READY, SET--RETOOL (int'l edition)Most companies figure the faster they convert, the better
European industry is about to get the single currency it so ardently wished for. Chief executives across the Continent have lobbied long and hard for monetary union, envisioning a time when they could build plants, sell products, and raise capital in other European markets without giving currency fluctuations a thought. But now that the day has nearly arrived, reality is sinking in. Many of the most dramatic benefits of the European Monetary Union, far from being automatic, will come slowly--and only to companies that are prepared.
To be euro-ready, most multinational companies will need to invest millions of dollars. DaimlerChrysler, for instance, is spending some $120 million up front to shift to the euro. Even more important, they must formulate a strategy to make the most of monetary union. Besides revamping their technology, companies may need to redefine their notion of competitiveness as the European market becomes more integrated. Those that can use low pricing and economies of scale to build a Continent-wide presence have the best shot at becoming the new Europe's corporate winners.
MORE PAIN, MORE GAIN. Retooling for the euro is expected to cost European business $65 billion between now and July, 2002, when the old currencies disappear. Manufacturing an service companies can expect to spend roughly 0.5% of annual sales adapting their software systems to the euro, industry experts calculate. Yet most executives believe that up-front investment in conversion to the euro will pay off in a competitive advantage as companies scramble to broaden their reach across a single-currency continent. ''We will be able to build market share quickly all over Europe,'' says Gabriel Martin Ocana, assistant finance director at Puleva, a $246 million Spanish dairy-products maker that is making plans to invade Northern Europe with low-priced goods.
A few pioneers, including the Netherlands' Royal Philips Electronics and German engineering behemoth Siemens, are taking a Big Bang approach and switching all internal operations immediately. The logic: The sooner they take the pain, the greater the gain. Indeed, Europe's biggest companies have been strong advocates of a single currency for more than a decade, eager to benefit from a borderless European market. Philips, for one, will be euro-ready on the first business day of 1999.
But most companies operating in Europe--including French chemical giant Rhone-Poulenc, U.S. computer maker Compaq, and German auto maker BMW--plan a two- or three-phase transition. Phase One, preparing to account for sales and purchasing in euros, is nearly complete. Phase Two, the internal accounting transformation for everything from research and development budgeting to tax reports, will take place over the next 12 to 18 months.
During that time, many will operate with a dual internal accounting system that puts the local currency and euro side by side. That's what executives are planning for Rhone-Poulenc's companywide operations. But middle managers will decide how quickly to shift their individual units to the euro. They're likely to hurry, since Europe's chemical giants are already in a fierce battle to grab more market share. ''No one is obligated. They can be proactive, or they can delay. But if they delay, they may miss an opportunity,'' warns Yves Schell, euro coordinator for Rhone-Poulenc.
Most companies will have the software in place to handle financial transactions in euros starting on Jan. 1. In every European country where multinationals handle payments and receivables, they have set up separate, euro-denominated bank accounts and put division heads in charge of the switch-over. For months they have been training executives, sales staff, and marketing managers to cope. Although few will require payments in euros immediately, many will insist that customers choose one currency for the transition period and stick with it to avoid confusion.
''NEW THINKING.'' Finnish heavy-machinery maker Rauma, which had sales of $2 billion in 1997, started planning for conversion more than a year ago. It will be ready to conduct financial transactions in euros starting in January, but management plans to use the transition period between January and 2002 to study the new currency's behavior. Executives will watch the euro's strength against the dollar, its effect on the interest-rate environment, and its popularity with customers. ''The time we now use every morning to evaluate the Finnish economy, we'll also use to evaluate the factors affecting the euro,'' says Chief Executive Saakari Tamminen.
The final step in the euro changeover will be paying taxes and switching over the corporate payroll. Since few governments will be prepared to accept tax payments in euros starting in 1999, corporate finance officers are not rushing to switch their internal procedures. And since individuals won't use euro bills and coins until the year 2002, most companies won't change their payroll systems to euros until then. However, many companies will start translating the net salary figure on pay stubs to euros in January. ''We want [employees] to get used to the new thinking,'' says Eva Schwarzfischer-Helten, deputy head of BMW's euro project.
Complex and costly as the nuts and bolts of the transition may be, European bosses say the strategic issues surrounding the arrival of the euro are far more critical to companies' survival. They predict that the single currency will prompt savage price wars that only the fittest will survive. Today, the wholesale price of most products varies from 30% to as much as 200% within the euro zone, according to industry experts. Come 1999, pressure to bring prices down will be dramatic, slicing the profits of companies that are not prepared. ''The benefits of the euro are marginal if you screw up pricing,'' says Nicklas Garemo, euro project leader for McKinsey & Co. in Goteborg, Sweden.
Well-managed companies aim to wield lower prices to grab market share across the Continent. To prepare for the coming price wars, they already have begun cutting costs to protect their margins. French auto-parts maker Valeo recently launched a major restructuring of its European operations to generate double-digit productivity gains in manufacturing, distribution, and marketing networks. ''The euro is an opportunity if you are ready ahead of the others,'' says Thierry Morin, Valeo's chief financial officer.
CONFUSION. In Spain and Portugal, where prices are well below the European average for most products, many domestic companies are aiming to use that advantage to invade higher-priced markets to the north. Tabacalera, the former Spanish tobacco monopoly, plans to enter other European markets and undercut the competition with prices that are 50% lower for a pack of Marlboros than in the North. And over the next three to five years, as prices in Spain gradually rise, the euro will provide the company with fatter margins at home.
Companies with a wide spread of prices across Europe may initially try to settle somewhere in the middle of the range by lowering prices in some countries and raising them in others. But raising prices may make products uncompetitive in some regions. Ultimately, companies may decide to abandon products or markets where they can't match the lowest-cost producer. ''There will be a lot of confusion in the first year,'' says Michael Littlechild, a partner at KPMG Peat Marwick in London. But it's likely that survivors of the shakeout will be the companies that got a headstart in remaking their systems and strategies for the euro zone.
By Gail Edmondson in Paris, with Karen Lowry Miller in Munich, Margaret Popper in Madrid, and Ariane Sains in Stockholm
Updated Dec. 3, 1998 by bwwebmaster
Copyright 1998, Bloomberg L.P.