Dot-com share plunge turns spotlight on ‘old’ economy

Date: 27/04/2000

By Bruce Barnard

THE end of the bull market in over-hyped technology media and telecoms stocks on both sides of the Atlantic provided a timely reminder to European policy-makers that the unfashionable 'old' economy is still intact and remains the main motor of growth.

Just days before the recent plunge in share values, the European Commission forecast that the Union's economy would grow by 3.4% this year, its best performance since 1989. Some independent economists are predicting that growth in the 11-nation euro zone could top 4%, and say most of this will be driven by 'old' economy businesses from cars to chemicals, not dot-com start-ups with minuscule revenues.

But EU leaders appear to be as mesmerised by the 'new' economy as the amateur online day traders who were largely responsible for the spectacular surge in share prices.

The recent 'dot-com summit' in Lisbon paid only lip service

to traditional industries as governments set themselves ambitious goals and even more ambitious timetables to harness the 'new' economy to make the EU 'the most competitive and dynamic knowledge-based economy in the world'.

Eighteen months ago, policy- makers were transfixed by Y2K, the 'millennium bug' which spectacularly failed to materialise but poured billions of euro into the pockets of savvy computer consultants.

The UK, the most enthusiastic follower of the 'new' economy craze, spent the most money fighting the phantom bug while Italy largely ignored it. A White House advisory committee even recommended that US President Bill Clinton urge the EU to postpone the launch of the euro from 1 January 1999 because it was diverting banks' attention away from Y2K preparations.

There is no doubt a new Internet-based economy is emerging, but its size, rate of growth and potential are being overplayed. The first official figures from the US put the value of e-commerce - retail sales on the Internet - at €5.6 billion in the final quarter of 1999,just 0.6% of total sales of €868 billion and way below private sector estimates.

There are also doubts about the speed at which the mobile telephone will replace the personal computer as the main terminal for accessing the web. This is of crucial importance to Europe because mobile telephony is the one new-economy business in which it leads the US - by up to 18 months, according to industry watchers.

While Union leaders were fretting last month about the increasing shortfall in skilled IT professionals in Europe to run the growing 'sunrise' economy, one of the Union's 'sunset' industries was also facing a labour crisis.

Chantiers de l'Atlantique, the French shipyard which recently clinched a 720-million-euro contract to build the Queen Mary II ocean liner, has been advertising heavily on television and in newspapers across the country for 2,000 welders and other production workers. It was the availability of a skilled workforce which allowed Europe to repel an Asian assault on the cruise ship market until late 1999, when the UK's P&O ordered two giant vessels from Japan.

Other industries are reporting shortages of skilled labour, particularly companies which slashed their workforces during the deep recessions of the late 1980s and early 1990s and axed traditional training programmes for school leavers.

There is also evidence that firms facing labour shortages are reluctant to hire and train workers for fear that they will not be able to lay them off when the market turns down.

While Europe's 'new' eco-nomy sectors struggle to narrow the yawning transatlantic technology divide, its 'old' industries are poised to overhaul their American rivals.

The four-nation aerospace consortium Airbus is proceeding with its €15-billion project to build a double-deck 650-seat jumbo jet which will finally end the lucrative monopoly of the Boeing 747. Deutsche Post is taking on two US corporate icons, UPS and Federal Express; Daimler is a key player in the US car market after its take-over of Chrysler; the all-British merger of SmithKlineBeecham and Glaxo Wellcome will create the world's biggest drugs company; and Volvo and Renault have just announced plans to merge to create the world's second largest truck company.

Meanwhile, European paper and pulp companies have leapfrogged above US giants in the global rankings after a spurt of multi-billion-euro acquisitions this year; and Ireland exported more computer hardware than the US last year.

At the same time, an earlier 'old' economy problem - the imbalance between European investments in Japan and Japanese spending in Europe - is correcting itself.

Ironically, it is Renault, the French car manufacturer whose obituary was being written by industry watchers as long ago as the 1980s, that is setting the pace by taking a controlling stake in its Japanese rival Nissan. DaimlerChrysler has acquired a third of Mitsubishi Motors and Siemens has joined forces with Fujitsu to boost Europe's small computer manufacturing business.

Old-economy companies are also forging links with other Asian countries. Airbus has just signed up its first Asian risk-sharing partner, Taiwan's Aerospace Industrial Development Corporation, for the super jumbo project and Renault is poised to take over the troubled Korean car-maker Samsung Motor.

The recent annual report from the European Central Bank refocused policy-makers' attention on their most important challenge: speeding up reforms to capitalise on the potential of the euro. The ECB's call for measures to boost the role of the capital markets, encourage mergers and acquisitions and stimulate competition applies to both the old and new economies.

The e-commerce hype has created a false divide between the old and new economies. The new one is simply being grafted onto the old: oil, chemicals, steel, automobile and transport companies are, for example, pioneering e-commerce, setting up giant industry-wide electronic trade exchanges to handle their procurement needs.

The end of the bull market in over-hyped technology media and telecoms stocks on both sides of the Atlantic provided a timely reminder to the European policy-makers that the unfashionable 'old' economy is still intact and remains the main motor of growth.