France: A Quiet Revolution

The deal was struck behind closed doors in the early 1990s at the Paris headquarters of Company X. Changes in global markets were causing upheaval at this state-owned enterprise. Although it was profitable, the company needed a total restructuring of its core business and massive layoffs to survive. The unions would negotiate--but only if management kept their agreement secret. Not a word was leaked to the press. Over the next several years, Company X shed nearly half its 40,000 workers without suffering a strike. It expanded in international markets and boosted exports to 70% of sales. Even now, few outsiders know about the layoffs.

Company X isn't alone. Under a veneer of resistance, a quiet revolution is taking place in tradition-bound France. Until now, efforts to modernize its distinctive model of a state-dominated economy amounted mainly to privatizing the largest companies. Now, the forces of globalization, technology, and deregulated markets are encouraging reform-minded French people to change the system itself.

A growing army of citizens, though still a minority, want to shrink the state's role, reverse a pervasive hostility toward entrepreneurs, and erase the handout mentality that dominates French society. "There is an enormous demand for change," says Bernard Gilly, chief executive of Transgene, a $7 million biotech company based in Strasbourg. "People are fed up with state intervention."

The fighting forces come from every walk of life. Naturally, those in the front lines are entrepreneurs, shareholder activists, and venture capitalists. But their ranks also include government officials, labor leaders, and industry bosses. They have little in common except the belief that France must rethink the centuries-old economic model it has held so dear. Even Prime Minister Lionel Jospin, due to arrive in Washington on June 18 for a state visit with President Bill Clinton, has begun to acknowledge publicly that France must shift its priorities.

The country is far from embracing U.S.-style capitalism. But advocates of reform collectively are turning up the heat on Jospin's government. They want to free up the country's formidable resources to produce more efficiently, through deregulation and decentralization. That means removing barriers to entrepreneurship, lowering taxes and social charges, and cutting the fat from state spending.

PERVASIVE. It's a huge challenge. French society is designed to perpetuate the status quo, starting with an education system that discourages individual initiative. Elite schools channel the country's best students into state administration. The statist system pervades government-funded scientific institutes that shun startups. And it fosters corruption as the same people move back and forth between government and state-owned industry. Thus, modernizing France involves hundreds of reforms touching almost every sector of society.

A top priority, reformers say, should be shrinking state spending from 54% of gross domestic product today to somewhere around 47%. That would still exceed public spending in the U.S. and Britain but would represent a major improvement for France. Advocates of change also want a more flexible labor market in which companies can negotiate individually or by sector rather than being bound by rigid national laws.

A new generation of executives want to replace worker-vs.-capitalist enmity in France with a more democratic, motivating relationship that spreads wealth through employee shareholding. During a recent public offering of shares in industrial giant Saint-Gobain, a surprising 40% of the company's blue-collar workers bought stock. "The model that makes Microsoft's employees so happy could be transplanted to France," says CEO Jean-Louis Beffa.

The reformers face daunting resistance. Nearly a quarter of French workers are employed by the state, receiving generous pay, benefits, and early-retirement packages. Politicians push taxes ever higher to fund the country's bankrupt social security system, rather than reform it. Unionized civil servants in transportation regularly shut France down with nationwide strikes, demanding fat pay increases and resisting benefit cuts.

Unlike France's private companies, which have undergone a wrenching transformation in the name of global competitiveness, the French state at its core has remained an unyielding monolith. Jospin has promised to create 350,000 new public-sector positions. Meanwhile, unemployment benefits remain so high that it makes no sense for the French to take minimum-wage jobs. Overall, only 38% of the population works, compared with a weighted average of 48% in the U.S., Japan, and Germany.

Now the winds are shifting. After one year in office, Jospin has begun injecting the concept of "modernizing France" into his speeches. His Socialist government has accelerated privatizations of state companies, begun reversing some laws that hobble new businesses, called for education reforms, made the Internet a national priority, and slashed the number of jobs public officials can hold at one time. And in May, in a stunning break with tradition, Defense Minister Alain Richard for the first time awarded a naval-ship repair contract to a private company whose $2 million bid was half that of the state shipyard in Toulon. Toulon workers struck for eight weeks in protest.

