European Companies Gird For '92

EC BUSINESS

THE shape of business in Europe is starting to change in anticipation of the European Community's further integration in 1992. Companies all over Europe are revamping their business plans, moving production facilities, and streamlining operations. The end result, business leaders hope, will be a revived corporate sector better able to compete against Asian and United States companies.

The developments are occurring relatively quickly. A survey last summer of 700 European companies by the accounting firm KPMG Peat Marwick found that 63 percent of the executives were considering changing their business strategy because of 1992. One year later, those considerations are turning into hard plans.

``A very large proportion are reviewing and coming up with ideas and proposals,'' says Ian Watt, a general partner at Peat Marwick McLintock in London.

``It [1992] is like putting the plank to the back of the donkey,'' said Sir Robert Scholey, the chairman of British Steel, in an interview at St. Gallen University during a Europe 1992 conference.

Peter Wallenberg, the vice-chairman of Skandinaviska Enskilda Bank in Stockholm, observes that European corporations are preoccupied with becoming more competitive. ``There is a need for Europe to strength its enterprises,'' says Mr. Wallenberg, whose family has extensive business interests in Sweden.

At the St. Gallen conference, there were anecdotal signs this is happening. At a refreshment break on the modern campus, an executive says Procter & Gamble decided to close its Koblenz, West Germany, plant and consolidate production at two other factories in France. Rainer Bastian, P&G's general manager for Switzerland, says the Koblenz factory was old and had structural disadvantages. Mr. Bastian says the factory probably would have been closed at some point in the future, even if further European integration was not taking place. But he adds, ``It [1992] speeded things up. ... Our goal is to be a low-cost producer.''

Later another executive says many European businessmen are tightening their belts in anticipation of much greater price competition. A businessman in Belgium can buy auto parts from Spain where labor costs are lower and ship them to West Germany.

``A number of companies will have to adjust prices and it will have a severe impact on many of them,'' says Geneva-based Pierre Tacier, a partner with Carr'e, Orban & Partners, management consultants. In fact, in the KPMG survey, the European executives said the main disadvantage of the single Community market was the exposure of poor productivity in different parts of the EC.

Mr. Tacier expects price pressures to be especially apparent in the pharmaceutical business. For example, in West Germany, consumers pay high prices for prescription drugs. But the same products are sold ``as low as one can imagine in Italy and Spain,'' says Tacier. He predicts a shakeout in the industry.

Asea Brown Boveri Ltd., one of the participants in the St. Gallen conference, has made major administrative changes to help it become a stronger competitor. Since the Zurich-based manufacturer of electrical equipment has operations in 13 European countries, it conducts all corporate meetings in English. ABB has streamlined its corporate headquarters staff to 100 professionals, running a company with 200,000 employees.

With such a decentralized structure, line units have bottom-line responsibility. In fact, the company brags it has 3,500 different profit centers.

``We try to be big and small at the same time,'' says Percy Barnevik, the president and chief executive officer.

The company, which has grown quickly through mergers, has also been fast to move when it needed to restructure. For example, as a result of a merger, ABB found it was producing transformers in both Baden, Switzerland, and Mannheim, West Germany. It shut down part of the assembly line in Mannheim, laying off 1,100 workers. ``It was better economics,'' says an ABB spokesman.

Mr. Barnevik, who compares his company to riding on a fast-moving train, says, ``We try to move as fast as the politicians allow us.'' He adds, ``We don't intend to sit still like the steel industry.''

Sir Robert believes 1992 may hasten the consolidation of the steel industry in Europe.

``A substantial portion of the tonnage is not competitive in price or quality,'' says Sir Robert, who singles out some production in Italy as particularly inefficient. Labor is 30 percent of the cost of a ton of raw steel in Continental Europe, he says. By way of contrast, it is 12 percent for Korean steel, 16 percent for Japanese steel, and 20 percent for British steel.

The KPMG survey found that two-thirds of the European businesses planned some association with other EC-based companies. Mr. Watt says this is happening, especially in marketing and joint ventures. For example, ABB has announced a joint venture with Westinghouse's European unit to service nuclear power plants.

At the conference, Sir Robert hinted at an acquisition on the Continent for British Steel. And Alfred Herrhausen, the chairman of Deutsche Bank AG, said he was looking at acquisitions in France and Britain.

This consolidation might happen even sooner, if Barnevik's vision of Europe 1992 is accurate. He predicts that over the short term only one-third of European companies will be winners. Less than half the companies are competitive with Japanese and US manufacturers, he says. There will be fewer manufacturers and fewer people making the same number of units. In short, Euro-optimism will be tempered by reality.

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