"Perhaps we are looking at the wrong race"

Europe is lagging behind the United States and China when it comes to large AI models. But that does not automatically mean Europe will lose out economically. In fact, manufacturing in particular offers opportunities to turn AI into productivity growth and greater competitiveness. For the A quick call with... series, we discussed this with APG economist Charles Kalshoven.

OpenAI, Nvidia, Meta. Anyone following the news could easily get the impression that the winners of the AI era have already been decided. According to Kalshoven, however, that is far from certain. “Perhaps we are looking at the wrong race. Economic history shows that the biggest winners of a technological revolution are often not the companies that develop the technology, but the organizations that apply it most intelligently.” And that is precisely where Kalshoven sees opportunities for Europe. Not because the continent is leading in AI, but because it has a strong industrial base where new technology can create value directly.

Isn’t that a bit too much like wishful thinking?
“No. Europe certainly has strong assets. We have a large industrial base, with sectors such as chemicals, pharmaceuticals, biotechnology and advanced manufacturing. AI can help make processes smarter, more efficient and more productive. Industrial AI is about something different from the chatbots that attract most of the attention. It is not about writing texts or generating images, but about optimizing physical processes, such as quality control, predictive maintenance and process management. This can help companies become more productive and competitive. If you already have a great deal of production knowledge, data and well-organized processes, it is easier to add value with AI than if you have to start from scratch. You can also see this in new European initiatives such as the Paris-based AMI Labs – Advanced Machine Intelligence. It is working on AI systems that do not only understand language, but are specifically intended to understand the physical world. That aligns well with the industrial strength Europe already has.”

But don’t factors beyond technology also play an important role in competitiveness?
“That is true. Of course, factors such as energy prices, regulation and labor costs play a role. But I think we sometimes overstate those factors. It is often said that Europe is held back by expensive energy and too many rules, but that does not fully explain why some industries are losing ground. At least as important is how companies respond to technological change. Take the European automotive industry. For a long time, it focused on further optimizing the combustion engine, while competitors in the United States and especially China moved much earlier and more decisively toward electric vehicles. In hindsight, that can be seen as a strategic miscalculation. Europe also faces strong competition from China, where companies often benefit from state support and other advantages. So the issue of competitiveness is about more than technology or regulation alone. It is also about how quickly companies recognize and dare to embrace new developments, and about fair competition.”

If AI increases productivity, why is this barely visible in the economic figures yet?
“That mainly has to do with time. New technology rarely translates directly into higher economic growth. Companies first have to discover how to use that technology to best effect and adapt their processes accordingly. We saw the same thing with the introduction of electricity. It was available, but it took years before factories had adapted their layouts and working methods to it. With AI, we are essentially in a similar phase.

In addition, not all economic gains are visible in the statistics. Sometimes consumers receive a better product or better service for the same price. That certainly creates additional value, but it is not always reflected in gross domestic product. AI can also improve processes in the services sector without this immediately leading to higher revenue. If AI enables you to answer customers’ questions faster and better, new demand often emerges. Customers make greater use of that option and ask more complex questions. The quality of service improves, but this too does not automatically show up in economic growth figures.

In industrial applications, this is often easier to see. Productivity gains can be measured more concretely there. Think of predictive maintenance that reduces machine downtime, or quality controls that reduce waste. Such improvements make companies more efficient and more productive. That is why I expect the economic effects of AI to become visible eventually, but it will take time first.”

Suppose Europe succeeds in applying AI successfully in industry. Who benefits most?
“In the short term, probably the companies that are first to use the technology successfully. They can produce more efficiently, reduce their costs and increase their profits. But such advantages usually do not last. Competitors eventually adopt successful applications, causing part of that profit to disappear again.

Over the longer term, the benefits therefore often shift to consumers, employees and the economy as a whole. Consumers receive better products for the same price, or the same quality at a lower price. Employees can benefit because successful companies grow and have more scope to offer higher wages. And if companies can produce more with the same number of people, prosperity ultimately increases as well.

So the question is not so much whether the benefits will be shared, but how quickly that happens. History shows that technological progress rarely ends up benefiting just one group. Sometimes government policy is also needed — for example, to break up monopolies — but ultimately several parties usually benefit from the productivity gains such innovation delivers.”