As they gathered at an offbeat management meeting early this sum mer at Euro Disney's spanking new theme park outside of Paris, top executives of General Motors-Europe were feeling pretty good. After all, they had spent the past five years honing their manufacturing edge into the sharpest in Europe, and a pat on the back seemed deserved. Unlike their fumbling bosses in Detroit, the Euro crowd could claim some of the hottest cars on the Continent, the most efficient auto plants, and, not to be overlooked, profits--big ones. While Detroit poured red ink, GM Europe had kicked in $9 billion, making it the undisputed gem in GM's tarnished crown.
But kudos were scarce at Disneyland. All the GM brass got to take home were fake $1,000 bills encased in plastic. The message: To compete in the future, GM still must squeeze a thousand bucks from the average cost of cars it produces in Europe.
GRASS-ROOTS EFFORT. Practically every big Continental company is broadcasting similar reminders these days. As the countdown quickens toward Europe's day of destiny--the creation of its vaunted single market on Jan. 1, 1993--the Old World's industry is girding itself to meet the shock of wide-open international competition.
Carmakers such as GM, whose Opels and Vauxhalls are nameplates as European as Renault, are in the vanguard of this revolution. They face tougher rivalry not only from one another but also from the Japanese, the South Koreans, and export-hungry Americans. To meet the challenge, Mercedes-Benz is slapping up a new $1.4 billion plant near Heidelberg that will build cars 20% more cheaply than Mercedes does now. France's Peugeot has boosted productivity by 50% in the past five years and is charting another 50% gain over the next five. Fiat is moving production to Poland. Ghostly assembly lines stand idle at its grimy headquarters town of Turin, Italy, where unemployment is 10% and rising.
Multiply such moves over every industry in Europe, and it adds up to a grass-roots makeover of the $6 trillion European economy--the biggest industrial overhaul the Old World has seen since the reconstruction days following World War II. Shakeouts loom in nearly every European industry. That's because Europe has too many of just about everything: 22 airlines, 12 auto makers, 36 brands of baby food, 225 makes of home appliances. So formerly stodgy companies that stuck to their home markets are reinventing themselves as Europewide players. Like Dutch giant Philips Electronics, they're closing local plants to concentrate production at their most efficient sites, and chasing the economies of scale promised by the new Europe.
Some of these new strategies are certain to fall flat. Philips, for one, is finding the slogging tough: It has eliminated 20% of its work force--47,000 employees--but still can barely turn a profit.
But Europe's survivors are going to emerge with new muscle, ready to fight for a bigger slice of global markets. That's already starting to happen. For example, Britain's formerly sleepy phone company, British Telecommunications PLC, has shed 170,000 jobs and invested $17 billion in new technology since it was privatized in 1984. Now, it's grabbing a major share of the transatlantic data-transmission business from U.S. companies. French and German phone companies are joining the fight.
Or take Usinor-Sacilor, the French steelmaker. Near bankruptcy a decade ago, it has gone through a vast shakeup, eliminating 50% of its 115,000 jobs. It has invested in new technology to become the world's second-largest steel company after Nippon Steel Corp. and has moved aggressively into the U.S. Among other likely winners in Europe's big makeover are French chemical producer Rhone-Poulenc, British Airways, telecommunications giant Alcatel-Alsthom, Britain's United Biscuits, Asea Brown Boveri, and Nestle.
Clearly, Europe's restructuring binge offers a big payoff. But nobody said it would be easy. The European Community, already mired in an economic slump, faces high unemployment (chart) and extremist political backlash--such as Germany's anti-immigrant riots of recent days. Like the former Soviet bloc, the 12-nation EC is discovering an unpleasant truth: It's painful to emerge from a protected shell.
