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EC-92: more opportunity, more competition.

EC-92: More opportunity, more competition

The economic unification of Europe has become a great spectator sport for industrial America. Everyone is talking about it. The question is, will American manufacturers decide to play or will they forfeit?

Europe is continuing down its path of economic unification. But the economic revolution expected to accompany EC-92, so termed because all the pieces are to be in place by the end of 1992, won't happen. Even if most of the rules and regulations are agreed to by then, the assimilation of the societal and cultural changes required to create a truly economically unified European Community--where goods freely flow across national borders--will stretch into the 21st century.

The fact that EC-92 is an evolution, rather than a revolution, is unfortunate for the United States. Americans rebound best to explosive developments--a crisis. The creeping evolution of Europe into a market that will end up being larger than that of the US may find US manufacturers asleep at the switch. As a result, they will be poorly prepared to reap the harvest of EC-92. What's worse, US manufacturers may find themselves losing even more of their domestic market to stronger European competitors and at a disadvantage in the race for the growing global market.

Many companies are looking at EC-92 as a tactical opportunity to expand their marketing into Europe. Strategically what is being overlooked is that the same forces that are enhancing Europe as a market are working to create stronger European companies. Because of the problems the EC is experiencing in erasing its economic border-barriers, too many US firms are rationalizing it won't happen and are taking a wait-and-see attitude.

Won't happen overnight

Charles F Carter, VP-technology, NMTBA--The Association for Manufacturing Technology, agrees "it isn't going to happen overnight. There are already pockets of problems which prove everything will not fall automatically into place on Dec 31, 1992. But those problems are not going to upset the entire apple cart.

"Americans are going to see more competition from Europe," he contends. "Just as there are many companies in the US that have not made a serious entry into Europe, there are many European companies that have not made a serious entry out of their own country. EC-92 will wake them up to that much-larger market; they will realize they can ship, not only to the neighboring country, but across the sea to the US. US companies better start doing the same--looking at Europe and investigating how to get a foothold there," he adds.

"EC-92 seems to have become one of the industrial world's greatest spectator sports. Everybody is interested in it. The question is, do you work the opportunity or do you sit by and let the next guy do it," Mr Carter says.

Let the other guy do it

James F Swallow, vice president, A T Kearney Inc, Chicago-based management consultant, fears too many US firms will let the other guy do it. "Manufacturing executives are thinking more globally, but their thinking may still not be expansive enough to achieve the competitive gains required to meet the challenges of European consolidation in 1992 and beyond," he feels. The consultant points to a Kearney survey which shows that 42% of the manufacturing respondents plan expansion of domestic facilities within the next two years, mostly in the southeastern United States.

"Our results indicate a continued preoccupation with cost factors, giving cost as a primary reason for expansion rather than competitive positioning--a far more appropriate objective when considering the impact of Europe 1992," Mr Swallow adds. "EC-92 will result in European firms becoming much stronger world competitors. If we close our eyes to what EC-92 will do to strengthen the companies that are already competing in Europe, we can just forget about being competitive," Mr Swallow says.

As Kearney points out, the US has been criticized for its domestic mind-set and inadequate understanding of the global marketplace. Partly the problem lies in the US being the largest and richest market. In addition, US management has tended to view foreign markets as tactical rather than strategic. Foreign activities are judged on their ability to stand on their own in generating profits and repatriating dividends rather than being part of an integrated strategy including foreign sourcing, market share, and cutting off cash flow at the foreign competitor's source.

"US CEOs must adjust their game plans to the larger playing field and begin to take advantage of the significant opportunities through integrated global activities," A T Kearney advises. "They must acquire a better understanding of the cultural, market, and technological resources of competitors abroad," the firm adds.

People and travel

One CEO who has done that is Brian McLaughlin, who heads up Hurco Companies Inc, an Indianapolis electrical-discharge-machine manufacturer. To be a factor in the marketplace, a company has to have international penetration, he contends. Cracking the international market, Mr McLaughlin believes, takes investing in the right people, a travel budget, and the appropriate product.

You have to find the right people who are willing to go beyond the hit-and-run strategy too many American companies try. "They go over, introduce and talk a good plan, get everyone excited, and then, maybe six months later, somebody goes back," he chides. "The people you select have to live on planes, patiently build relationships, and take the time to understand the culture," he adds.

How does a CEO prepare himself to go after international business? "The first step is to travel internationally a lot to begin to understand the markets and customer needs, the competition. You need an open mind and flexibility. You can't go in with predisposed notions of what you are going to do and how you are going to operate. You have to determine what you are willing to give up and what you want to remain proprietary for the long range," the Hurco CEO explains.

