Perspective

How Europe's tech sector is hiding in plain sight


Europe’s tech sector has long been overshadowed by the “superstar” tech firms in the US and Asia. Arguably no tech stock in Europe is a household name, certainly not one with the instant recognition of Apple, Samsung, Microsoft or Google. Nokia once came close when it was famed for its handsets. It lives on, albeit as a less conspicuous networks provider.

The region’s listed technology sector is much smaller than the US’ as well. As at 31 December 2019, the IT sector represented 23.4% of the market capitalisation of the MSCI USA Index, but only 6% in the MSCI Europe Index.

But Europe does have cutting edge tech companies that are crucial not only to the functioning of our existing devices (such as smartphones) but also to the development of new technologies in the automotive sector and the internet of things. Both of these are likely to be very significant areas of growth in the coming years.

Internet of Things to transform tech demand

The Internet of Things (IoT) is a hugely exciting opportunity for the tech sector over the next ten years. The IoT involves connecting devices to enable them to send and receive data, effectively meaning they can communicate with each other.

Many people are familiar with the concept of “smart homes” whereby you can turn the lights on remotely to give the impression that someone is in, or switch the air conditioning or heating on before you get home. Wearables such as smartwatches are another example.

However, these consumer applications are far from being the whole story. The real revolution, and biggest growth opportunity, is likely to come with the digitalisation of the industrial sector, also known as smart manufacturing.

Industrial sensors are a key part of smart manufacturing. For example, motion, environmental and vibration sensors can be used to monitor how equipment is functioning, its positioning, and any external shocks. This could lead to significant efficiencies when planning maintenance. Rather than estimating when a facility needs to be closed, connected devices could mean each machine has a sensor that detects exactly when maintenance or replacement is needed.

Connected machines can also help optimise planning and flexibility in the manufacturing process. The digitalisation of the industrial sector in Europe will require a huge range of sensors, microcontrollers, microprocessors and other products.

Europe’s semiconductor sector is well-placed to produce these. STMicroelectronics is one company with a wide suite of products to facilitate the switch to smart manufacturing. Infineon Technologies, another European-listed stock, recently bought US group Cypress Semiconductor in order to bolster its capabilities in this area.

Growing tech demand from automotive sector

The tech component of cars has been rising and this is only set to continue as greater automation is introduced and the internal combustion engine is gradually replaced by electric cars. In particular, as emission standards continue to get tougher, the outlook for electric vehicle sales looks promising.

The growth in electric vehicles is also fuelling demand for new types of semiconductor materials such as silicon carbide. Indeed, one of the reasons behind the market leader Tesla’s electric vehicles being more efficient than competitors is due to the use of silicon carbide chips supplied by STMicroelectronics.

Tech is also increasingly used in the area of active safety. Advanced driver-assistance systems (ADAS) are electronic systems that help drivers. The sensors that detect when a car is close to hitting an object and warn the driver accordingly are an example of ADAS. Such systems help to avoid human error and prevent accidents.

Other examples of ADAS include automated lighting, warnings of traffic congestion, navigation instructions or even collision avoidance, where the vehicle takes over from the driver. Such systems require an array of specialist sensors and lighting, mapping tools and inputs from multiple data sources.

In the future, ADAS could involve car-to-car connectivity via wireless networks, or car-to-infrastructure, to improve road safety further. Laser-based sensors that could be used for self-driving cars are an important area of development for many companies.

Again, European-listed STMicroelectronics and Infineon Technologies are among the market leaders in providing semiconductors for the automotive sector. Meanwhile, Austrian group AMS – a specialist in facial recognition and 3D sensing technology - is buying German lighting firm Osram Licht to gain access to the latter’s automotive lighting products.

Advanced tools are needed to make complex chips

All of the above is very complex technology. For these applications to work properly, the semiconductors behind them need to be not just powerful but also incredibly small. Europe is home to two semiconductor equipment companies – ASML and ASM International – whose technology is important to the development of advanced semiconductors.

ASML specialises in lithography, which means using light to print tiny patterns on silicon. This is a crucial step in making computer chips. The next generation of lithography machines will use extreme ultraviolet light (EUV) which can make chips even smaller. ASML is the world’s only manufacturer of lithography machines that use EUV.  

Meanwhile, ASM International specialises in atomic layer deposition (ALD) technology which, as the name suggests, allows films to be created in layers, atom by atom. This allows for great precision at very small dimensions.

The shrinking size of chips is one of the key factors that has enabled advances in technology over the last 50 years. This is seen in Moore’s law, which is the observation that microchips become twice as powerful every two years, while the cost of computing halves. Innovations such as EUV and ALD can help ensure that Moore’s law continues to hold true and that these advances continue.

Simply possessing advanced technology isn’t on its own enough to make a company a good investment. As with any sector, investors need to examine factors such as credible management teams, balance sheet strength and valuation.

The economic cycle is another factor to consider. The recent slowdown in the car sector has weighed on the share prices of a number of tech companies who have automotive exposure, for example. But investors in tech may want to bear in mind that consumer products are only one part of the picture and there are many companies whose technology is crucial, but hidden.

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This article is issued by Cazenove Capital which is part of the Schroders Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. 

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All data contained within this document is sourced from Cazenove Capital unless otherwise stated.