That's why French voters, weary of 10% unemployment and wary of losing sovereignty, are threatening to sabotage Europe's crucial next step toward unity, the Maastricht Treaty, at a Sept. 20 referendum. The treaty, negotiated by EC governments last December, would create a single currency by decade's end and launch Europe toward political union. Danish voters nixed it in June, and polls indicate the French could, too. While a non vote would put the single currency in limbo and roil the financial markets, many Europeans think that it might not be such a bad thing. Stripped to its essentials, Europe '92 has been history's most ambitious exercise at deregulation. But opponents say Maastricht risks stifling the whole experiment by vesting bureaucrats in Brussels with new powers.
Yet no matter how the French vote, the fundamentals of the single market are in place. And most Europeans realize the course they have taken is irreversible as global markets get more competitive. But that also means the coming shakeout could be long and painful. Company after company plans to slash jobs over the next two or three years: 8,000 more at Usinor-Sacilor steelmills, 10,000 at Volkswagen, 20,000 at Mercedes-Benz. At Asea Brown Boveri, the electrical equipment giant, "you will see us closing factories this year and next year across Europe," says Eberhard von Korber, head of German operations.
COUNTING THE DAYS. The EC has 40% of the industrial world's work force, but 60% of its unemployed. The restructuring wave could raise Europe's jobless share to 80% by decade's end, predicts an internal study of the Organization for Economic Cooperation & Development. "When it comes to unemployment, you ain't seen nothing yet," warns Douglas McWilliams, economic adviser to the Confederation of British Industry.
Some U.S. executives worry that when the full brunt of open competition finally hits European companies, they will once again cry out for governmental protection. They wonder, for example, whether Europe is serious about deregulating government procurement--a nationalistic, $400 billion market.
Yet most of Europe's companies are eager to see borders fall. They're hunting new growth potential in a vast market of 344 million consumers--and they're eager to take advantage of a seamless Europe's new efficiencies.
German auto maker Audi is counting the days until Jan. 1. Then, quick border crossings will let it integrate cheap Portuguese suppliers into its "just-in-time" system. Consumer giant Unilever PLC is replacing local brands with European products. That has let it shut three of its five toilet-soap factories. Local rules limited such standardization in the past.
Despite protectionist fears, American companies should be among the new Europe's big winners. Because they were always organized on a Europewide basis, such old hands as GM, IBM, Hewlett-Packard, and Coca-Cola have a huge headstart in the race to restructure for the single market. They're used to big, open territories. Many Europeans also see them as allies in fighting the Japanese--who have their sights trained on the new Europe. Now, U.S. companies are making major new commitments, hoping European expansion will make up for flat markets at home. Coke, for example, thinks soft drinks will grow 8% a year in Europe in the 1990s, vs. a scant 1% in the U.S. It's trying to build a more efficient bottling network to gobble up market share.
Last year, Whirlpool Corp. bought out Philips' appliance business, and now it aims to dethrone Electrolux Corp. as Europe's white-goods king. Whirlpool is finding it can sell the same washer and refrigerator around Europe--a cost-cutting strategy that defies classic views on consumers' balkanized tastes. Thanks to the emerging single market, "this is a unique chance to position yourself," says Jeff Fettig, Whirlpool's European marketing vice-president. "You rarely see a time when customers, government rules, everything is changing all at once."
ADDED MILEAGE. Brussels is smoothing the way by setting Europewide standards for hundreds of products, from the flammability of children's toys to the size of a can of peas. Fewer than 200 will be ready by the Jan. 1 target date, but they're coming, and many businesses are pleased. More significant still: Starting Jan. 1, a product that's approved for sale in one EC country must be accepted anywhere. That will allow, say, Pepsi-Cola to be bottled from the same formula all over Europe. Now, Pepsi must switch ingredients to meet national standards, boosting costs. "We're looking at pan-European products in all our markets," says Eric L. Nicoli, CEO of United Biscuits.
The added efficiency is needed if European companies are to catch up with their rivals. In such key global industries as automobiles, computers, machine tools, consumer electronics, semiconductors, and air transport, the Old World has fallen behind its cost-efficient Japanese and American rivals.
