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Eurotech Blows A Fuse


International Business

EUROTECH BLOWS A FUSE

The past few weeks have produced a spate of distressing news for some of the mainstays of Europe's high-tech industry. At state-owned French computer maker Groupe Bull, for instance, record losses of $2 billion over the past three years finally did in Chairman Francis Lorentz on June 23. But the government's curious choice of successor, Bernard Pache, the head of the state coal company, seems ominous. He is better known for mothballing businesses than for rebuilding them.

Bull was far from alone in making European high-technology analysts uneasy. Only days earlier, Dutch behemoth Philips Electronics destroyed the optimism building around its return from massive 1990 losses with the news that its flagship consumer-electronics business is floundering. Perhaps more unsettling, Germany's Siemens has quietly decided against dumping more cash into a losing war with Japanese and South Korean memory-chip rivals. The decision will knock Europe out of the global race in a critical technology after 1995--and leave Siemens' partner, IBM, searching for a new mate.

HYBRIDS. All in all, these developments are "further indication that Europe's old-line players are still struggling to compete," says William J. Pade, head of McKinsey & Co.'s European electronics consultancy in London. Last year, the Continent's trade deficit in high-tech products--mainly computers, chips, and consumer electronics--hit a staggering $40 billion. And, Pade warns, "things will get worse rather than better."

That will put pressure on European players to accelerate ties to U.S. and Asian allies for new technology and investment. The result may be more global hybrids operating in a web of cross-ownerships and alliances.

The change at Bull comes at an awkward moment. After a decade of constant restructuring, Lorentz finally had cut costs by slashing 13,000 jobs and settled on a strategy to unify Bull's jumble of computer product lines. Despite government opposition, he linked up with IBM and NEC Corp. But the fact that 1992 first-half losses would approach $285 million helped give vindictive bureaucrats an opening to dump Lorentz.

SHOCKER. Now, the turnaround is up to Pache, 57, head of Charbonnages de France. There are no signs yet that he will make any changes in Bull's strategy. But the company already has lost crucial time in bringing new products to market because of the warfare over IBM and NEC, says French computer analyst Daniel LeBourhis.

The same holds true for Philips. Savage price-cutting on televisions, videocassette recorders, and other consumer gear has stopped the company's turnaround cold. After a rebound last year to $553 million in profits before extraordinary items, Philips warned in mid-June that 1992 profits could slide below last year's. That was a shock to analysts, who had not been tipped at a meeting just days earlier. The resulting 18% plunge in Philips stock immediately triggered a lawsuit from U.S. investors claiming that the company had misled them. "We presented the information as timely as possible," says Henk Bodt, chairman of the consumer-electronics unit. Now, the company's fate hangs more than ever on its ability to stimulate consumer demand with new products, such as a digital audio-cassette player set for launch next fall.

RATHOLE. Such jams are increasingly forcing Europe's technology giants to face up to the realities of global competition. When the market for new 16-megabit DRAMs, or dynamic random-access memory chips, winds down in the mid-1990s, Siemens will retreat as Europe's sole domestic producer. That leaves Europe without a maker of the product considered crucial to developing advanced production techniques for other chips. The reason for the retreat: Japanese and Korean price pressures mean "our losses grow with every DRAM we sell," says Klaus H. Knapp, a senior director in Siemens' chip unit, which has recently suffered annual losses of roughly $300 million. An investment of $1 billion in a plant for next-generation 64-megabit chips, which Siemens was widely expected to build with IBM, would be money down a rathole, he says.

While cutting losses is welcomed by Siemens investors, the retreat is a blow to those who fear it could expose European chip buyers to hardball tactics by Asian suppliers, especially in a market shortage. "Relying entirely on the outside is dangerous," warns a European Commission official. About the only thing more dangerous would be a further crippling of Europe's technology leaders in a year that's shaping up as make-or-break for many.TROUBLE SPOTS IN EUROPE'S HIGH TECH

BULL

Chairman ousted as big losses in mainframes and PCs continue

SIEMENS

Retreats from advanced memory chips, ending Europe's role in that market

PHILIPS

Turnaround set back by deep discounting in consumer electronics

Jonathan B. Levine, Paris


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