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Slash And Earn On The Continent


International Business: Europe

SLASH AND EARN ON THE CONTINENT

One by one, the bosses of Europe's big companies are mounting podiums to announce their 1993 financial results. Few have a bounce in their step. Last year was "very bad," said a grim-faced Jean Gandois, chairman of French aluminum giant Pechiney, who on Apr. 19 disclosed a $167 million loss. The ink flowed even redder at Daimler Benz, Michelin, Solvay, and dozens of other industrial leaders. Moreover, the collapse of Germany's Schneider property developer is spreading fears of new troubles for Europe's banks (page 48).

Yet the wave of bad news masks a happy reality: European industry is on the mend after its worst battering since World War II. Many companies are forecasting better bottom lines this year. Much of the profit increase will come from earlier cost-cutting. Beyond that, thanks in large part to strong export demand, companies in just about every sector have enjoyed an upturn in recent weeks. After falling 0.6% in 1993, Europe's economy is starting a modest turnaround, with growth expected to reach 1.3% this year and 2.1% in 1995.

HIGH YEN. That is far from what's needed to ease unemployment in Europe, where a binge of restructuring has pushed the jobless rate to 10.9%. However, the cost-cutting is starting to pay off big for corporate coffers (chart). In Germany, productivity is up 6% in the past year with no growth in wages. "We have a significantly lower cost base," says Manfred Schneider, chairman of chemical giant Bayer. After four years of steadily falling profits, he hopes for a 20% jump this year.

Although the paring isn't over, Europe is now emerging as a more serious competitor to the U.S. and Japan. Japanese auto makers that expected to move quickly into the European market "will be hard-pressed to make their [government-negotiated] quotas this year," says John K. Lawson, analyst at DRI/McGraw-Hill in London. European cars are cheaper--especially since the yen has risen 30% in the past 18 months against the ECU, a basket of European currencies.

Carmarkers are poised for a profit turnaround. Of the six big European producers, only Renault and General Motors made money in 1993. This year. Peugeot should join their ranks. Mercedes-Benz and Saab also are likely to enter the black. Ford of Europe may break even, and losses should lessen at Volkswagen and Fiat, predicts Lawson.

Governments worried about jobs are helping. On Apr. 12, Spain cut its car tax by $700 for consumers who junk a 10-year-old vehicle. That, plus a $900 French government rebate, will help boost Europe's auto sales this year by 300,000 cars, say industry executives. Michelin will likely earn $200 million or more this year, compared with a $625 million loss in 1993. Other auto suppliers, such as Pirelli and Valeo, also expect a better year.

NO NEW JOBS. European exporters are getting a boost from the U.S. and Asia. On Apr. 18, Alsthom clinched a $2.1 billion contract for a South Korean high-speed train system. Europe's steelmakers are boosting shipments to the U.S.--despite dumping duties imposed last year--because American producers are nearing capacity. Analysts say strong exports and rising prices will lead to vigorous profit upturns in chemicals, metals, building materials, and paper. Belgian chemical producer Solvay thinks overseas demand for its plastics--along with its 9% workforce reduction in the past two years--will help it turn a 1993 loss of $197 million into a $106 million profit this year.

Although bourses are down so far this year, the cheerier eutlook for industry spells stronger markets ahead, many experts believe. "Lots of stocks that look fully valued now will seem less so when earnings come out," qays Mike Young, director of European investment strategy for Merrill Lynch & Co.

Not all companies face a quick upturn, however. The main laggards will be those that depend on Old World markets, especially in consumer goods. "Consumer confidence remains depressed," says Anthony Greener, chairman of Britain's Guinness PLC. "Our prospects will be constrained until it improves." He expects only "modestly" better profits this year, mainly from cost cutting.

Consumer worry isn't surprising, given stubborn unemployment that probably hasn't peaked yet. Economist Jurgen Pfister at Germany's Commerzbank thinks workers can't hope for much new hiring until late next year. Banks, too, should find little cheer this year. Customer bankruptcies--which typically mount as recessions climax--may produce weighty reserves for bad loans.

Still, most of Europe's beleaguered companies see a bright year before them. "Now our head is above water," says Cesare Romiti, chief executive of Fiat, which lost less money than expected in the first quarter. That's hardly a rousing recovery. Still, it's the kind of new European business has been craving for a long time.By Stephen Toy in Paris, with Julia Flynn in London, Patrick Oster in Brussels, and bureau reports


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