Now, Europe's carmakers are rapidly toughening up. As quotas on Japanese cars gradually lift by decade's end, the Europeans face a brawl to hang on to market share. But the best performers should do better against the Japanese than America's auto makers did in the 1970s. And their falling costs will help them compete in the U.S. as well. European costs were 25% above the Japanese, but they have cut that gap nearly in half. On top of that, they are rushing out new models at a faster pace to catch up to the whirlwind Japanese. Mergers and alliances--some of them with foreign multinationals--should help. Renault and Volvo, linked already, are likely to merge outright. Fiat has proposed a merger to Peugeot, says Peugeot Chairman Jacques Calvet. So far, though, he's not interested. GM and Ford, which have lots of experience fighting the Japanese, have squeezed the cost difference with them down to 10%.
TELECOM TITAN. In the high-stakes world of high tech, Europe is having a tougher time. Groupe Bull, Philips, Thomson, and Olivetti are struggling, and the prognosis is uncertain. The best hope of these companies may be alliances with competitors, including Americans. IBM, which wants to beef up in Europe, is happy to oblige. It has forged partnerships recently with Bull and Siemens and has invested in literally hundreds of European software firms and computer dealers. Digital Equipment has teamed with Olivetti, and Motorola with Philips. One European high-tech company that seems certain of emerging on the first team is France's Alcatel-Alsthom. The company has been buying telecommunications equipment businesses around Europe--from ITT, AEG, and Olivetti. It has pulled past AT&T as the world's biggest telecommunications manufacturer.
Other powerful forces are driving change as well. A new wave of privatization is forcing remaining state companies to get into better shape. Massive sell-offs are afoot in France and Italy, where such companies as Rhone-Poulenc, Pechiney, and ENI will go on the block once markets permit. Germany is even preparing to privatize Lufthansa--one reason why it is pushing its generously treated employees for concessions. On Sept. 1, Lufthansa's unions agreed to pass up pay increases this year, work more flexible schedules, and refrain from protesting the elimination of some 8,000 jobs through 1994.
The high cost of labor is also redrawing the industrial map. With wages rising faster than productivity, German industry has begun moving elsewhere, and the exodus to Eastern Europe and points farther afield may grow. Volkswagen is trying to cut labor costs by putting 50% of its new investments outside Germany, including a new car plant in Spain. And BMW is setting up a big plant in the U.S. "It's a political message to the unions," says Norbert Walter, managing director of Deutsche Bank Research. That message is: "Don't think we can't transfer production abroad."
NO CHOICE. Labor can't help but notice. Take the industrialized north in Italy. Unemployment is soaring, and the government says that one in ten industrial jobs in the area could be at risk next year. The job decline is already under way at the giant GFT works at Settimo Torinese, Italy's largest apparel factory, which churns out top-end men's suits with labels such as Giorgio Armani and Valentino just 15 miles north of Turin. GFT's unions have had no choice but to go along with management's strategy to shift half of the company's production capacity offshore to places such as its Cuernavaca plant in Mexico and another in northern China. Says Giuseppe Cadili, a 30-year veteran of the plant: "We thought of opposing the strategy of internationalization, but the company would have gone completely bust."
While job losses hurt the idea of European unity, most industrial leaders are convinced that Europe has little choice but to go ahead with corporate overhaul. Most Europeans are still modest players on a world scale, exporting mainly to one another. Without the vast single market, "no European country has any future," says Bertrand Collomb, chairman of French building materials giant LaFarge Coppee.
But the uproar over Maastricht has made a politically united Europe seem decades away. Confronted with the ravages of the recession and economic restructuring, Europeans are clutching national sovereignty like a ragged security blanket. But if the Old World's big industrialmakeover works and Europeans grow accustomed to a borderless market, they may eventually find borderless politics more palatable to the governance of their new economic space.
It is also in the interest of the rest of the world to have Europe's shakeout pay off. True, the new Europe may become a tougher competitor. But its spark of rising productivity could ultimately light a new fire under global trade and growth, benefiting everyone. That's cause for a hopeful toast come Jan. 1, as Europe heads into its turbulent new era.