Europe's Hi-Tech Edge

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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 cafe 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' Promethee 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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Europe's Hi-Tech Edge

That said, the GSM standard offered a one-time advantage. Wireless companies around the world are preparing to adopt the so-called 3G standard (for third generation). Although the phones will eventually work all over the world, there will be three variants of 3G: European (already adopted by Japan and most of Asia), U.S. and Chinese. Acceptance by Japan means the European version already has a head start, so there is a good chance that it will be the one to win out with customers. Says Falk Müller-Veerse, head of European research activities at Durlacher, a research and investment group, "Nokia will continue to be in the driver's seat because they are not following the market, they are making the market."

In addition, the precursor wap phones, which can handle short data transmissions, are already taking off in places like Finland, where users can download short messages like weather reports and market updates. Wold points out that because U.S. companies have just completed expensive investments in networks for current-generation mobiles, there will be no great appetite for massive new spending.

Europe's wireless revolution is having an impact well beyond the phone industry. "Just by taking time out of the economy it makes it more efficient and quicker," says Hugh Jagger of Ernst & Young. Moreover, by freeing up the Internet from PCs, wireless will make e-commerce genuinely mobile, increasing penetration in Europe. The technology will also have many business-to-business uses. "A lot of technologies can be used by paper-and-pulp companies as well as Internet companies," says Jonas Ridderstrale of the Stockholm School of Economics.

Europe Unlimited, a Brussels-based research firm, tracks the growing number of European companies that are winning shares in the global technology markets, creating jobs and wealth with innovative technology, aggressive acquisitions and smart niche strategies. Its latest list shows that 127 of Europe's 500 fastest-growing companies are from the tech sector. These companies boast an average annual growth in revenues of 42% and in employment of about 36%. Among the strongest sectors are smart cards, encryption software, e-commerce software, electronic games and digital television.

The list includes two companies from the smart card sector: Gemplus and ASG, a smaller German firm. These companies are well positioned to cash in on the mobile-commerce craze, says Caroline Martin, an e-commerce analyst in the London office of Datamonitor. So-called SIM cards are already present in all European mobile phones to identify users for billing purposes. Once new phones with wireless Internet access come on the market these smart cards will be used to encrypt a consumer's credit card details and send them securely to merchants over the Internet.

The smart card was invented by a former French journalist and technological autodidact, Roland Moreno, in the 1970s. Initial applications centered on ID cards, but by the 1980s--in another example of state-led adoption of new technology--France Telecom introduced prepaid telecartes that rendered coins in phone booths obsolete. Applications quickly blossomed as the association of Carte Bleue debit cards ordered their banks to fight fraud by issuing only chip-embedded cards, and as France Telecom issued the Minitel with smart card readers to enable online purchase of everything from opera tickets to train reservations--well before anyone had heard of the Internet.

Gemplus' Giry anticipates a global explosion in the use of smart cards. "The potential applications are innumerable and provide almost total security and reliability of identification," he says. Giry explains that the cards themselves are inexpensive to produce, so that the only brake on use has been unwillingness of merchants to invest in readers and communications devices. The countries that have not adopted smart cards have been waiting until losses from fraud and theft start to outweigh the costs of updating hardware.

He believes the U.S. has now reached this point, and anticipates finance companies like Citibank and First USA will follow the recent move by American Express to issue smart cards to their clients, as well as readers for their PCs at reduced prices. Noting Motorola's decision last year to pull out of an already tight global smart card market, Giry expresses confidence that new players will not be able to take on the three French companies that have over 70% of the global production market: Gemplus, Schlumberger and Bull.

Governments are also playing a positive role by helping to jump-start high-tech companies. Germany, for example, held a competition to identify the three top bio-tech "clusters"--areas specializing in the field. The winners were Munich, Heidelberg and Jülich, which each received $25 million to give to start-up companies for pure research. In addition, both the German national government and state agencies pushed start-up financing that matches the risk taken by venture capital firms. They also encouraged the creation of the Neue Markt, a sort of German nasdaq. As a result, there are now more than 80 bio-tech firms in Munich, including Morphosys, which has a library of 10 billion human antibodies. Another recipient, CyBio, in the former East, makes the hardware that drug research companies use to match liquid test substances.

In spite of such successes, Europe's promise will be fulfilled only if its political leaders continue to enact the reforms necessary to make the Continent more competitive. Much has already been done. Governments are ridding themselves of state-owned monopolies, liberalizing trade, and slashing national budget deficits. Germany has promised to cut corporate taxes from 55% to 38.5% in 2001. Likewise, France plans to remove a tax surcharge that will reduce the corporate rate from 41% to 39%.

France, which had made it virtually impossible to fire anyone, now allows limited-duration contracts, a measure that is credited with creating some 300,000 jobs. But there is still need for more measures to loosen sclerotic labor markets and to junk regulations that inhibit entrepreneurship and the flow of capital. France's 35-hour week, while not as bad as many had predicted, was an unnecessary reminder that the country's bureaucrats still believe they should mandate everything down to the cafeteria menu. German Chancellor Gerhard Schröder's decision to bail out the bloated, bankrupt construction company Philipp Holzmann sent a confusing signal.

As the successful application of the GSM standard shows, European governments clearly can play a role in guiding the Continent's economic future. But they will be most effective if they avoid regulations that limit what people can do and instead focus on creating an environment in which some of the world's most innovative people can prosper by taking smart risks and working hard.

Reported by Bruce Crumley and Jennifer L. Schenker/Paris, James Graff/Brussels, Thomas Grose/London and Charles P. Wallace/Berlin