The European Union’s digital sector is the highly dynamic and R&D-intense ecosystem of the bloc’s economy. There were more than 6M people employed in this industry and represented almost 5% of the value-added, amounting to nearly €645B in 2019. The EU has prioritised the further development of the digital economy and related ecosystem, as the ecosystem growth weakened before the COVID-19. The industry suffers from fragmented investments with low amounts and a slow pace of digital innovations adoption in the private and public sectors. 

During the first wave of the pandemic, there was a boost of Information and Communications Technology penetration and digital adoption, which increased to 95%. Even so, the digital sector faced negative impacts from the pandemic, especially during the first wave. It resulted in supply chain disruption and a slowdown of production in many member countries. In addition to hindered supply, a decline in demand affected the manufacturing part of the supply chains, including demand for hardware. Then demand was further shrunk by industries confinements such as hospitality or automobile sectors amid their face-to-face B2C nature, implying weakening demand for digital services and manufacturing products. Nonetheless, as there still was a need for telework, the digital infrastructure demand grew substantially. 

In April Europe’s ICT companies participated in the survey, which revealed one-third of the businesses expecting layoffs. Meanwhile, total employment rose 0.5% in the second quarter compared to the prior year, working hours per person fell 6.4% in a similar period. Although this means that short-term working schemes were in place in the digital sector, they scored well in comparison to others. It is also confirmed by the yearly changes in value-added in the Q2, including a 4.8% decrease and adding the digital industry to the sectors that experienced the smallest decline, compared to the prior year. 

In the second wave, the digital sector seemed not negatively impacted by the COVID-19. The number of employed persons in the industry rose by 0.9% in the Q3 compared to the prior year. In the meantime, the value-added in the Q3 increased by 1.8% year-on-year. Figure 15 The sector’s infrastructure as service went through continuous yearly growth in demand in 2020, compared to a year before. Another sub-sector has even benefited from the pandemic, which is the sector of devices, such as tablets and PCs, for which demand was up 4.6% year-over-year until December 2020. Alternatively, the software market focused on consumer experience and remote collaboration gained from home-based work policies and demand grew by 4% during the last year.

While the positive shifts restrain the total damage in the sector, common purchases by businesses decreased. Moreover, storage, network, and server equipment declined more than 5% during the pandemic year. SMEs, which account for the biggest part of the sector, was hit especially hard by the pandemic itself and the confinement measures. 

The recovery forecast for the sector was positive, as most digital industries being damaged are expected to get into restoration during 2021. It was expected that ICT’s total spending reveals that it will be lower in 2020, but lesser than feared during the first COVID-19 wave. Early recovery signs were expected in 2021, but full recovery – in 2022. In the same year, post-crisis ICT spending is set to outperform the pre-crisis forecasts. 

As for Artificial Intelligence, AI spending is expected to increase by 33% between the three-year period to 2023, in spite of budget reductions after the COVID-19 pandemic. Not only AI, but automation saw a short-term reaction to the pandemic. Therefore, it is likely that artificial intelligence will take advantage in the long term as well, as businesses that would not have considered AI might invest in it to remain competitive.

It can be concluded that the digitals sector was resilient, as it was only moderately affected during the first wave and even profited from the rising demand for digital solutions. In the next section, we switch focus to two strategic value chains, contributing to other industries modernisation: artificial intelligence (AI), microelectronics and nanoelectronics. 

Artificial intelligence is a technology for general usage and has key importance for the EU technological development. The possible applications of AI are far-reaching. Artificial intelligence is capable of revolutionising manufacturing by enhancing or automating industrial processes. In addition, AI is pivotal in the autonomous driving and mobility field and can also be used in medicine and healthcare for diagnosis. Across these practices, quality, availability, and data integrity are the major challenges. The AI value chain can be divided into the following: raw materials, hardware, software. As for raw materials or data access, European businesses cannot compete with Chinese or American rivals such as Baidu, Alphabet, Facebook. In fact, reluctance related to data sharing and lack of trust in artificial intelligence in the EU results in less data generation than in the US and China. EU policies, including General Data Protection Regulation, even more complicated data use. Alternatively, the EU lags in hardware production with 14 firms developing chips, compared to 62 companies in the US and 29 in China. The EU has left behind also in semiconductor manufacturing. Lastly, the block is doing well for the research into algorithms and software on the academic side, considering the number of AI research papers, but underperforms in research and development spending of software and computer business.