WATERSHED. At the same time, the European Union's evolution into a single market--in which each member must compete with the others for capital and jobs--is exposing France's sclerosis. Already, in preparing for European monetary union on Jan. 1, 1999, member governments have had to benchmark their fiscal health against not only the qualifying criteria but also against each other. That competition will increasingly galvanize French reform. "The European framework will force the state to think about how it spends," says Beffa.

Even union leaders quietly admit that monetary union will change work rules by making countries compete for investment with attractive labor markets. Increasingly, they say, French labor will be governed by individual contracts rather than federal laws--still a radical notion in France.

A watershed of sorts was reached on June 9 when Air France's striking pilots accepted a deal that gives them a choice between a seven-year wage freeze and a 15% pay cut offset by share ownership. The settlement came as proof that France's labor traditions are giving way to economic reality. And for Air France, squeezed by air deregulation and lower-cost rivals, the deal will lower personnel costs by $6 billion over seven years.

Managers at other French companies are brainstorming to find ways around barriers to growth. Take the example of a new law that shortens the French workweek to 35 hours starting in 2000, from 39 now. Global software companies, whose programmers often log 60 to 70 hours a week, would have to flee France to remain competitive. Already, a strict interpretation of existing laws has inspired troops of inspectors to make raids on managers working past 6:30 p.m. and threaten their companies with heavy fines. Defense-electronics maker Thomson CSF and telecom provider Alcatel have both been cited for violating current law.

So some chief executives plan to wield technology to bypass the law by giving employees personal computers, electronic-mail software, and remote access to the company's network. "Our people will be able to work 35 hours in the building and work around the clock from home," says the CEO of a French technology company. "Technology can make this law irrelevant."

Indeed, the need to nurture French technology startups to create jobs could become one of the most powerful tools for dismantling the old state-dominant French model. Historically, the largest companies benefited from massive subsidies and generous contracts. Their CEOs were members of the ruling elite who took more pride in size than profitability--and managed accordingly. Small companies were considered lowly and trivial.

Now, faced with chronic unemployment hovering at around 12% of the workforce, government officials have little choice but to pay closer attention to the needs of entrepreneurs. That's encouraging young companies to fight for change. Croissance Plus (Growth Plus), a one-year-old lobbying group made up of growth companies and venture capitalists, was founded to foster a business climate more favorable to Silicon Valley-type startups. The group already has won government support to wipe out social-welfare charges in taxing capital gains on stock options for young companies. Taxes combined had totaled 120% of the gain.

Croissance Plus has also helped persuade government officials to laud entrepreneurs publicly--and thus begin to change their negative image in France. "A big part of the problem is mentality. The government is starting to do real, concrete things to encourage entrepreneurs," says Denis Payre, founder and chairman of Croissance Plus and co-founder of Business Objects, a $114 million French software company listed on NASDAQ.

At the National Council of French Employers (Patronat), a parallel revolution is afoot. Long the bastion of corporate chieftains with close ties to politicians, the Patronat is seeking to overhaul its role as the bastion of France's industrial old guard. Its new president, Ernst-Antoine Selliere, is championing the needs of France's 1.4 million entrepreneurs. "Big companies are accelerating their growth outside France. Entrepreneurs are the driving force for modernization and change inside our country," says Selliere.

BRAIN DRAIN. If France doesn't make the environment more comfortable for new businesses, young talent will continue to move elsewhere. The country's best and brightest are already leaving in droves to start businesses abroad or to work for non-French companies. Last year, for example, some 20% of the graduates of the elite Grandes Ecoles fled France to find jobs in places such as the U.S. and Britain, where opportunities are more abundant, pay is higher, and taxes are lower.

For instance, Yannik Gourmelon, a 24-year-old graduating this month from a leading business school, the Ecole des Hautes Etudes Commerciales (HEC), is determined to leave France to launch his career. He has turned down jobs at big companies, including France Telecom and L'Oreal, and plans to help launch a startup finance company in London--becoming one of 185,000 French working in the City. Gourmelon says his classmates make fun of former members of the business elite found guilty of mismanagement and fraud. "We want to get rid of the corruption and the rotten system we've had," he says.

