TIME EUROPE
JANUARY 31, 2000 VOL. 155 NO. 4
Europe's Hi-Tech Edge
Although the U.S. dominates many businesses of the future, European firms lead the way in several key areas
By HENRY MULLER Paris
When an American Internet merchant like Jeff Bezos joins Charles Lindbergh and Winston Churchill in the pantheon of Time's Men of the Year, it's all too easy to assume that the economic future belongs exclusively to the U.S. and that Europe will become a quaint museum dependent on tourism and some luxury niches for its livelihood. Too easy--and wrong. While the Old World is still bedeviled by archaic habits and practices, it enjoys a global lead, possibly unsurpassable in certain key industries. And we're not just talking about champagne and silk scarves. Europe is leapfrogging the U.S. in some sectors that are at the heart of the technological revolution.
Take the mobile phone. If it's impossible to sit in a Milan café without being drowned in competing phone conversations, the reason is not only that Italians like to talk. European wireless technology is simply more sophisticated and user-friendly than in the U.S. Europeans can already check e-mail and get news bulletins on their cell phones, and soon they'll surf the Net and shop online from mobile phones that double as fashion accessories.
Another increasingly ubiquitous, albeit less visible, high-tech object is the smart card. Many a European wallet now includes one or more cards embedded with a memory chip, which may hold anything from a cash balance to be spent on small purchases to personal information that reduces the possibility of credit card fraud--or even, as in France, a complete medical history. Three French companies produce more than two-thirds of the world's smart cards, a $12 billion business set to explode as companies discover the limits of the familiar magnetic-strip card, which can hold relatively little information and is not nearly as secure for e-commerce. Jean-Marc Giry, vice president for strategic marketing at Gemplus, one of three French firms that dominate the world market for smart card banking applications, expects 2000 to be the year most U.S. banks and credit card companies begin to issue smart cards to their customers.
Then there's Airbus, long ridiculed by Boeing as a massive pork-barrel project for second-rate aircraft manufacturers. Last year the European consortium captured 55% of global sales, outflanking Boeing for the first but probably not the last time. Competitive prices and superior salesmanship are factors in the success of Airbus, but so is technology. Airbus beat Boeing to the market with computer-laden "fly-by-wire" technology, which, it says, enhances safety while also lowering costs; the flying experience is so similar from model to model that Airbus-equipped airlines save millions of dollars by having pilots who can easily switch from an A318 to an A321 without retraining and even to a long-range A340 with only minimal instruction.
The common thread in these examples is a uniquely European approach to business. While the U.S. has embraced the pure marketplace with ideological fervor, Europeans in general continue to believe the state has a role to play in guiding markets. Exhibit A is the GSM, or Global System for Mobile Communications, standard introduced in the European Union in 1991. Thanks to GSM, a subscriber in Portugal can use her phone in Poland or Hong Kong. The U.S., in contrast, still allows various incompatible standards--like trains running on tracks with different gauges--to compete. As a result, a New Yorker cannot use his cell phone in London, and, depending on his carrier and his instrument, sometimes not even in St. Louis.
Europe is becoming more competitive just as its economic prospects look better than at any time in a decade. Business and consumer confidence is on the uptick, and there are indications the region is on the cusp of a period of extended growth, perhaps equal to the near-decade of good times the U.S. has enjoyed. Most economists predict steady growth of 3% for at least the next three years, with no inflation to ruin the party. As in the U.S., technology and its impact on productivity may push Europe's normal economic cycle beyond historic levels. "Some elements of the new paradigm are in place," says William Kennedy, an economic historian at the London School of Economics.
The euro, introduced little more than a year ago, has been crucial in accelerating the pace of change. Those who wring their hands over its declining value in 1999 miss the point. "The euro has allowed Europe to almost completely overcome its historical weakness of market fragmentation," says Albert Bressand, economist and director of Paris' Prométhée think tank. "It's created a larger, almost seamless economy roughly the size of the U.S. economy." The euro's undervaluation has, in fact, given European exporters a shot in the arm by lowering their prices in overseas markets. Most experts foresee a rise in the euro, perhaps to the $1.10 level, this year, but by then, they say, Europe's consumers will be generating enough demand to power further growth.
European competitiveness has also been spurred by a continuing trend toward corporate restructuring and by further deregulation of what is increasingly a true single market with transparent pricing. Hardly a week goes by without the announcement of a major consolidation or takeover--the merger of the British pharmaceutical companies Glaxo Wellcome and SmithKline Beecham being the latest example. The most auspicious development of the past year, given Europe's historic fragmentation along national lines, is the cross-border merger. Aventis is the new, conspicuously neutral name for what used to be Germany's Hoechst and France's Rhône-Poulenc. Nor are Europeans confining their targets to the Old Continent. Even a few years ago it would have been hard to imagine Renault buying Japanese carmaking giant Nissan or Daimler-Benz acquiring Chrysler.
These mergers are creating a single global business culture in which national interests no longer determine corporate behavior. Shareholder value is the new mantra, and the shareholders of an Aventis or a DaimlerChrysler are as likely to be a California pension fund as a bank in Austria. This new business culture sees the world as its market; it cares little whether its products are manufactured in Stuttgart or in Shanghai; and it is as likely to find an executive or a new idea in Buenos Aires as in Brussels. "The economic imperatives behind such consolidation bring about a mixing and altering of business cultures that no one can impose or ignore," says French economist Jean-Marie Chevalier. "It requires a larger global thinking, vision and management. When companies link together, the stress is increased on brands, while nationality concerns tend to fade away. What nationality is a DaimlerChrysler or a Hoechst-Rhône-Poulenc? The markets certainly don't care, and neither, at the end of the day, does the consumer if product quality and price are roughly the same."
No sector will have more impact in the years ahead than wireless. The adoption of the common GSM standard gave Finland's Nokia and Sweden's Ericsson a home market of more than 300 million, counting only Europe, and many times that if one includes Asia, which also adopted GSM. Europe's lag in traditional telecommunications helped too, of course. Until Jan. 1, 1998, most European telecoms were still overregulated, state-owned entities, gouging their customers for services that were less efficient and less innovative than in the U.S. Local calls were essentially free in the U.S., so when mobiles came along they seemed comparatively expensive.
In Europe, however, mobiles came into being in a deregulated wireless market where cutthroat competition ensured low prices, speedy market penetration and innovations such as pay-as-you-go phones. These do away with the need for credit checks, deposits and other ornery paperwork that inhibited customers. Since December 1998 in the U.K., up to 80% of new customers buy pay-as-you-go mobiles. In addition, Nokia and Ericsson showed huge creativity in making cell phones fashionable, ensuring quality and keeping up with fast-paced technological change. "In Italy, the must-have fashion accessory is a wap [Wireless Application Protocol] phone in chartreuse," notes Marie Wold, manager of the communications industry practice at Deloitte Consulting. MORE>
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