The Best Laid Plans Of Multinationals...

As a Ford Motor Co. executive in the far corners of the world, L. Lindsey Halstead has seen his share of political and economic turmoil. In topsy-turvy Brazil, the Ford veteran recalls spending more time "riding a financial bicycle" than building cars. These days, in the wake of the violent storms sweeping through Europe's currency exchanges and political corridors, Halstead, now chairman of Ford of Europe Inc., admits he may have a similar problem: "We've all been shaken."

It wasn't supposed to be like this. Since the mid-1980s, Europe's companies have been thoroughly overhauling themselves, prepping for the open competition that will begin on Jan. 1, 1993. Along with lowered trade barriers, executives had been expecting a Europe of low inflation and strong growth. The biggest payoff of all was to be a single currency, designed for one large market.

TWO TIERS. The single market program certainly is not dead. Andfew executives were realisticallyanticipating a single currency soon. But they had been hoping at least for currency stability. In a frantic few days in September, those hopes were swept away. "Our faith is unshaken in Europe," says Nigel Stapleton, finance director for publisher Reed International PLC, which on Sept. 17 braved the crisis to announce a $ 4 billion merger with Holland's Elsevier. But the turmoil, he warns, "is going to cause people to think twice about planning long-term."

For now, executives are planning on a two-tier Europe, made up of a hard-currency bloc of countries and soft-currency players. The result: Europe will be a place of varying growth rates, currency fluctuations, and investment patterns. The danger: "European industry will be less competitive against the U.S. and Japan," says David J. Small, vice-president of Europe at Motorola Inc.

Already, corporate chiefs are redrafting their blueprints. Britain's BAT Industries PLC plans to put on hold an expansion of its big insurance business onto the Continent, an insider says. Without a single currency, which would make cross-border selling much easier, the expansion doesn't make sense.

Motorola, meanwhile, figures Britain's devaluation of the pound and its new lower interest rates will boost Motorola's production and exports. That advantage will be offset, however, by slower growth in Italy and Spain. "Overall, it's a net-net loss," Small says. And though the second tier may be attractive for low-cost investment, that benefit must be weighed against what he expects to be high inflation and a lower skill base. "The crisis will exacerbate splits between the north and south," observes Stephane Garelli, of the International Institute for Management Development in Lausanne. "The honeymoon with European integration is over."

To most European executives, the sheer uncertainty they now must factor into an equation already dominated by recession and painful restructuring is a nasty shock. Currency issues just became devilishly trickier. "All of our risk policies have to be reassessed," reckons Ian Revill, group treasury manager of Imperial Chemical Industries PLC. Indeed, the currency fluctuations within Europe are clearly unsettling to companies such as Belgium's Barco, which derives 85% of its sales of electronic equipment from exports. "Things are very bad," frets Erik DeJonghe, Barco's chief operating officer.

NEW WAGE CUTS? Unchecked currency volatility unsettles a key European strategy pursued by such multinationals as Unilever, Procter & Gamble, and Whirlpool. Each of these companies has centralized production of some products, betting on economies of scale and currency stability. Now, depending on where the cost base is, they "may have been building inflexibility that won't work in the new conditions," says McKinsey & Co. Director Dominique Turcq.

Uncertainty also hangs over the heads of the workers who managed to keep their jobs during Europe's savage wave of cutbacks. The new currency alignments make Britain, Italy, and Spain cheap-labor countries, which could force more wage cuts and layoffs in the rest of Europe. "We would expect a particular impact on Germany," says Tom Van Heesch, senior director for Europe of Philips Electronics.

But what's bad for Germany may be good for second-tier-based companies. Take Weir Group PLC, a maker of pumps and engineering equipment. Chief Executive Ronald Garrick says he was "beating the pants off" French and German competitors even at Britain's former excruciatingly high exchange rate. With the pound devalued, he raised prices 15% in export markets, locking in handsome margins. And small companies see Britain's new currency and interest rates as a fresh start. "Everyone I talk with is absolutely relieved," exults Ronald Cohen, chairman of venture capital house Apax Partners Ltd.

But dangers lurk ahead for the second-tier economies. "It's fool's gold," says Garrick. In fact, the prospect that Britain will return within a few years to high inflation and high interest rates has him considering manufacturing on the Continent and in the U.S.

Italy eventually may be in even worse shape, local executives say, if the country can't attack its chronic budget problems. "We won't be in the Europe of big industrial groups," says Andrea Bollino, chief economist at energy giant ENI. "That is the real disaster for Italy."Disaster or no, Italy's economic outlook, along with that of the rest of the region, is sending European executives back to the strategic drawing board. The challenge now: to design a competitive scheme for a not-so-unified Europe.

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