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Believing In Europe (Int'l Edition)


International -- Europe Cover Story

BELIEVING IN EUROPE (int'l edition)

U.S. companies are plowing billions into the Old World--and shaking up its business practices in the process

As he sits in his new Brussels office, where buzz saws scream and workmen stomp about installing flooring and lights, Timothy Adams hardly seems a symbol of triumph. But to influential Europeans, the president of Chrysler Europe is precisely that. They see the U.S. carmaker's 27% annual sales growth in Europe over the last seven years as proof of a new American mind-set in the Old World. Compared with European carmakers, says Deutsche Bank director Rolf E. Breuer, "Chrysler is pure productivity and earnings. God bless the management."

Eighteen years ago, Chrysler crashed and burned in Europe and fled back across the Atlantic. Now, with its new headquarters and soaring sales, the company is part of a big U.S. investment push into Europe. After years of productivity gains at home, U.S. companies are targeting Europe as a prime zone they can exploit. As they angle for bigger shares of markets in autos, telecommunications, and retailing, the Americans are finding it easy to outpace their long-protected European competitors. The U.S. companies are coming in droves--with new products, technologies, and management techniques. And their audacious tactics are spurring Europe's own industrial shakeup.

Billions are riding on this new bet on Europe. Over the past six years, American companies have plowed some $150 billion into Europe, nearly doubling America's investment base there, to $364 billion (chart, page 25). U.S. direct investment in Europe leaped 17% last year, edging out the 16% jump in Asia, according to the U.S. Commerce Dept. A flurry of recent deals challenges the conventional wisdom that U.S. investors prize Asia's growing economies over the giant European Union market.

STRONG HAND. This surge of investment is different from previous U.S. acquisition waves. Back in the 1960s, U.S. multinationals put down big markers in individual countries. That American challenge became a rallying cry for European policymakers to counteract what they considered Yankee imperialism by building up "national champions." In the late 1980s and early 1990s, U.S. companies spent billions to get on the inside of a new "Fortress Europe." The aim was to take advantage of economies of scale offered by the new single market. But it was clear that they would be playing by European rules: feeble price competition, social protection, and big concessions to unions.

The '90s wave of investment is based on a new set of assumptions. As global competition has increased, the European business climate has become more like that of the U.S.--deregulated, with price skirmishes and a premium placed on customer service. That plays into the strong hand of U.S. companies in areas such as financial services, retailing, and technology.

"It's not the Americanization in the 1950s and '60s, when we all drank Coca-Cola," says Martin W. Hufner, chief economist at Bayerische Vereinsbank in Munich. "What we associate with America now is they've done lots of things we had in mind but we didn't do, and we need to do them now."

Indeed, not only are Americans profiting, but they are also becoming Europe's agents of change. With their reengineered plants and efficient use of capital, U.S. companies are prompting European companies and governments to take a hard look at their rigid labor rules and other obstacles to growth. In a big shift from 30 years ago, many European companies are embracing the U.S. business model as perhaps the only remaining path to profits and job creation. "The one thing that is compelling today is growth," says Breuer. "Growth is in the U.S. and in the U.S. model."

To be sure, this Americanization of Europe's workplace doesn't sit well with some of Europe's hard-nosed labor leaders. They are likely to resist cutbacks in benefits and changes in work routines. "The French won't accept to be managed in an Anglo-Saxon manner," says Marc Blondel, head of France's Force Ouvriere union, which led a strike that crippled the country last fall.

Still, the momentum for change will grow as governments continue to deregulate key industries, privatize state companies, and break down Europe's remaining cartel-like arrangements in everything from pricing electricity to selling clothes. By the decade's end, estimates Morgan Stanley & Co., privatizations will exceed $300 billion in the EU. More will follow as Central European nations join the fold.

HIGH-TECH HEAVYWEIGHTS. Competition in telecommunications is one arena where the U.S. is making inroads. When Germany and Britain began dismantling state-run monopolies and opening up mobile, satellite, and data services in the early 1990s, the U.S. Baby Bells immediately jumped into the breach. AirTouch Communications, BellSouth, and Ameritech, in partnerships with local companies, have helped shape the cellular-phone landscape in Europe, bringing speed, efficiency, technology, marketing, and better service.

