5 minute read 18 Jul 2018
solo climber climbing centre

How growth and agility are paving the way for European businesses to expand overseas

By

Andy Baldwin

EY Global Managing Partner – Client Service

Passionate about innovation, FinTech, inclusive growth and geopolitics. Leading media commentator on financial services, economics and investment trends. Keen cyclist.

5 minute read 18 Jul 2018

Agility and speed are helping European middle-market leaders seize new growth opportunities, EY Growth Barometer 2018 reveals.

Middle-market company growth ambitions across Europe are second only to Asia Pacific, EY Growth Barometer 2018 clearly reveals. While what French President Emmanuel Macron calls the "music of nationalism" may still be playing in the UK and Italy, Europe in general is showing a new confidence and sense of identity. The region is seeing the strongest economic growth since the financial crash. Building on the advantages of a single market with 500 million consumers, companies in the European Union have ambitious international expansion plans both within the single market and outside of it. Europe races to embrace artificial intelligence (AI), fights for digital talent but struggles to find sufficient working capital to fund growth.

  • EY Growth Barometer Survey Methodology

    EY commissioned Euromoney Institutional Investor Thought Leadership to undertake an online survey of 2,766 C-suite (60% CEOs, founders or managing directors) in companies from 21 countries with annual revenues of $1m-$3b. The survey was conducted from 15 January - 1 March 2018. EY further invited its global network of EY Entrepreneur Of The Year™ alumni to take the survey. The survey was available in English and six other languages. Further in-depth interviews were carried out during March - April 2018 to provide additional insights. Countries included in the Europe region were UK, Germany, Finland, France, Russian Federation, Netherlands, Belgium and Italy.

Find out how growth and agility are paving the way for middle market European businesses to expand overseas in our report below.

Surfer on a high wave
(Chapter breaker)
1

Chapter 1

Strategies for growth

One in four (25%) of Europe's business leaders sees entry into a new overseas market the number one growth priority.

Europe is enjoying the strongest growth since the financial crash a decade ago, and the dynamic middle market is even more ambitious. Company leaders across the region plan increased revenue growth this year, well ahead of 2017. Nearly two-thirds (62%) of companies will grow by high single digits (24 percentage points up on last year) while a further 29% are targeting double-digit growth (6 percentage points up on 2017).

Revenue growth projections chart

"Continental Europe sees the strongest growth sentiment for a decade both domestically and export-led," says Andy Baldwin, Area Managing Partner, EMEIA, EY, "and we see this confidence reflected in foreign direct investment into the region. Moreover, Europe has moved beyond Brexit. It is now a localized UK issue, weighing on business confidence, but not impacting continental Europe."

At the upper end, Russia (boosted by government initiatives to grow domestic consumption) and the Netherlands lead the region with 38% of respondents targeting growth over 11%.

Europe’s largest economies (Germany and France) are not far behind the leaders, with 31% of companies looking at double-digit growth. The UK proportion of companies showing double-digit growth is predictably lower at 24%, as Brexit uncertainties dampen prospects.

In 2017, foreign direct investment (FDI) projects in the UK declined by 6 percentage points over 2016, now overshadowed by Brexit, and leaving Germany in pole position, EY's Europe Attractiveness Survey, EY shows. A surging France (up 31 percentage points) is now a much fiercer competitor. “In Europe, the historic growth of inward investment to the longstanding league champion, the UK, has stalled,” says Baldwin.

Beyond borders

One in four (25%) of Europe's business leaders sees entry into a new overseas market the number one growth priority, whether that be expansion within the single market or beyond it. France, riding a wave of new confidence, leads this expansionist drive with 33% of respondents looking to enter a new overseas market.

Strategic growth priorities chart

Cloud computing firm OVH is a prime example of this French outward-looking ambition. The company has been growing at an average of 30% per year, and has hired 1,100 people in the past 12 months. CEO and founder Octave Klaba says: “We have expanded into 14 different countries in Europe and what it has taught me is there is no such thing as Europe. Every country has a different story, but we must also work together to compete with the US and China.”

In the UK, however, only 16% of leaders place overseas expansion as a priority. Europe has left Brexit behind, but leaving the EU continues to weigh heavily on UK business leaders, who are now focused on increasing market share (21%) and pursuing M&A opportunities (19%), rather than cross-border expansion.

