European High Tech Tries To Do Something Drastic: Grow Up

Europe's high-tech leaders are hurting. Dutch giant Philips bled $2.5 billion in red ink last year. French computer maker Groupe Bull lost $600 million and had to lay off 5,000 workers. France's Thomson and Italy's Olivetti are languishing, while Germany's Siemens is wrestling with the takeover of Nixdorf. Now, along come the Eurodoctors in Brussels with a radical solution to the high-tech woes: They want to pull the plug on the life-support systems.

After years of pouring billions in subsidies into European electronics companies, Brussels is calling for cuts. In a sweeping review of its policy toward high tech, to be completed by Mar. 26, the European Commission is expected to push for freer competition, including lower tariffs and open bidding for government contracts. "We're not in the business of propping up ailing companies or picking winners," declares Sir Leon Brittan, the commission's leading advocate of open competition.

The free-market push in Brussels sets the stage for a life-and-death struggle across Europe. On one side are the ailing companies, which are sure to continue to lobby their national governments for protection. Ranged against them are the free-marketeers in Brussels, led by the British. Watching with interest from the sidelines are powerful U. S. and Japanese high-tech companies, who stand to grow stronger in Europe if the protection falls.

'THE LAST FIGHT.' The outcome has implications beyond the fate of Europe's $156 billion electronics market. As the first area on the EC's new industrial agenda, electronics policy is likely to set a precedent. Battles over autos, aeronautics, and chemicals lie ahead. "This is the last fight for a Fortress Europe," says one American electronics executive in Brussels. "I think it's bound to fail. But the beast is not dead yet."

Brussels' push follows years of misguided protection and research subsidies. The EC has spent $6.2 billion on high-tech research since 1987. The money padded payrolls but did little to boost Europe's competitive standing. Antidumping duties and local-content rules only prodded the Japanese and Americans to set up shop on the Continent. The EC's electronics trade deficit has doubled in four years, to $35 billionin 1990. With only 25% of the world market, Europe's computer makers are losing ground on their home turf.

Even the free-marketeers in Brussels aren't ready to cut off European firms cold turkey. They worry about the Continent's growing dependence on the U. S. and Japan for such basics as semiconductors and software. Their strategy is to consolidate investments, with hopes of getting more bang for fewer bucks.

With Brussels backing out of the subsidy and protection business, much of the fighting will move to Europe's capitals. There, politicians will face a stark choice: either spend money to support ailing companies or risk higher unemployment. Warns one executive at France's Thomson, "We may very well be dead tomorrow if nothing is done."

The fight in the electronics industry pits the North against the South. While Britain, the Netherlands, and Germany, have grown weary of handouts, dirigistes in France, Spain, and Italy continue to push for industry support. France alone is planning to pump $800 million of new equity and grants into Groupe Bull and Thomson this year. Elisabeth Guigou, France's minister for European Affairs, says such aid is urgent and calls laissez-faire high-tech policies "suicidal."

If so, Brussels is knotting the noose. The biggest test of the EC's resolve will be a new megaproject designed to link social security agencies, tax offices, and police and customs offices. Dubbed the European Nervous System, the massive computer project should be worth billions in contracts.

The question is who will win them. A decade ago, the Europeans would have divvied up the pork barrel. But these days, it's hard sometimes to tell who is European and who isn't. Since last year, when Fujitsu Ltd. purchased ICL, Britain's only major computer maker has been Japanese. IBM and other U. S. players are also well entrenched.

CHIP AID. With the Americans and Japanese dug in across Europe, Olivetti, Bull, and others fear that without special treatment, they won't get fat Nervous System contracts. Indeed, starting in 1993, tenders for telecommunications gear and computers must be open to any bidder whose products have 50% or more European content. This will put top Japanese and U. S. companies on equal footing with the Europeans, a frightening prospect on the Continent.

In the meantime, Europe's companies continue to clamor for handouts. Late last year, for example, Germany's Siemens and Franco-Italian SGS-Thomson were close to merging their chip companies. To fund the restructuring, the companies called for $4 billion in government aid. France and Italy agreed, sources say. But negotiations collapsed in December when Germany refused.

Executives say they'll talk again this year. But this time, much will depend on Brussels' willingness to help foot the bill. "The EC has to get into the picture," says Alain Gomez, chairman of Thomson, which owns 45% of SGS-Thomson. Don't count on it, many Eurocrats say. The winds in Brussels are blowing in the opposite direction.

Before it's here, it's on the Bloomberg Terminal.