The Competitiveness of Europe
Presented by
Pasquale Pistorio
President and CEO,
STMicroelectronics
International
Electronics 2004
Prague, May 4, 2004
Good
afternoon Ladies and Gentlemen.
And thank
you Malcolm for inviting me in beautiful Prague, and for giving me the opportunity
to participate in this very interesting meeting, while having a chance to visit
for the first
time one of the most charming and beloved cities in Europe.Which is, by the
way, also the
site of one of our fastest growing and most promising design and application centers. So
much that, in fact, our Prague IP Design Factory - this is its official
internal definition -
grew from just ten people in December 2002 to over 160 people by now, making it by
far the largest semiconductor design facility in Eastern Europe, excluding
Russia.
I also wish
to thank Future Horizons – and the many of you who have been regularly attending
these meetings – for having been perseverant enough to respectively invite me and listen
to my presentations on as many as ten out of thirteen editions of the
International Electronics
Forum.
Well, I must
say that this tenth occasion is a special one for three reasons. First of all, because ten
is a nice round number, and it’s worth celebrating. Secondly because this will be the last
time I will participate in this forum as the CEO of ST. And last but not least, because this
Forum coincides with a very special event: the Czech Republic and nine other countries
joining the European Union.
In light of
this historical event, Ladies and Gentlemen, I will use this special
opportunity to talk about
one of my favorite subjects: the competitiveness of Europe.
Actually, in
preparing today’s address, I went through the presentations I had prepared for previous
editions, and found out that the word Europe was repeated on a very high number of pages. It
was also fun to read some of the forecasts I made, realizing once again how accurate
professional and amateur crystal ball readers can be in analyzing the causes of
past events, and
how hazardous it can be for them to forecast the future.
In the ‘80s,
I had been following the development of European electronic and
microelectronic
industries with the loving care of a parent of talented, but not very diligent children. I
had been looking with dismay at missed opportunities and at the risks of
retreats with no
return. However, I have always been a firm believer of the fact that Europe
would eventually
be successful: and I was right.
At the turn
of the decade, and later on in the ‘90s, I have been watching the first signs
of important
recovery, welcoming – and, if you allow me, contributing to – the new winning spirit and
the unprecedented global attitude of the European semiconductor industry. I
saw, of course,
the explosion of a worldwide leader like Nokia and, among others, the further strengthening
of European automotive electronics producers. I witnessed the change in the balance
between competing macroeconomic systems. And, while I could clearly anticipate the trend,
never had I imagined the actual explosion of the Asian market nor could I have imagined the
corresponding decline of the American one. By the same token, I could not foresee, ten
years ago when we convened in Munich, that the European semiconductor market,
which was some 19% of the world’s total at the beginning of 1994, would still represent
19% of the total in February 2004. Nor could I anticipate that the European consumption
could be slightly higher in February 2004 than that of the American market, which used
to be one third of the world in 1994. And even in my most optimistic dreams I could have
imagined to see in 2004 three European companies among the top ten world players in
semiconductors.
Anyway,
while trying to objectively observe Europe in its permanent competition with other major
macroeconomic systems, I always tried to analyze both positive and negative aspects,
suggesting whenever I could some possible improvements and corrections to negative
trends. Today the Old Continent is living another moment of difficult
transition, with the
late and slow picking-up of economy, while the pendulum of industrial success
is
decidedly
swinging in favor of Asia and specially China.
While
Europeans should be praised for some outstanding achievements like the
conception of welfare
state or the creation and the enlargement of the European Union, I believe
that, in the new wave
of globalization, they have not done their homework properly as far as competitiveness
is concerned. In past years the European economy has not been able to take the leading
role America used to have and become the world’s economic locomotive.
More recently, Europe has been unable to react to the irresistible comeback of American economy. The differential between the two economies has become even more evident recently, as the American GDP in 2003, with the help of the devaluation of the US dollar against most other currencies, has grown almost eight times faster than that of countries in the Euro area, which were able to grow at the disappointing rate of just 0.4%. And while for several years there has been general consensus on the fact that the insufficient and improper use of modern technologies is one of the root causes of this differential, little has been done to address this vital issue.
More recently, Europe has been unable to react to the irresistible comeback of American economy. The differential between the two economies has become even more evident recently, as the American GDP in 2003, with the help of the devaluation of the US dollar against most other currencies, has grown almost eight times faster than that of countries in the Euro area, which were able to grow at the disappointing rate of just 0.4%. And while for several years there has been general consensus on the fact that the insufficient and improper use of modern technologies is one of the root causes of this differential, little has been done to address this vital issue.
