Magazine

Europe's Hot Growth Companies


DUTCH BOND TRADER FLORIS

Alkemade, frustrated by the limited selection of financial market data available online, quit his job to start his own data company and quickly built it into a euro 20 million business. Italian Fabrizio Lori, after inheriting his family's plastic bag manufacturing company, turbocharged growth by developing a breathable plastic film in his company's lab. British consultant Anton Milner teamed up with three German partners to start a solar cell manufacturer, Q-Cells, in a depressed East German town.

Like entrepreneurs everywhere, these three share impressive qualities. Imagination. Determination. A keen eye for opportunity and the agility to seize on it. But even more remarkable is that they have built flourishing businesses in the heart of Western Europe, a region where high taxes, rigid labor rules, and scarce financing have stymied many a promising startup. Nowadays, even global powerhouses such as IBM () and Philips () are trimming their Old World payrolls and moving jobs to cheaper, less regulated markets in Asia and Eastern Europe. How many entrepreneurs can beat those odds?

Quite a few, it turns out. Just look at the second annual list of Europe's Hot Growth Companies, prepared by BusinessWeek and the Brussels-based organization Europe's Entrepreneurs for Growth. Even as the European Union has posted subpar economic growth over the past three years, these 500 small and midsize companies expanded revenues an average 14% annually and added a total of 130,000 jobs since 2001. The Europe's 500 ranking is based on companies' job-creating power, using the so-called Birch Index established by Massachusetts Institute of Technology economist David Birch in the 1980s. Birch's research showed that smaller companies, which he called gazelles, contributed more to job growth and economic dynamism than big corporations did.

HIGHER CALLING

The European gazelles on this year's list showed stellar job gains for three consecutive years, while maintaining solid revenue growth. Although they range in size from a few dozen to upwards of 6,000 employees, two-thirds are in the 100-to-1,000-employee range. Some previous gazelles grew so robustly that they dropped off the list by topping 5,000 employees at the start of the three-year reference period.

Are most of these workers emptying bedpans or flipping hamburgers? Far from it. Nearly one-fourth of the companies on the list are in the information-technology business. In fact, the top-ranked company is Assystem, a French consulting outfit that sells engineering and design knowhow. Or, as President Dominique Louis puts it: "We are in the business of selling gray matter." By drawing on Europe's highly skilled workforce and world-class research capabilities, such companies can keep growing even as lower-skilled jobs migrate offshore.

Indeed, some high-tech gazelles find globalization a plus. Take SDL, a British maker of language translation software. Its chief customers are global corporations that increasingly manage information in many languages. "Companies are putting vast amounts of resources into their Web sites, and any information that is valuable in English ought to be equally valuable in other languages," SDL Chief Executive Mark Lancaster says.

Old Economy companies, manufacturing everything from auto parts to specialty chemicals, figure prominently on the list, too. That may seem surprising, until you take a closer look at how these companies are adapting to changing market conditions. At Italian plastics company Nuova Pansac, for example, CEO Fabrizio Lori knew he couldn't beat low-cost foreign rivals if he stuck to making simple plastic bags. So he turned his engineers loose in the laboratory, where they developed a breathable film used to cover disposable diapers and feminine hygiene products. Since 2000, Nuova Pansac has quadrupled its workforce and tripled sales. But Lori knows he can't sit still for long. "An innovative product can last three to four years at most," he says. "You need to do continuous research."

Improving efficiency can pay big dividends, too. Just ask Rosenberger Hochfrequenztechnik, a German manufacturer of coaxial and fiber-optic connectors. After moving about half its production capacity to lower-cost venues in Asia and the Americas over the past decade, it's now shifting some high-volume operations back to Germany, where it has invested to build highly automated, super-productive factories.

There are other encouraging signs. While the region's three biggest economies -- Germany, France, and Britain -- still dominate the rankings, nearly every Western European country has at least one company listed. "We often underestimate what this entrepreneurial mid-market sector is bringing to the backbone of the economy," says Mark Hopton, a partner in KPMG's mid-market company practice based in Birmingham, England.

MODEST REFORMS

Yet even as the Europe's 500 companies celebrate their successes, the overall outlook for small to midsize businesses in the region is far from bright. The World Economic Forum's 2005 Growth Competitiveness Index, a country-by-country ranking of prospects for economic expansion, showed Western Europe continuing to lose ground against the U.S., Asia, and the Middle East. No major Western European economy scored in the top 10 worldwide. A European Commission study found that during the 1990s, 19% of U.S. midsize companies doubled their turnover within three years, compared with a paltry 4% of comparably sized European companies.

What's holding them back? High taxes to support generous welfare benefits and laws that make it costly and time-consuming to lay off workers are still a major problem in big Continental economies such as Germany, France, and Italy. While some reforms have been enacted, most have been so modest that businesses scarcely feel the difference, says Martin Schoeller, a German businessman who heads Europe's Entrepreneurs for Growth.

Lack of financing is another big impediment. A 2004 survey of 1,100 German entrepreneurs found that 58% of those in companies with 200 or fewer employees had to curtail investment because they couldn't get necessary financing. Banks on the Continent are far more conservative than their Anglo-American counterparts in making small-business loans, Schoeller says.

Certainly, some new sources of financing are becoming available. EQT, a venture-capital firm owned by Sweden's Wallenberg family, for example, has helped power growth at Plantasjen, a Norwegian-based chain of garden superstores. But private equity investors usually demand rapid returns and a quick exit, a poor fit for many smaller family-run businesses whose owners seek investment for long-term growth.

How is the Europe's 500 list likely to look next year, and the next? There'll almost certainly be plenty of repeat performers. Half of the companies on this year's list were on last year's. Indeed, two Italian companies on the list -- sporting goods chain Cisalfa Sport and security alarm system company Sipro Sicurezzi Professionale -- as well as Sweden's HL Display, a manufacturer of in-store merchandising displays, have been star performers since 1992, when Europe's Entrepreneurs for Growth first started surveying fast-growing businesses. Only one company from the 10 new European Union member countries made the list this year: M?rdter Dvorak, a toolmaker in the Czech Republic. But more such businesses are likely to show up soon, as economic growth continues on Europe's eastern rim. At the same time, some companies such as France's Assystem have now gotten so big that they'll graduate from the rankings, which cover only companies up to 5,000 employees. This is one herd of gazelles that can't be stopped.

By Carol Matlack in Paris. Correspondents Esha Bhandari, Heidi Dawley, Maureen Kline, Andy Reinhardt, Ariane Sains, Katharine Schmidt, Joan Tarzian, and Rachel Tiplady contributed to this report


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