INNOVATION

Reinventing Europe
Sep 4th 2003

With so much of its industrial base ageing and resistant to change, how can Europe close the research and development gap with America?

DURING the run up to the war with Iraq, the “Old Europe” jibe from an exasperated Donald Rumsfeld, America's secretary of defence, hardly helped his cause. But it did reflect a deeper truth about the way Europe is seen in the United States as outdated, under-invested and burdened by a lingering enchantment with notions of social justice.

Europe's industrial base certainly needs updating. It has more than its fair share of capital-intensive industries that have reached the end of their innovation cycles, and are unsure where to go next. European industry is also investing too little in research and development (R&D), at least if it hopes to keep up in the knowledge-economy stakes. But increasing the amount that Europe spends on R&D is difficult when so much of its industrial base is mature.

Local politicians know this better than anyone. But being European, they have come up with a plan and set targets, rather than ease regulatory rigidities that make it difficult for such reforms to occur. Late in 2002, in an initiative dubbed “More Research for Europe”, European heads of government declared that the region should boost its industrial R&D to ensure future competitiveness and social well-being. The bureaucrats want to see Europe's R&D investment rise from its current 1.9% of GDP to 3% by 2010. And industry, they say, should provide most of that extra investment.

Will it? Andrew Dearing, secretary general of the European Industrial Research Management Association, says Europe is under-investing in R&D to the tune of €100 billion ($120 billion) per year compared with the United States. Philippe Larédo, director of research at the Centre de Sociologie de l'Innovation in Paris, reckons this is the legacy of a traditional difference in public support for R&D in America and Europe. He estimates that, between 1990 and 1996, American taxpayers forked out $140 billion on R&D compared with $70 billion coughed up in Europe. Half of the $140 billion of the public money spent on R&D in America was for defence research. The implication is that the Pentagon underwrites a goodly chunk of American innovation.

Les échos
Such excuses for under-performance have been trotted out by hand-wringing Europeans ever since 1967, when Jean Jacques Servan-Schreiber first warned of the industrial challenge posed by American defence research in his book “Le Défi Américain” (“The American Challenge”).

Today, such explanations ring hollower still. In fact, ever since the end of the cold war, far from American industry getting a hidden subsidy from the Pentagon, civilian technology has underwritten much of America's defence effort. The reasons for America's willingness to invest in R&D and Europe's reluctance to do so go to the very heart of what distinguishes one culture from the other. Europeans need to look more closely at the cultural traits that are inhibited at home but given freer rein in America.

Start at the company level rather than that of the country or continent. Being the individual cells of an economy, firms are easier to put under the microscope. The first thing to notice is that if European industry is to increase its investment in R&D significantly, then individual firms will need to see, and retain, an improvement in returns. That means rewarding them for shifting up a gear from making incremental improvements to their existing products, to coming up with radical innovations that rewrite the market rules. The question is whether the best practices—in terms of management tools, organisational structures and cultural changes—devised by successful firms can be cloned and applied to mature, capital-intensive industries.

The good news for Europe is that there are a number of local companies that are as innovative as any. For instance AgustaWestland, a helicopter maker, is moving into what it dubs its “third era” of sustainable growth, following periods when it was classed as a “pioneer” and later as a “market leader”. The company has launched two big research-based projects to achieve this.

The first is to work with partners to develop a “friendly helicopter” that uses 20% less fuel than today's aircraft, makes less noise outside, suffers less cabin noise and vibration, emits fewer pollutants and can be used in more weather conditions. The second is the introduction of the world's first civilian tilt-rotor aircraft—a cross between a light aircraft and a helicopter. But to accomplish this, AgustaWestland has had to push its research horizon out to 2020.

It is no surprise to find an aerospace company at the cutting edge of technological innovation. But even a company producing building materials can use breakthrough research to reinvigorate its business. The Paris-based Lafarge group, the world leader in construction materials, spends a paltry 1% of sales on corporate research and development. But with sales of €14.6 billion in 2002, that still means Lafarge has close on €150m a year to spend on learning “how to crush stones and put them back together,” says Denis Maitre, senior vice-president of the company's central R&D labs.

Lafarge's most recent innovation is Ductal, a fibre-reinforced concrete with six to eight times the compressive strength of ordinary concrete, ten to 100 times the durability, and much greater ductility. The concrete is so strong that a 25-metre bridge beam that is one metre thick can be deflected 30cm without breaking. Ductal has already been used to build a 120-metre footbridge with a deck that is only 3cm thick.

Having developed Ductal with a multi-disciplinary team that grew to include ten other labs, Lafarge's next challenge is to get it employed by a fragmented and conservative construction industry. But one of the most important lessons for Dr Maitre has been the realisation that even the construction industry need not regard its technology as being set in concrete, as it were.

