The danger of losing out on technologies

Maximilian Scherr, strategy consultant and partner at Arthur D. Little, does not see the future of Austria as a business location through rose-tinted glasses.

Science scepticism, oversleeping dramatic changes in the world, an energy supply that is no longer up to date – these are just a few of the points where Maximilian Scherr, partner at Arthur D. Little, the world’s oldest strategy consulting agency, sees need for action. A native of Graz, he leads ADL’s cross-sector Strategy, Organisation & Innovation Practice Group in Austria and is co-author of the global ADL CEO Insights. He sees a prosperous future for Austria as a business location at risk if fundamental changes are not introduced quickly.

If you believe the experts, Austria’s economic situation is not worrying. Do you agree with that?
Maximilian Scherr: Maximilian Scherr: No, I don’t. However, you have to differentiate. Firstly, measured by purchasing power and especially the purchasing power of the top 80%, we are doing very, very well in Austria. This is probably also the case with the purchasing power of the bottom twenty percent because we as a country, including the social institutions, have done many things right. Secondly, we are privileged: Our favourable geographic location, pleasant climate and rich culture allow us to be a successful tourism nation and bring money into the country; we have done this smartly. In addition, we have many companies, especially successful small and medium- sized enterprises, and overall, we have achieved a level of prosperity that allows us to have good universities and a very good apprenticeship system. We thus have many of the ingredients that help us to be successful. At the same time, I see the danger that Austria is losing out on key technologies, both in research and in application. Austria is one of the most science-sceptical countries and we need to find out why. There are good researchers, and they also stay in the country, but we should not rely on that. One example is the computer scientist Sepp Hochreiter, a German-born AI luminary who conducts research at the University of Linz, and who is convinced that he has a better language model than Open AI/ Chat GPT but is not funded accordingly. Other European countries provide much more funding, and we should not underestimate the Middle East. I was recently in Abu Dhabi, Bahrain, Dubai and Saudi Arabia, among other places. In these countries, completely different amounts of money are invested in technology. We are lagging behind significantly. Consequently, there are fewer opportunities to study and grow in such fields. Science and applied technology need an eco-system around them. Like in Silicon Valley. There was nothing there for a long time until investments, especially by pension funds, in venture capital were made possible. We don’t have this venture capital to the same extent. Besides the scepticism about technology and research, this is also an issue of the pension system.
As a result, there are fewer opportunities to study such subjects and grow from them. Science and applied technology need an ecosystem around them, like in Silicon Valley. There was nothing there for a long time until investments in venture capital became possible, especially through pension funds. We don't have this kind of venture capital to the same extent here. In addition to the scepticism towards technology and research, this is also a pension system issue.

Where do you see the greatest threat to the future of Austria as a business location?
Scherr: Scherr: I rather wonder where the greatest leverage lies. I see the biggest threat in the fact that we are still sufficiently aware of how drastically the world is changing – precisely because we are still doing so well. But if we don’t sufficiently try to stay on the ball and get things going, we run the risk of no longer keeping up.

Has Austria not yet arrived in the 21st century? And is the Austrian mentality of being rather laid back and “let’s see” also an obstacle?
Scherr: Scherr: I don’t want to engage in Austria bashing, but there are too many people for whom the preservation of the status quo, of their old networks, their existing political environment and so on is much more important than understanding what is really happening in the field of AI and new energy systems. When I look at how many Austrians complain about energy prices on the one hand, and on the other hand they vote against a wind turbine being erected in their community, it won’t work. I am not in favour of expropriation and coercion. But I dare to predict that if we take the issue of the energy transition in Austria seriously, we will reach the point where the question of whether we want it or not will no longer arise. Instead, a wind turbine will simply be erected where the right location is. Then the distribution grid of the energy suppliers will be built where it is necessary. We can’t demand to be more “green“ on the one hand, but on the other hand not want any grid expansion or wind parks and photovoltaic projects

Do we need a stronger hand of government and more regulations again?
Scherr: Scherr: In my view, it is not a question of more or less government, but where do you need the government? It is a question of “intelligent governing”. Thesis one is that there needs to be more assertiveness on large infrastructure projects that the country needs. These include the transmission grid for the energy transition, more wind farms and the like. There also needs to be less regional and local peculiarities. Whether another University of Technology in Linz is important, although you already have a very good university in Linz, I don’t know. Especially a small country like Austria should probably have a manageable number of excellent centres for certain subjects instead of distributing funds as much as possible. The public sector needs to acknowledge that the energy transition also costs the owners of the energy grids money and that they have to pay for it. These are often the provinces or indirectly the federal republic when it comes to Verbund and APG (Austrian Power Grid). Thesis two: There have to be regulations so that the energy suppliers can capitalise differently on and charge for the necessary grid expansion. Austrians cannot expect everything to be as cheap as possible and countless billions of euros to be poured into grid expansion out of thin air in the years to come. The calculation is relatively simple. Investing more in both generation and transmission results in a lower electricity price. However, investments take a long time to pay off.
Thesis two: There have to be regulations so that the energy suppliers can capitalise differently on and charge for the necessary grid expansion. Austrians cannot expect everything to be as cheap as possible and countless billions of euros to be poured into grid expansion out of thin air in the years to come. The calculation is relatively simple. Investing more in both generation and transmission results in a lower electricity price. However, investments take a long time to pay off.

