| BUSINESSWEEK ONLINE : FEBRUARY 8, 1999 ISSUE | ||||||||
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| COVER STORY
Europe Rising Restructuring and the euro may soon make it America's equal It was the kind of corporate coup that leaves coffee mugs rattling in executive suites. Bell Atlantic Corp. (BEL), the phone Goliath of the eastern U.S., was just about to buy San Francisco's AirTouch Communications Inc. (ATI). But at the last minute in early January, London-based Vodafone Group PLC (VOD) outbid Bell's original offer by $17 billion, paying $62 billion for AirTouch. The world's largest cellular-phone operator would be British, not American. Far from concluding that the European company was overreaching, investors quickly bid up Vodafone shares by 17%. The deal sounded a wake-up call. Long considered a collection of economic has-beens clinging to outdated social systems, Europe is on the rise. The single currency, officially born on Jan. 4, is only the latest milestone in the Continent's long journey back to global prominence. Gradually, over the past 10 years, companies have restructured and governments have dismantled regulations that stifled competition, following a model perfected in the U.S. TEAMWORK. Indeed, until recently, it seemed safe to assume that Japan, or perhaps China, would become America's closest economic peer. But with Asia, Latin America, and Russia all in deep financial trouble, Europe seems most likely to fill that role, at least in the medium term. Right now, it's one of the main props under the fragile world economy. Although the global crisis is slowing growth, the euro zone's gross domestic product is still projected to expand by 2% this year--about the same as the U.S. rate--and to recover to around 3% growth in 2000. Monetary union is only part of the story. European companies have painfully cut costs and sold off money-losing businesses to get into fighting trim. Now, the strongest are teaming up with U.S. counterparts to gain even greater market strength. Several recent mergers give a glimpse of the new transatlantic corporation. At DaimlerChrysler (DCX), the biggest combination so far, a jet shuttles executives between Stuttgart and Detroit three times a week, and the two companies plan to integrate procurement and share technology. Deutsche Bank bought Bankers Trust to complement its homegrown clout with U.S.-style investment banking savvy. Media giant Bertelsmann has widened its global presence in publishing by acquiring Random House. And to cash in on the Continent's growing Internet craze, Bertelsmann took a 2% stake in America Online (AOL) and manages AOL's booming European operations in a joint venture with the U.S. company. Last fall, Bertelsmann poured $200 million into a partnership with Barnes & Noble (BKS) to take on Amazon.com (AMZN) in the U.S. Such deals, along with British Petroleum's $53 billion buyout of Amoco (AN) and Vodafone's triumph over Bell Atlantic, suggest that America is Europe Inc.'s favorite shopping mall. Even when they're not snapping up U.S. counterparts, European companies are proving to be global powerhouses. Formerly state-subsidized Airbus Industrie matches giant Boeing (BA) order for order in small and midsize jets. Sales of Mercedes and Volkswagens (VLKAY) are booming around the world. Finland's Nokia and Sweden's Ericsson (ERICY), along with Vodafone, have conquered global telecommunications markets. Another force behind the Continent's growing muscle is deregulation, which has turned ''Fortress Europe'' into a freer, more efficient market. For instance, since the German and French telecommunications markets were fully deregulated a year ago, they have become among the most competitive in the world. Companies such as France Telecom (FTE), Deutsche Telekom (DT), and Mannesmann are being forced to cut costs and expand across Europe to survive. The side effects are already palpable. German telecom companies alone created 40,000 jobs in 1998. And competition has reduced Germany's phone rates by as much as 70%. Deregulation will set off the same process in banking and finance, media, and energy. Once the leaders in these industries gain enough critical mass in Europe, many will strike out abroad, as Vodafone did. No matter which side of the Atlantic they're on, says John J. Studzinski, Morgan Stanley Dean Witter & Co.'s European investment banking chief, ''the biggest companies in each industry will drive consolidation.'' Indeed, former monopolies trying to hold on to market share as they begin to face private-sector competition are likely to drive more Europe-U.S. mergers. For instance, giant state-owned Deutsche Post in Bonn is getting ready for mail deregulation by teaming up with air carrier Lufthansa to buy a big stake in parcel-delivery company DHL International Ltd. That way, it will have another business to offset falling margins in letter mail. Yet some European industries are on the ascendant, thanks to what Americans might consider state intervention. That's certainly the case with the Continent's global lead in cellular phones. The early adoption of a single Europewide standard has created a huge platform for its cell-phone companies. By contrast, says Vodafone CEO Christopher C. Gent, the laissez-faire U.S. created ''a mess of standards'' by letting multiple systems battle it out. Adds Jorma Ollila, Nokia's CEO: ''Economic theory would say that [the U.S. approach] is better, but it hasn't worked out that way.'' In fact, Europe is likely to set the world standard for next-generation video cell phones. AMBIVALENCE. For all the progress Europe has made toward global competitiveness, its citizens remain committed to policies that mitigate the harsher aspects of the U.S. economy. Voters want to retain state-run health care, retirement benefits, and liberal unemployment and welfare benefits, even if that means setting aside some of their new wealth to pay for them. The left-of-center governments that run 13 of the European Union's 15 nations are beholden to labor, and their new policies could reverse the moderate wage demands that have helped keep unit labor costs in the euro zone flat for the past two years. Indeed, Europe's recovery is a two-tiered affair, in which companies often succeed despite government labor and social policies. Decades-old rules that protect workers could hamper further gains. ''There is a world of distance between the actions of [European] companies and governments,'' says Daniel L. Vasella, CEO of Swiss drug giant Novartis. Still, thousands of companies are tailoring strategies to capitalize on the Continent's new strength. Out of the ferment will come ever more Daimlers and Vodafones poising themselves to globalize once they are strong enough in Europe. They present a challenge to the U.S.--and an opportunity. ''Americans are and will continue to be ambivalent about what's happening here,'' says a top EC official in Brussels. ''They know they need a stronger Europe. But finding another big guy on the block makes them nervous.'' If you don't believe him, just ask the execs at Bell Atlantic. By Thane Peterson in Frankfurt, with William Echikson in Brussels, Stephen Baker in Paris, Julia Flynn in London, and bureau reports _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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