Germany’s Nokia Moment

For a long time, Nokia thought it was infallible – and then along came the iPhone. We can learn a lot from this story, according to Sebastian Matthes. Five ideas for the future of Germany’s digital economy. And a message: it’s not too late, but time is running out!

Just ten years ago, mobile phone company Nokia was wowing its shareholders with a record profit of 7.2 billion euros, a market share in the mobile phone business of around 40 percent and end devices that seemed technically flawless. The Finnish corporation believed it was unbeatable. In the same year, Apple boss Steve Jobs took to the stage. He said: “Today, Apple is going to reinvent the phone,” holding his iPhone into the cameras in front of cheering fans. The rest is history. Apple became one of the world’s most valuable companies and smartphones a sort of remote control for our everyday lives, lives that Nokia soon disappeared from.
Nokia’s managers underestimated the power of the new – and overestimated their own product. At the same time, they were blind to the change that the iPhone brought with it, because for too long they were simply earning far too much money with their mobile phones with buttons.
In the same vein, the German economy is also reporting record after record: in exports, in industrial production and on the stock exchange. But these records are being achieved by many companies with innovations from an industrially dominated world: whether improving combustion engines, constantly developing new luxury cars or selling highly optimised machinery or chemical products all over the world.
This industrially dominated world, in which Germany is so strong, is not likely to disappear any time soon. But in the future, as many experts here agree, economic growth and prosperity are primarily emerging in a digitally dominated economy.
Which isn’t Germany’s strength. For years now, the German economy has been exporting more than consumers and companies are importing. A few months ago, Germany’s trade surplus was decried a global problem by US President Donald Trump. But of all people, the American President doesn’t need to worry. A closer look at the figures actually reveals a very different picture: according to calculations by investor Klaus Hommels, in terms of digital goods and services – i.e. the goods that will shape the economy in the future – Germany is suffering from a foreign trade deficit of around 26 billion dollars with the USA. Per year. So today we are already importing far more digital products than we are exporting. And that’s not surprising as a lot of digital innovations come from the USA: Facebook, Google, Apple – they all accompany us in our lives, pretty much around the clock. Success is what made these companies big. Massive, in fact.
Google and Amazon have long since been turning over as much money as entire small countries and pouring it into new developments: into personalised medicine for example, spaceships or autonomous drones that can deliver parcels all on their own. No other company in the world spent more money on research and development in 2017 than Amazon. And while the German economy is debating the future of diesel engines, the digital giants from the USA are increasing their lead to ensure they will also be able to play a role in future growth areas, such as networked, self-driving cars for example, or artificial intelligence.
Here in Germany we have to “completely recalibrate”, says investor Hommels, who invests in a lot of growth companies himself with his venture capital firm Lakestar. His message is that we have to think bigger, be more daring – and, above all, we have to understand that we don’t have much time left.
But what does that mean? If we speak to investors, researchers and consultants, a clear picture emerges: first and foremost, we are lacking the money, will and a vision of which fields the German economy wants to lead the way in. But these conversations also show that it primarily comes down to five points:

1. First of all, our country has to change
This is probably the most important and also most difficult task. The media and politics have been contributing to an extremely technophobic debate for years now. They have demonised Google Street View, declared social networks as the downfall of Western culture and meticulously laid out all the risks associated with algorithms.
During this time, other countries have rolled up their sleeves and set to work: according to German newspaper Handelsblatt, 23 percent of the companies specialised in artificial intelligence come from China. The Chinese have decided to become the world market leader in this field by 2030 – while the Germans are preferring to spend their time discussing the risks, only to then go on and import such services from abroad in the future.
As long as we refuse to recognise digitalisation as the most important future field, no politician who has any level of ambition will fully commit themselves to the subject. Only when our country develops a “welcoming culture” for digital ideas is that likely to change. And yes, this is also the job of the media.

2. We need a smart mind at the helm
If German were a company, it would have long appointed a Chief Innovation Technology Officer by now. A daunting task: large parts of Germany’s economy have to be reinvented – without letting the old business fall by the wayside.
This is why Germany needs a strong digital minister. This innovation leader of the German government would have to, for example, define the digital fields in which Germany wants to lead the way, and then develop them in cooperation with companies: with investments, tax breaks, direct funding and, yes, classic industrial policy. Something that China, for example, is already doing.

