The Battle For EuropeStewart Toy and Jonathan B. Levine and Mark Maremont and Karen Lowry Miller
France's new Prime Minister has a single big item at the top of her agenda, and she's not shy about discussing it. Leaning back in her Paris office, Edith Cresson gathers herself for a forceful thrust. "The Japanese have a strategy of world conquest," she says. "They have finished their job in the U. S. Now they're about to devour Europe."
With such tough talk, Cresson is voicing a growing anxiety across Europe. Industrialists and politicians of every stripe see the Japanese coming their way, and many are worried. Hardly a week passes without an announcement of a major Japanese deal. Fujitsu last November snapped up ICL, Britain's last full-fledged computer maker. NEC is negotiating to buy a small stake in Groupe Bull, the tarnished symbol of France's ambitions in computers. And Mitsubishi Motors Corp. has struck a deal to team up with Volvo in Holland.
From metal fasteners to memory chips, the Japanese are suddenly everywhere. Europe's fearsome fortress is beginning to look like Swiss cheese. Japanese investors are pouring in their dollars and yen, totaling $54 billion as of April, leaping over Europe's hurdles, and establishing manufacturing footholds from Manchester to Milan. For Europeans smug in the belief they could avoid making "American mistakes" in dealing with Japan, it's a big shock. Europe is looking a lot more like America in the early 1980s, when U. S. consumer-electronics, auto, steel, and machine-tool industries were hit hard.
REDDEST CARPET. Cresson could galvanize Europeans who fear Japan's challenge. "We cannot close our eyes to the Japanese as the Americans did," she says. Europe's concerns are the underlying reason for the official trip to Tokyo on May 22 to May 25 by European Commission President Jacques Delors. Before his arrival, the news hit that Europe's trade deficit with Japan soared 63% in the first quarter, to $9.9 billion, and in April topped the U. S. deficit with Japan. To ease the pain, Japanese officials rolled out their reddest carpet: Delors and his wife lunched with the Emperor and Empress, a privilege usually reserved for heads of state.
Delors' high-level treatment shows just how much is at stake in the world's largest market. Western Europeans are already the biggest buyers of cars and consumer electronics. Soon Europe will be the No. 1 outlet for computers and other key products as well. With boundaries being wiped from the map as 12 nations prepare for a vast single market by the end of next year, the Old World is about to become an even juicier plum.
A steadily growing giant whose native companies often lack global fighting power, the new Europe is a tempting market for Japanese and American companies. And as the world's last such industrial market up for grabs, Europe is likely to become the fulcrum of the world's economic power balance for the new century. It's a booming base from which multinationals will consolidate the financial strength and the economies of scale essential to compete around the world. As a result, a three-way fight is now shaping up among Americans, Japanese, and the Europeans themselves to determine who will reap these benefits.
For American companies, many battered by the Japanese at home, the fight for Europe may be a final, winner-take-all showdown against the Japanese. That comes as a nasty jolt: Since the 1950s, Europe has been the bastion of American industrial might abroad and in recent years has become a cozy haven for profits for many American blue chips. IBM, Ford, and GM have been raking in more money in Europe than in the U. S.
Now, the easy life is over. "Europe has put together a fantastic market, and now look who's marching through the door," mutters Mark R. McCabe, chief executive of General Motors Corp.'s European components operation. For industry after industry, including semiconductors, "whoever wins in Europe will win the war," predicts Marco Landi, European marketing vice-president of Texas Instruments Inc.
American companies are rushing to get in shape for this last-stand fight. They're scrambling to cut costs, tie down customers, and build alliances. Some U. S. companies should emerge stronger. They include GM and American Telephone & Telegraph Co., which is managing to build new ties with Europe's phone-equipment buyers and break old national monopolies. But IBM, Ford, Caterpillar, Eastman Kodak, Xerox, Goodyear, and other American icons are likely to feel pressure on profits and market share.
For protected Europeans facing the Japanese for the first time, the shock will be greater. Some of Europe's six big automobile makers--possibly Fiat or Renault--will almost certainly be forced into mergers. As for computers, chips, and consumer electronics, the chances appear strong that many Europeans will be squeezed out of the market entirely (table, page 46).