What does the transformation of the energy sector need to look like?
Scherr: We need more decentralised production and thus more decentralised feed-in with much more decentralised grid management. That only works digitally. This includes solutions such as ensuring that car batteries from electric vehicles are not only charged when the user wants them and discharged when they are driving. This decentralised energy storage can be used. Solutions are needed to limit the peaks of the feed-in from photovoltaic systems because otherwise a transformer station can overheat and the power then fails completely. This control must also be digital. That is why digitisation is a very essential core for the transformation of energy suppliers and energy networks.

Does Europe need to become an isolated island – de-risked, so to say? Is it even possible to reverse globalisation?
Scherr: Scherr: You have to differentiate. A nation like the United States, which is large in terms of population, companies and surface area, can more easily afford to be self-sufficient because, among other things, it has a lot of technology in its country. A nation like China can also afford it more easily. The leadership of Russia had the idea that it could afford to be self-sufficient, which doesn’t work. Together, Europe would have a lot, even if not everything, like energy, rare earths and more. But Europe is still fragmented into many nation states and Euroscepticism has even increased in some countries. As much as I would like Europe to have this common language and power, this is rather wishful thinking and a dream that cannot be fulfilled in the foreseeable future. In Austria, too, I miss the general consensus that existed before EU accession, that the country must be part of a larger whole. Here I am even pessimistic, because many are crying out for more self-sufficiency without knowing what it costs and what sacrifices it entails to be self-sufficient. The best cautionary example has been set by Great Britain. The majority of voters have fallen for the narrative of some politicians that de-risking through separation is the strategy of choice. They are now learning that separation is not de-risking, but rather the road to disaster. If even an economically important country like Britain can’t do that, how can we?

So, federalism kills?
Scherr: Federalism can also go too far. I believe that Austrians, with their mentality, need a bit of federalism. But when it comes to big challenges like the energy transition, investments in future technologies, the reorganisation of the pension and health system, we need more national cohesion

Has Austria already missed the boat in terms of AI?
Scherr: Scherr: I believe that we still have top researchers in Austria. The social environment also attracts people who like to stay here. In the field of cyber security there are some luminaries in Graz around Prof. Stefan Mangard, in the fundamental questions of AI Sepp Hochreiter is leading the way, in AI in dermatology Harald Kittler from the Medical University Vienna is a trailblazer... so there are some – and these are only three examples. Therefore, it would be unfair to say that we have missed the boat, but we are not promoting enough focus. In addition, I believe that there is a considerable need to catch up, especially in schools, in the primary school and the grammar schools. If we have more hours of religious education than IT in some years, that is not particularly forward-looking. Unless you think foremost about life after death

“I don’t pay good wages because I have a lot of money, but I have a lot of money because I pay good wages,” said Robert Bosch. Does that still apply or where does the focus lie in future recruitment?
Scherr: Scherr: I would modify this quote from Robert Bosch. I would say that I have work and life because I also enable others to have a work-life balance and thus manage to keep the good employees. At the end of the day, we are successful because we enable these things.

So, the paradigm shift, that money alone isn’t everything has long since taken place?
Scherr: Scherr: It is already a reality for many. But not everyone who would like to have a better work-life balance performs enough that it would be justified to simply give it to them. In sports, the history books are full of people who were born with talent but squandered it because they wanted too much life, and an imbalance occured.

What are the most common issues that clients ask Arthur D. Little for advice on?
Scherr: Scherr: There are three main issues. Firstly, what does AI mean for them and their company? This is not a question to which there is a single answer. With many things that represent a paradigm shift – and the publication of such language models represents such a paradigm shift – many people experience a gold rush. Not everyone will survive it, but in this gold rush there will be developments that are not even foreseeable today. This is exactly what companies have to prepare for. At the end of the day, this will also strongly influence the activities within each job and some activities will be eliminated. Everywhere where data is stored relatively consistently anyway, where research takes place that is documented, in journalism and many other areas, it won’t be long before models have selective access to this data and employees can use it all. Much of today’s knowledge will be distributed more democratically. Drawing the right conclusions from this and not just using statistical probabilities will still be a great art. Getting to the heart of what this means for companies is a question that concerns many CEOs and that we discuss with them.
The second topic is still, how do you create growth? Many are currently asking themselves how they can deal with increased costs and reduce them. But they don’t always discuss that with us because we know primarily about how to deal with growth in value chains. Responsible companies take care of cost reduction in good times to be able to invest in growth in bad times. Especially those who have already done their homework, we can help them to grow.
The third topic is cyber security. This is still a topic that many CEOs are a little bit concerned about every now and then and it is so omnipresent that they are worried from time to time. But being worried is not enough. Many companies have good people in their security departments, such as their Chief Information Security Officer. But not all of them have the power and the strength to be able to discuss with the board at eye level. If nothing has happened for a while, nothing has been updated and not much money has been spent on training and technology, there is also an expectation that things don’t have to change dramatically. Of course, many CISOs know that they are not safe just because the company has not yet been successfully hacked – but they often do not have the business transparency, i.e. quantified risks, to be able to successfully lead board discussions. That’s where we help to gather courage and facts and get the CEOs to listen. And in other cases, we help boards get an independent second opinion on how their security is really doing.