3. It can only succeed with a multi-billion euro financial boost
In Europe, billions are being invested in agriculture in the form of subsidies. Start-ups only receive a fraction of these sums. This has to change. After all, European growth companies are currently competing with start-ups from the USA that have been financed with five times more funding. “In terms of financing, Silicon Valley is 40 years ahead of Germany,” says Clark Parsons from the Internet Economy Foundation think tank in Berlin.
But that would change if investments in research and start-ups were fully tax-deductible. And we also need to make it easier for pension funds and foundations to invest in growth companies. According to the Internet Economy Foundation, pension schemes in the USA alone are investing 50 billion dollars every year in venture capital funds. Money that helps the young companies while their growth could lead to higher profits for investors.
There are enough role models, and we don’t even have to travel far to find them: France, for example, has introduced a tax break for start-ups in their first years of business. Its President Emanuel Macron recently announced a new fund of ten billion euros that will be invested in growth companies, start-ups and new technologies. Still a small sum compared to the tech investment fund of 93 billion dollars raised by the Japanese corporation Softbank – with money from Saudi Arabia, Abu Dhabi and several US tech firms like Apple. But such a fund would be a first step that Germany also needs to take.

4. We need a plan…
…a big project that shows the positive potential of digitalisation and also drives the digital economy beyond that. A completely digitalised administration would be such an idea – including the entire health sector. No more waiting times in citizen’s offices, quick answers to all questions, swiftly processed permits and permanent access to your most recent blood tests from the doctor’s surgery: the quality of life of millions of people would increase, especially of people living outside of the urban conurbations.
This would give young companies and technology providers a major boost. They could apply for tenders, develop new applications and then also sell these technologies to companies and possibly other countries. We would need companies from the most diverse sectors: specialists in artificial intelligence, database pros and internet security experts.

5. We won’t manage it alone
It’s not only US funds that are investing billions in their growth companies, but also their Chinese counterparts. Almost unnoticed by the rest of the world, gigantic players have emerged there: internet firm Tencent, for example, is investing in some of the most successful internet companies in the world, including gaming providers, social networks, virtual shopping centres and recently also electric cars.
Compared to their American and Chinese competitors, European start-ups have, as well as the lack of funds, another disadvantage. They have to respect new rules for every European country. Only a joint European domestic market for digital products could solve this problem, according to Stefan Schaible, who is responsible for the Roland Berger consultancy’s business in Germany, with the same regulation and data protection laws in the entire eurozone. The result would be a new, digital Europe.
Such a digital industrial policy could also bring Europe even closer together. Germany and its neighbours could work together to define which areas of the digital economy should be promoted in particular – like China is doing, for example. And at the same time, countries like France and Germany could join forces to raise larger funds to finance technology.
If we don’t manage to create such a European Union for the digital future, there will be unpleasant times ahead. After all, it’s becoming increasingly clear: the boundaries of the future are no longer only blurring between political systems, between East and West, between democracies and autocracies. The new boundary is blurring between countries that are resting on their laurels in the industrially-dominated world and those who are making a foray into the new age.
We know from history that disruptive changes start off slowly. Almost invisibly, in fact. And then it all happens very quickly and suddenly – as shown by the slump in sales of Nokia phones following its record year of 2007.
This progression of disruptions is what makes this development so dangerous. After all, once the collapse has already begun because the business has been stirred up by a new player, it’s usually already too late.
Let’s make sure Germany doesn’t let things get that far. We can still prevent a Nokia moment from happening. But we don’t have much time left.

Illustrations: Mario Wagner

Sebastian Matthes

Sebastian Matthes soon-to-be Deputy Editor-in-Chief and Head of Digital, Handelsblatt

Before Sebastian Matthes took on the role of Editor-in-Chief at Huffington Post Germany in 2013 in Munich, he already had a few years of experience as an economic journalist under his belt. Since its launch at the end of 2013, he and his team have successfully developed the HuffPost’s reach. The online portal had attracted 24.9 million visits in March 2017 and has established itself as one of the top 20 online news offers in the past four years. In spring 2018, Matthes will be taking on the position of Deputy Chief Editor-in-Chief and Head of Digital for German daily newspaper Handelsblatt. He has always been fascinated by the question of how new technologies are changing our everyday lives, the economy and politics. A topic that he has expressed his opinions on in several articles over the past few years. When he’s not working, Matthes plays the violin, including with the Neuss Chamber Orchestra.

At Innovation Day 2017, Sebastian Matthes participated in an entertaining war of words on the topic of “Journalism between fake and facts” with Jürgen Kaube, Publisher of the Frankfurter Allgemeine Zeitung newspaper, and Editor-in-Chief of GEO, Dr Christoph Kucklick.

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