The rolling vineyards of northern Burgundy are renowned for their earthy wines and tangy mustard, not for high tech. Yet the kingpins of European electronics are set to assemble there on Apr. 19, at a secluded chateau near Dijon, for a secret dinner meeting that may help determine their industry's fate.
The agenda for the summit, called by European Commission President Jacques Delors, is to have a wide open brainstorming session. But its purpose is clearly to come up with a plan to deal with the crisis sweeping Europe's semiconductor and computer makers. In the past year, they have announced more than 70,000 layoffs as Philips, Groupe Bull, Thomson, and others have launched crash restructuring programs to stem mounting losses. Without quick action, some observers say the EC's burgeoning $35 billion trade deficit in electronics could double by the end of the decade as Asian and American suppliers increase their presence.
SOGGY CHIPS. Industry sources say Delors' dinner companions will include Chief Executives Karlheinz Kaske of Siemens, Alain Gomez of Thomson, Carlo De Benedetti of Olivetti, Jan Timmer of Philips, and Francis Lorentz of Groupe Bull. These five dominate the European effort in computers, semiconductors, and consumer electronics. The EC ministers for technology, industry, and competition will also be there.
The most important single issue on the table will be how to rescue Europe's flagging chip industry. Many European executives now privately admit that Europe's $5 billion JESSI chip research project, launched with much fanfare in 1989 to restore the Continent's competitive edge, is not effective because it spreads too little money among too many companies.
There is growing concern that if the ability to design and produce semiconductors goes by the boards, even the Continent's still healthy telecommunications, machine tool, and robotics sectors will fall prey to big, integrated Japanese companies. The Japanese now control the European market for leading edge memory chips, and they could withhold them from European equipment makers to gain advantage for their in-house products. Already, Fujitsu, Mitsubishi, and Hitachi are plowing hundreds of millions into new European memory plants, and they promise to make even further inroads.
But with none of Europe's big three--Philips, Siemens, and Thomson's SGS-Thomson unit--holding even 4% of the world market, these companies can no longer afford the huge capital outlays to develop new generations of chips. R&D and production costs for the so-called 16-megabit dynamic random access memory due out in two years or so will run about $4 billion, or double the current generation. It's no wonder that ailing Philips recently pulled out of some leading technologies, and Siemens has teamed up with IBM.
One option likely to be discussed at Dijon is a merger of SGS-Thomson and Siemens' chip group. Such a deal was broached--but then iced--last fall, partly because the merger would lead to huge restructuring costs. It was just four years ago that SGS and Thomson were merged to strengthen Europe's firepower. But exploding development costs have already rendered the $1.5 billion firm too small to keep pace.
It isn't at all clear that a Siemens-SGS-Thomson merger will solve the problems. The combination would approach the 5% critical mass judged necessary to compete in the world market and would offer customers a full line of memory products comparable to the largest Japanese suppliers. But even the two together couldn't match the R&D spending of any one of Japan's leaders. And the costs of layoffs and plant shutdowns will need massive government support.
So Thomson plans to squeeze Delors for financial aid. To bring the combined company's R&D spending up to the level of industry leader NEC will require a minimum $200 million a year in subsidies. The total tab for maintaining a viable chip industry on the Continent would run closer to $1 billion a year for 10 years, Thomson economists figure.
POLITICS. But it's going to be tough to get much money out of Brussels. The EC is already scrutinizing recent capital infusions that Bull and Thomson got from the French government, looking for possible anticompetition violations. Anything smacking of direct aid would seem to run counter to a noninterventionist industrial-policy statement released by the EC in late March. To make any aid politically palatable, industry pundits say, it could be funneled through established programs like JESSI. Low-interest loans could help cover restructuring and capital costs.
That Siemens and Thomson are even talking is a sign of how desperate the situation has become. For years, national rivalries have dashed all but a few mergers and efforts at sharing development costs. But the EC is likely to try another strategy for the ailing computer industry. It wants to push troubled companies to team up with both European and foreign rivals to save costs on specific projects. Digital Equipment Corp., for instance, recently announced that it will market Olivetti laptops. Siemens, Bull, and Olivetti also joined a workstation consortium that some think could serve as the core for a new joint-venture company.
But Delors wants to see clear signs that the days of squabbling are over before he rallies EC support for the industry. "The Commission is prepared to review any steps that have a reasonable chance of success," says a Delors aide. "The question is whether the companies are really serious about working together." Dijon shapes up as a great opportunity to show that they can pass muster.