Why US Business Will Lose Out in Europe
AS Dec. 31, 1992 - the starting point for the integrated European market - draws near, I have a sinking feeling that United States business is preparing not to capitalize on the opportunity, but to blow it. If my view seems pessimistic, it's for a good reason. This nation's record on doing business abroad on any terms but those it dictates is not good, and, despite recent success in the Persian Gulf, the US is weaker than at any time in the postwar period. Moreover, we are weak in ways that have less to do with economics - though there is little cause for cheer there - than with business attitudes. The simple fact is that US business has had nearly two decades in which to adjust to global business reality,
and has not done so.
Part of the problem with our business attitudes is reflected in the general American view of developments in Europe, a view that tends to be overly rosy. In listening to business people talk about the opportunities an integrated Europe holds, I can't help but be reminded of similar sentiments expressed during President Nixon's visit to China nearly two decades ago. At that time, all marketers could talk of was the Chinese "opportunity the profits to be made if 2 billion Chinese bought their products onc e
Those dreams, of course, were dashed. Aside from a temporary sales surge, the opening of China brought few economic benefits to America. Those benefits were reaped instead by the Japanese, closer to China in culture, custom, and geography.
We can see something of the same dynamic at work with regard to events in Europe today. It is certainly exciting to see the insular, fragmented Europe we have known throughout history - the Europe composed of 12 distinct, protected, and sometimes fractious markets - gradually giving way to an integrated Europe with the economic muscle to compete effectively on the world stage. The problem is that Americans tend to emphasize the means, "integration a loaded word here, inevitably conjuring up a series of p
olitical ideals and principles - while completely missing the point of unification, which is to create a Europe able to compete.
The motivation for the integration of Europe rests not on some lofty ideal of unity, harmony, or world peace, but on a simple economic fact. Since World War II, the countries that make up the Common Market, with the notable exception of Germany, have lagged far behind the US and Asia in economic growth. To take only the most telling of many possible examples, in the decade of the 1980s - a period of dramatic economic growth in the US and Japan - Europe created no net new jobs.
The formation of the European Economic Community recognized that fact, and represents an important step to secure Europe's future in an increasingly competitive world. The goal, as the Commission of the European Community put it in a 1985 white paper, is to create a European market "without internal frontiers, in which the free movement of goods, persons, services, and capital is assured."
The steps taken to date to achieve that goal have been dramatic. Never before in history have 12 nations voluntarily surrendered so many aspects of their national sovereignty for the common good. Never before have so many nations willingly given up so much of their freedom to act independently.
Over the last two years, we have seen hundreds of legal and regulatory barriers to intra-European trade fall. We have seen the introduction of a pan-European currency - the European Monetary Unit, or EMU. We have seen the harmonization of regulations governing products, materials, foods, and the environment.
But exciting as those developments are, there is another point we need to remember. The intent isn't to create "opportunities" for the rest of the world. Instead, it is to establish Europe as a real economic power, capable of capitalizing on opportunities the rest of the world offers. This is the issue American business forgets.
It forgets, too, that to deal with this market, it will need to take a different approach to trade than it has in the past. Over the last several decades, the inability of US business to compete internationally has been blamed on remote legal and regulatory structures - so-called non-tariff barriers to trade.
Without question, those barriers can pose problems, sometimes major ones. But they also provide a convenient scapegoat for a much bigger issue. If American business can't compete, the reason is simply that it doesn't know how. A look at the record over the last few years will dispel any doubts anyone may have on that score. When, for example, the dollar began to weaken dramatically five years ago, many economists expected the US to become a dominant player in the export market. Things did not turn ou t that way, and for a simple reason. US business didn't - and still doesn't - understand what it means to have a weak or strong currency, or what currency shifts mean to other nations.
Most US businesses deal exclusively in dollars, and simply don't realize what currency moves mean to their global competitive positions. The issue could be made to sound more complicated, of course, but basically it is as simple as that. One reason the US hasn't capitalized on offshore opportunities is that so many American firms don't understand the basics of the export business.
That misunderstanding goes beyond the relative position of the dollar. A few years ago, one of my clients did recognize the opportunity the sagging dollar presented and moved to take advantage of it. The company's plans didn't pan out, however, and we visited Europe to find out why. I was astonished to find that the company was charging nearly three times more for its product abroad than in the US, and had presented distributors with tough credit terms to make up for expected delays in payment.
That high-price, tough-terms reasoning made sense by traditional US business logic, but it would have startled the Japanese. As they figured out long ago, the aim of exporting isn't to match profit margins at home, but to increase production volume and reduce unit costs. Exporters can tolerate lower margins because as higher volume drives costs down, they make more money here by boosting sales there.
Many companies argue that it doesn't work that way, that doing business abroad involves higher costs in the form of transportation, packaging, and so forth, which must be passed along. Some are unfazed by the fact that passing costs along will make their products uncompetitive, and so lose the benefits exporting could bring. Others make an even bigger mistake: They try to cut those costs, skimping on new packaging, labeling, or marketing.
Frustrated by the export business, some companies have taken more direct measures, moving to Europe to acquire companies. Again, the record is sobering, and the reason is simple: US businesses insist on having their overseas partners do things the American way, often under American management. Blinded by the hardheaded need to control and homogenize operations, they lose sight of the fact that the world isn't homogeneous. Management, manufacturing, and marketing practices that work in the States frequen t
ly fail miserably when transplanted to a foreign market. Quite obviously, American businesses have been stopping short when it comes to researching new markets, understanding the fundamental elements involved in marketing their products successfully, and in cooperating with the needs of target publics.
That inability to cooperate is a problem abroad, but it is even worse at home. Not only are US companies in related industries unable to see their common good and make common cause, the American government seems unable to take a supportive role toward business.
The basic message for American business is clear. As Europe 1992 approaches, it is critical for American business to get its house in order, come to grips with its role on the world stage, understand the dynamics of trade, and acquire the knack for cooperation as a partner, though not necessarily as a dominant one.
That won't be easy. But if we don't act, and soon, we risk a staggering loss of production and jobs to other markets, where those basic points were figured out long ago.