A New European Challenge

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Over 30 years ago Jean-Jacques Servan-Schreiber's book, Le Defi Americain (The American Challenge), elicited gasps of disbelief in European political and business circles. Today, its prediction of U.S. corporate hegemony is an accepted reality. But the balance of power is about to shift again, and this time it is the prospect of the European Challenge that confronts the U.S. and the rest of the business world. Greater Europe's prospects haven't looked this bright for a long time.

Unfortunately, most European business leaders are still so preoccupied with playing catch-up in a new, euro-denominated single market that, rather than throw down the gauntlet to their U.S. and global competitors, they look more likely to absentmindedly hand over the European market on a plate.

That would be quite a concession. Despite the controversy over the euro and its current weakness, Europe is increasingly looking like the place to be. Within five years, Europe's 15-nation market is set to expand with the addition of new E.U. members to the east. Already, Poland, Hungary and the Czech Republic are trading primarily with their west European neighbors, effectively increasing the size of Europe's market to 450 million people, more than 60% larger than the U.S. market.

By 2010, Greater Europe (including the rest of Eastern Europe, Russia and Ukraine) will be more like 800 million-strong, compared to around 450 million for the nafta market of the U.S., Canada and Mexico. With Asia's promise slow to be fulfilled, Europe is poised to take over as the center of gravity for the world economy, for the next two or three decades.

The signs are already there. Europe has recently displaced Latin America as the second-most preferred regional destination for foreign direct investment (FDI), after the U.S., according to A.T. Kearney's FDI Confidence Index. It has certainly been the most active region of the world for cross-border mergers and acquisitions lately.

But only in certain industries. Many of the biggest deals — such as Vodafone AirTouch and Mannesmann, or Zeneca and Astra — are in the communications or pharmaceuticals sectors, where the pressure to achieve global scale is particularly strong. Much of the rest of European business remains preoccupied with the easiest opportunities to cut costs through consolidation within their domestic markets.

If European firms don't move more radically to meet their pan-European customers' escalating needs — for single pricing, centralized invoicing, and pan-European service — they will surely leave a vacuum that will draw in new entrants. This is already happening in the financial services industry, where Europe's banks are finding themselves coming up against growing competition from non-traditional, e-commerce-based service providers.

And yet Deutsche Bank attempted to merge with its German competitor Dresdner Bank, rather than looking for a European regional partner. Perhaps it is lucky that deal failed and has given Deutsche Bank a second chance, because it probably would have kept the merged company looking inward for quite some time. But the omens for a pan-European deal are not good: when Deutsche Bank did go cross-border before, it went across the Atlantic to acquire Bankers Trust.

In retailing, the Wal-Mart example is a telling one. While European food retailers worry about how large they can get in their domestic markets before the competition authorities come breathing down their necks, Wal-Mart has been able to breeze in and establish a substantial beachhead. As the big French retail chains Carrefour and Promodès were digesting their merger, Wal-Mart scooped up Britain's Asda, plus a couple of German retailers.

In fact, U.S. competitors may be better placed to take advantage of the opportunities, if they can just get over the psychological hurdle of accepting that the economic center of gravity is shifting away to Europe. Much of European business needs restructuring according to models already in place in U.S. firms. American companies don't carry the cumbersome baggage of multiple national organizations dealing in many currencies, differentiated pricing and administration, not to mention historical cultural predilections. They also have a head start in e-commerce. And, since English has become the business language of Europe, U.S. firms no longer suffer as much from the linguistic shortcomings of their staffs.

Ironically, it may be European firms that face the bigger psychological hurdle: their inferiority complex vis-à-vis their big American competitors. They should realize that the best way for them to compete globally with the U.S. and Japanese giants is to establish their dominance within Europe, quickly and convincingly. Were they to do that, they would find themselves kings of the castle, as greater Europe realizes its potential as the dominant single-currency market in the world.

Gianni Montezemolo is a director of A.T. Kearney and author of Europe Incorporated: The New Challenge, published December 1999 by John Wiley & Sons