Sluggish monopolies, forced to keep pace, also are teaming up with market-savvy U.S. companies. Ameritech Corp. led a consortium that in December won 49.9% of Belgacom, the recently privatized Belgian operator. Ameritech will now do the dirty work of restructuring one of Europe's most overpriced operators. Already, Ameritech managers have attacked Belgacom's indifference to customers, launching new services such as voice mail. More scrambling for alliances is likely in the runup to full liberalization on Jan. 1, 1998.

In industries ranging from autos to consumer appliances, U.S. companies are proving more adept than their European counterparts at exploiting the EU's single market. By buying up parochial companies and integrating them into their own networks, U.S. companies have boosted the sales and productivity of their acquisitions. Such an approach helped U.S. high-tech companies capture more than 50% of the European market for computers, office equipment, and software, double their European competitors' share. "It is a real U.S. industry," concedes Jean-Marie Descarpentries, chief executive of France's Groupe Bull.

Now the Americans are building powerful continentwide service businesses. Take United Parcel Service Inc. The U.S. courier pumped $1 billion into Europe in the late 1980s and early 1990s to create one of the continent's largest package-delivery networks. Now, it's planning another huge expansion. In mid-September, the company unveiled its plan for improved overnight-delivery services--part of $1.1 billion in new investment it will sink into Europe by the year 2000. "We're bringing American-style service to Europe," declares Edwin Reitman, president of UPS Europe. "Most of our customers now will get packages before 8:30 in the morning."

Such speedy service would have been impossible before customs barriers fell in Europe's single market. "French customs had a database called Sophie, which closed from midnight to 8 a.m....The customs agent would say, `Sorry, Sophie is sleeping,"' Reitman recalls. "Now we get our European packages cleared at customs at one single air hub."

That opportunity explains why UPS is moving ahead, despite running up $500 million in losses in the region in the past two years. UPS believes the EU's key role in a global network looms larger than ever. Archrival Federal Express Corp. has also beefed up staff to 4,000 in Europe, after scaling back to about 2,300 during Europe's recession. FedEx is opening new offices in Dublin and a new hub at Charles de Gaulle airport outside Paris.

PRICE WARS. In financial services, U.S. companies are eyeing millions of poorly served middle- and upper-middle-class households. Europe's banking, insurance, and brokerage industries remain stodgy and characterized by high fees and low returns. Opportunities are expanding rapidly as European governments ponder opening up their near-bankrupt state-run pension systems to private funds. Says Phil de Christo, Fidelity Investment's managing director for continental Europe: "New pension products are going to come to Europe shortly, driving mutual-fund investment."

Last year, Fidelity doubled the number of European countries where it operates, to 14. Its business in Europe grew 20% for the first six months of this year, and de Christo expects that pace to pick up as the company introduces more local European products such as German mark-denominated funds to complement its established U.S. dollar funds.

Mighty General Electric Co. has been one of the most ardent believers in a truly European financial market. GE's European financial-services unit paid $1.5 billion for French specialty lender Sovac last year, just part of $5 billion in investments GE Capital Services has made in Europe in the past six years. GE expects its leasing business to boom as European companies seek new ways to keep costs down. GE also believes it can offer better consumer-finance deals than European commercial banks, which are plagued by high fixed costs such as extensive branch networks.

Meanwhile, some of America's best-known retailers have been assaulting Europe with technological and marketing advantages honed in the U.S. In the process, they are forcing local rivals to be more responsive to consumers, who are tired of Europe's archaic distribution system and squeezed by high prices.

In recent months, for example, Procter & Gamble Co. imported into Europe its strategy of "everyday low pricing," which calls for permanent price cuts designed to grab market share for its household consumer products. P&G cut prices on liquid dishwashing products in Britain, Belgium, and Germany by about 10%. Reaction came swiftly from supermarkets such as J. Sainsbury PLC in Britain, which slashed prices on house brands to compete. Now, Unilever PLC also plans to join the price war.

