The Top European Business Stories of 2007
From the launches of the Airbus A380 superjumbo jet and the Apple (AAPL) iPhone to the U.S. subprime mortgage crisis and its financial aftershocks, 2007 was an eventful year for business in Europe. Initially confident of its economic prospects, the Old World saw growth projections dim by yearend due to the surging euro and tightening credit. The repercussions hit everyone from automakers to banks. And in Britain, sagging housing and retail sales could make for a tough 2008.
An array of political news set the backdrop. France elected a reformist President; Gordon Brown took over from Tony Blair in Britain; Russia's Vladimir Putin named his successor; and the European Union agreed to a treaty replacing its failed new constitution. Surging energy prices—and ongoing tussles over energy policy—set the stage for a boom in alternative energy, while growing concern over climate change put carbon dioxide emissions on the public agenda as never before.
There was plenty of corporate drama, too. The troubled DaimlerChrysler (DAI) merger came apart, while Porsche tightened its control over Volkswagen (VOWG.DE). Bribery allegations at Siemens (SI) forced out the chairman and CEO. Alcatel-Lucent (ALU) struggled to make its merger work in a weakening telecom equipment market. And European banks staggered from the subprime mess, leading British lender Northern Rock (NRK.L) to the verge of collapse.
Read on for our summary of the top European business stories of 2007, including lots of links to coverage throughout the year.
1. The Credit Crisis. Everyone knew there were too many questionable mortgages being written in the U.S., but a raft of clever financial instruments such as collateralized debt obligations spread the risk and hid the extent of the problem. Then it all came undone with brutal speed. After French bank BNP Paribas (BNPP.PA) said on Aug. 9 that it was suspending three funds with U.S. subprime exposure, investors began to realize that Europe wasn't immune to the crisis. The European Central Bank injected liquidity into the market and the panic cooled. At the same time, Europe's homegrown mortgages looked to be on more solid footing.
Soon it became clear, though, that the problem wasn't going away. A top Barclays executive resigned over his role in the bank's subprime exposure. The potential impact on Britain's economy began to emerge. And analysts worried that the aftereffects could spread as far as Eastern Europe.
In mid-September, the crisis hit Britain's fifth-largest mortgage lender, Northern Rock, whose innovative leverage techniques had earlier won it praise. Facing a sudden cash crunch, the bank was forced to turn to the Bank of England for a bailout. That prompted a run on deposits, compounding Northern Rock's woes. By yearend, even a potential sale to Richard Branson's Virgin Group was looking shaky, and Northern Rock faced the possibility of being nationalized.
Northern Rock wasn't the only European victim. Switzerland's UBS (UBS) took a big writedown on Oct. 1 and shuffled top management. Then it had to write down even more in December. By the end of the year, the final impact of the continuing credit crunch still wasn't known, but the European Central Bank flooded the market with a staggering $500 billion in short-term loans in a bid to ease credit. The story will no doubt continue into 2008.
2. The A380 Flies in a Tough Year for Airbus. European aerospace giant Airbus started the year off with a thud, revealing that its losses in 2006 from the delay to its A380 megaplane were worse than expected and that it planned an extensive restructuring in 2007, including a risky increase in production for its narrow-body A320 line and the sale of six factories.
Meanwhile, though Airbus invited the press aboard the A380 for a demonstration flight, it was struggling to win orders for its midsize A350, designed to compete with the popular Boeing (BA) 787 Dreamliner. A breakthrough finally came at the Paris Air Show in June, when it announced billions of dollars in orders for the troubled plane.
By yearend, the A380 had finally entered commercial service for Singapore Airlines, hard on the heels of a crucial order for a dozen of the planes from British Airways (BAY.L). But Airbus' woes aren't over, because the plunging dollar is whacking profits. The company hopes its planned divestiture of plants, finally sealed in December, will improve the picture next year.
3. The iPhone Lands—and Europe Responds. Its arrival wasn't exactly a surprise. But the Apple iPhone has generated intense excitement, even in the traditional European stronghold of local heroes Nokia (NOK) and Sony Ericsson. Before the sleek device launched in the U.S. in June, European mobile firms already were positioning themselves to respond. One startup, London-based Omnifone, rolled out a competing mobile music service to Apple's iTunes. And Nokia, taking advantage of Motorola's (MOT) fading fortunes, expanded its global market share with strong offerings at the high and low ends of the market.
By August, though, it became clear how seriously Nokia took the iPhone threat. Citing a rapidly evolving market, the Finnish giant unveiled an ambitious plan to offer a raft of mobile services, from music to maps to photo sharing.
When the iPhone finally arrived in Europe in November, customers were giddy with anticipation, though there was grumbling about its high price and the long service contracts required by carriers. Sales were strong, but hardly enough to nick Nokia. Still, as promised, the Finns made a strong counteroffer, rolling out a free music service that will be built in to high-end models. This battle will be worth watching in 2008.
4. The Troubles at Alcatel-Lucent. The transatlantic merger of two of the world's largest makers of telecom equipment had its doubters from the beginning. But their numbers surged when in January, only months after the deal was sealed, Chief Executive Patricia Russo shocked the market with a profit warning.