So far, Japan's presence is still far greater in the U. S. than in Europe, and conversely, Aml production was required, they launched investments in plants, sometimes from scratch. And most recently they have been buying big chunks in companies outright, from clothing makers such as Laura Ashley and Hugo Boss to Germany's construction-gear maker Hanomag. They have also worked at becoming good "corporate citizens," funding soccer teams, university chairs, and museums and art galleries across Europe.
Add it all up, throw in a recession and high unemployment, and suddenly there's a danger that some critical European industries will be hollowed out. ICL turned over key mainframe computer manufacturing to Fujitsu in the early 1980s, leading to its takeover last year. Similar gears may be grinding at other European corporations. Olivetti depends on Canon and Sanyo for office equipment, Fiat on Hitachi for construction gear, and Bull on NEC for mainframes. While some industry executives argue that such alliances are keeping the Europeans afloat in critical technologies, in Prime Minister Cresson's view, it all spells trouble. The Japanese aim is to "dominate" key industries, she says.
Japan's strong presence is putting a heavy damper on the Europhoria of 1992. Suddenly, the policy decisions that swirl around 1992 are about Japan and not much else. France's Cresson is readying proposals for EC industrial aid and other Japan-fighting moves. But Britain--where the Japanese have put 40% of their EC investments--will oppose the French. German officials, confident about their staying power vs. Japanese rivals, are against protectionist measures. France's protestations merely prove that "the weakest always cry the loudest," says Jurgen Bohle, head of Asian-Pacific relations at the Federation of German Industry. All these national divisions are threatening to stall the 1992 marriage.
The lure of Japanese investment has deepened this European schizophrenia toward Japan. Just as in the U. S., where Washington is often at odds with U. S. states over Japanese investment, Brussels tries to craft an EC-wide response to Japan in the face of national rivalries. Individual governments trip over each other to woo Japanese investors, promising juicy tax subsidies and outright grants.
Last December, for example, the EC granted Mitsubishi Electric Corp. an $8 million subsidy to build a $350 million DRAM memory-chip plant near Aachen, Germany, at the request of Aachen City Hall, which needed jobs in that depressed coal region. Never mind that the Japanese giant had been previously accused of dumping memory chips in Europe or that Japan already has 70% of the market for the chips the Aachen plant will produce.
AMERICAN CONNECTIONS. As gridlock threatens a common policy response, some Europeans, including Prime Minister Cresson, are preaching alliances with American companies to resist Japan. Throwing off postwar rivalries, they are eager to team up with U. S. companies, with which they feel most comfortable culturally. "The Americans integrate, they're like European companies," says Wisse Dekker, chairman of the supervisory board of Dutch giant Philips Electronics. "But the Japanese desire is to dominate."
The Americans, too, are trying to deepen their European corporate hookups. IBM, for example, is scared that Japanese rivals will buy weak European electronics companies as a springboard into the market. So Big Blue is building a defensive network of partnerships to keep the Europeans independent. Last year it launched joint chip research with Germany's Siemens, a big switch for the normally solitary U. S. giant. "We want to cooperate with Europeans any way we can," says David E. McKinney, chairman of IBM Europe. Likewise, Texas Instruments Inc. is hoping to use such alliances to lock up a piece of the European chip market (box, page 52).
America's good-guy image helped Digital Equipment Corp. snatch a German acquisition from Fujitsu a few months ago. DEC's $200 million bid for computer maker Mannesmann Kienzle was below Fujitsu's, but the German company feared it would disappear under a Japanese owner.
But European and American companies alike have extensive webs of relationships with Japanese partners. As Toshiba Corp. expands its chip operations in Europe, there's a good chance its partner will be none other than Motorola Inc. Over the next five years, IBM laptops sold in Europe will almost certainly be fitted with color liquid-crystal screens supplied from IBM's own manufacturing joint venture with Toshiba in Japan. It's hard to see American-European alliances accomplishing what the Eurocrats in Brussels cannot.