To some in government, the message is getting through. Finance Minister Dominique Strauss-Kahn and Technology & Education Minister Claude Allegre are working to make France friendlier to entrepreneurs. Besides eliminating payroll taxes on stock-option gains at companies less than 15 years old, they have promised to change laws prohibiting scientists from holding shares in companies they collaborate with. That should help boost technology transfer from public institutes to startup companies and improve commercialization of breakthroughs that traditionally have failed to leave French labs.

French entrepreneurs are relieved that the government has finally begun to address their concerns, but they insist Jospin has not yet tackled their biggest problems: high taxes and the rigid labor market. Total labor costs in France, including social-welfare charges, amount to $16.91 an hour, vs. $11.64 in Spain. As the single currency makes such discrepancies more obvious, pressure on the government will mount.

Keeping startup companies from leaving is critical to that effort. Pascal Brandys, founder and CEO of Genset, a $16 million NASDAQ-listed biotech company, says that if France's business environment improves, fledgling biotech companies could employ 20,000 within five years, up from 3,000 today.

That's because as France's state-owned giants shrink, its new businesses are cloning themselves. Pierre Haren, founder of Paris-based software maker Ilog, spends Saturdays coaching employees on how to start their own companies and raise financing. "We hope one-third of our employees will seed their own companies," says Haren, who already counts three spin-offs. And venture capitalists are channeling funds toward job-creating startups. Jean-Bertrand Schmidt, a managing general partner at venture-capital firm Soffinova Partners, spent seven years in Silicon Valley during the 1980s. He has returend to France convinced that a turning point is at hand.

Another group of agitators is targeting the French system of higher education, which has long churned out a homogenized elite far removed from economic reality. The country's top schools are geared to produce public administrators and engineers who go to work for the state. Recent polls show that 36% of students still aspire to become civil servants. "We have to create in universities the expectation not to become managers in big companies but to be creators of their own companies," says Jacques Attali, who headed a commission to suggest reforms.

At French business schools, more students are participating in programs that let them study in other European countries for a semester. The HEC has helped build a network of European business schools that encourages French students to study elsewhere and fosters technology and international skills.

But aiding entrepreneurs and revamping education won't produce results overnight. To groom itself for the 21st century, France will have to tackle tough structural problems--especially the social security and retirement systems--before the next recession hits. Jospin has a rare opportunity while economic growth can ease the pain of cutbacks in benefits. The French economy is expected to grow 2.8% in 1998 and 3% in 1999. "It's a window of opportunity that won't last," warns Genset's Brandys.

Although Strauss-Kahn has promised to reduce France's budget deficit to 2% of gross domestic product by 2000, from 3% today, economists warn that other European countries are shrinking their deficits faster. And Strauss-Kahn plans to raise real spending in 1999 by 1% instead of cutting back. "The basic fact is this government has used over 40% of the gain [from economic growth] to increase wages and pensions for the civil sector," fumes economist Christian Saint-Etienne, president of European Strategic Consulting.

BILKED FORTUNES. Indeed, wastefulness and self-interest by government officials are another classic facet of the French model that is under attack. Energetic magistrates are pursuing corrupt politicians and businesspeople who bilked hundreds of millions of dollars from state coffers to fund political parties and enrich themselves. Pending cases reach all the way to the head of the constitutional council, who is under investigation for complicity and abuse of corporate funds at oil giant Elf Aquitaine. The latest revelation: hundreds of fictitious jobs created to channel money into illegal party funds.

The rise of accountability already is working profound changes in France's corridors of power. More and more, political leaders and corporate bosses are measured by performance, not pedigree. The drive for efficiency that has already changed France's private sector is about to put the public sector through an equally jolting shakeup. "We are at the end of the first wave of transformation and the beginning of the second wave," says Bruno Roger, a partner at Lazard Freres in Paris. "Today, we have a new frontier, and that is Europe." For the troops toiling for change in France, that's the battle cry of the future.

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