strategy+business is published by PwC Strategy& LLC.
or, sign in with:
strategy and business
 / Winter 2004 / Issue 37(originally published by Booz & Company)


Europe: Old World or New?

Pineau-Valencienne: I'm not sure this is about the difference between Europe and the U.S. Even in the U.S., the New Economy did not deliver what it was supposed to deliver. The new ways of selling, which were going to kill the old distribution systems, have not materialized, at least not yet. Maybe that's why we are back to admiring the old system: It's been more resistant and robust than we expected.

Kissling: But let me give you an example where it has materialized: Holcim, which is one of the largest cement companies in the world. Until a few years ago, Holcim sold cement entirely through traditional channels -- through agents and dealers and directly to large accounts. Today, in Thailand, Holcim sells about 70 percent of its cement through the Internet. And in Indonesia and Vietnam, about 80 percent. This is only one excellent example. So some traditional companies have adapted to the new business models.

Mensing: I think that is more true for the United States than it is for Europe.

Habbel: But there are many other European success stories. If you track Germany's DAX index back the last 20 years, probably half the companies have turned over. That's a lot of creative destruction.

Claus Helbig, chairman of
Bankhaus August Lenz
New Growth

S+B: Where else might European growth come from?

Van Wachem: Quite a bit of the growth in Europe in the coming decade will have to come from the new members. In some quarters, that is seen as a threat. I look upon it as a great opportunity. The European Round Table might well get involved in that.

Habbel: Can you explain a little bit more about the European Round Table?

Van Wachem: The European Round Table has been in existence for at least 20 years. Practically all the big multinational companies in Europe are members, as many as four or five major companies from each member country in the E.U. It's quite powerful, in the sense that they also are seen by Brussels as the legitimate connection to big business, so they have an established 20-year-long relationship with the European Commission.

Mensing: One fix that we will see is that those new countries, like Poland, and others that follow them -- Ukraine, Russia -- will become the agriculture belt for Europe. That's where most of the livestock, that's where most of the grain, is going to come from.

Habbel: What they were before World War I.

Mensing: Absolutely. That's what they used to be. The climate is there, the labor costs are there. The "old E.U." is going to lose most of our agriculture. We better realize that and plan for it, rather than resist it by tariffs and other means. That means we should allocate funds to other new things, and to education. The only way Western Europe will survive in production industries is to find new ways of doing business.

Pineau-Valencienne: Yes, it would be very helpful if we learned to work differently, if we learned to use capital investment in a different way. If we did, we could be extremely competitive and bring back production in our countries.

Wittlöv: But I think we have to go further than just saying "We need a new way to produce." Europe needs an automotive industry and a chemical industry. But we ought to look at the whole value chain in these industries and make decisions about what should be produced in Europe and what should be produced somewhere else. That's a very important discussion right now.

It's too easy to use words like manufacturing or services. When we talk about the service sector, we have to understand that there are many different elements. We have private services. We have financial services. We have a service sector that supports the manufacturing sector. But we talk about services like services is everything. There are very different services, and they are driven by different factors. Companies like ABB and Volvo drive a huge service sector -- in IT, consultancy, finance, maintenance.

Van Wachem: Understanding those linkages and deciding how and where to play is critical. I can give you one example: Singapore. It's the only country in the world that I know of that's actually subsidized the export of jobs to a neighboring country. This may sound totally crazy, but that's what they did, and they ceased to be a cheap-labor country. They subsidized the export of manufacturing jobs to places like Indonesia, by companies like Philips, as long as Philips maintained its design and service and R&D businesses in Singapore. It was a terrific, successful policy.

Fedele Confalonieri, chairman of Mediaset
Looming Crises

S+B: What crises are looming on Europe's horizon?

Banerji: If you study the problem at any length, pensions and health care are precipitous and frightening problems for Europe. There are simply not enough funds to pay for these, and the picture looks worse the further out you go. Between aging and liability, your future generations are guaranteed to be poorer than this one, simply because there is no way to square the circle without increasing taxes.

In Italy today, budget deficits run about 120 percent of GDP. Some projections estimate the Italian population by 2050 will be 30 percent less than today. These are radical changes in demography, on top of radical changes in European demography over the last 30 years. Based on the study we've made of the problem in the U.K., the demographics are fundamental and frightening all across Europe.

Van Wachem: All across Europe.

Kissling: In my small country, GDP amounts to more than 400 billion Swiss francs. Spending for health -- for immediate health-care needs, and for long-term provisions for health -- is 48 billion. Forty-eight billion out of 400. And each month, we are spending 100 million Swiss francs more than the previous month! If you compare this growth in health-care spending with our lousy growth in GDP, this is crazy. This is not working.

S+B: Isn't that fundamentally a government problem?

Banerji: We have to look for more creative solutions. I think the workplace is significantly undervalued as a mechanism to drive solutions to this fundamental social problem of enormous importance in Europe for the next 30 years.

I'll quote you one piece of data that is quite interesting: The U.K. Department for Work and Pensions has recent survey data that says, "Individuals trust the workplace more than they trust private providers or the government in the context of pensions."

Habbel: If we all worked five years longer, what would that do to your statistics?

Banerji: It would have an enormous impact. If you could extend retirement age by five years, the provisioning problem would drop in the U.K. by 20 to 30 percent. Another thing we might do is ask companies to make sure their suppliers are provisioning adequately for pensions.

Willy Kissling (left) and Alexis Lautenberg
S+B: Use the extended enterprise as a mechanism for policy change?

Banerji: It is not uncommon that companies, in structuring their upward and downward supply chains, require a code of conduct from their suppliers. Fiduciary conduct, health and safety in the workplace, discrimination -- it's not uncommon for a modern corporation to ask a supplier or a distributor to guarantee these things.

S+B: As in the apparel industry, and the anti-sweatshop codes.

Banerji: Exactly. All I'm saying is, can you get guarantees from suppliers around pension provisioning? If large companies can hold their suppliers to account, it would make a big difference.

S+B: Are you optimistic about the ability for these changes to happen?

Habbel: There's a source of optimism, but it is under pressure. In Europe, we have always been able to make changes. But the pressure to change isn't strong enough right now. There's too much well-being -- if such a thing is possible. How can we remind people that making change proactively might be a better solution than to wait until we are forced?

Lautenberg: The question is whether we're prepared to take the pain or not. If we can stand a certain amount of pain, this crisis, too, will clear itself.

Wittlöv: We all have to accept that growth is a way to deal with the pension issue and the welfare system.

Napolitano: The business community today has two important assets. One is the resources to make growth happen. The other is intellectual capital -- the talent and the ideas. The business community is capable of devising solutions, and making integration work for the benefit of all Europeans. 

Reprint No. 04407

Follow Us 
Facebook Twitter LinkedIn Google Plus YouTube RSS strategy+business Digital and Mobile products App Store


Sign up to receive s+b newsletters and get a FREE Strategy eBook

You will initially receive up to two newsletters/week. You can unsubscribe from any newsletter by using the link found in each newsletter.