The Multinational Monitor


C O R P O R A T E   A C C O U N T A B I L I T Y

Giving Europe the Business

by Eileen Schreiber

Optimists see it this way: By the year 2000, twelve European national markets will meld into one. U.S. firms operating in any European Community (EC) country will be able to market products to 320 million of the world's most affluent consumers with no import tariffs imposed at any border. Exporters to the EC will need only to comply with product standards for one member country in order to distribute throughout the remaining eleven. As products reach new markets, U.S. businesses operating in Europe will steadily grow. Corporations will capitalize on cross-border mobility to rationalize operations into new heights of competitive efficiency. Consumers, they say, will be showered with cut-throat-priced, transnational goods and services. Everybody who competes well will win. But some observers of international business believe this rosy scenario will come to pass not for all U.S. companies, but only for the largest multinational corporations, which increasingly operate without national allegiance.

Lord Cockfield's "White Paper" of 1985 began the move toward commercial unity, known as EC 92. The ratification of the Single European Act in 1987 made it a reality. With three quarters of the 300 Directives needed to legalize the Single Market passed, European companies now are positioning themselves for success through mergers, acquisitions, joint ventures and buyouts.

U.S. businesses have received strong encouragement to participate. The business media have feverishly pitched EC 92 as essential to any company's profit strategy. The U.S. Chamber of Commerce has urged U.S. companies to enter into the common market as well, promoting programs that link U.S. exports to European distributors. The message is clear: to pass up Europe now is suicide.

But the influx of U.S. firms has not fulfilled expectations. A March 1990 study of U.S. investment patterns in Europe, published by the Cambridge, Mass.-based National Bureau of Economic Research (NBER), finds that no "stampede to build new or improved capacity in the EC on the part of American firms as a group" has occurred. Media reports of an explosion of U.S. investment in Europe, the paper warns, fail to take exchange rate effects into account. The NBER study concludes that new U.S. investment in Europe in 1988 was actually lower in real terms than it was at the beginning of the decade.

Surveys of U.S. executives conducted by international accounting firms show that U.S. corporate strategies for Europe 92 vary with the size of the firm, its product, and its previous EC activities. Large U.S. high-tech and manufacturing multinationals with European subsidiaries, for example, are well positioned to take advantage of the single market, and have specific plans to do so. A KPMG Peat Marwick survey of 870 executives labels this group "the movers." They are multi- million and multi-billion dollar corporations in the high growth markets of high-tech goods and services, automobiles, electronics, pharmaceuticals and food. Many of them are household names in the United States: IBM, AT&T, ITT, Ford, GM, Coca-Cola, Dow, Texas Instruments and Black and Decker, among others.

A look at U.S. business activity in pre-92 Europe gives a fair indication of how post-92 relations might develop. According to Gary Clyde Hufbauer, Marcus Wallenberg Professor of International Financial Diplomacy at Georgetown University and editor of Europe 1992: An American Perspective, one of every four dollars spent on U.S. exports in 1988 came from the EC. Of the $76 billion in goods sold to EC customers, 45 percent were classified as high-tech. Sales by U.S.-owned affiliates in EC countries constitute a far larger share of U.S. business in Europe, reaching $620 billion in 1988. And U.S. investors invested $326.9 billion, or 38.7 percent of all U.S. foreign direct investments, in EC countries, making the EC the highest regional recipient of U.S. direct foreign investment.

Even before the most recent drive for EC 92, Europe was the United States' most important regional customer and market. Thus, "most of the companies who want to do business with Western Europe already do," says Jim Kelly, vice president of European operations for Valmont, a Fortune 500 corporation. While no merger and acquisition stampede from new companies has occurred, U.S. multinationals in Europe are quietly and deliberately repositioning.

A May 1989 Business International survey of senior executives found that, on the whole, the strategies most favored by U.S. multinationals in Europe are "expansion through local production, acquisitions and alliances." Corning is a good example of a U.S. firm responding aggressively to the single market. Building on its historical emphasis on joint ventures, Corning has allied itself with a number of European firms. "In the telecommunications area, [the company has] several joint ventures with local partners who help [it] gain access to the European ... market," according to Van C. Campbell, vice chairman of Corning Inc. The company also recently bought a German maker of microwave cookware and acquired a share of an Italian glassware manufacturer.

Those who are not leaping into the new market are the U.S. firms with no previous European connections. These businesses comprise a wide range of small to medium-sized producers, merchandisers and transportation and service firms. A 1989 survey of 2,000 international CEOs conducted by Ernst and Whinney and Fortune magazine found that nearly 50 percent of smaller U.S. service firms and one third of Fortune 500 service firms were unconcerned about EC 92. The Peat Marwick survey shows that not only smaller firms, but many companies with gross revenues ranging from $10 to $100 million are unaffected by the prospects of 92. Thus, only 37 percent of all respondents to Peat Marwick are "actively developing strategies" for 92; 58 percent do not consider the EC, with its 320 million consumers, significant to their business.

