Quotes of the Day
No one ever said running a small business was easy — especially in europe. Regulatory headaches, difficult access to capital and a hodgepodge of privatization policies make the hard job of running a business even harder. Little wonder that more than half of small-business start-ups fail within five years. And yet Europe depends more and more on the bold entrepreneur. Across the region, over half the 120 million private-sector jobs are in small businesses (with fewer than 50 employees). As Europe's industrial giants move jobs to low-wage locales in developing countries, small and medium enterprises (SMES) are the engine of new job growth, accounting for about two-thirds of all new jobs created.
What's it like running a small business in a Europe struggling to emerge from recession? To find out — and explore what might be done to lighten their load — time visited four businesses in four different countries. Some are thriving, some are on the verge of giving up, but all have shown themselves to be willing to sacrifice and innovate to keep their vision intact and their businesses alive.
UNITED KINGDOM: RED TAPE
Mary Gallagher puts her hands on her hips and casts a practiced eye around Athenaeum House, the residential-care home for the elderly she runs in North London with her husband, Patrick. But before she can join her staff in feeding and tending to residents, she must tackle mounds of paperwork — a task that takes up about a quarter of her time. "What elderly people need is time spent with them," she sighs, picking up a folder thick with documents. "Paper doesn't look after people."
Government regulations mandate that Gallagher must assess the performance of each staff member six times a year, and review the care plans of each of her residents once a month. She must pay out certain benefits, like tax credit or maternity pay, to employees on behalf of the government. As much as Gallagher would like to free up time, to hire someone to take on the paperwork would cost her about €22,300 annually — more than she can afford.
And she's hardly alone. There are about 24,000 care homes for the elderly in England and Scotland. Over each of the past five years, says the National Care Homes Association, about 800-900 homes have closed.
And here's the disturbing part: small business owners in the U.K. arguably enjoy the most favorable climate of any in Europe. The U.K.'s Department of Trade and Industry claims the nation is among Europe's fastest and cheapest places to start a business. Setting up a limited company in the U.K., says the DTI, takes one week and costs €28, compared with an E.U. average of 25 days and €883. Earlier this year, a World Bank survey named Britain among the 10 least-regulated business nations. Yet talk to a British small-business person and you'll get an earful — largely about red tape. A recent Small Business Service Omnibus survey revealed that 10% of British small businesses feel they are so choked by regulation and taxes that their very existence is threatened.
Sure, low interest rates and stable inflation have given small businesses a favorable environment. And the Federation of Small Businesses (FSB), which draws its membership from Britain's 3.8 million SMES, commends governmental and other programs that offer access to capital. But since the Labour Party came to power in 1997, says the FSB, red tape and administration costs have increased 17%. And part of the struggle Gallagher faces comes from being dependent on the government. U.K. government authorities fund about 70% of the patients who occupy the nation's 350,000 beds for the elderly, and uses its clout to drive down prices and regulate caregivers. It's not as if regulators aren't trying to address the amount of paperwork. The DTI says that a flat-rate vat scheme, introduced last year, has cut red tape for 700,000 small businesses. It also notes that before any regulations are introduced, studies are done to assess the effect they might have on small business. But others remain unconvinced. "There is this emphasis on a paper trail," says a spokesman for the FSB. "But a tick in the box doesn't mean the business is any better."
Still, Gallagher remains positive. As she moves through Athenaeum House, she has a warm rapport with her residents — bending at the bedside of one and asking about the family of another. "When you're looking after people like this," she says, "you're involved in every aspect of their lives."
FRANCE: INFLEXIBLE FRIENDS
Never mind the slumping economy, or the difficulty of running a business in this land of red tape. French plastics manufacturer Appli'Plast defied conventional wisdom last week. The Normandy-based company finalized the purchase of a new factory site, which will more than quadruple Appli'Plast's capacity — and perhaps even its workforce. "Hiring more people is also part of the general plan," says Appli'Plast owner Eric Lenoir. "But that will only come if we can continue growing. With an average of one company going out of business per day in this region, you should never be too confident."
Nestled just north of Alençon, the new factory site is a sign Appli'Plast and its 45 employees have cause for optimism. Since taking it over in 1995 as a bankrupt business creating plastic manufacturing molds, Lenoir and Appli'Plast manager Jacques Vaillant have transformed the company into a producer of plastic components and accessories. End clients include carmakers Ford, Renault, Nissan and Opel, as well as appliance manufacturers.
Unlike many small- and medium-sized businesses in France, Appli'Plast refused all financial aid offered by local and regional governments, says Lenoir. It has also not exploited the reduced labor charges on new employee hires arising from France's reduced 35-hour workweek — a measure Lenoir calls "a nightmare." "Rather than offering assistance and incentives that are eventually shrunken down or simply taken away, the state should get out of business's way," scolds Lenoir, a proud economic liberal who thinks France's conservative government has the right reformist idea — but may lack the political courage to impose it fully.
