Catalysing European competitiveness

Imagine a country building enough nuclear reactors to supply most of its electricity within a little more than a decade. An economy building a world-leading, high-speed rail network across the entire country. A city becoming the world’s largest port. Imagine an industrial powerhouse supplying the world with cars. Or a research institution developing the defining technology of its time.

You might be thinking of China. Think again.

These are European stories. France’s Messmer Plan, launched in 1974, drove a rapid nuclear build-out. Spain opened its first high-speed rail line in 1992 and went on to build nearly 4,000km of high-speed rail, so that today, it is second only to China globally. Rotterdam became the world’s largest port in 1962 and held that position until 2004. Germany turned its automotive industry into a global export powerhouse. And Tim Berners-Lee invented the World Wide Web, which CERN made freely available in 1993.

What it takes to compete today

Europe knows how to build at scale and create world-changing technologies, but that is not the Europe we see today. Instead, Europe has difficulty attracting enough investment to maintain its productive and innovative capacity, let alone expand it significantly.

The EU’s net productive investment excluding real estate sat at just over 2% of GDP in 2024. Since countries typically grow at about half their net productive investment rate, this means the EU is adding productive capacity consistent with roughly 1% of annual GDP growth. Faster growth requires more productive investment. Companies invest where they expect to make a return, making investment one of the clearest signs of competitiveness.

Currently, lifetime costs for projects in Europe are often at least 40% more expensive than elsewhere, and sometimes almost 3.5 times as expensive. A recent McKinsey Global Institute (MGI) report, “Catalyzing Competitiveness”, compared global levelised costs for ten investment cases spanning energy generation, heavy industry, advanced manufacturing, life sciences and the artificial intelligence (AI) value chain. In cases with the narrowest gap between regions, such as semiconductor manufacturing, Europe was at least 40% more expensive than leading locations for making chips. In research-intensive activities such as new vehicle or drug development, this gap can approach 250%. China’s costs are lowest in eight of ten cases.

The reasons for these cost differences vary across industries, but the same disadvantages recur, namely, the cost and speed of building, labour cost and productivity, and development speed and energy prices.

Take nuclear power. The newest French reactor took 17 years to build, while Chinese reactors have been completed in six. The resulting capital costs were far higher in France, €13.2bn per gigawatt versus €2.9bn in China. The result? Levelised cost is about €165 per megawatt-hour in France, compared to just over €52 in China.

In biopharma R&D, speed is critical. A Chinese company can develop a fast-follower monoclonal-antibody drug in just over 10 years, about 2.5 years faster than major global pharma companies. These 2.5 years give companies more time to earn back development costs before patents and competition compress commercial opportunity, explaining roughly 40% of China’s 2.7-times cost advantage.

In AI data centres, energy access and prices can make or break the investment case. The levelised cost of an AI colocation data centre is about €331 per megawatt-hour in the UK, almost twice the roughly €174 in China. Power costs alone account for around 60% of that difference.

In semiconductor manufacturing, several disadvantages add up. A wafer produced in a 28-nanometre semiconductor plant in Germany costs roughly 40% more to produce than in Taiwan. Labour cost account for roughly a third of this gap. Traditionally higher European wages were offset by higher productivity, but today, Taiwanese engineers have access to the same or better technology, work longer and more productively, and deliver roughly 50% more output at half the labour cost. Construction compounds the disadvantage since a plant in Germany costs about twice as much and takes twice as long to build as in Taiwan.

In the new geopolitical era, Europe should prepare for more competition, not less. Greater concern about resilience, strategic dependencies and security will not make the underlying economics disappear. China’s scale and structural cost advantages – and the ability to replicate them through investments in other Asian countries – mean competitive pressure will likely remain intense.

Closing Europe’s competitiveness gap

So, what can Europe do? If Europe wants to maintain its industrial strength, it needs a step-change in productivity and speed to close the gap.

Given such wide gaps in levelised costs, a few percentage points of efficiency improvement or a few reductions in reporting requirements here and there will not cut it.

In construction, European companies could instead start industrialising capital expenditure, supported by streamlined permitting or pre-approved sites. Projects need to be more modular and less like bespoke one-offs, as France did with nuclear in the 1970s and as South Korea is doing today.

Europe could also move much more aggressively on AI and robotics to reduce its higher labour costs. High European wages make productivity-enhancing technologies more valuable than elsewhere. Western Europe still has more robots per manufacturing worker, but China is catching up quickly and now installs more industrial robots than the rest of the world combined. Countries with more flexible labour markets are likely to be more adept at turning disruption to their advantage.

Additionally, Europe needs to rethink where to locate electricity-intensive activities and how it secures competitive energy supplies. New capacity can increasingly move towards parts of the Nordics and Iberia where power costs are lower, while gas-dependent industries can benefit from diversifying suppliers.

European companies also need to innovate faster. Incumbent carmakers take 36 to 48 months to develop a new EV platform in Europe, compared with 21 to 28 months in China. Europe can innovate quickly when urgency is clear: BioNTech’s COVID-19 vaccine went from clinical trials to approval in eight months. But this is not the norm.

Where Europe cannot win on cost, it needs to win through differentiation and by regaining innovation leadership. The continent should be realistic about where it can compete on cost and which commodity products it wants to participate in. In those areas, it needs to innovate or differentiate enough to justify charging a higher price. That means continuing to out-innovate where Europe already leads, leapfrogging where it is behind, and focusing on products for which performance, intellectual property, customer trust or strategic importance support a premium. Europe remains strong in R&D but struggles to commercialise its technologies on the continent. This is where it should shift its emphasis.

The EU can also become more competitive by leveraging different strengths within its own internal market. For example, moving manufacturing to central or eastern Europe in order to lower labour costs. Designing industrial footprints around advantageous differences can improve economics without giving up the benefits of producing within the EU.

Europe’s challenges look – and are – formidable. But Europe’s own past proves that it can solve them. Now’s the time to raise ambitions and do what needs to be done.

This article is a contribution from a member or partner organisation of Friends of Europe. The views expressed in this #CriticalThinking article reflect those of the author(s) and not of Friends of Europe.