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Visit Cranfield and find out more about our MBA on one of our preview days, designed to give you the opportunity to experience the teaching style and meet faculty, students and alumni: • Friday 2 March • Saturday 21 April • Friday 18 May • Saturday 30 June • www.cranfieldMBA.biz/ela The Cranfield Experience For further details please contact Maureen Williams, MBA Marketing Manager Tel: +44 (0)1234 754 386 Email: [email protected] The Economist February 10th 2007 A special report on European business 1 Who are the champions? Also in this section Tomorrow the world European companies face competition from new directions. Page 3 Home and abroad How two European giants keep up with the global race. Page 5 Driving east The car may be German, but its innards are nearly all from eastern Europe. Page 6 Buy, buy, buy Europe’s businesses are changing hands at a record rate. Page 7 In the steps of Adidas How smaller rms can survive globalisation. Page 8 The chic and the cheerless Below a shiny crust of top companies, busi- ness in France is in a sorry state. Page 10 European business seems stuck between awesome America and low-cost Asia. In fact it is doing surprisingly well, says Iain Carson Not what it was T IS not dicult to be pessimistic about internet and all the business sectors it has European business has improved out of Ithe future of European business. Com- spawned. And even where Europe is hold- recognition. Page 12 pared with the awesome strength of ing its own against America, it seems un- America and the raw power of emerging able to retain its advantage. Boeing drifted Funny business Asia, Europe is sometimes portrayed as a badly in the 1990s as Europe’s Airbus has-been, excelling in luxury goods, ne made strides, but having merged with Mc- The tortuous tale of Telecom Italia. Page 13 food, wines and fashion but weighed Donnell Douglas the American giant down by too many old industries and old bounced back. It is now taking market ideas. From microchips to microbes, poor share from the Europeans. old Europe seems to trail in America’s and America’s economic growth, averaging Asia’s wake. 2.5% a year since 2001, has reected this dy- America enjoys awesome advantages namic business culture, whereas Europe over Europe. It is a huge, truly single mar- has managed an average growth rate of ket with a relatively youthful, growing barely 1.5% over the same period, though population. It is the world’s economic su- the pace has picked up in the past year. Eu- perpower, with much higher productivity rope’s sluggish performance is often put than its competitors (though productivity down to the poor business climate. Rigid growth has recently been disappointing, labour laws and strong unions make it dif- and last year was slightly below Europe’s). cult for rms to re redundant workers It has world-class universities that work and unattractive to hire new ones. Product hand in glove with business. Americans markets are not as competitive as Amer- Acknowledgments have not only won more Nobel prizes, ica’s, and the single European market has The author is grateful to many people who helped in the they have turned more scientic advances yet to become a reality in areas such as preparation of this special report. Particular thanks go to Eric Labaye of McKinsey, John Andrew of Eidos, Dante Raz- into protable businesses than anyone banking and services. zano of Investindustrial, Alfred Steinherr of DIW, Laurence else. Many of these rms have gone on to Corporate governance too is variable: Capron, Pekka Hietala, Subramanian Rangan and Soumitra become the giants of modern business. transparent and world-class in Britain, but Dutta, all of INSEAD, and Roger Lund. It may have been a British scientist, Sir often inadequate in continental Europe. In Tim Berners-Lee, working at a laboratory Germany workers sit on boards, and in An audio interview with the author is at in Switzerland, who invented the world France even small rms have to have an www.economist.com/audio wide web, but America is the home of the employees’ committee that can make life1 2 A special report on European business The Economist February 10th 2007 2 dicult for management. Minority share- holders do not always get enough say. Punching its weight 1 Moreover, European governments like Number of companies in Global 2000 by region and sector, % Number of companies to meddle. France has drawn up a list of Europe US Asia/Pacific Others strategic industries, including casinos, that it thinks need special protection from for- na 2,198 336 105 410 307 77 63 503 129 eign takeovers. Even Spain, with its new 100 Anglo-Saxon business culture, tried to 80 stop a German utility from taking over a Spanish power company. Telecom Italia’s 60 attempts to hive o its mobile-phone busi- 40 ness became highly politicised. 20 Many European politicians are fearful about the eects of globalisation and the 0 GDP 2004 Total High Life Basic Consumer Transport, Automotive Finance Engineering rise of China and India. France’s vote tech sciences materials, goods, logistics & assembly & construction against the European constitution in 2005 chemicals, retail, utilities, wholesale was partly a protest against globalisation, energy which is blamed for persistently high un- Source: McKinsey employment there. Certainly Asia has been making itself pean top management in recent years. As strong European management teams more strongly felt in Europe in recent he points out, most big European busi- emerging who are aggressive, hungry and years. Japan now has car factories in nesses are now successfully global. The g- eager to expand. France and the Czech Republic as well as in ures bear out Mr Immelt’s impressions. Some of this revitalisation of European Britain, and imports from South Korea’s re- Kevin Gardiner, head of global equity business is due to the impetus from a more surgent car industry have been causing dif- strategy at HSBC, an investment bank, open trading system in a global economy. culties at Renault and PSA Peugeot Ci- who rst spotted the Celtic Tiger miracle of European companies, small as well as troën. India’s Tata Group too is planning to the Irish economy a decade ago, has re- large, have quietly got on with moving export cars to some southern and eastern cently made another remarkable discov- many of their operations abroad where it European markets where they will provide ery: European businesses are making bet- makes economic sense to do so. more competition for the traditional west ter prots than their American counter- But two other powerful forces are also European manufacturers. parts (see chart 2). He notes that currently at work. One is the structural change now European companies seem to be slightly taking place in Germany. After years of Europe’s pride more protable even than their American languishing, Europe’s biggest economy is Yet even though European business has to peers. This has been achieved even beginning to feel the benet of reforms, operate in a dicult political, social and though revenues have been growing more particularly to its nancial system. economic environment, it has produced slowly than in America, which under- The other force is a gush of private-equ- an impressive crop of world-class compa- scores Europe’s growing success in restruc- ity nance, much of it originating in Amer- nies. An analysis by McKinsey, a manage- turing and consolidation. Corporate ica and landing in Europe. This started ment consultancy, shows that Europe has America and corporate Europe are now only a few years ago, but already private- 29% of the world’s leading 2,000 or so neck and neck in the globalisation stakes. equity and venture capital invested in Eu- companies, broadly in line with its 30% Dominic Casserley at McKinsey’s Lon- rope totals 173 billion ($225 billion) and is share of world GDP. It punches its weight don oce also takes a bullish view. Write growing by leaps and bounds. in most global industries except IT, where o Europe at your peril, he says. In many Donald Gogel, the boss of Clayton, Du- America is leagues ahead (see chart 1). sectors European companies are clearly in bilier & Rice, an American private-equity British companies were pioneers of the premier league. We see a generation of rm, sums up the benets: better gover- globalisation, perhaps because of Britain’s nance; a more stable shareholder base; up- open Anglo-Saxon business culture and - graded management talent; higher expec- nancial system. More recently Britain’s BP Beating America 2 tations; and a sense of urgency. Private bought several American oil companies, Return on equity*, % equity gives the owners of the business di- triggering a wave of oil mergers in America rect control over its performance.