When it comes to the digital economy, there is no question that the United States took the lead compared to Europe, causing some European policymakers to look at the competitive edge many leading U.S. tech companies have with fear and envy.

But in their eagerness to see Europe catch up, there is a real risk that Europe will focus on protectionist policies that unfairly tilt the playing field to their advantage rather than identify opportunities where European industries can build on their strengths.

As the digital economy enters a new phase – one in which data-driven products and services built on the Internet of Things enable a company’s success – Europe is well-positioned to establish itself as a world leader, if it can avoid succumbing to these protectionist urges.

In particular, European countries have an opportunity to lead in smart manufacturing if they work with the expertise of the U.S. IT industry, rather than work against it, to develop its own competitive edges.

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Smart manufacturing uses the Internet of Things to transform every aspect of the manufacturing process. Before materials even get to the factory floor, connecting supply chains to the Internet of Things allows all participants in the manufacturing value chain to gain real-time insight into how their resources are moving to make better planning decisions, increase efficiency and transparency, and reduce costs.

Inside the factory, companies can analyse data from networked machinery to detect potential problems earlier and perform predictive maintenance, which reduces downtime.

Integrating connected technology into these routine processes has the added benefit of increasing the potential for automation, which can substantially boost productivity and let Europe, with its high wages, better compete against low-wage developing nations.

And incorporating connected sensors into manufactured goods themselves unlocks the potential to transform business models. For example, rather than just selling a jet engine to an airline, a manufacturer could adopt a product-as-a-service business model so that it sells the engine’s function (i.e. providing thrust for flight) as a service but retains ownership of the engine – a model that UK-based Rolls Royce has used successfully for years.

Though this entails manufacturers assuming more risk, it can lower the investment barrier for their customers and lead to market expansion. Finally, once connected devices become ubiquitous, the data they generate can serve as the substrate for future business opportunities that the manufacturing sector – and industry as a whole – cannot yet foresee.

For example, widespread adoption of global positioning system (GPS) technology and sensors that monitor vehicle performance has given rise to a robust telematics industry that analyses this data to help the shipping industry better manage fleets, optimise routes and reduce fuel consumption./p>

To fully capture the benefits of smart manufacturing, a country must successfully combine the best expertise in both manufacturing (including engineering and industrial design) and IT (including cloud computing, data analytics, and other technologies that support the Internet of Things).

Many European countries, Germany and Austria in particular, lead the world in advanced manufacturing prowess. So rather than make it harder for U.S. IT companies to do business in Europe, European policymakers should recognise U.S. IT expertise as a necessary ingredient to spur the growth of smart manufacturing as efficiently and effectively as possible.

By marrying these skills, both the U.S. and Europe could capitalise on their unique competitive advantages in the global manufacturing marketplace.

However, Europe will not get this advantage if it pursues a policy of attacking U.S. tech companies. If European policymakers view the digital economy as an opportunity to carve out protection for European companies, the logical extension of this approach would be the implementation of two policies that protect domestic interests at the expense of the value of the Internet of Things as a whole.

First, European countries might establish nation-specific standards for the Internet of Things to promote the production and adoption of domestically produced connected goods and services.

Second, countries might restrict the flow of data – between devices or between countries – under the guise of protecting privacy or security, despite it having no impact on either whatsoever.

However, these anti-innovation policies would balkanise the Internet of Things, which would be forced to grow where production is more expensive. Domestic Internet of Things companies would have less competitive pressure to innovate, while less efficient or less innovative companies would gain a greater share of the market than market forces would otherwise allow, making it difficult for more innovative companies, both foreign and domestic, to compete.

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Standards balkanisation would be particularly damaging for the growth of the Internet of Things as nation-specific standards would dramatically reduce the benefits that certain connected products and services could generate at scale.

In short, these protectionist policies would come at the direct expense of European manufacturers, forcing them to transition to smarter manufacturing without access to the best, most cost-effective IT expertise available, and sabotage the growth of the Internet of Things both in Europe and as a whole.

The sooner Europe treats the advent of Internet of Things as an opportunity to build on its strengths, the sooner it can capitalise on its unique competitive edges.

By using smart manufacturing as a model of success, Europe can identify other opportunities where European companies can similarly benefit in other sectors poised for disruption by the Internet of Things.

Sourced from Joshua New, policy analyst, Center for Data Innovation