Young footballers tackling the ball
(Chapter breaker)
2

Chapter 2

Challenges to growth

Europe's business leaders place slow or flat global growth in pole position (with 28% of the cohort) among a long ranking of external risks.

Given this focus on cross-border growth, it is unsurprising that Europe's business leaders place slow or flat global growth in pole position (with 28% of the cohort) among a long ranking of external risks, 18 percentage points up on 2017 and 4% more than the rest of the world. Risks that might be considered related, such as geopolitical uncertainty and higher trade barriers, hardly figure. "So long as political actions don't obstruct global economic growth, company leaders are relatively sanguine, whatever media headlines may say," says Baldwin. "The critical issue we see in the market is sustained global growth."

Challenges to growth chart

In terms of operational challenges to growth, the dominant theme selected by 37% of European company CEOs is insufficient cashflow, up 22 percentage points on 2017. In France half (50%) of all company leaders place it first, ahead of technological disruption and lack of skilled talent. "As digitization drives new business models, shortens supply chains and enables consumer-driven sales, there are strains on working capital," says Baldwin.

Thirdly, there is a global shortage of skilled talent from which Europe is far from immune. Company leaders place attracting young, digitally-native talent as the top priority (36%) of an improved organizational culture and talent is also seen as the number one factor in accelerating growth. As countries such as the UK face new limits on immigration, the squeeze on available digital talent will only get tighter.

“The biggest challenge Brexit poses is talent and the war on talent,” says Simon Rogerson, CEO and Co-founder of Octopus Capital. “Making sure you get the best people is a priority for all growing businesses. Brexit makes people feel they are unwelcome in the UK and that’s a problem. Anything that stops us hiring the best people is a problem.”

Female professional presentating to a team
(Chapter breaker)
3

Chapter 3

Building stronger teams

Europe's business leaders are on a hiring spree.

Showing confidence in the sustainability of ambitious revenue growth, Europe's business leaders are on a hiring spree, with almost four in ten (37%) CEOs offering new full-time jobs, up 10 percentage points on last year. Traditional hiring patterns may dominate in the region, but that doesn't mean that alternative channels to access rare talent are closed off: 28% of respondents are planning to hire part-time, hire contractors and make use of AI for some processes. While no respondents plan lay-offs, a significant 35% remain cautious on expanding the workforce, planning to retain current staffing levels for this year. In Germany, four in ten (40%) business leaders play it safe with no plans to hire more people.

Hiring plans chart

In line with a massive shift across the world, 42% of European company leaders place diversity at the top of strategic recruitment priorities, a 29% uplift on 2017. Only 23% of the executive leadership of all European respondent companies is female and just 4% have a woman as CEO. It is therefore good to see a close correlation between respondents whose leadership teams lack gender diversity and those who prioritize diversity as a recruitment priority. It looks as if 2018, already dubbed the year of the woman, may finally be the year when all-male executive teams are consigned to history.

“Diversity isn't just about gender. New challenges are creating a need for a different kind of employee,” says Simon Rogerson, CEO and Co-Founder of UK-based Octopus Capital "People with creativity, good at problem-solving, people who love disrupting and challenging the status quo. We need all kinds of diversity, but particularly diversity of thought."

Company leaders across the region place talent with the right skills as the number one factor for accelerating growth (33% of responses and 11% up on 2017). The focus on attracting young, digital talent is even more highlighted by what an improved organizational culture can deliver, with 36%, followed by flattening the organizational structure and empowering existing staff (29%).

Some companies look to bolster internal talent with external alliances as a key to increasing agility. Across Europe, 23% of leaders see external partnerships as the prime route to increasing agility, second only to rapid decision-making (28%).

"We do have technology specialists in-house," says Craig Donaldson, CEO of Metro Bank in the UK. "But it is three times larger if you include the external people we collaborate with. I can't afford to hire all the best people out there. But I can afford to work with them," he says.

steelworker with molten metal taken from furnace
(Chapter breaker)
4

Chapter 4

Embracing business change

Middle-market business leaders recognize they need to spend more time on strategy and less time running current operations.

"A challenge...is just staying on top of everything that is happening in global retail,” says Niccolò Ricci, CEO of Italian luxury menswear brand, Stefano Ricci. "Change happens so fast, so what was an opportunity before, may not be now."

Change happens so fast, so what was an opportunity before, may not be now.

