Table of Contents
The deeptech sector, encompassing fields such as biotechnology, quantum computing, robotics, and artificial intelligence, is burgeoning within the European Union (EU). The EU aims to solidify its standing in the rapidly evolving deeptech landscape. However, for the sector to reach its full potential, the regulatory framework must support rather than hinder innovation. Identifying existing regulatory constraints and proposing solutions to create a more flexible legal landscape is crucial for enabling maximum innovation.
Energy Needs
Deeptech’s reliance on vast energy resources stems from its energy-intensive manufacturing processes and the maintenance of IT infrastructure. To thrive, deeptech companies require accessible, affordable, and green energy. In many parts of the EU, particularly in Central and Eastern Europe (CEE), energy infrastructure is lacking, especially in terms of green energy accessibility. Investments in green energy infrastructure and regulatory reforms to bolster cross-border collaboration are vital for the deeptech sector to achieve its full potential. Small and medium-sized enterprises (SMEs) must have access to cheap green energy for the sector to flourish. For instance, initiatives like ECO2Fuel and OXiNEMS demonstrate the potential of deeptech innovations in energy and health sectors.
Market Fragmentation and Geographic Imbalance
Market fragmentation primarily caused by the fact that the EU, while undertaking harmonisation efforts, still allows member states to determine specific rules based on their individual needs and requirements. While a flexible approach, this could prove to be burdensome for deeptech companies, who operate cross-border and need to track and follow the specific requirements for each individual member state. Nevertheless, some sector-specific steps are being taken to unify these requirements. Notably, the proposed European Health Data Space (EHDS) is going to have an impact on the healthtech sector. The EHDS mainly aims to foster a single market for electronic health record systems, relevant medical devices and high risk AI systems, and also to create an efficient system for the secondary use of health data.
Despite harmonisation efforts, the EU still faces geographic imbalance. Most of the deeptech sector in the EU is centred around innovation hubs scattered across Western Europe, making that part of the EU the forerunner in the deeptech sector, with Sweden and Finland being notable exceptions. By supporting deeptech initiatives in the CEE region through financing programmes for innovation hubs (such as the Incubatore Creativo Istria in Slovenia) and universities, as well as providing targeted accelerator campaigns and fundraising opportunities, the EU could bolster deeptech activities in the CEE region, strengthening its market position and enabling its bright minds to bring their projects into life.
Deeptech clusters that connect consumers, technology, and industry can accelerate knowledge transfer from labs to startups. An example is the future innovation campus in Luxembourg, which will host innovative companies working on new products and solutions together with the regional research ecosystem. Creating such clusters in the CEE region would greatly aid the deeptech sector in the region.
Funding in Early to Late Stages
A comparative analysis by the European Patent Office (EPO) reveals that the EU lags behind the US in deeptech SMEs. The US has twice the number of deeptech SMEs, with a larger proportion holding patents. The primary obstacle holding back the EU deeptech SME target group is financing. While the European Institute of Innovation and Technology (EIT) provides funding, it often focuses on early-stage activities, leaving a gap in later-stage support.
Funding programs tailored to the needs of deeptech SMEs are crucial. The EPO’s analysis shows that US deeptech SMEs hold more patents and receive more funding than their EU counterparts. The EU must enhance its funding mechanisms to support intensive R&D processes beyond the early stages. Initiatives like the European Innovation Council (EIC) Scale Up 100 and the Horizon Europe program are steps in the right direction, but more targeted funding is necessary. Europe must develop a clear strategy to foster deeptech growth, similar to the strategic support seen in the US and China. The US, for instance, has launched multi-trillion-dollar investment packages through initiatives like the CHIPS and Science Act, IRA, and IIJA. These initiatives provide significant opportunities for US tech firms, creating a competitive environment that the EU must match. By adopting state-backed initiatives, the EU can create hubs for deeptech innovation, as seen with the House of Quantum in Amsterdam.
Restrictions arising from the EU AI Act
The EU AI Act, which entered into force on the 1st of August, 2024, will significantly impact the deeptech sector, as more and more deeptech companies use AI-powered systems as part of their business cycle or provide AI-powered solutions themselves. The EU AI Act places substantial obligations on providers and other persons in the value chain of high-risk and general-purpose AI systems, which you can read more about from here. The EU AI Act was not adopted without controversy though, as many interest groups saw it as another attempt to overregulate a technological sector that would otherwise bloom in a deregulated market. Indeed, adhering to the obligations is costly and time-consuming for the AI sector, causing some companies like Apple and Meta to refrain launching certain products within the EU.
On the upside, the adoption period for most obligations arising from the EU AI Act is long enough (24-36 months) for most deeptech companies to comply during the product development phase, ensuring compliance from launch. The EU AI Act might have the same effect as the GDPR, increasing trust in businesses and consumers alike if companies comply with the EU legislative requirements. While the EU AI Act is approved and its strict rules will not change, some open-ended questions still remain. For example, the Act requires providers of general-purpose AI models to draw up and make publicly available a sufficiently detailed summary about the content used for training. The exact extent of this obligation remains to be seen. If the EU (through the AI Office) wishes to encourage the deeptech sector to utilise AI, it ought to make obligations such as this less stringent. Otherwise, the burdensome obligations would hinder development and create market disruptions.
Conclusion
The deeptech sector holds immense potential for innovation and economic growth within the European Union. However, for this potential to be fully realised, the EU must address several key issues within its regulatory framework. Ensuring access to affordable and green energy, reducing market fragmentation, supporting geographic balance, enhancing funding mechanisms for all stages of development, and refining the EU AI Act are all critical steps. By creating a supportive and flexible regulatory environment, the EU can foster a thriving deeptech sector that drives technological advancement and strengthens its position on the global stage.