Lenoir's lament is common among French small-business owners, who form a massive economic chorus. Ninety-nine percent of France's 2.5 million businesses employ fewer than 50 people — yet they still make up 53% of the labor market. Despite Lenoir's major gripes with France's labor strictures and tax regimes, he says he's willing to wait on French reform instead of defecting to friendlier business environments in the U.K. or Eastern Europe. In addition to exempting businesses with 20 employees or fewer from the 35-hour week, France's conservative government is considering measures to lighten corporate taxes and allow companies to hire and fire with greater freedom. It's also examining calls to partially shift financing of some programs — such as health coverage and pensions — from the employer to privatized schemes workers would pay into. All that, Lenoir says, would leave both businesses and employees with more money to use and invest more efficiently, and according to need — though it's not likely to happen rapidly in protection-obsessed France.
"Running a business also involves certain social and economic duties," he explains. "I'm not going to close this company and tell my employees, 'Sorry, but I can do better elsewhere. Blame the government.' My employees and companies like this are the solution, not the problem. Our job is to prove that by succeeding — and live better, fuller lives for it."
BOHEMIA: E.U. HEADACHES
For many people, headcheese — a seasoned loaf customarily made of pig's- head meat molded in aspic — is a culinary turnoff. But for Jirí Hlavácek, a butcher in Susice, south Bohemia, it was for years an economic lifeline. A grocer by profession, Hlavácek went into the meat business in 1991 at the exact same spot where, four decades earlier, Czechoslovakia's communists confiscated his grandfather's meat shop. His headcheese became a sought-after delicacy, praised for being uniquely ungreasy and lean (one secret: he uses pork knees).
Then about six years ago, business started to flag. Supermarket chains, able to command lower purchasing prices from suppliers, squeezed Hlavácek's profits by selling at big discounts. So Hlavácek, now 51 and employing 10, tried to counter the only way he could: better customer service. He converted part of his shop to a stand-up diner, and broadened his selection of meats, salads and ready-made meals.
Then came what Hlavácek says may be a final blow: E.U.-related hygiene and operation standards. These rules, which regulate everything from the proper handling of foodstuffs to production equipment, came into effect in 2000 as a precursor to the Czech Republic's joining the E.U. next year. But by the end of the year, some 400 of the country's 4,000 larger food-processing plants, and a number of small ones, will be forced to shut down for failure to meet the standards, according to the State Veterinary Administration. Meatpacking and production will be the hardest hit. Many facilities are obsolete or redundant, but others simply don't have money for necessary upgrades. Hlavácek's is one of them. He has already invested €61,000 in a new smokehouse, stainless-steel kitchen equipment and other upgrades, but balks at further enhancements. "This is not a business anymore," he says, estimating that his turnover has dropped by 30% over the past five years. "This is a hobby."
In theory, the government has programs to support small- and medium-sized businesses. Last year, 12,000 entities drew some €115 million in state funds, and the Czech Agriculture Ministry distributed an additional €8 million in subsidies aimed at increasing the competitiveness of the Czech food industry. Hlavácek says he has never heard of such programs, and Jaroslav Vlcek, general director of the Association of Small- and Medium-Sized Enterprises, calls their funding level "zero, zero, nothing" in a country where the SME sector employs 60% of the workforce and produces 37% of GDP. He argues that only lower taxes and less bureaucracy can make a difference.
Unless an investor materializes, which is unlikely, Hlavácek plans to close shop by Dec. 31. He is trying to take a broad view. "My headcheese is not irreplaceable," he says. "People will ask about it several times and then move on to other products. Headcheese doesn't make history."
GERMANY: LOCAL TARIFFS
Friedrich Scharf has had enough. at 63, he plans to retire in two years and turn his struggling landscaping and gardening business over to his two children. "We're in a very difficult economic situation," says Scharf, whose business has an annual turnover of €8 million.
Scharf, who joined the company in 1960, when it was still run by his father, once stayed busy building tennis courts and athletic fields in Berlin. As of the mid-1990s, more than 80% of his business came from the city of Berlin. But today the city is almost bankrupt. Even when there is a contract open for bid, Scharf's company finds competition tough. His company is based in West Berlin, which until 1990 was categorized as part of West Germany — yet it is surrounded by the state of Brandenburg, formerly part of East Germany. Thanks to contracts negotiated by unions and employers' associations, wage rates — known as the tariff — are 7.5% higher in West Berlin than in Brandenburg. This used not to be a huge problem. "Ten years ago, the quality of East German work wasn't good enough," Scharf says. "But now they have reached our level." Is there any relief in sight? Maybe. The government of Chancellor Gerhard Schröder has proposed a set of economic reforms designed to lower nonwage costs in Germany, currently 42% of salary and a heavy burden for small employers like Scharf. Perhaps even more importantly, the opposition Christian Democrats have demanded a number of additional reforms, such as ending the tariff system of national wage settlements and making it easier for medium-sized companies to fire employees when economic conditions turn bad. Scharf says the employers' association that he belongs to is trying to reach an agreement with Brandenburg's employers to harmonize wage rates in both states. But Brandenburg employers are understandably unwilling to raise wages. "The government should abolish the tariff because it's an old-fashioned concept that doesn't work anymore," Scharf says. But, if necessary, Scharf has an exit strategy. In 1996 he bought a new one-hectare warehousing complex for his company — in Brandenburg.
- A look at how four of Europe's small companies cope with challenges