Integration woes and weakness in wireless gear made the situation worse as the year went on. In September, Alcatel-Lucent issued its third profit warning of the year, and by late that month, it appeared that Russo's job could be on the line. At the end of October, she presented a turnaround plan to the board that included sharp job cuts. And by November, she gave signs that the worst may be over for the company.
One factor that helps put Alcatel-Lucent's woes in perspective is that its top rivals also are seeing troubles in the market. Top player Ericsson (ERICY) shocked investors in October with an unexpected profit miss. And the Nokia-Siemens Networks joint venture continues to struggle as well with losses and fierce price competition. Prospects for the sector aren't much brighter in 2008.
5. The Demise of DaimlerChrysler. The ambitious merger of Daimler and Chrysler engineered by former Daimler-Benz CEO Jürgen Schrempp was always unpopular with investors. But in early 2007, as Chrysler's woes dragged down the parent company, Schrempp's successor, Dieter Zetsche, began moving to undo his predecessor's mistake. By April, he confirmed that he was in talks with potential buyers.
By May, when the deal was finally done and other potential buyers had been eliminated, the surprise winner was private equity firm Cerberus Capital Management, which paid $7.4 billion for Chrysler. The buyout may prove to be a poisoned chalice for Cerberus, but Daimler looks poised for stronger growth and profits without its troubled American branch.
Daimler wasn't the only big European auto story of 2007. German rival (and Europe's No. 1 carmaker) Volkswagen underwent its own drama, as an embarrassing court case over alleged bribery heated up early in the year. By November, testimony suggested that former CEO Ferdinand Piëch may have been aware of the activities. Meanwhile, surging sports car maker Porsche (PSHG_P) moved to tighten its control over VW, though cultural tensions run deep between the companies.
6. Changing of the Guard at Siemens. At the start of 2007, then-Siemens CEO Klaus Kleinfeld seemed impervious to a bribery scandal alleged to have occurred long before he took over the top job. The hard-charging exec was busy remaking the sprawling company and earning a few enemies in the process.
But as the trial of two former Siemens managers got under way in March, new revelations emerged about how common bribery may have been at the company and another manager was arrested. With pressure mounting, first the company's chairman and former CEO, Heinrich von Pierer, stepped down and then Kleinfeld resigned.
His surprise replacement announced in May was a company outsider, Peter Löscher, who previously worked for drugmaker Merck (MRK). Löscher set to work in July trying to tackle problems that Kleinfeld hadn't had time to fix, and by the end of the year, he was clearly already making his mark on the company.
7. Energy—and Alternatives. It was a huge year for the European energy sector, from concerns over Russia's growing clout to BP's shakeup to surging investment in alternatives. Early in 2007, the European Commission indicated that it might order a breakup of Europe's big utilities, and by the end of the year, the plan had been floated amid considerable opposition.
Meanwhile, after facing a wretched 2006, BP's (BP) legendary CEO John Browne said in January that he would retire by summer, only to be chased from office three months early by a personal scandal. His successor, Tony Hayward, moved fast to fix problems left behind by Browne, and also had to contend with Russia's increasing hostility to foreign oil companies.
The tribulations of big oil and soaring crude prices added yet more urgency to the search for alternatives. Europe already has staked out a position as the leader in sustainable energy research and production, with huge commitments to solar and a growing stake in wind power. Spain's Iberdrola (IDRO.DE) is now the world's largest producer of wind-powered electricity, and Britain is increasing its commitment to vast windmill farms.
8. High-Tech Antitrust. By now, Europe's tendency to wade into controversial antitrust cases involving American high-tech companies is well known. After all, in 2004, the European Commission slapped Microsoft (MSFT) with a tough decision concerning product bundling and disclosure of tech specifications, and ever since then, the case has been wending its way through the courts.
In 2007, the court finally ruled, strongly upholding the Commission's decision against Microsoft. By October, Microsoft had agreed to tough new conditions imposed by the Commission, bringing an end at last to a case that has dragged on since the late 1990s.
In the meantime, Europe has now pointed its guns at Intel (INTC), launching a probe into the chipmaker's marketing practices. It also opened a formal investigation into the patent licensing practices of mobile-chipmaker Qualcomm (QCOM). Looks like European lawmakers and tech companies are going to be tangling for some time.
9. Climate Change and Carbon Awareness. You might call 2007 the Year of Carbon, at least in the sense of the public's rising awareness of global warming and the planetary impact of carbon emissions. Indeed, we noted early in the year how consumers and companies were latching onto carbon offsetting to boost their green quotient. The U.N.'s startling climate change report in April only added to the sense of urgency.
Europe got off to an early start with its carbon trading system, which was hailed as a success in May, though the cost of carbon credits later plunged due to oversupply. By the end of the year, the Euronext stock exchange announced that it plans to launch a carbon trading market in 2008, when new regulations go into effect.
Even as awareness and markets grew, though, some abuses crept into the system, prompting some to worry about a potential backlash if consumers lose faith that their carbon offsetting is doing any good.