The US may embrace the opportunities offered by a unified Euro-market, but it should not assume such a transformation is a single-edged sword. As the consequences of the euro emerge, any multi-national aspiring to maintain a global presence must address how the shifting landscape will affect its own terrain. The euro has dominated discussions in European boardrooms and cocktail parties for months, saturated international publications, caused sleepless nights for technology and accounting staff, but has yet to make an impact on corporate America. Whether Americans are distracted by the activity on Wall Street or in the White House, they have not taken into account the full implications of the euro, nor considered how to distinguish themselves in this new marketplace.
A need for a change
The introduction of the euro may offer US companies long-term pan-European opportunities, but they will also have to redefine their competitive profiles, both domestically and internationally. ‘There’s no question that any US company with significant European commitments or ambitions must re-examine its corporate positioning, marketing strategies and entire communications matrix over the next couple of years, given the impact of the single currency,’ says Alan Watson, chairman of Burson-Marsteller Europe and vice chairman of the European Movement, an organization pushing Britain to adopt the euro. Moreover, CFOs will need to react to growing European competitiveness, including financing costs and pricing and marketing issues; and IROs will need to target a new shareholder base and new analysts. European banking, for example, will be affected by consolidation, first by country and then internationally. Credit relationships, which have dominated European financing, will be replaced by capital markets; and there will be more corporate deals as consolidation accelerates. Likewise, treasury departments will need to review and perhaps re-engineer all finances, including current banking relationships. The process will be gradual, but as the European market evolves, it will ultimately impact any US company with a European bank relationship.
Brass tacks
The advent of the euro will be reflected in alterations to asset allocations within the Emu countries. Fund managers are already shifting from a country basis to a more sectoral basis. Before the euro, continental European fund managers typically invested predominantly in their home countries. Now it’s much easier to invest abroad, within the eurozone, because although technically cross-border, such investments will not carry currency risk. The risk is also changed for US investors buying euroland stocks, since they will only be dealing there in one currency instead of eleven. But it’s also easier for non-Emu companies to access the euroland investor base. Clearly there is now a much larger homogenous investment base in Europe; and international fund managers will see the need to adjust their habits accordingly. Indeed, any German fund manager who continued investing only in German companies would seem as provincial as a fund manager in Florida who would only invest in citrus stocks.
Consolidation & competition
For companies selling products inside the eurozone, increased price transparency will heighten competition. And as competition grows, together with the disintegration of investment barriers between the countries that make up the euro-zone, the appetite for mergers and acquisitions will intensify and more companies will feel the need to plunge head-first into the global market. American CEOs, CFOs and IROs will need to reposition their companies as having global ambitions and capabilities if they are to achieve and increase their presence in the EU market. Consolidation means that a company’s relative niche – once only regional – can now expand significantly. With the dam broken, lake-bound fish can swim in the sea – and risk being eaten by the predators with a much larger appetite, or disappear in the shoal. Companies within euroland will be struggling to develop a competitive equity story and a superior management team that distinguishes them. Craig Macdonald, president and chief analyst of World Research Advisory, counsels US companies and major multi-national firms about the financial issues surrounding the introduction of the euro. ‘One of the longer-term but major ramifications of Emu is that US companies are going to have to improve their competitive edge,’ he points out. ‘But there are so many little tactical issues in the short term, that this is all being masked.’ Consultants like World Research Advisory have been working with global companies throughout the transition period to help them maneuver, compete and thrive with their counterparts in Europe. It is a long-term approach, gaining momentum in time with the evolution of the new European marketplace.
Supply & demand
New pan-European companies will have greater ability to export goods, and most likely at a lower cost. Increased presence of low-priced, high-quality European products on US soil will undoubtedly intensify the pressure on some US companies. Those within the eurozone which did not have a strong stand-alone identity before will now see opportunity, raise their profile, and pursue more access to US markets. Likewise, European trade ministers who might not have had the leverage to negotiate with US trade officials individually, are now – in aggregate – a huge trading bloc, and suddenly have a much louder voice. ‘Before the euro, we could dispute the French over wine and whether they are going to charge us extra duty to ship California Merlot into France; everything was okay. But now all of those relationships are going to have to be re-addressed,’ says Matt Dennis, European strategist at ABN-Amro. Another larger, more political issue overshadows the entrance of the euro: the currency debate. The performance of the dollar will have significant implications for US companies – especially international exporters. According to Dennis, ‘There used to be collective agreements on either dollar strength or yen weakness which had significant implications for the underlying growth profile. Now there will be a much broader, much stronger block that represents a larger portion of world growth and world-traded goods. As one single block, the currency will move as a function of the aggregate fundamentals driving it and they will no longer be able to offset the volumes.’ This has significant implications for the big US companies which have internal treasury departments. While it will benefit companies operating within the EU who don’t have to pay currency transaction costs, it will also affect how treasury departments forecast volumes and revenues based on currency movement estimates.
