- The US has led the way in technology innovation, but there are signs that the next decade could be very different
- Businesses to business rather than business to consumer applications are likely to dominate, here European names could be better placed to shine
- European stock indices are still trading at a large discount to US indices, creating opportunities for long-term investors.
The US may have led the way in technology innovation over the past decade, but Sam Morse and Marcel Stötzel , portfolio managers of the Fidelity European Fund and Fidelity European Trust PLC believe that Europe is well positioned to compete in this space over the next ten years. They expect growth to be increasingly driven by business-to-business (B2B) developments, where Europe excels, rather than the business -to-consumer (B2C) innovations that have dominated recent history - think Amazon, Google or Facebook.
One of the most remarkable features of the global stock market recovery of 2010-2020 is the dominance of the US. The S&P 500 Index returned a 10%+ compound annual growth rate over this period, while the MSCI Europe Index remained broadly flat (in USD terms). Mega-cap tech stocks, including Apple, Microsoft, Amazon and Facebook have driven US markets higher.
Many of these companies are selling to the consumer market (B2C). This is a reflection of where the most significant innovations have occurred over the last decade - such as smartphones, social media and e-commerce. Europe has few of these tech winners and the few that have succeeded – such as Spotify - have ended up listing in the US rather than locally.
The growth of ‘B2B’ innovation
For investors today, the real question is: what will the next decade look like? In the next decade, growth looks set to be driven by innovation from businesses selling to other businesses (B2B). Why do we think this? One indication is by the areas in which most global patents are being filed. This can give a flavour of the type of sectors and technologies drawing greater focus.
Ranking of global patents by technology
Source: WIPO, EPO, JPO, USPTO, Morgan Stanley Research, 2020.
This patent information shows many of the biggest trends of the future decade primarily have business rather than consumer applications, including cloud computing, 5G or robotics. While some areas, such as artificial intelligence (AI), will also have a consumer impact, the potential for B2B applications is far greater, as less progress has been made. We could also use this same argument for semi-conductors and their Industrial Internet of Things applications.
Consumer-facing innovation is more readily copied by competitors than B2B: B2B requires deep industry knowledge or at least a partner with that expertise. As such, B2B innovation can have more enduring growth.
With B2B innovation, Europe is far more “in the mix” this time around, ranking third overall globally behind USA and China in filing patents, but second when measuring “quality / high value patents” (behind the USA).
Equally, in sharp contrast to the dearth of B2C companies in the last cycle, Europe already has a number of globally competitive B2B companies, such as ASML, SAP, Ericsson, Dassault Systemes and Capgemini.
Lastly, the B2B innovation benefits will also spill over to industries where Europe has a competitive global position such as electricity, pharmaceuticals, manufacturing, banking, insurance, fintechs and telecoms.
Against this backdrop, it seems likely that Europe will benefit from the B2B cycle much more than it did in the B2C cycle. Europe is better placed to compete in the B2B innovation arena: it has more companies focused on new innovations for other businesses than for consumer technology and it has a greater share of those industries likely to see the most benefit from these innovations.
Some investors have already started putting serious money behind this idea. There is rising interest from the Venture Capital (VC) industry – often a fertile place to look when innovations are progressing from patents to actual businesses.
Outside the VC industry, European listed corporates are already bringing these B2B innovations into day to day use. For example, Roche’s Genentech division is focused on data-based drug discovery, using cloud and AI advances to deliver breakthrough and transformative medicines.
Additionally, Roche has partnered with, among others, Dassault Systemes, which provides the necessary digital design, simulation and clinical trial software. This innovative new approach has resulted in new Genentech product launches contributing more to overall sales in the pharmaceutical division.
Another example would be ASML, which provides chipmakers with hardware, software and services to mass produce patterns on silicon, helping to increase the value and lower the cost of a semiconductor chip. Leveraging advances in AI and semiconductors has allowed ASML to gain 90% market share of the total lithography market and 100% market share of the leading-edge technology extreme ultraviolet lithography (EUV).
Europe is not behind the curve on innovation, but its B2B focus has meant many of its incredible advances in technology remain under the radar. European stock markets still trade at a large discount to US markets, partly because the US has had a better track record on innovation. However, this gap between perception and reality should create significant opportunities for patient investors willing to back European innovation and, potentially, benefit from the leaders of the next decade.
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