EUROPE: The nightmare Europe must fight to escape.

EUROPE: The nightmare Europe must fight to escape. - The US has dug itself out of a pit of inefficiency; now it is Europe's turn.

by Robert Heller.
Last Updated: 31 Aug 2010

The US has dug itself out of a pit of inefficiency; now it is Europe's turn.

To judge by corporate horrors (you need only look at General Motors and IBM), the US economy is on the downward path already well trodden by Britain. Its leading companies have suffered relative, sometimes absolute decline before the onslaught of pushy overseas rivals at home and abroad.

As its lead opponent, Japan has done damage similar to West Germany's initial bruising of Britain. But suddenly the air is thick with reports of US comebacks, of soaring quality and mounting exports; of leaner and fitter factories, competing from a base that easily outdoes the world in productivity.

Careful comparisons, using exchange rates based on purchasing power parity, show a gap in "value added per joint labour-capital input factor" that is impressively large. With the US at 100 in 1989, Japan lagged at less than 90, while Germany languished in the lower 80s. Moreover, the US lead was longer than in 1982: and the 1990s have further enhanced the famous productivity of US labour. That fame, though, recalls the notorious gibe, "If you're so smart, why aren't you rich?". If US factories are so wondrously efficient, how come they aren't clobbering the competition? One answer is that maybe they are: by end-1991, thanks to a very powerful surge in the late 1980s, the US had a world-leading 18% share in manufacturing exports.

The "maybe" reflects the decisive influence of exchange rates on export surges. The dollar has halved against both yen and Deutschmark. So it is impossible to tell how far the US comeback "has been driven by a set of management practices actively and systematically applied". The words are those of McKinsey researchers, currently at work on a fascinating comparison of US and German companies.

The US sample excelled in many areas. They had far smaller numbers of suppliers, to whom they had delegated more responsibility for quality. Their plants were emphatically more flexible, with many more product variants and faster cycle times. They maintained tighter inventories, worked to shorter planning horizons, had far shorter queue times and took only 3.7 weeks from order receipt to shipment - against Germany's 7.8.

Thanks to all these wonders, the most successful US companies were almost out of sight in "manufacturing effectiveness". Compared to the best Germans, the US advantage was 1:2.7. Here, though, McKinsey strikes a warning note. Like Britain's bounce in the mid-Thatcher years, the Bush "miracle" relied on massive labour cutbacks for its productivity gains. Those one-off boosts resulted in an ageing, under-trained workforce by comparison to a Germany whose preparation for the future looked notably more impressive to the McKinsey men.

So does German speed to market: a 30-week development period in the sample, against 40 weeks for the US. Are the Americans, like the British before them, suicidally achieving current results at the expense of future strengths? Or are the Germans, with their fewer variants gaining an easier European ride from softer competitive conditions, which allow higher prices - and greater simplicity?

McKinsey believes that "If there is one key explanation of superior competitiveness, it is simplicity - in a company's product range, customer base, organisation structure, and business system". Whatever the truth, the Europeans have been getting away with some lamentable inefficiencies; the once-vaunted Wolfsburg VW plant makes 29 cars per employee-year; Nissan in Sunderland, Europe's best, does 90% better.

Percy Barnevik, creator of power engineering giant ABB, and destroyer of many jobs in the process, argues that these inefficiencies must be eradicated - along with many more employees. He fears, however, that the dream of a richly prosperous single market may consequently turn into a nightmare of mass unemployment. So it will, unless the Europeans far outdo the downsizing Americans in product and job creation.

The new challenges demand no less. The German car industry, for instance, has been cocooned from the full impact of Japanese competition, which makes it easier for a leader like BMW's Eberhard von Kuenheim to pooh-pooh the threat. "The story of (Japan's) endless success" may indeed "be ending", but not because, as he told Fortune, of Japan's overcrowded car industry, isolation, deficient living standards, and (weirdly) lack of cultural tradition. That smacks all too much of the arrogance with which UK industrialists fatally ignored their own weaknesses.

Price levels are Europe's danger-point: in cars, for example, the US sticker price for one Mercedes has risen 29% in 18 months. That kind of escalation has helped Detroit to clamber out of the pit dug by its earlier inefficiencies. Europe dare not dig itself into the same hole.

The effort of US companies to manage themselves back to global pre-eminence, and the extent to which a unified Europe can rouse itself to similar endeavour: these are two great themes that will work themselves out in President Clinton's first term. Their resolution may determine whether he has a second - and whether the Europe of the single market is Barnevik's dream or his nightmare.

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