Ibm Europe Starts Swinging Back

For powerful IBM, it's au revoir to the good times in Europe. From Stockholm to Rome, Big Blue is under assault. Fat IBM Europe margins that once pumped up the parent company's returns are ebbing fast, while U. S. and Japanese rivals are eating away at its market share.

Stung by its slide, IBM is launching an all-out counterattack to hold its ground in the Old World. The stakes are enormous. Europe generates half of IBM's total profits. To preserve that trove, IBM Europe Chairman David E. McKinney is conducting a sweeping reorganization of IBM business practices on the Continent and building alliances with the Europeans to fend off the Japanese. IBM isstill the dominant player in Europe, but victory for McKinney is by no means assured.

TIPPING THE SCALES. To stay on top, the $28 billion European giant must slash costs while learning to snap to attention at customers' demand. Competition is getting fiercer. Analysts say Compaq, Hewlett-Packard, and Toshiba personal computers have all made inroads recently into IBM's big mainstay corporate accounts. With most of Europe's key technology champions ailing, IBM's battle for Europe looms increasingly as a winner-take-all contest against the Japanese. "Whoever wins in Europe will tip the worldwide scales," says James Beveridge, a senior analyst at International Data Corp. in London.

Although IBM Europe's profits were up 11%, to $3 billion last year, such increases are unlikely to continue. The weak dollar camouflaged a drop in local-currency profits in all four of IBM's major European countries, and the firming greenback this year may expose the downturn more sharply.

That's why McKinney is wasting no time with his shake-up. IBM has traditionally served Europe on a country-by-country basis, creating strong local companies in such major markets as Germany and France. Now, with Europe becoming one big market, McKinney wants his local managers to think big, too. Country managers are taking on pan-European duties for each key product line and marketing specialty. Germany gets mainframes, while Britain takes finance marketing. The goal: save money, react faster to market changes, and get competing national units to cooperate. "People do better when they're empowered to act on their own," McKinney says.

At the same time, McKinney is also playing on new perceptions of IBM in Europe. Where the giant computer maker was once viewed as Europe's bete noire, now it's the Japanese. Europe's weakened computer makers are creating a vacuum the Japanese are rushing to fill. Last year, Fujitsu took over Britain's flagship mainframe company, International Computers, and Mitsubishi Electric bought PC maker Apricot. And NEC Corp. is negotiating to buy a stake in ailing French computer maker Groupe Bull.

The recent deterioration of other European rivals, such as the Netherlands' Philips, has IBM worried that Japan could take a bite out of them, too. In the key mainframe market, Hitachi Ltd. has been growing faster than IBM, with sales of its IBM-compatible machines by Comparex in Germany and Olivetti in Italy. Japan controls less than 10% of the European market with its own brands. IBM, however, figures that Europe-based computer makers depend on Japanese technology for 40% of the components, by value, in their products. This could lead to more takeovers of troubled companies. "It's a deep worry if these guys go down the drain," says an IBM executive in Paris.

In a major drive to counter the Japanese, IBM is pushing to cement ties with rivals in Europe. Last year, it teamed up with Siemens to develop high-capacity 64-megabit memory chips, due out in 1995. Competitors expect the two to shortly announce a deeper relationship for earlier 16-megabit chips. That's likely to be just the first of many partnerships linking IBM with European computer makers. When asked about the chances of IBM, Siemens, and Thomson teaming up to produce chips one day, IBM Germany Chairman Hans-Olaf Henkel admits: "Anything is feasible." That's a dramatic switch for a company that once prided itself on going it alone.

IBM is also pushing to sell everything from microchips to finished subsystems to European rivals for resale. Siemens and Bull buy IBM disk drives and say IBM is trying to sell them telecommunications and other gear. "We're trying to put agreements in place with all of the Europeans and challenge Japanese dominance with all our means," says Fausto Talenti, IBM's Europe's director of strategy and business development. IBM will also forge a crucial R&D link between the U. S. and Europe as a newly admitted member of a European project called JESSI to do advanced chip research.

'OUR MAMMA.' McKinney is also throwing money around liberally, especially to Europe's smaller companies. In an effort to forge new links, IBM has become a major source of venture capital for independent suppliers of software and services. As rivals have lured IBM's plum dealers with cheaper or more innovative products, such as laptop models from Toshiba, Compaq, and Olivetti, Big Blue has sought to regain their loyalty with equity capital. In the past two years, McKinney has plowed more than $100 million into nearly 200 joint ventures and partnerships, from a German software maker to a Danish supplier of network services. "IBM has been our mamma for years," says one Italian agent with fresh IBM cash.

McKinney, a smooth-talking Tennesseean who encourages dissenters to speak up, is winning over obstinate country managers to his revolutionary thinking. Says Germany's Henkel: "If IBM Italy makes a decision that's good for Europe and bad for Germany, I have to say it's O. K. I have to trust they will make the right decision for Europe."

Eager to reduce advertising costs by making one campaign for the entire European market, McKinney ran into stiff opposition in Germany. "We Germans were proud of our way of expressing ideas. I was against a single ad campaign for Europe," recalls Henkel. McKinney responded by putting Henkel's own marketing manager in charge of the task force to cut ad costs. Suddenly, Henkel was being lobbied--and convinced--by his own man that the French ads were the best.

The new cooperation among country units is also paying off in sales. IBM Germany recently won the first round of a massive Lufthansa project for 2,500 PCs and software to link some 100 worldwide airport check-in systems to Frankfurt headquarters. IBM's Stuttgart office will provide one bill, coordinate deliveries, and manage installation by its sister companies around the world. Otherwise, "we would have had to give Lufthansa the addresses of our 100 IBM companies and tell them to deal on their own," risking losing the business to rivals, says Hans-Ulrich Maerki, director of international marketing. "Customers won't put up with that anymore."

IBM still has a tough road ahead. McKinney's reorganization will include slashing staff at IBM's slate-gray Tour Pascal headquarters near Paris by two-thirds, to about 600 next year. Many of the departures--highly paid professionals on three-year assignments from their national units--will return home. But there will be cuts there, too. Overall, about 4% of Europe's 40,000 nonsales positions will be cut this year, and even more cuts will be needed to reduce the buildup of highly paid staffers in Europe since the 1970s. "No other company could survive IBM's overhead," says Gilles Tugendhat, a former IBM manager and now president of ECS, a lessor of IBM equipment. In France and other countries, he adds, "10% to 20% should go."

The new structure has proven unworkable for some product lines. In March, McKinney quietly ordered control of the PC business to move from its new home in London back to Paris and flew in an American to head it up.

The mistake in Britain shows the makeover of IBM Europe won't happen overnight. But it also reflects McKinney's ability to admit a mistake and act quickly to correct it. "No organization is permanent," he parries. With that kind of flexibility, McKinney clearly shows he's ready to do whatever it takes to keep IBM Europe on top.

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