LESS RED TAPE. In some senses, the Japanese have beaten the `92 process even before it officially starts. Europe's unification, while aimed at strengthening homegrown companies, is turning out to make the 12-nation European Community a much easier place for foreigners to do business, as well. Standardization of Europe's diverse national markets will open up areas long dominated by national monopolies and protected by arcane regulations, which Japan's lobbyists monitor zealously (box, page 50).
One telling example is in mobile telephones. Until now, European markets have been splintered by six different technical standards. That keeps manufacturing runs low--and has held volume-minded Japanese producers at bay. But in July, Europe begins switching to a single standard. The floodgates will open, and the Japanese will start moving in. NEC, Panasonic, and Mitsubishi have already built niches in Europe's mobile-phone markets. Sony Corp. and Toshiba started getting ready last year. The Japanese will probably build European factories and touch off price wars for control of this enticing market, which market researcher Dataquest Inc. predicts will grow 54%, to $3.4 billion, by 1995. Leaders Motorola, with a 25% market share, and Finland's Nokia, with 11.5%, will feel the pressure.
The Japanese presence undoubtedly carries benefits for Europe. New factory jobs are an obvious boon, which even Japan-baiters like France are fighting their EC neighbors to win. Japan's famed manufacturing skill should also diffuse into European industry. Economists say that is clearly happening in Britain. Barry Wilkinson of the University of Wales studied the Welsh auto components industry and found that Japanese-inspired techniques such as total quality management and just-in-time production are revitalizing a tired auto-supply sector.
Some economists think Japanese investment will be crucial to Britain's manufacturing future. Thanks to Sony, Matsushita, and others, Britain, with no indigenous TV makers, is now a net exporter of televisions. By the year 2000, an astonishing 16% of British factory workers will have Japanese bosses, predicts Douglas F. McWilliams, chief economist at the Confederation of British Industry.
That pattern could be repeated around Europe, because many Japanese companies are getting ready to jump off from Britain onto the Continent in a big way. Their motive: Spread the wealth and prevent political backlash. That's one reason Mitsubishi Electric gritted its teeth at "red tape, bureaucracy, and regulations" in France and picked that country for a new mobile-phone plant, says European boss Nishino. Despite France's official hostility toward Japan, it has now become a major recipient of Japanese investment.
Germany, the biggest and most attractive market for Japanese electronics giants, is already home to a thriving Japanese presence. Germany buys fully 40% of Japanese exports to Europe. And now, German and Japanese heavyweights are signing up together to make and market everything from trucks to plane engines. U. S. investment in Germany is still bigger, at a cumulative $23 billion in 1989, or more than four times Japan's $5 billion-plus in the same year. But the Japanese are catching up: Direct investment in the North Rhine-Westphalia region, for example, has grown between 20% and 30% a year in the past few years and may overtake American investment in the state (box). And in the Bavarian heartland, Toshiba is planning to triple its local production of laptop computers by 1994. That will make it the base for 60% of all the laptops it sells in Europe.
NEW PLANTS. Auto makers are a big part of this investment plunge. Every major Japanese carmaker except Mazda Motor Corp. has announced plans for European factories. While much of southern Europe has quotas on Japanese cars--3% of the market in France, 1% in Italy--most northern countries have none. To create a common policy across Europe, Brussels proposes a six-year transition to a free market. But France wants British-built Nissans, Toyotas, and Hondas counted as Japanese and not European, thereby limiting them. Peugeot Chairman Jacques Calvet has even accused Britain of allowing itself to become an "aircraft carrier" for the Japanese.
Britain and Germany, along with Japan, are fighting the French plan. Nor are the French likely to get much help from the Dutch or the Danes. Because of their national differences, compounded by huge Japanese auto investments and growing alliances, it seems unlikely the Europeans will put up a rock-solid front against Japan beyond the six or so years. Indeed, cross-border competition among the Europeans themselves is heating up. Japanese or no Japanese, "I don't expect all six auto companies to survive," says GM Europe President Robert J. Eaton.