Explanations of U.S. business indifference to 1992 vary. One view is that fears of a "Fortress Europe" are keeping U.S. companies from investing in strategies for a unified Europe. In this pessimistic view, the Single Market is seen as a members- only club, created by Europeans to benefit Europeans. These fears are fuelled by debates within the EC Commission on local content rules, public procurement laws and reciprocity agreements, and many business leaders have predicted that tariff and non-tariff barriers will keep U.S. companies out. Two thirds of the respondents to the Peat Marwick survey, for example, "forecast the EC will create significant trade barriers for non-EC countries."

But while fears of the Fortress may have thwarted U.S. business activity in the earlier stages of negotiations, they have little basis now. Unrelenting U.S. pressure in the General Agreement on Tariffs and Trade (GATT) and on the EC Commission have resulted in directives which favor outsider access to the Single Market. According to a trade specialist at one Washington, D.C. accounting firm, the laws governing the EC are "as pro- competitive as those of the U.S." In fact, there is widespread agreement that the 1988 U.S. Omnibus Trade Bill gives more basis for the description "Fortress America" than the EC structure does for Fortress Europe.

Other international business people, however, say the obstacles that discouraged mid-sized and small U.S. businesses from expanding into Europe before the creation of the Single Market are still an impediment in the new economic climate. Kelly says, "There is a lot of hype for businesses to invest in Europe now. But companies considering the move quickly find that the cost, language, or cultural barriers to doing business here are still enormous. The old problems don't just disappear with this new concept."

Michaela Platzer, Program Director for EC 92 in the U.S. Chamber of Commerce agrees: "With such a vast domestic market, most American businesses simply are not geared toward Europe. Their rationale is: why spend so much money going abroad when the market potential exists at home?"

There is good reason why it is primarily global corporations which are gearing up for 92: they are the ones with the resources to adjust their operations to the different market. Only the giants can afford the enormous costs of penetrating competitive markets. Kelly, who is based in Brussels, asserts that "to do well here, a company must be close to its customers, know national and local preferences and provide the consumers the product they want. They can't just send American products into European markets." European customers and the EC laws will ultimately favor corporations which do most of their research and development and product designs on European soil. This means substantial investments in research and development, marketing and distribution channels, and often bearing losses while products get off the ground.

Some U.S. government programs attempt to help companies overcome the barriers to entering the EC, but they appear to have done little to entice small business to venture into the European market. The Agent Distributor Service (ADS) of the U.S. Department of Commerce, for example, tries to bring U.S. exporters closer to European customers. Victor Ferreira, assistant to the Trade Specialist working on ADS, explains that the service "sends company brochures and product descriptions to U.S. embassies in targeted countries. There, they try to make a link with local distributors." The program also provides follow-up work and translation services. Although this and other services available to U.S. businesses eliminate the initial legwork to finding European connections, Ferreira says that "the response has not really been that high."

Close-up: autos and telecommunications

The automobile and telecommunications industries are two crucial markets where U.S. multinationals are European leaders. Corporations such as GM, Ford, IBM and AT&T have the most to gain, or lose, in post-92 Europe, depending on the outcome of protectionist de-bates in the EC Commission.

Ford and General Motors already treat Europe as a single market. Ford, for example, integrated its European operations in 1967. Today, Bert Salle, director of international public affairs for Ford, says, "We think what is happening in Europe [in anticipation of 1992], we did back in 1967."

Recently, Ford and GM's pan-European integrated corporate structures have paid off. In 1988, Ford earned a record $1.6 billion in Western Europe, almost three times its 1986 earnings, while GM earned a record $1.8 billion, an impressive turnaround from losses of $2.2 billion between 1982 and 1986.

Ford and GM each hold approximately 10 percent of the European auto market. Together, Ford and GM sold 13 million cars in Europe in 1988, 2.5 million more than they sold in the United States. They each hold shares roughly equivalent with those of the indigenous major auto manufacturers, Volkswagen, Fiat, Peugeot and Renault.

Most of the Ford and GM cars sold in Europe are produced there. Thus Ford and GM will not be affected if local-content standards � rules defining the portion of a finished product which must be produced in the EC in order for the product to be exempt from tariffs � are applied to automobiles (a possible protectionist dart aimed at Japanese auto producers). In fact, Ford and GM are noted to be in a better position to expand than their European competitors. Unlike many national European auto producers, they have long treated Europe as one market.

Recent acquisitions by both auto giants are seen as means of diversifying their product lines for the European market. Ford purchased Jaguar for $1.66 billion in November 1989, and GM paid $600 million for 50 percent of Saab shortly thereafter. In 1989, Industry Week disclosed Ford's plans to invest $17 billion in the Community within the next five years. By all accounts, Ford and GM are poised to reap the benefits of a unified market.