Niccolò Ricci  

CEO of Stefano Ricci

As the pace of change accelerates, middle-market business leaders recognize they need to spend more time on strategy and less time running current operations. More than four in ten (41%) say a wider and deeper pool of managers who can take on operational responsibilities would most free them to do this, in line with their peers in the rest of the world (40%).

Looking to long-term megatrends, demographic shifts, as last year, is the dominant disruptive force impacting European business (35%) as for peers in the rest of the world. Europe in general is facing the challenge of an ageing population exacerbated by low birth rates (particularly acute in Germany). But this year, just over one in five company leaders in Europe see industry convergence as the key megatrend, reflecting both the blurring of sector boundaries and the birth of new subsectors driven by digitization. These shifts are not necessarily challenges – indeed for the agile, they offer new opportunities.

Finland's Tuomas Riski, co-founder and CEO of Norsepower, is one company leader benefitting from convergence. "We are at the forefront of convergence because we are the first to combine wind power and shipping," he says. "Our technology is essentially underpinned by an Internet of Things (IoT) system, which enables us to track the performance and run maintenance on our rotor sails remotely. Digitization is therefore a big enabler for our business."

Government policy as a driver of innovation, rather than an obstacle to it, emerges strongly this year. Over one in four (27%) of Europe's entrepreneurs place it joint first with profitability, up 8 percentage points on 2017.

 "We see how government regulations on reducing carbon emissions have accelerated the development of electric vehicles and other smart transport solutions," says Baldwin. "The mayor of Paris, alongside those of Madrid, Athens and Mexico City, has announced a ban on diesel vehicles in the city center by 2025. These policies drive market change."

Europe's company leaders, broadly reflecting global peers, adopt a twin strategy for increasing innovation in their companies, both harnessing their own staff's creativity (30%) and using customer data to drive innovation (29%). 

AI has emerged from the margins of science fiction into the boardrooms of the world in a huge leap. While last year 70% of European leaders said they would never adopt robotic process automation (RPA), today an even greater percentage (75%) say they are adopting AI within just two years. In fact 97% of all Europe's company leaders have plans to adopt AI within five years, putting the region ahead in embracing cognitive technologies and machine learning.

AI has the power to transform every business process from the back office to the customer experience, and while companies are at different stages none doubts its critical role in the near term.

"Bitcoin's underlying technology – distributed ledger technology – could potentially offer some use and benefit in our business," says Ingrid Faber, CEO of Europe's leading integrated pooler and producer of wood pallets, Pooling Partners. "I'm not talking about investing in Bitcoins, rather what the technology could mean for our business and operations."

For TomTom, the Netherlands-based global leader in satellite navigation services, the opportunities are all in cloud-based services and IoT applications. "We see connected cars, software-based safety systems in cars and self-driving technologies as major future growth areas for us," says CEO and Co-founder, Harold Goddjin.

Technology is also singled out as a driver of improved productivity by one in four respondents, up 5 percentage points on 2017, and second only to economies of scale (29%).

However, companies may be underestimating the need to mitigate cyber threats, as they grow their digital footprints. Just 7% of Europe's middle-market leaders are investing in technology to reduce risks and 5% see rate cyber threats as the key challenge to growth.

"Company leaders need to develop strong digital security strategies hand-in-hand with their AI adoption plans," says Baldwin.

Skater jumping off his skateboard in skate park
(Chapter breaker)
5

Chapter 5

Conclusion

In this world of rapid transformation, agility is a key business strength.

Europe's growth barometer is set fair for 2018, with companies harnessing new cognitive technologies to drive process efficiencies, improve data capture and analysis and gain better customer understanding. Company leaders are looking to build strong, diverse teams with a focus on digital talent and to explore new overseas markets for growth. "In this world of rapid transformation, agility is a key business strength," says Baldwin. "Winners in Europe will be those who can move fast to embrace new opportunities, build relationships outside their organizations and ensure they have a strong balance sheet to help fund growth."

Summary

European business confidence is higher than at any time in a decade. The dynamic middle market is harnessing new technologies and pivoting East for growth, limited only by shortages in skilled talent and pressure on cash flow.

About this article

By

Andy Baldwin

EY Global Managing Partner – Client Service

Passionate about innovation, FinTech, inclusive growth and geopolitics. Leading media commentator on financial services, economics and investment trends. Keen cyclist.