What these examples illustrate is that success does not come quickly. Ductal took more than ten years to develop and could face another decade or more before being adopted by industry in some commercially significant way. With the need to devise production methods, rewrite design and safety codes, encourage multiple sources of supply, and develop repair and maintenance procedures, it is no surprise that new materials (such as engineering plastics, super-strength ceramics or carbon fibre) generally take 30 years to go from invention to commercial use. In aerospace, the gestation period for innovations can be even longer. The world's first tilt-rotor aircraft (Bell XV3) flew in 1953, yet the first flight of a commercial tilt-rotor was in 2003—some 50 years later.

Learn to listen
When R&D takes decades to bear fruit, researchers need different methods for managing such long-term projects, especially when their companies are changing around them. “You manage breakthrough and incremental research in different ways,” says Dr Larédo. “That makes it difficult to do ‘breakthrough innovation' within large organisations.”

One way to help breakthrough research thrive in large organisations is to ensure they listen to themselves carefully. There is more to that than placing suggestion boxes around the workplace. Businesses need to tolerate—even encourage—failure. Otherwise, employees will be reluctant to propose seemingly outlandish but potentially mould-breaking ideas. Above all, companies need to separate their perception of the value of an idea from the way it is presented, or the track record of the person proposing it. A good idea is a good idea, wherever it comes from. Also, if staff can work in multi-disciplinary teams, with a wide circle of peers, the quality of ideas tends to improve.

Another key source of ideas for breakthrough research is the customer. The notion that you can improve the relevance of your research by asking customers what they want remains a revelation to some European companies. Again, this is a reflection of the difference in attitudes to research in America and Europe. In the United States, innovation is all about solving a problem, while in Europe it is more about doing science.

That said, a handful of European groups are using customers to drive their research agendas. Stefano Marzano, head of Philips Design, which is part of the Dutch consumer electronics group, says companies need to get away from the idea that people simply want products, and look instead at what they value. He believes consumers want to be omnipresent, omniscient and omnipotent, with the maximum comfort and freedom and with the minimum effort. Philips Design uses the specific values that its consumer research has uncovered to promote its product development.

Look outside
Lafarge, AgustaWestland and Philips have all managed to turn breakthrough research into paying products. But some large European companies seem unable to change their emphasis away from incremental research, despite recognising the need to alter their thinking. For these, the best solution could be corporate venturing or academic partnering. Both offer an effective way to engage in breakthrough research without having to rip up the corporate structure and start all over again.

The promise of corporate venturing is clear: shorter development times and reduced development costs. The approach may also widen a company's research options and provide opportunities for sharing risk. Corporate venturing can help companies avoid internal projects cannibalising one another, and take advantage of possible clusters of new technologies.

One key issue with corporate venturing is the cultural differences that emerge between the investing parent and the new venture. These need to be respected. There is little point in creating a separate organisation if the parent then insists on imposing its management methods and values on a fledgling that needs to operate lean and nimbly.

It is also important that the parent does not shield the new venture too much. It is being created specifically to take risks and try new approaches. But corporate venturing does not work for every organisation trying to reinvigorate its research. For instance, there is no point in creating a corporate venture if there is a conflict of interest, or if the parent firm does not have the resources to sustain it.

For its part, academic partnering has always been fraught with difficulties. While attitudes in European universities about academics getting their hands dirty have softened, arguments nowadays rage on how professors should spend their time, who owns the intellectual property they create, and how the rewards from its commercialisation should be shared.

One possible model for collaboration between industry and academia is emerging in the Netherlands. The government has formulated a €200m plan, known as the Netherlands Genomics Initiative (NGI), to undertake genomics research and extract value from it. Industry and the universities have been asked to propose research projects that can contribute to the global genomics effort. The request has led to tenders for ten projects worth €50m a year over a five-year period. After being assessed by an external panel, the successful projects will be funded equally by the participating universities, the companies involved and the new government agency.

That way, says Peter Folstar of NGI, not only is each research consortium of a globally relevant size, but the research is also kept tightly focused on its commercial goals. Dr Folstar sees this as a shift from the typical European way of supporting research to much more of an American approach to solving problems. “When you're investing in university research, you need both to sponsor it and manage it,” he says. “You have to do both to succeed.”

The NGI approach is similar to one taken in the formation of the Netherlands' Technological TOP Institutes, which undertake pre-competitive research that is meant to lead to commercial innovations. The institutes receive 50% of their funding from the government, 25% from universities and 25% from industry. They were created by tapping the universities for ideas and then defining a series of technology areas for each of the institutes to focus on. The industrial partners then chose which areas to back.

While free-standing institutes can give industry a way to access academic research, some universities are more interested in making it easy to get their own intellectual property (IP) into the marketplace. One such group is the chemistry department at the University of Oxford, which has struck an innovative deal with a venture-capital company. The department produces 80 PhDs each year and £10m ($16m) in research income, and is creating a growing stream of spin-outs. “The key is that the university owns the IP,” said Graham Richards, chairman of the department. This has been a controversial issue among academics, many of whom want to hold on to as much of the “value” of an invention as possible, regardless of how the work was funded.