U.S. telecommunications equipment companies are in a far less secure position. A high-growth, high-tech market which includes semiconductors, computers, televisions and video equipment, telecommunications equipment sales totaled $17.5 billion in 1986 and are predicted to grow 67 percent by 1995. According to Georgetown's Hufbauer, the United States exported $1.3 billion worth of equipment to the EC in 1988. Because of the enormous profit potentials and the high global strategic importance of the products, the EC Commission is most protective of the indigenous manufacturers of these goods. Pending decisions on rules of origin, local content specifications, product standards and public procurement laws will either create almost impenetrable barriers to U.S. firms or give rise to markets whose profitability can reach enormous proportions.

The semiconductor industry provides a good example. Faced with U.S. and Japanese dominance in semiconductor production, the EC defined the origin of a semiconductor as the country where the wafer diffusion, the major production process, takes place. If wafer diffusion occurs in the United States or Japan, an EC tariff applies. According to Hufbauer, this caused "NEC Corporation to stop buying U.S: made computer chips for the circuit boards it puts into its computer printers assembled in Great Britain." The implications of this ruling for U.S. firms are self-evident.

The telecommunications giants IBM and AT&T are most concerned with the outcome of public procurement decisions for telecommunication systems. The EC has opened its doors to outside competitors in "value added services" such as facsimile and electronic mail. But reciprocity is the key word in a small trade war being fought between the United States and EC on basic phone systems. As it now stands, if public procurement bids for basic phone services and systems are to be opened to non-EC firms, the bids will be subject to a 50 percent EC content rule, or a 3 percent "Buy Europe" rule (meaning non-European firms will have to bid 3 percent below European firms in order to be awarded a contract; the United States imposes a 6 percent "Buy America" standard on all foreign bids). Peter F. Cowhey, a telecommunications analyst, writes in Europe 1992: An American Perspective that "most U.S. firms, including AT&T, will find it hard to meet European content rules." Will the United States further open its telecommunications system to foreign competition so that U.S. firms have easier access to the EC? The answer is worth billions.

The big get biggger

Although nobody can predict the resolution of these and other issues affecting U.S. businesses, it is certain that such questions abound only for the largest U.S. corporations. Small and medium-sized businesses have been left out, as the consoldiation of the European COmmunity spurs ever greater consoldiation of economic power, not only in Europe, but in the United States as well.

EC Legislative Structure

European Commission

The European Commission is responsible for introducing and implementing European Community (EC) legislation. It has the exclusive right to initiate new legislation. In addition, the Commission is able to amend a proposal at any point in the approval process.

Seventeen members make up the Commission; two each from France, Germany, Italy, Spain and the United Kingdom, and one from each of the remaining states. Members are appointed by the State governments, but during their four-year terms they can be removed only by the European Parliament.

Council of Ministers

The Council of Ministers, composed of direct representatives of the individual member states, is the final arbiter of EC policy. It accepts and passes or rejects legislation proposed by the Commission. It cannot, however, introduce legislation of its own. A balance of power therefore exists between the Council and the Commission, and the two must cooperate in order to pass new legislation.

Each member state is represented on the Council by one or more representatives, usually the governmental minister relevant to a particular piece of legislation. Council members are strictly responsible to their respective governments, and can be removed for failing to satisfactorily represent the state.

European Parliament

The Parliament has remained on the periphery of the Community's legislative process, despite recent attempts to strengthen its position. Its role is mostly advisory, although it does have the power to vote the Commission out of office, and can amend proposed legislation. It has been proposed that the Parliament be granted the right both to introduce its own legislation and to elect new Commission Members.

The Parliament is composed of 518 members, elected directly by citizens in national elections. Members of Parliament are grouped and defined not by nation but by political orientation and affiliation.

Court of Justice The Court of justice rules on questions of interpretation and implementation of the Treaties and Community Acts. It is composed of 13 judges and six Advocates-General, agreed upon by the governments of the member states, and appointed to six-year terms. Each state is represented by at least one judge.

There are four types of measures available to Community institutions: directives, regulations, decisions and recommendations. A recommendation is not binding, and therefore is little more than a position offered by either the Council or the Commission. Decisions and regulations are binding and do not require any national legislation in the member states. Directives, by far the most common form of Community legislation, require the individual member states to pass national legislation to achieve a specified result, but leave it to the states to decide what that legislation should be.

The Legislative Process

Consideration of directives begins when the European Commission proposes an act to the Council of Ministers. The Council obtains commentary on the proposal from the European Parliament and, usually, the Economic and Social Committee (made up of Community business and labor representatives). Here, and throughout the adoption process, the Commission can amend its original proposal.

Next, the Council must adopt a 'common position' (its version of the Commission proposal) regarding the directive.

The Parliament can make four possible responses to the Council's position. If the Parliament approves or does not comment, a majority of Council members can adopt the act. If the Parliament rejects the 'common position', the Council can adopt the act only by a unanimous vote. Finally, the Parliament can offer amendments to the proposal. In this case, the Commission must rule on the Parliament's amendments. If the Commission accepts the amendments, the Council needs only a majority to adopt the act. If the Commission rejects the amendments, the Council must have unanimity to adopt either the Commission or Parliament proposal.

� Nadav Savio

Eileen Schreiber is a freelance writer living in Washington, D.C.

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