In March
2000, the European Council in Lisbon set out a ten-year strategy to make the EU the world's
“most competitive and dynamic knowledge-based economy in the world”, aiming at
catching-up with American ICT supremacy by 2010. Well, until now, only telecommunications
can show real progresses, mostly thanks to Finland, Sweden and Denmark. We
spend too much in subsidizing agriculture and too little in R&D. And, while the 2002
European Council in Barcelona reiterated the unanimous commitment to increase European
R&D spending from 1.95% to 3% of GDP which was at the base of the Lisbon Strategy,
very little is happening also in this field. Yes, we have the apparently very
good excuse of
the lack of available resources in times of weak economy, and certainly it
takes time to make
a big ship turn around. But it’s a fact that in the meantime each European cow is being
subsidized, every day in the year, with six dollars of EU money, or, if you
wish,with three
times the money available on average to each individual in one third of the world’s
population to survive.
We are
clearly suffering from a lack of competitiveness, and the comparison becomes
even more scaring
as countries like China and India not only show GDP growth figures approaching
ten, but also are clearly and rapidly closing their traditional technological
gap.
Today, China
is already the fourth largest economic power in terms of GDP and is by far the fastest
growing one. With its superior power in terms of population, territory and resources,
it can challenge any other macroeconomic system, and, in fact, many analysts predict
that, in 20 years, China could become the #1 economic power in the world. It is
true that the
European Union, with its 450 million citizens after the enlargement to new countries
and its strongly developed economy, could theoretically challenge this primacy, but, as I
said, competitiveness issues must be addressed first, even if we choose of just keeping our
present position.
I have
identified five of these issues that I would like to share with you today.
The first
one is:
to Take
better advantage of Europe’s human capital to create a constant stream of innovative,
high value-added products and services
Innovation
has been extensively discussed at all political and technical levels for many years now. I
have personally addressed this point on several occasions and even in previous editions of
this forum. However, it was, it remains and, I guess, it will continue to be a
truly focal issue
for European competitiveness also for the next several years.
In my opinion,
Europe must focus on three major aspects of innovation:
a)
Education, in order to prepare the human capital for a knowledge society.
The way for
a Europe that wants to remain competitive must pass through an intensive strengthening
of its educational system, from basic schooling to the universities, in order to raise the
level of wide groups of the population, allowing them to participate in increasingly
compelling processes of innovation. The risk, if this is not carried out, is progressive
social erosion, with intellectual elites who would remain linked to the global process of
worldwide development and an ever-widening range of less educated and less competent
social groups that would increasingly lose ground and be forced to accept progressively
decreasing relative wages.
b) Research
and Development, so that new technologies and new products can be created and adopted,
capable of continuously moving the economy toward higher value added products and
services.
c)
Innovation in operating processes, both at public and private institutions and corporations.
For the sake
of time, I will limit my comments here to the point of Research andDevelopment.
As we
discussed before, the European Council set for the EU the target of 3% of the
GDP to be spent in
R&D by 2010. Well, according to the latest data available from Eurostat, Research and
Development spending in the Union progressed by just 0.04 percentage points to 1.99% of
GDP in two years. In the same timeframe, American R&D spending increased by twice as much
the European amount, to 2.8% of GDP.
So, while I
have no doubts that reaching the target of 3% of GDP for R&D spending would be a
fantastic achievement for Europe, I believe that the Union and member countries
have not yet
developed and deployed the tools needed to translate the target into reality. I
am also
convinced that, in order to achieve that goal, all actors on the scene should
contribute with a
special effort. I am referring to the European Union itself, to national
governments and, of
course, to the private sector which should rapidly close the gap that today
exists with other
competing macroeconomic systems. The contribution of EU private enterprises to total
R&D spending indeed represents in Europe only 56% of the total, against
more than two thirds
of the total in the US and Japan.
In my
opinion, we should act in 4 directions:
- a
generalized tax credit on R&D spending should be decided for all companies,
in any sector and
in any European geographical area. For example laws should be passed so that at least 10% of
any R&D expenditure is automatically transformed in tax credit. There mightbe
variations on the same principle, but the basic concept should not be changed:
automatic tax credit.
Some countries have already devised more elaborate systems by which tax credit is received,
with different rates, both for the total R&D expenditure for the year and
for the incremental
amount versus the average of previous years. There are advantages in both thesimpler and
the more complex systems. What is really vital for encouraging investments on innovation
is the stability in time of the tax credit system, in order to give full
visibility for the future
and allow entrepreneurs to plan ahead for the next years. In my opinion the stability of
the system should be guaranteed for at least 10 years.
- a limited
number of mega-projects on which the community wants to play the future of Europe.