GM-Europe, which produced $1.9 billion in profits to counter its parent's $4.6 billion in U. S. losses last year, seems a sure survivor. Already strongly productive, the company is launching a campaign to cut its manufacturing costs by $500 a car. It will merge parts plants in Britain, and it is building a new factory in eastern Germany that will emulate Japanese techniques. And GM's European model lineup is strong. But if it treats Europe as a cash cow and fails to invest, or if its profitless Saab subsidiary, acquired last year, proves to be a long-term drain, problems could arise.Rival Ford is in worse shape. Its European models are humdrum, and its strongest market is Britain, whose economy is the weakest among Europe's major nations. It's also where the Japanese are likely to be strongest. To spread its bets around, Ford is pushing hard into Italy. And it is discussing joint European manufacturing with Mazda, of which Ford owns 25%. Still, "Ford is vulnerable," says analyst Maryann Keller of Furman Selz Inc.
Electronics companies think they also are in harm's way. Recently, the EC set up a task force to consider a rescue plan. Sources say it will consider tougher antidumping measures on Japanese chips, limitations on opening public procurement bidding to foreigners, and holding chip tariffs at 14% rather than cutting them as proposed under the General Agreement on Tariffs & Trade (GATT). But at the same time, European computer makers depend on Japanese memory chips and therefore want a freer market. That's similar to the dilemma that has haunted American semiconductor negotiations with Japan for years.
High technology is one area where Prime Minister Cresson wants to target government aid. She thinks expanded, better-managed EC research programs can make a big difference--despite poor results in such efforts to date. In her first major address to French lawmakers on May 22, she called for "a new European electronics community." U. S. companies should be involved, she believes, because they are developing products in Europe and integrating into local economies. IBM is already a member in good standing of EC-sponsored research programs. But ICL was kicked out of several such programs after Fujitsu bought it last year.
'HIDDEN MESSAGE.' Still, Europe's chances in high tech are waning. It lacks world scale in the key semiconductor industry, and its No. 1 electronics company, Philips, ranks a mere 10th globally. Europe's two other chipmakers, Germany's Siemens and the Franco-Italian SGS-Thomson, are discussing a possible merger--with technology backing from IBM. A growing dependence on foreign chips will make it tougher for Old World companies to keep pace in a growing gamut of industrial and consumer products.
With the stakes so high, Japanese officials are trying to manage an increasingly delicate relationship. As for France's new Iron Lady, "we should not overreact," says Kaoru Ishikawa, director of the Japan Foreign Ministry's First International Economic Affairs Div. He suggests that Cresson's remarks are mainly for domestic consumption and that they boil down to a "hidden message" to prod France to work harder.
Cresson, however, argues that she is approaching her new job with a sense of mission: to avoid coddling the Japanese as she feels the Americans did. "The Americans thought everybody was the same," she says. "They didn't realize that the Japanese are different." Cresson's goal is to help give Europe a strong new industrial strategy that will prevent it from becoming "a Japanese colony."
But Cresson may find herself at odds with her free-market European partners. Britain, Germany, Holland, and Spain either hesitate to erect a European fortress on philosophical grounds or because they covet the jobs Japanese companies are bringing. For that matter, France itself is hungrily eyeing Japanese investment and technology. Cresson faces crucial decisions soon that will show clearly whether her call to arms is a genuine attempt to galvanize Europe or whether it is merely populist rhetoric that plays well at home. At issue is whether the Prime Minister will go along with Mitsubishi's proposed purchase of a stake in Volvo/Holland. The French became Volvo's biggest shareholder last year via a 25% stake owned by Renault, the state-run auto maker.
WRENCHING PROCESS. Cresson is likely to encounter lots of other such tests of her fighting mettle, as Japanese industry spreads throughout Europe and dangles new jobs and investment. Her dilemma is Europe's dilemma of the 1990s, as well. The double-edge sword of Japan cuts to the heart of how Europeans want their promised union to evolve. Given this heavy political backdrop, dealing with the Japanese challenge may prove even more wrenching for Europe than it has for America. How the Europeans react will shape not just their own economy, but also America's place in the world economic order for decades to come.