European Firms Beat American Rivals

It's become a truism that America is full of "can do" people and companies, while slow-moving Europeans are more likely to offer a "yes, but" when faced with challenge. American firms set the bar for corporate excellence, or so the story goes, coming up with the hottest new products and ideas, and then doing the best job of selling them in every corner of the planet. While the U.S.-generated financial crisis has, of course, tarnished the patina of American banks, it really hasn't dented this idea about the supremacy of the American multinational, or the American corporate model. Indeed, the worries about Europe's ability to compete on an ever-tougher global playing field have only been heightened by the fact that, post-crisis, Europe is still trailing the U.S. in economic growth, even as it tries to stem its own high-profile problems like the threat of sovereign default in Greece, sky-rocketing deficits, and a plunging euro.

But as is so often the case, a close look at the numbers tells a different story. Contrary to the widespread cliché of American dynamism versus European economic stagnation, over the past decade Europe's top companies have beaten America's (not to mention Japan's) by an often substantial margin. Despite the rise of China and the rest, Europe has held roughly steady, at about 17 percent, its share of world exports since 2000, while America's has fallen by more than a third, from 17 to 11 percent—a crude but significant indicator of global competitiveness. Since the early 1990s, Europe has steadily expanded its share of the world's 100 biggest multinationals compiled annually by the U.N. Conference on Trade and Development, from 57 in 1991 to 61 last year, while the U.S. number has dropped from 26 to 19. Europe has moved up these and other corporate rankings with new and fast-expanding companies in such sectors as energy (Germany's E.On and France's GDF Suez), finance (Britain's HSBC and Italy's UniCredit), and telecommunications (Spain's Telefónica and Britain's Vodafone)—while America's roster of large global companies has been mostly static and declining, with new stars like Google the exception, not the rule.

What's more, Europe's growth has been highly profitable. According to a study of the top 3,000 global companies by the German business consultancy Roland Berger, the European companies in the group grew profits at an average rate of 13 percent a year over the decade from 1998 to 2008, almost double the 7 percent rate for their U.S. rivals. Berger CEO Burkhard Schwenker says corporate Europe now has higher earning power than America Inc., with gross earnings in the Berger sample averaging 19.8 percent of 2008 revenues in Europe, versus 13 percent in the U.S. Some of these numbers must obviously be taken with a grain of salt—for example, 2009 earnings (a compilation of which Berger plans to release next month) show a significant rebound for U.S. companies versus their European rivals, who were hit later and harder by the recession.

But amid all the uncertainty over economic prospects coming out of the crisis, these numbers offer an important starting point. At the heart of the debate is the question over "rebalancing"—whether deficit economies like the United States' will need to move away from debt-driven consumption and imports and compete harder on world markets, as Barack Obama said in his State of the Union address in January, when he promised to double America's exports over the next five years. Until now, that debate has centered on macroeconomic data—trade balances, currency-exchange pegs, and capital flows. But when you drill down to the level of actual companies, it's clear that in many sectors, European firms have out-competed American rivals across the globe, and Obama's dream of rebuilding a world-beating export sector in which American firms trump European ones could be an uphill slog, to say the least.

It's a picture that forces us to revise some old clichés about the European economy. "The myth of a sclerotic, no-growth Europe that is somehow doomed to fail is just wrong," says Charles Roxburgh, director at McKinsey Global Institute in London. In fact, European per capita GDP has grown slightly faster than the U.S. since 2000. That metric is crucial: because of its faster population growth, the U.S. must generate 1 percentage point more growth than Europe each year just so Americans can hold on to their level of prosperity. Roxburgh attributes the European edge to a sharp rise in employment after a series of labor-market reforms in the late 1990s and early 2000s. He also says many European export-oriented companies have excelled when it comes to restructuring, increasing their competitiveness even as they face off against lower-cost rivals from China and other developing countries.

Indeed, recent worries over a Greek government default and its implications for the euro have obscured a string of good news coming out of the continent. Fresh numbers show a stronger-than-expected recovery—which would seem to confirm Berger's and McKinsey's reappraisal of European economic performance. In March, a key index measuring European export orders hit the highest level in 10 years. Industrial production—the total output of Europe's factories—also beat expectations, rising at the fastest quarterly pace on record. An average of GDP forecasts shows 1 percent growth in 2010, roughly equal in per capita terms to America's 2 percent. There are many question marks on these data, of course, not least the rapid growth of government debt that could create new tremors in Western economies.