Those projects of strategic importance should be co-financed at a reasonably high level by
national and European institutions: I am thinking of public coverage in the
range of 30% of total
R&D cost, and the actual support should depend on both the level of
financial resources
required and on the level of risk of the specific investment. The number of
such projects
should be obviously limited in order to focus available human and financial resources on
selected items, and it would be difficult for me to imagine more than ten strategic
programs being active at the same time. In view of the importance of these projects, I
guess that most of them should not be limited to the tight boundaries of individual
countries and should therefore involve all or most of the countries in the Union.
The obvious
model that springs to my mind is the experience we have built-up with Jessi and Medea
programs in the areas of electronics and microelectronics.
I have in
mind some of the subjects that, at least for me, would fit into the definition
for those
strategic mega-projects: nanotechnologies and nanoelectronics, biotechnologies,
life sciences,
wide-band communications, intelligent transportation systems and energy conservation
and generation. The list can of course be changed at will, but the choice must be in any
case selective in order to avoid the excessive proliferation of projects and of
R&D centres
involved, and in the end the wasting of already scarce resources.
- increasing
dramatically the efficiency of European research institutions, both
Universities and other
public research entities, by cutting useless bureaucracy, creating efficient networks in
order to improve synergies while minimizing duplications and introducing proper
measurements criteria, based on objective results. On this specific aspect, I
wouldlike to
mention that the linking of public funding levels to the amount of
contributions from private
enterprises that certain European research institutions are experiencing is, in
my opinion, an
efficient way to channel public funds where they can provide the highest possible
returns. In general, I would also state that by linking to actual performance
both theamount of
funds available for research at each single R&D lab and the remuneration of individual
researchers is, in my opinion, an excellent way to maximize efficiency and to favour the
cooperation between industry and public research institutions.
- giving, as
a further way to foster the creation of efficient public/private R&D
networks, a strong tax
credit of say 30% of total expenditure for all R&D funds destined by
private enterprises
to universities for cooperative projects, not otherwise financed. It’s a
simple, but rather
ingenious mechanism which could in my opinion help overcoming the difficulties that
particularly small and medium enterprises have in dialoguing with universities.
The second
point is:
to Reduce
dependency on fossil fuels
Europe is
dramatically dependent from imported energy, which today is based on fossil fuels,
particularly oil. The problem is that oil, both per se and indirectly, is a
major threat for
humanity. First of all it is a major source of pollution, and pollution kills:
not only those that die
because of breathing toxic end products from combustion, but also those that
perish under
extreme weather conditions caused by greenhouse effect gases. Oil is also a
major cause of
economic and political instability. Just think of this: each $10 per barrel
increase in the price of
oil increases the European Union’s oil bill for external supplies by about $40 billion a
year. This means that, from the time of the $10 low in oil price in autumn 1997
to now, the oil
bill for Europe has increased by almost $100 billion a year. And if no valid alternatives
for oil are found, and no new sources for oil are discovered, in 20-25 years
the economic
independence of Europe may be at serious risk too. So, for the Member States and for the
Union, it is vital to develop an energy policy which will drastically reduce
the dependence
from oil. In this respect, we must act in three directions:
- favour all
forms of conservation in general
- increase
fuel efficiency for automobiles and other vehicles
- develop,
with maximum possible determination, alternative and renewable sources, that is to
say: wind, solar, biomass, hydroelectric and eventually hydrogen, as a mean of
storage and transportation.
By investing
in those areas, Europe would not only reduce its dependence from the supply of fossil
fuels, but the development of new technologies that are needed to support this strategic
choice and their spin-off on several industries would boost the overall competitiveness
of the European system. The extrapolation of these concepts convinces me that the
nations who do not pledge protection of the environment, particularly for the control of
the greenhouse gas emissions that are changing the climate of our planet, will
see their
companies defenseless against the more forceful competition of enterprises
which have known how to
confront and successfully overcome the challenge of sustainable development.
A case in
point is the automotive industry. For example, if the United States does not
make the
commitment for compliance with environmental parameters as other countries have done, it
could find itself in serious difficulty when confronted with competition from Europe or
Asia, where innovative solutions would have been developed to limit unitary
consumption
and pollution.
The third
item is:
Companies
must be able to adapt more quickly to market changes
The European
system has a much bigger inertia than other systems in responding to the changes in
the demand of the market, which are becoming increasingly frequent and fast. In order to
improve these circumstances which negatively impact Europe’s competitiveness, I would
suggest two main streams for action:
-
bureaucratic simplification;
-
flexibility of labour. Allow me to say here that I am not advocating the
adoption in Europe of the
American or Asian type of flexibility, the total freedom to hire and fire
which, in my opinion,
cost too much in terms of disruption in the lives of both individuals and communities.
