Europe’s firms enter brave new world

Date: 07/10/1999

By Tim Jones

THE biggest challenge for European industry and government is learning their new lines.

For all their talk of a 'third industrial revolution', industrialists and politicians can quickly revert to European stereotype when faced with a crisis.

French Prime Minister Lionel Jospin threatened last week to punish tyre-maker Michelin when it took a commercial decision to shed jobs, while the EU's €34-billion annual state aid is testimony to how even the most ardent capitalist melts at the sight of a subsidy.

Most economists would agree that it is this very half-heartedness which continues to hold back European industry and economic growth.

They point to sluggish employment generated in the EU compared with the 2 million jobs created every year in the US since 1992 and sustained anaemic economic growth rates in Italy and Germany, and wonder why Europeans cannot quite make the leap into the full-blown market.

Yet it is coming and fast, and it is not just the much-hyped small and medium-sized enterprises and high-technology companies that are leading the way.

Seeing the writing on the wall for its core activity, German engineering giant Mannesmann, for one, has offloaded more than 40 businesses over the past four years and has become a major player in the new liberalised telecommunications market.

Massive hostile take-overs have become a seemingly monthly event, culminating in the ground-breaking €55-billion acquisition of former state-owned monopoly Telecom Italia by Olivetti, a company eight-times its junior which had almost bankrupted itself as a computer hardware firm only four years earlier.

Even that sleepiest of businesses, the post office, is turning into a steely-eyed corporate raider. As the loss of its letter monopoly and privatisation approaches, Deutsche Post has gone on an €8-billion shopping spree, with the aim of turning itself into a logistics company that can move anything anywhere.

Nobody is safe and this is shaking up the European industrial establishment as never before. A new generation of French and Italian business executives scoff at the semi-commercial attitudes of their elders. Many of these US-educated young Turks are baffled that someone should run a company for any other reason than to return maximum value to shareholders.

Germany, in particular, is undergoing a revolution in attitudes. Management consultants BBE-Unternehmensberatung estimate that the generation succeeding Germany's postwar rebuilders will inherit more than €1 trillion from their parents by 2002. Anecdotal evidence suggests that the second generation takes a more high-risk/high-return attitude to business.

It is in Germany, rather than the City of London, that Europe's stock market is emerging for high-tech firms. Small biotechnology, new-media and Internet companies from all over Europe have chosen Frankfurt's Neuer Markt over rivals in Brussels, Paris, London and even New York to raise expansion capital. Last year, the market rocketed 170%.

Admittedly, this trend has not been one-way. When free Internet service provider Freeserve floated on the London market in July, it was hyped, seven-times over-subscribed and immediately shot into the league of the UK's top 250 firms.

Last month, when it emerged that the company had spent more than its revenue in its first year of operation, the stock fell below issue price. However, the experience of Europe's first Internet public offering of stock has hardly dented the plans of German Internet advertiser Pixelpark and auctioneers QXL and Ricardo to come to the market.

The EU still lags behind the US in harnessing the potential of the information revolution. Recent figures from the European Information Technology Observatory reveal that the US' outlays on IT hit 4.08% of gross domestic product in 1997, compared with 2.61% in Japan and 2.34% in Europe. In the same year, there were 105 business personal computers per 100 white-collar workers in the States and just 55 in Europe.

Until recently, European companies were unwilling to sell via the World Wide Web and European consumers were reluctant to buy. This was partly because of the high cost of local telephone calls and computer hardware, fears about security of financial data and innate conservatism. Above all, however, it stemmed from a simple lack of awareness.

In his latest book Building Wealth, US economist Lester Thurow claims that business, work patterns and ultimately prosperity will depend on how efficiently economies deal with the convergence of microelectronics, computers, telecommunications, new synthetic materials, robotics and biotechnology.

For now, the US is stealing a march on everyone else. But, despite the Americans' encouragement of entrepreneurship and lack of red tape, Thurow warns that they have a major flaw which the Europeans could exploit: inadequate education and training.

This is bound to be a favourite theme of new European Commission President Romano Prodi as he begins his five-year term at the helm, since he used to sit on an information society task-force under disgraced former Industry Commissioner Martin Bangemann.

The new Commission team is keen to champion its own version of the 'third way' - an economic model which combines the dynamism and job-generation of the US with a role for the 'guiding hand' of the state to promote socially or even commercially desirable ends.

Policy-makers from all sides will acknowledge that the 'European model' has proved invaluable in the market for mobile telecoms. The decision to set a single pan-EU standard known as CDMA for the next generation of mobile phones - handsets able to transmit and receive data, pictures and potentially replace the computer for most standard uses - should guarantee success for European manufacturers and distributors.

The direct result of the EU's standards committee decision to choose the GSM standard ten years ago has been the rise and rise of Nokia and Ericsson and the relative eclipse of Motorola in the European market for mobile phones.

Genetically-modified organisms, which are at the cutting-edge of the new industries, are likely to fall victim to EU regulation, although this matters increasingly little. As the tide of public opinion against GM products grows, it is clear that whatever rules are put in place to control how biotechnology companies sell their products within the EU, few people will want to buy them.

The debate has become such a headache for seed-makers that they are starting to wonder whether it is worth the hassle. Novartis, one of the world's biggest seed companies, has announced plans to sell off biotechnology interests while Monsanto - the big bad wolf to the anti-GMO lobby - has launched an expensive campaign to make itself loved in Europe.

As he campaigns for the presidential nomination next year, environmentalist US Vice-President Al Gore will find it hard to justify his enthusiasm for 'green' causes, his doomed fuel tax and the 1997 climate change deal in Kyoto.

On paper, the Europeans are more enthusiastic environmentalists, but they are as likely to strike 15-sided deals on 'polluter pays' laws and energy taxation as is the hapless Gore.

The energy tax package could, however, become a ground-breaking experiment for the Union. The Dutch have already floated the idea of abandoning an implacable Spain and pushing ahead with a common fuel levy in 14 countries or even fewer. 'Doing a Schengen' with tax would be extraordinary, but would still depend on striking a complex deal over how to tax cross-border interest income and business profits.

Part of a survey 'Challenges for industry', p13-20.