The key to the European model has been globalization. European companies have moved much faster and further to seize markets beyond their borders. Foreign sales—even when considering all of Europe as a single home market—are 39 percent, versus roughly 30 percent for U.S. and Japanese companies, and only 20 percent for big companies in the BRIC countries. The latter, far from conquering the world, remain mostly focused on their domestic markets. If one looks at strictly national markets (for example, German versus non-German sales for Volkswagen), the globalization effect is even higher. Hermann Simon, a German entrepreneur and business professor who has studied the "hidden champions"—the small to midsize highly specialized manufacturing companies that dominate the German, Italian, and Scandinavian economies—says it is not unusual for these companies to have an export share of more than 80 percent.

That means a much larger share of EU growth has piggybacked on economic dynamism in the emerging markets—the BRICs, but also Eastern Europe and the big-spending OPEC states. If these markets continue to generate an increasing share of global growth, as most economists believe, then European companies are in a much better starting position. European companies have written the book on how to grow and prosper in these markets—and not just via outsourcing, as Europe's healthy trade balance shows (the non-energy trade surplus was €15.6 billion in January). European automakers from Volkswagen to Renault and Fiat, high-speed train manufacturers like France's Alstom, not to mention countless highly specialized niche manufacturers, already dominate trade with the BRICs—and could make life hard for an America that thinks it can revive its manufacturing prowess and export its way to growth. Europe's globalization prowess isn't as much a matter of management decision as of geographic fate. While American companies traditionally concentrate on their large home market, says Simon, European ones coming from smaller markets are forced to go global at a much earlier stage in their company's development, giving them a leg up on international markets. This process really took off in the 1990s and early 2000s, as the European Union successively removed internal trade barriers to create its single market and later expanded to incorporate the newly capitalist economies in Eastern Europe. Countries were enriched and strengthened by all this, and built extensive trade ties with emerging markets in Asia, Latin America, Russia, and the Middle East. According to UNCTAD economist James Zhan, it was this rapid global-expansion phase that pushed European companies up the ranks of the world's biggest transnational companies, displacing American companies more focused on their home market. During this time, Spain's Telefónica became the biggest phone company in Latin America, Germany's Deutsche Post assembled its global logistics empire, and France's GDF Suez built up its energy business in Africa, Asia, and beyond. As they restructured by moving labor-intensive production abroad and concentrating on more sophisticated goods, European companies kept their competitive advantage. According to the global-competitiveness index compiled each year by the World Economic Forum, based in Geneva, Switzerland, 10 of the world's 15 most-competitive economies are European (including Switzerland at No. 1), and there has not been a deterioration of their position since the forum started measuring—again, contrary to the conventional wisdom of Europe as an uncompetitive, high-wage continent losing out to more dynamic economies elsewhere. Instead of being crowded out by the likes of China, the Europeans have managed so far to ride the rest of the world's ascendance by providing them with the infrastructure, factories, and high-end goods.

What makes European corporate success all the more astounding is the disadvantages that European firms have had to overcome, especially at home. Labor regulations and the stigma of bankruptcy make it much harder to move workers from less-productive activities to more-productive ones, slowing down the structural change that brings an economy forward (though, paradoxically, that also forces companies to think more long-term, which Schwenker argues is a strategic advantage). America continues to be a more dynamic place for innovation, and has done a much better job than Europe at raising productivity—primarily by a deeper infusion of IT as well as ruthless head-count cutting (which is then usually made up for by a faster creation of jobs in more productive sectors of the economy). Yet three quarters of America's productivity advantage is in services, which only accounts for 20 percent of global trade. If Obama is right and rebalancing means growing America's manufacturing sector, then the U.S. productivity advantage will be much harder to leverage. Conversely, it means Europe has some very low-hanging fruit if it wants to create growth: open up the continent's unproductive and overregulated service sectors. Countries like Greece are now being forced by the crisis to do exactly that—which should give Europe's economy a fresh boost down the road.

Which model is better? The jury is still out on how much of either European or U.S. growth is truly sustainable. Henning Kagermann—ex-CEO of SAP, Europe's most successful software company—wonders the extent to which European corporate success is based on restructuring and incremental technological advancements, rather than the radical innovation that can upend entire industries, and at which American companies like Apple and Google still excel. On the other hand, a lot of American growth is still fueled by debt spending, this time public instead of private. Europe has debt problems of its own, but its core economies, France and Germany, still have much healthier public finances. In any case, in a few year's time, says McKinsey's Roxburgh, the true competition won't be between Europe and America, but between Western companies and the new giants of the emerging world. In that race, slow Europe may prove to be the tortoise that wins.