Betting on EU AI Infrastructure: Navigating Fragmentation and the Race for Digital Sovereignty

The European Union's push to build AI gigafactories—massive data centers housing over 100,000 advanced AI chips—has thrown Germany's tech sector into a high-stakes competition. Once united in a consortium, firms like Deutsche Telekom, SAP, Ionos, and Schwarz Group are now racing separately for a share of the EU's €20 billion funding pool. This divergence underscores a critical question for investors: How can fragmented industry alignment translate into strategic opportunities in the AI infrastructure race?

The stakes are clear: the EU aims to close its infrastructure gap with the U.S. and China, where tech giants like Amazon and Alibaba dominate AI compute. To succeed, Europe must consolidate resources, but corporate fragmentation risks slowing progress. For investors, the challenge is identifying firms positioned to thrive amid this uncertainty—and even profit from eventual consolidation.

Ask Aime: Which companies in Germany's tech sector will benefit from the EU's AI investment, as they compete for a share of the €20 billion funding pool?

Ionos: Early Mover, Modular Advantage

Ionos holds a critical edge as the first German firm to submit an “expression of interest” to the EU by June 2024, securing a seat at the table early. Its nine existing data centers across Europe and the U.S.—including key hubs in Berlin and Frankfurt—provide a scalable backbone for AI infrastructure. Crucially, Ionos' modular cloud architecture allows it to adapt to evolving EU standards and partner with other consortia if consolidation occurs.

Investors should note Ionos' agility. While its stock has lagged behind hyperscalers like Amazon Web Services (AWS) in the short term, its early alignment with EU policy could pay dividends as subsidies flow. The firm's emphasis on “digital sovereignty” aligns perfectly with the EU's EuroStack initiative, which seeks to reduce reliance on foreign cloud providers.

SAP's Exit: A Strategic Retreat or New Play?

SAP's withdrawal from the consortium marks a pivotal shift. The software giant cited strategic disagreements over the project's direction, but its global network of 90 data centers—including five in Germany—remains a latent asset. SAP's focus may now pivot to vertical AI solutions (e.g., enterprise-specific models) rather than competing in raw compute infrastructure. For investors, this raises a question: Could SAP partner with winning consortia post-selection, leveraging its infrastructure without direct bidding risks?

The move highlights a broader theme: Not all tech giants want to bet heavily on capital-intensive data centers. SAP's retreat suggests investors should prioritize firms like Ionos and Deutsche Telekom, which have skin in the game and the infrastructure to scale.

Fragmentation Risks—and Why They're Manageable

The split among German firms introduces uncertainty. Separate bids could lead to redundant investments or underutilized facilities. Yet the EU's shortlisting process (expected by late 2025) could force consolidation, rewarding firms with the most modular, interoperable systems. For instance, Deutsche Telekom's sustainability focus—using AI to optimize energy efficiency in its 16 data centers—aligns with EU green mandates, potentially giving it an edge in the final selection.

Investors should also monitor Schwarz Group's StackIT subsidiary, which plans a 200MW data center in Lübbenau. While less tech-savvy than Ionos, its parent's financial muscle (Lidl's global reach) could attract EU favor for regional job creation.

Investment Thesis: Modular Tech and Cross-Consortium Plays

The optimal strategy for investors is to back firms with modular technology stacks capable of cross-consortium collaboration. Key criteria include:
1. Geographic reach: Data centers in EU member states with strong policy support (e.g., Germany's coalition push for at least one gigafactory).
2. Flexibility: Cloud architectures that can integrate with EuroHPC supercomputers or EuroStack standards.
3. Sustainability: Firms meeting the EU's stringent energy and carbon targets (e.g., Telekom's AI-driven efficiency).

Top Picks:
- Ionos: Early mover with EU-aligned infrastructure.
- Deutsche Telekom: Sustainability leader with scale.
- EuroHPC Consortia: Investors might also look to ETFs tracking the EuroHPC Joint Undertaking's AI factories (e.g., funds holding shares in Bull SAS or Atos).

Risks and Caveats

• Subsidy dependence: Projects reliant on EU grants may falter if funding delays or political shifts occur.
• Global competition: U.S. and Chinese firms could undercut EU infrastructure with faster, cheaper solutions.
• Talent drain: Europe's AI workforce remains smaller than in the U.S. or China; firms without strong R&D pipelines may struggle.

Final Call: Position for Consolidation

The German bids' fragmentation is a temporary hurdle. As the EU narrows its list, investors should position for consolidation by favoring firms with interoperable tech and policy alignment. Ionos and Deutsche Telekom are prime candidates, but keep an eye on StackIT's progress—its parent's financial depth could yet make it a merger target.

The EU's AI infrastructure push is a once-in-a-decade opportunity. For those willing to navigate near-term uncertainty, the rewards of digital sovereignty—and the compute power it enables—could be immense.