows that the effect has not been the same for all companies. Many large and already digitalised companies adopted new digital technologies in response to the pandemic. However, as can be seen in the figure below, the pace of digitalisation was slower among SMEs.  

Companies that became more digital in response to COVID-19: EU countries, EIBIS 2021 

Companies that became more digital in response to COVID-19: EU countries, EIBIS 2021

Source: EIB investment survey, European Investment Bank, ‘as a response to the Covid-19 pandemic, have you taken any actions or made investments to become more digital?

This could be explained by SMEs prioritising more pressing concerns, such as maintaining production and profitability, instead of investing in digital technologies. As a result, the gaps in digitalisation between SMEs and large companies have widened during the COVID-19 pandemic. 

What characterises the companies that are slower to adopt digital technologies? 

To understand why some companies digitalise faster than others, it is important to determine which companies are lagging behind. The European Digital Intensity Index measures SME digital intensity based on the number of technologies implemented. Companies are considered to have ‘at least basic digital intensity’ if they have implemented at least 4 out of 12 selected technologies. As shown below, there are significant differences in SME digitalisation across the EU. According to the Index, SMEs in Sweden, Finland, and Denmark tend to have the highest proportion of SMEs reaching at least basic digital intensity, while Romania, Bulgaria and Hungary score the lowest. 

Percentage of SMEs with at least basic digital intensity, without financial sector, 2021 

Percentage of SMEs with at least basic digital intensity, without financial sector, 2021

Source: Digital Intensity Index, 2022. Note: darker colour shows a higher rate of SMEs with at least basic digital intensity. The digital intensity score is based on counting how many out of 12 selected technologies are used by enterprises. A basic level requires usage of at least 4 technologies.

Additionally, our analysis points to several structural characteristics that are associated with lower uptake of digital technologies: 

  • Company size: larger companies tend to be more digitalised than smaller companies. 

  • Position in the value chain: enterprises that are on the higher end of the value chain tend to be more digitalised. For example, in the construction industry, engineering processes tend to be more digitalised than those lower on the value chain. 

  • Industry: ‘computer programming, consultancy and related activities, information services’ is the most digitalised sector in Europe, while ‘construction’, ‘transport and storage’ and ‘manufacture of food, beverages, tobacco, textile, leather, wood, paper; publishing and printing’ have the lowest digitalisation scores. 

  • Accessibility of technologies and infrastructure: companies that have access to digital infrastructures, such as broadband, and can choose from a range of solution providers are more likely to adopt digital technologies than those that do not. 

But not all differences in digitalisation can be explained by structural characteristics like company size or the industry in which a company operates. Other factors play a role too. 

Lack of skills and resources are at the core of the problem 

The underlying causes for slow digital technology uptake are not surprising. Our analysis of industry digitalisation gaps showed that insufficient availability of skills and resources to invest in digitalisation are at the core of the problem.  

Digital transformation requires companies to have staff with the necessary skills to implement and use digital technologies. According to the European Investment Bank, companies operating in countries with a high share of the population with above-average digital skills are more likely to be digitalised.  

At the same time, according to the Digital Economy and Society Index, all EU countries struggle with shortages of digital experts. These skills shortages particularly affect SMEs. In 2020, only 17.6% of European SMEs employed ICT specialists compared with 76.1% of large companies. As a result, SMEs can find it difficult to find the staff for implementing digitalisation projects.  

Meanwhile, SMEs also find it difficult to secure the financing necessary to pursue digital transformation. According to a study from 2021, SMEs consider both the lack of private investment and capital, and lack of national and EU public support as important barriers to digitalisation. 

What policymakers are doing to help companies catch up 

Despite these persisting challenges, the EU has set ambitious targets to increase SME digitalisation by 2030. The Digital Compass presents a vision to ‘empower businesses and people in a human-centred, sustainable and more prosperous digital future’. The Digital Compass sets out three objectives for the digital transformation of businesses. 

Digital Compass Objectives for the digital transformation of businesses

Digital Compass Objectives for the digital transformation of businesses

The EU and national governments have put in place several instruments to support SME digitalisation.  

On the EU level, the Recovery and Resilience Facility aims to dedicate at least 20% of its close to EUR 700 billion budget to digital investments. This comes on top of the EUR 750 billion of the Digital Europe Programme to support the adoption of advanced digital technologies in the EU.  

As a result, SMEs stand to greatly benefit from existing EU and government support for digitalisation. At the same time, accelerated uptake of digital technologies by SMEs could significantly contribute to the resilience and competitiveness of the European industry.  

If you have questions for the team or wish to join our mailing list, you can always reach us at digital_industry@ppmi.lt.