US seizes spoils of liberalisation

Date: 05/06/1997

By Bruce Barnard

US PRESIDENT Bill Clinton and European Commission President Jacques Santer missed something out when they waxed lyrical about transatlantic business ties at last week's EU-US summit in The Hague.

While both quoted mega trade and investment figures, they failed to acknowledge a new phenomenon: the American rush to move into the vacuum being created by the break-up of European cartels.

American companies are in pole position to exploit EU liberalisation because they got their first taste of deregulation at home more than 20 years ago.

US firms have moved into a wide range of European industries which are being opened up to competition for the first time, from energy and telecommunications to railways and postal services.

The latest invasion, like earlier US investment surges, has fanned fears of American domination, but most commentators and governments argue that, in fact, the US presence will benefit Europe.

In many cases, American firms have honed their skills first in the UK, which launched deregulation when it was still taboo in continental Europe. And that process is continuing: while electricity distribution remains firmly in national ownership in most of the EU except the Nordic countries, nine US utility firms which have already started operating in the UK are now eyeing the potential across the Channel.

Southern Co of the US, which moved into the British electric industry in 1995, became the first foreign group to take a controlling interest in a German utility last month when it acquired a stake in Bewag of Berlin.

“This is by far the most significant investment undertaken by an American company in continental Europe's electric utility industry,” said Southern's chairman AW Dahlberg.

The US presence is most pervasive in telecommunications, where small and medium-sized European operators are strengthening their defences ahead of full liberalisation next January and the big players are pursuing a global strategy.

And for almost all that means an American alliance: British Telecom has linked up with MCI, Deutsche Telekom and France Télécom with Sprint, and the Dutch, Swiss and Swedish operators with AT&T.

But small and nimble US operators which have become a thorn in the side of the big firms at home are also moving into Europe and are turning up in the most unlikely places. WorldComm, a US firm, stunned the German telecoms industry when it beat off Deutsche Telecom to win part of the telecoms account of the Bundestag, the country's lower house of parliament.

More recently, CyberGuard Corporation from Florida clinched a contract to connect the British government's networks to the Internet.

Europe is extremely attractive to American companies because its high-cost, cartelised environment - calls in Germany can be up to four times more expensive than those in the UK - have made firms extremely price conscious.

Hoechst, the German chemicals giant, chose AT&T as the priority provider of telecoms services for its global operations, a stunning setback for Deutsche Telekom, and a timely reminder that nationality and customer loyalty count for little in today's competitive global markets.

Small business users and domestic consumers are also shunning domestic providers: American call-back firms which exploit the huge transatlantic differences in telephone charges are expected to double their European revenues this year to more than 870 million ecu.

Efforts by some EU governments to impose sales taxes on these services are doomed to failure.

US firms are not the only threat looming for the national telecoms companies on the eve of liberalisation.

Deutsche Telekom's share of Europe's biggest market, worth 56.5 billion ecu annually, is expected to slide to 70&percent; by 2000 as local newcomers from the most unlikely backgrounds, such as Viag (an industrial and energy conglomerate), Veba (a utility), Mannesmann (a pipeline and engineering concern), Deutsche Bahn (the state railway) and Thyssen (a steel firm) muscle into the market.

In some sectors, US firms have built up a seemingly unassailable lead. This is particularly the case in express parcels delivery, a double-digit growth business where the European presence was barely noticeable until very recently.

United Parcel Service (UPS) has already sunk 870 million ecu into creating a pan-European network and is now spending an additional 870 million ecu on streamlining it.

The 26-billion-ecu-a-year European express business is growing by more than 10&percent; annually and will probably equal the US market by 2005, according to Carl-Stefan Neumann, a consultant with McKinsey & Company.

'Foreigners' like UPS, TNT and DHL are in the top five, despite efforts by EU governments to hobble their activities to protect their postal monopolies.

These players are so well-established and growing at such a pace that governments cannot 'rig' the market.

But the Europeans are fighting back, with Deutsche Post topping the EU rankings with a 10&percent; market share and France's La Poste fourth with nearly 5&percent;. But their global reach pales in comparison with their giant US rivals.

Companies based in EU countries with a track record of privatisation and liberalisation are best placed to challenge the outsiders.

Thus KPN, the privatised Dutch post office, cramped by a domestic market of less than 16 million, moved aggressively on to the global scene with a 1-billion-ecu bid for TNT, the Australian express group.

But it is not going to be easy to break into the big time.

KPN has to transform TNT from a 'boutique' to a high-volume player to compete with the majors, according to Neumann.

The monopolies are getting tougher with fellow state-owned firms. Deutsche Post, for example, has terminated all its contracts with Deutsche Bahn, the state railway, and uses its own fleet of trucks to deliver mail across Germany.

Most monopolies, however, have not prepared for deregulation, much less the arrival of tough competition from the US.

Unless European railways slash their costs and boost their services, “the Americans will come over here and do the job for us”, warns Ed Smulder, managing director of NS Cargo, the Dutch rail freight concern.

That process is already under way.

Wisconsin Central Transportation, a US railway company, has acquired most of Britain's rail freight industry, while CSX, the largest American rail operator, set up a joint venture NDX Intermodal with NS Cargo and Deutsche Bahn.

US firms are often quicker to spot the potential of deregulation and the single market than their European rivals.

Thus the Odgen group has moved into groundhandling at Amsterdam airport and several small airports in Germany well before the local competition. General Electric has the biggest truck-leasing fleet in Europe and US manufacturers of locomotives and freight wagons have begun to sell in Europe.

But there have been set-backs. Fedex ditched its intra-European operation, NDX cut the frequency of a rail shuttle between Rotterdam and Munich within months of its launch, and AT&T has struggled to make headway in Germany and France.

Some European industries have hired American executives to guide them through the pitfalls of deregulation.

The chief executives of Lufthansa and Swissair are both former American Airlines employees and Brussels-based Virgin Express is headed by an import from Southwest Airlines, the hugely successful low-cost American airline.