Starting to scramble

More recently, however, more American companies seem to be taking the time to explore the economic promise of EC-92. Tristan Grimbert, regional manager of the French Industrial Development Agency in Chicago, tells T&P that "We are in touch with a lot of American companies that want to settle in France to do business." The greatest interest, he indicates, seems to be coming from Midwest companies. Of the 3000 jobs that US investment created in France last year, about half of them came as a result of investment from these firms.

The merger craze throughout Europe is exploding. Last year some $7.4 billion had been invested in Europe, Mr Grimbert reports. Almost half (44%) resulted from mergers and acquisitions, and 22% came from foreign sources. The foreign investment, the French official reports, was centered in consumer goods, communications, biotechnology, construction, and transportation. The Commerce Dept estimates that direct US investment in Europe last year jumped 16% to an estimated $176 billion.

Mr Grimbert also points to a growing number of mergers between German and French companies. "They have to be stronger to be able to compete in the much larger market," Mr Grimbert adds. He points out that the merger and investment activity, both within Europe and from the outside, is being stimulated not only by the economic unification of the 12 EC countries (France, Germany, Italy, United Kingdom, Spain, Belgium, Greece, Netherlands, Portugal, Denmark, Ireland, and Luxembourg) but by shifts in consumption patterns. Two he mentioned are a growing concern over the environment and increased acceptance of air conditioning.

The flurry of investment

That flurry of investment comes from the oft-iterated theory, that to participate in the promise of EC-92, a company has to be manufacturing there--either directly, through a joint venture, or by some other strategic alliance with a European firm.

"Any company with a serious vision of participating will have to make an investment," Tom Mellnick, director of planning for Cross & Trecker Corp, told a survey conducted by the National Center for Manufacturing Sciences. "For those companies operating there, the opportunities will mushroom, but those not there will be looking in from the outside," he added.

Also convinced that more manufacturing presence in Europe is the way to go is Daniel J Meyer, CEO, Cincinnati Milacron. He says that his firm's sales offices and technical centers maintained in Europe "don't quite cut much with the Europeans. They like to go into the factories. We need not only a marketing presence in Europe but also a manufacturing presence."

Export works, too!

Not so sure is Stephen J Cooney, Jr, director-international investment and finance, National Association of Manufacturers (NAM), who has studied EC-92 and its impact on US industry extensively and produced two NAM reports on the subject. "I don't think you have to set up shop there, and the numbers bear me out," Mr Cooney tells T&P. He reports exports to Europe have about doubled from $45 billion in 1985 to $86 billion in 1989. In that same period, exports of US manufactured machine tools and metalworking equipment moved from $300 million to $700 million.

When it comes to direct investment he urges caution. "I don't think you have to jump in immediately," he says. "The export option is not to be discounted when looking and planning for EC-92, especially for the small- and medium-size company," he adds.

Mr Cooney does however suggest two things any manufacturer should do: (1) travel to Europe to study the market and get a fix on pricing and the competition; and (2) get established with a good distribution network. "Today it (the EC) is still pretty much nationalized, but it might--and I underscore might--evolve rapidly into a truly continent-wide market in the next few years. If so, you'll want to get a distributor there," he advises.

Eastern Europe

Capital-goods exports from the US to Europe should be in even greater demand with the opening up of Eastern Europe. "It's a significant opportunity for American manufacturers if they are fast on their feet," says Hurco's McLaughlin. "Countries such as Czechoslovakia and Poland have been building machine tools for the Russians for rubles. They are now interested in taking on the world in marketing their product, but a lot of them don't know how to do it. He indicates Hurco is actively pursuing relationships in Eastern Europe.

"There will be a strong motivation to create parity between East and West Germany immediately. That means bringing the East Germans up to the level of West Germany almost overnight," agrees A T Kearney's Swallow. "They are not interested in just being buyers of western goods. They want the opportunity to trade out," he adds.

That may not be all that unreasonable a goal. Larry Sweet, manager of CNC marketing and sales for GE Fanuc Automation tells T&P that the East German metalworking factories are in surprisingly good physical shape considering the economic conditions that have existed there. "The heart of the German machine-tool industry historically has been in East Germany. What's been lacking has been the electronics and control technology. That is changing with the opening of Eastern Europe; East Germany now has access to a much broader range of control technology," Mr Sweet says.

He sees some consolidation occurring with West German machine-tool builders, while other East German manufacturers may decide to go it alone with financing from West German banks. "The result, though, is that Germany, as a machine-tool country, will become much stronger than it has been," Mr Sweet says.

There is little doubt that the opening of Eastern Europe has the attention of its neighboring EC countries, perhaps even to the extent of sidetracking the EC-92 schedule. There is also little doubt that the movement toward achieving EC-92 will continue. As far as the United States is concerned, the European Community is its largest market. The opening of Eastern Europe only enhances the market opportunities and ensures an even greater attraction for US exports.