Are we prepared?
Americans certainly have the advantage of experience: a firm understanding of how to conduct business in a single market with a unified currency, a knowledge many believe can be swiftly transplanted to Europe. Says Burson-Marsteller’s Watson: ‘Historically, US companies have tended to see the opportunities of a continental scale market in Europe earlier than European countries which live much closer to the linguistic, cultural, and historic divisions. American companies tend to take an overview which gives them quite an important competitive advantage.’ But in order for the US to capitalize on the pan-European growth, US companies will need to redefine themselves as global players. Until January 1 of this year, half of all world trade was denominated in dollars. When the introduction of the euro is complete, estimated to be in 2001, it will have created a unified economic zone for 290 mn citizens, representing 19 percent of world output and $3.6 tn in equity values. The euro is expected to form one of the three main international reserves and trading currencies – in addition to the dollar and the yen. Europe’s economy is growing consistently: gross domestic product in the eleven euro countries has climbed 1.4 percent in two years. With over 20 percent of the Standard & Poor’s 500 profits coming from Europe, the Emu’s success rate could have significant effects on the US business environment. The EU foresees unlimited opportunities with the introduction of the euro: the desire for accessible capital, cross-border investments and growth will expand exponentially. Any American or multi-national company with overseas business interests will feel the reverberations of the euro’s pitfalls and the echoes of its trumpeted achievements and gradually perceive the need to adjust accordingly. The euro is expected to become the preferred currency for trade within Europe, ultimately surpassing the dollar’s global dominance. It will create economies of scale, liquefy capital throughout the European market, and boost GDP growth continent-wide. Suddenly European companies will have a bigger market share, and an opportunity to cut a bigger slice of America’s apple pie. As a result, all multi-national US corporations will feel increasing pressure to globalize their operations and adopt currency strategies similar to their competitors in Europe.
Not another Y2K
Most multi-national companies have regarded the euro transition as a simply technical issue, a sort of dress-rehearsal for the Y2K hurdle. By early 1998, the January 1999 transition weekend was looming on the US corporate agenda: wholesale, corporate and investment banks established programs to adjust their IT systems to the currency transitions. According to Craig Macdonald of the World Research Advisory, ‘There was a lot of hype about euro compliance throughout 1998 because a lot of very large European companies like Siemens and Daimler Benz made very public statements that they were only going to do business in euros starting from January 1, 1999. So American companies – their supply chains – all began to get frantic and realized that they needed to be compliant right from the very beginning. It was like death by 1,000 cuts,’ he comments. A long-term and more strategic approach is to view the euro movement as more than a mere currency and information system glitch. Move it out of the hands of IT staff and billing departments and make it the responsibility of a chief executive officer. The euro will create opportunities for senior management to re-address all strategic issues and add another dimension of responsibilities for investor relations officers and CFOs. ‘One of the longer-term but major ramifications of the Emu is that American companies are going to have to improve their competitive edge. But there are so many little tactical issues in the short-term, that it is all being masked,’ says Macdonald. In short, the euro brings complications that both the European community and the rest of the world are only beginning to calculate. Many US companies will need to communicate to their suppliers, customers, shareholders, analysts and employees how they are planning to effectively meet the increased competition that will flow from new and restructured pan-European companies. Ultimately, there is a need for IROs, CFOs and CEOs to recalibrate their communications. Proactive companies within Emu are already assessing business objectives, raising profiles and whetting appetites for acquisitions. Others are not so responsive. But time is running out. And when the dust settles in euroland, less agile US firms may find themselves on foreign terrain.
Ashley Chapman is a manager in Burson-Marsteller’s corporate/financial practice in New York
