The future of technology: The Netherlands as Europe’s Silicon Valley

The Netherlands is on the eve of a technological revolution. This article explores the challenges and opportunities for the Netherlands and Europe.

Stephan van Rhee, EY Global Technology Sector Analyst, is co-author of this article.

The Silicon Valley of Europe

The Netherlands and Europe both play a crucial role in the global technological ecosystem, and in the semiconductor industry in particular. Artificial intelligence (AI) is having more and more of an impact on the entire chain. Examples include AI algorithms that optimize stock levels and transport routes, or that help to monitor the performance of machines so that preventive maintenance can be carried out on time. The increasing importance of technological innovations, combined with changes in the climate and geopolitics, and the growing need to invest in developing talent knowledge and in digital security, pose a number of challenges, however, and these challenges are far too great for one country or company to tackle on its own. Cooperation is therefore key to success. Below we consider the areas in which stakeholders need to join forces to ensure this unique European ecosystem is flexible and can see further growth on the world stage.

Trillion dollar revenues expected

The global semiconductor market is on the verge of experiencing massive growth, and it predicts that revenues will exceed US$1 trillion by 2030, driven by the ever-increasing amount of data we produce, AI (including generative AI) and IoT, the energy transition, and the innovation and consumption of products and services. Such strong growth poses challenges in the global supply chain.

The question that arises is how the supply chain can facilitate this expected doubling of revenues in a volatile world, in which companies crave stability, reliability, and predictability. We observe that semiconductor companies navigate complex supplier networks. Many of these networks have become extremely specialized due to years of focusing on costs, and extremely risky due to the combination of vertical fragmentation and horizontal concentration. This was highlighted during the COVID-19 pandemic, which caused a supply chain crunch. The vulnerability of hyperspecialization was exposed during the pandemic, when disruptions in just one process were able to bring an entire chain to a standstill. Disruptions may be caused by a cyber attack, such as malware, ransomware, and data leaks. Operational technologies used for managing a factory are increasingly connected to a company’s IT network, and to the internet, so that suppliers can carry out maintenance remotely. All of this entails an increased cybersecurity risk. To minimize this type of risk in future, consideration must be given to factors other than cost-efficiency when making decisions related to the design of the supply chain, and cooperation in the chain will need to be stepped up further.

The CSRD: a multidisciplinary matter

The new Corporate Sustainability Reporting Directive (CSRD), which requires companies to report on their organization’s environmental and social impact, also brings new challenges, in particular because it concerns their entire supply chain / value chain. In addition to direct CO2 emissions from the organization’s own sources (scope 1), companies must also, for example, report indirect CO2 emissions from the purchase of electricity (scope 2). Finally, companies will also be required to report the CO2 emissions throughout the lifecycle of all the products they buy, manufactures and/or sell (scope 3). As a result, more and more information will have to be provided by suppliers and customers. Implementation requires a multidisciplinary approach, effective data management and technology, and that technology must also be scalable.

Basically, three matters have to be determined: what does the company need to report on, what information is already in its possession, and what information is missing? With regard to the first of these matters, a double materiality analysis needs to be performed (DMA). This involves identifying which sustainability themes affect the company (outside-in), and what impact the company’s business activities have on people and the environment (inside-out). This will force companies to put their finger on the problem, so to speak. The next step involves to set up the internal organization in a way that ensures the necessary data can be collected and the quality of data is adequate. This touches on strategy, policy, processes, internal controls, and IT and other systems.

Importantly, the implementation of the CSRD guidelines involves a change process in which companies must include their stakeholders in the value chain. In addition, under the CSRD companies must report on the due diligence program relating to their own business activities and those of the partners with whom they work. Companies must provide information on how they identify and mitigate risks relating to the environmental and human rights impact of their business activities and those of their long-term partners. In order to do this, companies need to expand the scope of their existing third-party risk management programmes. The good news is that the Horizon Europe programme offers opportunities for funding joint initiatives that contribute to European sustainability in the chain.

A business climate that is fit for purpose, and the war for talent

There have been many recent media reports about the growing pressure on the Dutch business climate and the uncertainty this entails for the business community. Trust, predictability and vision form the cornerstone of the business climate. Although the Dutch government has made initial investment commitments, uncertainty remains concerning broader financial and tax policies to support the high-tech industry on an ongoing basis, and this uncertainty is detrimental to the Netherlands’ own ‘Silicon Valley’. Senior executives in the Netherlands have been concerned about the business climate, and thinking about solutions, for a long time. The fact that the business community is unable to do this was also apparent from various roundtable discussions organized by EY last year, which were attended by dozens of CEOs and CFOs of Dutch listed companies, large family businesses and semi-public organizations. The influx of sufficient, highly qualified, talented people into the labor market is particularly important as a lifeline for the future, and this involves, among other things, increasing equal opportunities in education, encouraging young people to study STEM subjects, and ensuring a brain gain with regard to relevant specialist subjects (such as the sciences) in short supply in the Dutch labor market.

Since we are looking at a European technological ecosystem, it is important that the theme of the business climate is considered at a European level. How do we renew Europe's appeal as the habitat for the next generation of entrepreneurs?

In his recent report, Mario Draghi argued that Europe needs to be highly ambitious and that radical changes are necessary to make Europe appealing and fit for tomorrow’s world. In this context, Enrico Letta’s report, ‘Much More Than a Market’, is also very much worth reading, as it places Europe’s internal market - the cornerstone of European integration - at the top of the policymakers’ agenda. This is quite apt, as we are currently facing an interesting and defining period for European competitiveness.

Based on a nine-point plan, EY makes recommendations to enhance Europe's attractiveness for foreign investments. The recommendations are divided into three categories and are based on interviews with 500 executives, and a detailed analysis of more than five thousand FDI (foreign direct investment) projects in 45 countries.