Fortress Europe dead

The NAM's Mr Cooney uses that growth in exports to Europe to discount fears about a Fortress Europe being set up to keep out US manufacturers. "We have doubled our exports in the past five years. If they have a fortress out there, it's pretty leaky and not working very well," he quips. In short, imports are important to Europe.

He goes on to point out that the 1992 structure is pushing European companies to restructure and get price-competitive capital goods from any source. "In the alliances they (European manufacturers) are making, the joint ventures they are establishing, and the products they are buying, they are not being particularly loyal to the European Community. A German company that has been doing business with a German company will probably continue to do so, but a German company is not going to prefer a French company over a US or Japanese company unless there are political reasons for doing so," Mr Cooney feels.

The setting of unified standards that all EC countries will abide by is being watched closely by the US to insure they are not used to freeze out foreign products. In total there are some 2000 standards that have to be promulgated to support some 300 EC directives. NMTBA's Carter points out that the safety and health guidelines and standards being established now represent, perhaps, the biggest change for manufacturers dealing with European countries. Prior to this, he explains, the standards used were pretty much a function of what was agreed to between the buyer and seller. In the future, the elements of products relative to the health and safety of the user will be regulated.

Also still undecided is who, or what entity, will be authorized to certify that products meet the new standards. "It's not clear who will do the testing and be authorized to certify," says Mr Carter. Another ambiguity: what will be required by the inspector--a simple statement of compliance by the manufacturer, approval of the drawings, or a full-fledged inspection. And, if inspection is required, will there be entities--similar to the UL--to inspect, or will the product have to be sent to Europe?

Following complaints by US Commerce Dept officials, the Europeans now have provided a window to the US for its standard's making process.

"Even so," Mr Carter says, "I'm not worried because the European machine-tool makers are going to have to live with the same rules. They are not going to sit by while the government there comes up with regulations and barriers that will make life difficult for them. The reason I'm optimistic is that the European community depends on trade much more than we do."

And as Mr Cooney points out in his April 1990 NAM report, Update on EC-92, the fact is that "testing agencies in some of the more industrialized EC countries (especially the UK and Germany) may already have more mutual recognition agreements with non-European (testing) bodies, such as their US or Japanese counterparts, than with similar bodies in other parts of Europe."

Technological edge

Another clue that the Europeans are serious about doing business ala EC-92 is the rush of activity in Europe. Mr Cooney points out that one study determined there were some 700 mergers and alliances in the last quarter of 1989. That compares to only 1000 during the entire decade leading to 1986. "They want the best, most-competitive technology that's available in the world market," he concludes.

In addition to importing it, they are working hard at developing their own. As Prof Jerry Rosenberg of Rutgers University writes: "The EC, which is releasing billions of dollars for its mega-research programs, has formed numerous high-tech R&D consortia to compete with Silicon Valley. Not since Napoleon's quest to unite Europe has anything so ambitious been attempted."

Dr Otto Hieronymi and Dr Gary Stacey, senior economists with Battelle Europe, Geneva, Switzerland, concur: "While Europe 92 is obviously about further economic integration, competition, and more efficient markets, it is also about technology. It is about strengthening the technology position of Europe--about making European countries and companies more competitive through the development and efficient application of technology." As a result "the European economy of the 1990s will be more competitive, and it will be more technology driven than it has been in the 1970s and 1980s."

They point out that technology competition will be intensified with quality and performance becoming more important as decision factors, because national regulations will no longer protect domestic producers. "A critical success factor for companies in Europe will be how successfully they anticipate, acquire, and apply technology," they write, concluding that "future directions for business will be strongly influenced by technological change."

The impact on US firms is dramatized through a survey that shows in 1982 less than 5% of manufacturers counted a single foreign firm among their five primary competitors for the US market. Today, the two economists point out, 30% believe that three of their top five competitors for the domestic market are foreign. In the next five years that figure may approach 50%, they add.

With that potential growth in foreign competition, it's understandable why EC-92 has become such a great "spectator sport." But, as Richard E Heckert, former chairman of E I du Pont Nemours and Co, and NAM, told a congressional committee: the situation may not get any better, but it shouldn't get any worse; there may be some standards barriers that won't come down, but they might. And, in any event, the market is going to grow so fast, companies will be able to sell more.

NMTBA's Carter is also optimistic. "If things work out as they are laid out on paper, we know of a number of benefits; we don't know positively of any negatives--that is, situations that will put us in a worse position than the European manufacturers. The opportunities are certainly greater than the negatives for everybody."

Stanley J Modic Editor-in-Chief
COPYRIGHT 1990 Nelson Publishing
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1990 Gale, Cengage Learning. All rights reserved.

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Title Annotation:European Community in 1992
Author:Modic, Stanley J.
Publication:Tooling & Production
Date:Oct 1, 1990
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