CHAPTER SEVEN
Europe in the 1990s: Strategies for Survival
FOR EUROPEAN BUSINESSMEN the question is no longer: Will there be a true European Common Market? It is: What do we do today to prosper in the Europe of 1993?
The Common Market governments have pledged themselves to abolish the barriers to the intra-European flow of people, money, goods and services by the end of 1992. If they live up to these commitments, Europe will have fewer internal barriers than there are in the U.S., considering all our state and city regulations.
But do the European governments really mean it? Is it pure coincidence, for instance, that the French discovered drug smuggling from Spain just when France had to open its markets to Spanish fruits and vegetables? No drugs have been found so far, but Spanish produce trucks must wait for hours at the border, while the vegetables wilt. West Germany has introduced a bill that would make it expensive for middle-sized, family-owned businesses to sell out or merge across frontiers. And, though London’s bankers and brokers would clearly benefit, Prime Minister Margaret Thatcher staunchly resists the trend toward a common European currency or European central bank.
Businesses Are Off and Running
Yet what governments do or not do may no longer matter much. Businesses of all sizes have the bit between their teeth and are off and running. “We all know,” says the chief executive officer of a middle-sized specialty-chemicals firm, “that we have to act today as if 1993 were already here.”
Unilever, the foods, soap, and detergent multinational, called its European managers to Hamburg recently to put into effect a new organization and new strategies for a truly unified Europe. Another multinational, Philips, has reorganized its consumer-electronics business on the assumption that 1993 is already here. It replaced its 60-year-old structure of autonomous national companies—a Dutch Philips, a German Philips, etc.—with Europe-wide product-based businesses, a television-receiver company, for example.
Recently, five medium-sized, family owned food brokers—German, French, Spanish, Italian, and Danish—formed a “community of interest.” Each family holds 51 percent of its domestic company and 9.8 percent of each of the others. The five will act as one company in representing manufacturers and serving supermarket chains across national boundaries. “Knowing politicians, I expect all the present governmental barriers still to be here four years hence,” says the Italian most responsible for the deal. “But they will have become nuisances and additional costs rather than the dominant market reality they have always been, and this is the only possible basis I can see for picking a business strategy in Europe today.”
But it is also a shaky basis. It means committing one’s business to highly risky assumptions.
What, for instance, should a financial business assume regarding the future of Europe’s stock markets? London is, of course, by far Europe’s leading exchange. But its position is quite different from that of the New York Stock Exchange in the U.S. For the majority of European businesses, their own local exchange is the only one that matters—the only one that trades the shares of national companies and on which they can float their equity.
This national monopoly of the local exchange is highly profitable for the domestic banks. Small wonder then that the Continentals are committed to its perpetuation. But can it survive? Institutions, especially the pension funds, are rapidly becoming the dominant investors in Europe as they were in the U.S. 10 or 15 years ago. The local markets do not have the liquidity they need. And they are chafing under the high costs of the present monopolistic system. Perhaps the local exchanges will survive as the places where prices are officially registered, with the actual trading done off-market by transnational brokerage firms, especially for institutional customers.
Something like this is clearly what, judging by their recent actions, the Japanese, e.g., Nomura, are positioning themselves for. The large American and probably the major Swiss firms are acting on an even more radical assumption: the existing stock exchanges in Europe will become irrelevant, especially for large institutional investors, and will be replaced, in effect, by a trans-European over-the-counter discount market.
The future structure of commercial banking in Europe is another major area of uncertainty. Traditionally, competition among European banks was confined to one’s own country. But a few years ago the three big Swiss banks shocked everyone by moving into Frankfurt in an open bid for domestic German business. Deutsche Bank, Europe’s biggest, then moved aggressively into the domestic banking business in Italy. Is this going to be the trend of the future? Europe, after all—unlike the U.S.—has a long tradition of multibranch, nationwide banks with multiple headquarters. Or is the future prefigured by the recent Spanish development in which the country’s four largest banks merged into two even larger but purely domestic banks? And what future role is there for that peculiarly European institution: the bank that is a giant in its own small country where it controls the bulk of industry, but which is at best “supporting cast” on the world financial scene? Can banks like this survive in a unified common market? Will they have to ally themselves with a major-country bank, or perhaps even with a major U.S. or Japanese bank? Or will they themselves join in a transnational European “middle-class” banking league?
Even more critical—and perhaps a good deal more risky—are the decisions facing middle-sized, privately held firms. Quantitatively, such firms are neither more numerous nor more important in Europe than they are in the U.S. But sociologically, psychologically, and politically they loom much larger almost everywhere. Few of them, most observers agree, are likely to survive unchanged the shift to a truly integrated Common Market.
But which of three possible strategies should a given firm choose? The specialty-chemicals maker mentioned earlier is moving aggressively into Europe, marketing its products all over Europe, and even producing in several countries. But for this to be the right course, a firm needs distinctive products or distinctive technology and considerable marketing expertise. It also needs access to finance—and, in contrast to the U.S., that’s limited for middle-sized European companies. Above all it needs managerial resources that the European family-owned firm still finds hard to attract and hold.
Another strategy is the one chosen by the five food brokers mentioned above: to create a European company by transnational merger or affiliation. But a large number of European privately held companies seem to opt for what is least likely to work: merger or affiliation of their own non-European, national firm with other non-European, national firms in their own country, thus creating national miniconglomerates. Others are giving up and trying to sell their businesses to large publicly held companies in their own countries.
What makes decisions doubly difficult and highly emotional is that they get entangled in the “generation gap” in the European privately held firms. The people who built the businesses after World War II are reaching retirement and their whole experience has been within one domestic economy. The generation about to take over has, however, grown up as “European.” Where the other people see European economic integration as a threat, the younger ones see it as an opportunity.
Altogether the most important decision a European company has to make—but also an American multinational operating in Europe—is whether the Common Market will be primarily a market of competing national economies or of competing European businesses.
To explain: Deutsche Bank sees the European financial market as a common market for competing individual banks. Indeed, Deutsche Bank has announced that it intends to become a factor in all major European countries. But the industrial companies with which Deutsche Bank itself is most closely affiliated have made it equally clear that they foresee a different Europe in which very large but purely national enterprises compete against one another.
“Europe of Fatherlands”
French official policy similarly pushes French business toward what General de Gaulle once called a “Europe of Fatherlands,” that is, toward strictly French supercompanies. For the existing “European companies”—the subsidiaries of the American multinationals first and foremost, but also the large European companies headquartered in small countries, such as Philips and Unilever in Holland, the Swiss pharmaceutical giants, Sweden’s Ericsson and Electrolux—a unified European economy transcending national boundaries is the only thing that makes any sense at all; the only thing that can possibly work. And this is also how the newcomers, the Japanese and Koreans, see it. But while economically rational, it may not work politically—or only against tremendous opposition.
Almost certainly, the Europe of tomorrow will be both an economy of competing national economies and an economy of competing European businesses—in that respect it will look quite different from the “common market” of the U.S. But which industry and which market will go which way? Of the two leading telecommunications manufacturers of Europe, one, the Germany company Siemens, expects European telephone markets to remain national; the other, Ericsson in Sweden, is equally convinced that such major buyers as the Bundespost in Germany and PTT in France will tomorrow buy “European.” Can both be right? And will a large national retailer—Marks & Spencer in the U.K., for instance—buy “European” tomorrow or will it continue to buy “British”?
In a meeting of senior European executives I attended in London recently, the participants split 50-50 on this question. But they all agreed that any European business—and not only the big ones—will have to make up its mind within a year or two to which of these two assumptions it entrusts its future.
[1988]