The artificial intelligence value chain was not impacted by the pandemic amid its digital nature. In truth, as highlighted before, AI spending is expected to increase. Notwithstanding, the pandemic impacted AI development, as the need for quick decision-making in this period fastened the AI solution development. Before the pandemic, it took 3-4 months from initial concept to production deployment. During the pandemic, some solutions were designed within a week. Higher uncertainty with emotionally driven responses, rapid policy changes, and the lack of historical data resulted in dynamic algorithms which rely more on a model than data. Therefore, artificial intelligence has been applied for public health, diagnosis, clinical decision making, and therapeutics. It even has the potential to support efforts to tackle pandemics. However, the need for quick decisions and insufficient data brings also limitations and dangers, including the risk of unreliable predictions. 

The European Union has the ambition to provide more ethical and safer alternatives in artificial intelligence. While the block has no big tech giants, there are many SMEs and an increasing number of start-ups. Europe’s main advantage is higher consumer trust amid its strict privacy regulations, which could benefit these businesses. In fact, the proposed Data Governance Act aims to enhance data availability via public sector data use. Meanwhile, other regions seem to prefer a more regulated approach, and EU privacy policies are being expanded to other world regions. Though, Britain’s departure from the EU is a challenge for the bloc’s ambition. The UK accounted for more than a half of EU AI companies’ funding in 2019, and without it, the Union’s standing in AI investment is set to decline in the coming years.

As for microelectronics and nanoelectronics, all computing and digital technologies rely on micro- and nanoelectronics. The technology has the capacity to enhance electronics performance, diminish their weight, size, s well as power requirements. It is required in other value chains, including artificial intelligence and autonomous vehicle. Micro- and nanoelectronics have a major role in competitiveness and digitalisation. 

The micro- and nanoelectronics value chains are heavily globalised and outsourced. EU developers depend mainly on suppliers outside the EU, while more a user than a manufacturer of such technologies. Compared to the EU, Asia has nearly 80% of all semiconductor assembly operations. Therefore, it has almost 60% market share, with the main electronic circuit exporters based in Asia, such as China, Taiwan, South Korea and Singapore. The EU best performing in the rankings are Germany the Netherlands, both having only 2% market share. Meanwhile, the US is a leader in the high-tech market with a 47% share of global sales. Next to the US, the EU, and South Korea lead in specific semiconductor categories. 

The EU dependency is believed to be a risk. Reports from car manufacturers, confirmed with industry representatives’ interviews, stress out a semiconductor chip shortage. Though these effects were not caused due to pandemics, but the US protectionist measures. There were limited effects on micro- and nanoelectronics, with sales of chips falling due to factory closures in China, while demand recovered in the following quarters. In truth, the pandemic is apparently driving demand now, with the increasing importance of digital communication and connectivity. Global semiconductor sales were expected to have increased to $439B last year, recovering from the prior cyclical decrease to $412B in 2019. As for Europe, semiconductor sales seem to be restored at a slower pace than global sales. It is not expected that the coronavirus will increase reshoring in the industry, given the high capital intensity requiring large-scale investments and the necessity to support to increase the highly skilled workforce. 

By way of conclusion, Europe is well located with businesses delivering quality research and micro- and nanoelectronics products. Labour costs are becoming less of the main factor in microelectronics due to automation. Though, the major challenge for the EU in establishing high-end factories is a lack of large-scale investments. Therefore, the EU created the IPCEI on Microelectronics allowing the Member States to start cooperation projects and get exceptions from State Aid regulation. The IPCEI on Microelectronics obtained approval for €1.75B public investment. Furthermore, several EU Member States encouraged using investment funds from the Resilience Facility to bolster the bloc’s electronics industry and research and production capabilities.


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