APING GAP. In Italy, former P&G CEO Edwin L. Artzt has also been pushing its "everyday low pricing" strategy at pasta maker G&R Barilla & Sons. After retiring from P&G last year, he is working part-time as Barilla's executive director and shaking up Europe's pasta market, where Barilla commands a 22% share. By eliminating its expensive promotion campaigns, Barilla has slashed its pasta prices 12%, forcing its rivals to hustle.

Then there's Gap Inc. The clothing retailer has opened 72 European stores since 1987 and will open six more this year. By using U.S. methods of tracking inventories, the company can feed new designs into stores three times as fast as European retailers can. That's pressuring independent European retailers to improve their store designs, product mix, and advertising. One French retailer, Celio, is remodeling its stores by installing new lighting and floors similar to Gap's.

But Yankee ingenuity isn't always welcome. When shoemaker Nike Inc. tried to force European retailers to adopt a U.S. program that required closer cooperation on order placement, retailers such as Germany's Karstadt put up a stiff fight. They didn't want to lock in orders six months ahead, as Nike demanded. But in part because of growing competition from other U.S. retailers, such as Foot Locker, the European stores fell in line. Nike says it now does 80% of its business in Europe using this system, which keeps prices down and has lifted consumption. Last year, the company opened a new $140 million distribution facility in the Netherlands.

One of the biggest spurs to U.S. investment has been the freer hand Americans are being given to reengineer European companies. They have won concessions from many unions as they have put in place the production and distribution schemes that have worked in the U.S. So, while labor laws remain tough on the books, many aspects of Europe's social contract are being modified.

At an industrial park just beyond the 18th century splendors of Versailles, General Electric has transformed a quintessential European manufacturing operation into a global player. When GE bought the money-losing plant, which produces X-ray machines, from France's Thomson in 1987, the unit was selling 75% of its production inside France.

Then came the dramatic shakeup. GE eliminated management layers, established the unit as the center for research, development, and manufacturing of its X-ray and radiotherapy products worldwide, and brought marketing staff and engineers together on the production lines. By the time the unit opened a new factory this year, GE was exporting 82% of its output. And it plans a further expansion of the operation.

"WAKING UP." Altogether, GE has invested $10 billion in Europe since 1989. The company's European operations earned a record $1 billion on $14 billion in revenues last year. Its job rolls have grown fivefold, to 50,000, making it one of Europe's fastest-growing industrial companies. The GE experience holds lessons for all of Corporate Europe. Says Stephane Garelli, a professor at the Institute for Management Development in Lausanne: "U.S. companies are putting pressure on European companies, and they are suddenly waking up."

Ruedolf Rieder personifies that awakening. A purchasing manager at German computer maker Siemens-Nixdorf Informationssysteme, he was one of 25 middle managers chosen for a program aimed at prodding executives to think more creatively. They trained at Harvard University and Massachusetts Institute of Technology, studied Silicon Valley giants such as Intel Corp., and were personally coached by teams at McKinsey & Co. Each of the 25 managers signed a contract to repay the $1 million training cost tenfold within a year by generating savings or new-business revenues.

Using a model common at Silicon Valley companies, Rieder designed a new purchasing system for SNI that could produce more than $100 million in cost savings over two years. He also credits SNI's new CEO, former Motorola Inc. executive Gerhard Schulmeyer, for chopping the company's hierarchical management structure and urging employees to take risks. "We don't feel like we have to be perfect anymore," he says. After several years of losses, SNI earned $15 million on $8.5 billion on sales in the fiscal year ended Sept. 30, 1995. With personal-computer sales up 43%, it is now No.1 in Germany and No.5 in Europe.

Management innovations such as SNI's are only the initial steps in Europe's difficult process of corporate renewal. Governments will also have to cut state spending, speed up deregulation, streamline taxes, and push for greater productivity. Even so, some business leaders are optimistic that they can follow their faster, tougher, and more profitable U.S. rivals and whip their companies into stronger shape. "In five years, the corporate elite of Europe will be on a par with the corporate elite of the U.S.," predicts Eberhard von Korber, head of European operations at ABB Asea Brown Boveri Ltd. That would be a clear sign that Europe's competitive revival is under way.By Bill Javetski, with Gail Edmondson, in Paris, William Echikson in Brussels, and bureau reportsReturn to top


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