The small-to-midsize enterprises of Europe’s periphery—Ireland, Spain, Greece, Portugal, and Italy—have their backs to the wall. Their domestic markets are tanking. So they have little choice but to try to export.
That’s a difficult task. Germany’s midsize companies have spent decades turning themselves into world-class contenders. In contrast, the 8 million so-called peripheral SMEs, which employ 27 million people, have long struggled to overcome the high costs of labor, transport, and real estate in their domestic markets. These costs leave their largely low-tech products—including furniture, bricks, piping, and other construction equipment—ill-prepared for global competition.
“Small companies in peripheral countries will try to find new export markets, but they need to improve competitiveness,” says Peter Braendle of Swisscanto Asset Management. That’s especially tough, he says, since these euro zone countries can no longer devalue their currencies to make their products more affordable abroad.
Making matters worse is that many small businesses in these economies were involved in the construction industry, which last decade benefited from low interest rates and now is at an ebb throughout much of Europe.
Biossol, a Greek company that has roots in the 19th century, prospered for decades as a maker of construction products, such as scaffolding and heating and air-conditioning units. Since 2008, Biossol’s last profitable year, sales have slumped 57 percent, to €14 million ($19 million), and its workforce has shrunk to 100 employees from 250, says Executive Vice-Chairman Antonios Svoronos. The company has outsourced much of its manufacturing and diversified into more tech-oriented water treatment products such as water softening systems, which it sells at home and in Central Europe. “The situation of the economy in Greece is very difficult,” Svoronos, 51, says. “It’s in free fall.” Plans for bolstering the more profitable water division could be hindered because “it’s impossible to get financing from banks.”
High labor costs and low productivity are the twin evils besetting many small companies based in peripheral countries, says Gerhard Huemer, director of economic and fiscal policy at the European Association of Craft, Small and Medium-Sized Enterprises. In Germany, Austria, or Switzerland, says Huemer, companies think constantly about nurturing productive, cost-efficient employees.
Thus, 40 percent of young people without a degree enroll in training programs with companies to become highly qualified workers. In Spain, Huemer adds, low-qualified people demand high salaries, which companies can’t afford. Software and other information technology companies that boost productivity are also more widespread in Germany than in any of the peripheral countries.
To keep his business alive, Paco Casanova, founder of Spanish furniture maker Casanova Gandía, plans to expand to Russia, where consumers still have money to spend and Spanish furniture is popular. Although he has managed to sell furniture in Lebanon, Cyprus, Argentina, and the Dominican Republic, he calls exporting complicated. In Russia, Casanova says, in addition to cultural differences there are trade barriers and many local rivals. Overcoming these difficulties becomes an even tougher task because he needs to trim costs as demand back home shrinks dramatically. “The Spanish market is really depressed,” Casanova, 54, says. As sales sank 80 percent, to about €1 million, Casanova first thought pricing was the problem, so he cut his prices to be more competitive. He later realized that a shortfall of consumption was the real problem. His company is also facing a credit squeeze from banks, and his once-best customers struggle to pay what they owe. “It’s kind of the Wild West,” he says. “Nobody trusts anybody anymore.”
Brickmaker Cerámica Acústica, founded in 2001 in Zamora, Spain, grew to 60 employees by 2007 at the peak of the boom, with sales of €14 million that year. After the financial crisis hit and real estate collapsed, Cerámica had to fire 35 workers. The company expects to finish 2011 with about €3 million in sales. “Prices have been cut by 50 percent since 2007,” says accounting manager Javier Fincias. “We used to work 24/7 all year, and we now only work two to four months a year.”
Cerámica had a €2 million line of credit from its banks during the boom. Now, says Fincias, “the credit window is closed for us.” His company is marketing more online to cut costs, and it’s starting to export to Romania and Bulgaria. Still, an obstacle to entering foreign markets is that “our products have very little added value and transport costs are very high,” he says.
Pedro Fernández, chairman of Spanish construction equipment company General de Alquiler de Maquinaria (GALQ), says he’s “betting on Latin America, Eastern Europe, and Morocco.” It’s been tough slogging. “We started going to Latin America, thanks to some contacts I had there when I first visited some countries along with our customers in Spain,” says Fernández. “Brazil is a very difficult market to enter, as it’s very protectionist and bureaucratic. In Latin America, as a whole, you think because they speak Spanish that doing business is easy, but that’s not true because they are very different from us.”
Irish accordion maker Michael Searson says the crisis has forced him to sell to Australia, the U.S., Canada, and the U.K. Searson says to encourage sales he’s offered promotions and slight discounts. That’s sometimes not enough to compete with a vast offering from Chinese makers, who sell lower-quality accordions for €300, compared with the €2,000 tab for his cheapest instrument.