I am rather supporting the idea of a better use of existing national labour
legislation
so that adaptive measures can be rapidly implemented when needed, rather than being forced
to undergo lengthy negotiations with the Unions on each major variation in the market
cycle. Of course, this does not mean eliminating employee rights. Rather, companies
and employee representatives need to make a cultural step forward and agree on
measures
that allow companies to quickly adapt to changing conditions (through such ways as flexible
hours, part time and temporary work and temporary shutdowns) without incurring
social disruption.
The fourth
point is:
to Extend
working time during working life to meet market realities
We must
realize that, in an extremely competitive world, Europeans cannot continue to work so
little. Europeans could not compete with the Chinese by working 36% less hours
a year, even
if their yearly salaries were the same as theirs. And they are certainly NOT
the same.
Europeans cannot retire earlier than anyone else in the world: with the age of European
population averaging 50, with one person out of three aging more than 65, our grandchildren
will have to pay taxes as high as 75% of revenues on average, should they
decide to
keep the present social security system. Europe cannot have just 63% of the
total European
population at work when in the USA the corresponding figure is some 10 percentage
points above that level. Again, I would like to propose two paths for improvement:
- Gradually
lengthening the total number of hours worked in a year to reach an effective average of
1800 hours, like in the USA.
- Extending
the number of years worked in the life time of individuals. Most European governments
are attacking this difficult issue, often facing extremely negative reactions
by their public
opinion. However, I don’t think there is any reasonable alternative available
if, as I just
mentioned, we consider the aging of the European population, the low level of fertility
rate, and the increasing restrictions on the rate of immigration our countries
are adopting.
The retirement age must be extended and the level of pension should be based on the total
amount of money earned during an individual’s career (and not the highest
salary at the end
of that career).
The fifth
and last point is:
to Level the
fiscal playing field for European companies
In a global
economy, fiscal considerations are key as companies decide where to invest. To attract and
keep capital at home, Europe should adapt to corporate needs and offer a more competitive
fiscal package for corporations. The inevitable consequence of this is the reduction of
revenues, and therefore of available resources to keep up the welfare state
that is
fundamental for social cohesion. To some degree this lack of resources can be compensated
by improving the efficiency of public administrations and re-focusing the
action of
national governments only in those areas they should manage. That is, in my views,
defence, security, education, health and social solidarity.
But in the
end, at equal efficiency, if a country chooses to have a high level of social cohesion,
then it inevitably has to pay a high cost for the services and the life-long
support it must provide
to its citizens. Conversely, a country which decides to sacrifice social cohesion and
basically abandon less favoured layers of its population, will have to bear lower
monetary costs, and of course will have to pay a higher social price.
Therefore,
in order to maintain the social cohesion to which we are committed, and, at the same time,
level the fiscal playing field for European companies, we may well need to compensate
for reduced corporate taxes by paying more in personal taxes, either direct or indirect.
Squaring the
circle
I know,
ladies and gentlemen, that closing my remarks today on that harsh note might
leave this
audience with a dark shadow hanging over it. So let me add a few words as a conclusion.
First of all, allow me to say that while no one of us likes to see his own tax money
wasted, for example, in useless bureaucracy, I guess that, at least on a second thought, we
all appreciate the value of social peace.
The problem
is always the same: squaring the circle, as Ralf Dahrendorf has so clearly described.
In essence, squaring the circle means finding that optimum balance between economic
growth, political freedom and social cohesion. Now, we have seen Americans maximize
growth and freedom, while penalizing cohesion. Many Asian countries have preferred to
maximize growth and cohesion, reducing political freedom to various extents.
Europe has
been favoring cohesion and freedom, penalizing the maximization of growth.
We all
failed in squaring the circle, or maximizing all three factors. And this should
be our challenge
for the future.
Today, as
globalization envelopes increasingly large sectors of economic life, we in
Europe stand at a
crossroads. If we hide from the competitive realities or are unwilling to adapt
to them, we
will fall behind and see first our prosperity, and then the social and cultural
values to which we
are so deeply attached gradually dissolve. At the same time, we must resist a model of
globalization that is indifferent to social solidarity. If we address the
future boldly by building
on our existing resources and assets, globalization constitutes an enormous opportunity
to move Europe forward, by realizing our incomparable potential and perpetuating
our dream of a better world for everyone.
And let me
conclude by restating, once more, my optimism: Europe will find the way to
“square the
circle” and to make it happen!
Thank you for your attention.
Speech given by:
Pasquale Pistorio
President and CEO
STMicroelectronics
At the International Electronics 2004
Prague, May 4, 2004
