January 2, 2013 6:44 pm

Europe: Burnt and abandoned

Fears of a fresh chapter in the continent’s crisis heighten
A car burns as workers block the main gate of the Ford plant in Genk, Belgium©AP

Hotting up: a car burns as workers block the entrance to the Ford plant in Genk, following the US car maker’s announcement of plans to close the Belgian factory with the loss of 4,300 jobs

Peter Hulsmans had worked for Ford in the industrial Belgian town of Genk for 26 years. So when company executives summoned him and his 4,300 colleagues to a meeting on a rare blue-skied October day in eastern Flanders, he knew it would not be good news.

He expected a minor tremor, maybe a few job cuts. What he got was an earthquake: the US car maker, which laid its first brick at the facility in 1962, was shutting the plant down.

Europe charts Thumbnail

Europe charts Thumbnail

“We always thought that there was more security working for a multinational than a small company but we were wrong,” says Mr Hulsmans, standing next to the charred wreckage of a Ford Mondeo set alight by protesting workers outside the plant’s gate. “Ford is going and nobody will replace them ... nobody wants to invest here any more.”

In the three years since the eurozone crisis began roiling the continent, tales such as Mr Hulsmans’ have grown increasingly common. Foreign companies that once considered Europe a haven for slow but sure growth are now rapidly closing plants or cutting investment.

Between 2007 and 2011, annual investment in the 27 countries of the EU dropped by more than €350bn, vastly outpacing falls in other economic indicators, according to a study published last month by McKinsey, the US consultancy. The decline was 20 times the fall in private consumption, for example, and four times the decline in the overall economy.

That lost investment means companies in Europe will not generate €543bn in revenues they would otherwise have churned out between 2009 and 2020, the study estimated.

Businesses are cutting costs by shifting operations to emerging markets to take advantage of cheaper production; and shedding thousands of jobs, contributing to record levels of unemployment in the euro area.

Executives from global companies doing business in Europe say they largely shelved contingency plans for a break-up of the euro after Mario Draghi, European Central Bank president, announced in August he would use the bank’s printing press to prevent the currency’s collapse. But they have yet to return with their dollars, yen and renminbi. Their biggest fear, as they anticipate decades of stagnation across the bloc, is that the continent is turning into the new Japan.

A frosty welcome for eager overseas investors

Leo Sun, president of Huawei in Europe, says that whenever he goes back to Beijing to meet the senior management of the Chinese telecoms equipment maker, the main question on executives’ minds is: “What and where can we invest in Europe?”

“It’s the top priority,” says Mr Sun. “They keep asking me: what is France good at doing? Software or hardware? Optics or cloud computing? And what about Finland? What about Germany?

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“Europe is going to be slow-growth for a long time. If they allow a bank to bust like what happened here in September 2008, it could be worse. So count on Europe being slow,” Jeff Immelt, chief executive of General Electric, said last year at a conference in New York.

Corporate executives say it has not helped that the easing of the crisis has been followed by the rise of anti-reform politicians in eurozone countries such as France, Greece and Italy.

“We are seeing some worrying signs of anti-business rhetoric among some of Europe’s leaders and believe that this is not a productive and collaborative approach to take,” says Ian Hudson, president of Europe, Middle East and Africa operations for DuPont, the US chemicals group. “Business and government need to collaborate to face the challenges of the future.”

The list of high-profile closures and divestments in manufacturing is growing. Just five months before Ford closed its Genk plant, General Motors shut its 50-year-old Opel plant at Bochum in Germany’s Ruhr rust belt region, shedding more than 3,000 jobs. GE, once one of the most prominent US manufacturers in Europe, is focusing most of its $2bn in company-wide cuts announced in May on its EU operations, where executives say they fear the crisis is far from over. Dow Chemical, the US conglomerate, announced in October the closure of operations in Belgium, the Netherlands, Spain and the UK to shore up the bottom line.

Hewlett-Packard, the US technology conglomerate, has axed 8,000 positions in Europe as part of a restructuring effort. Meanwhile Kimberly-Clark, the maker of Kleenex tissues, has closed most of its European factories in its efforts to boost profitability.

Overall, global companies have lost close to $2tn as a result of the sovereign debt crisis that has engulfed Europe since 2009, according to data compiled by Grant Thornton, a US consultancy that interviewed more than 12,000 executives in 41 countries.

. . .

The shift is taking place not only in manufacturing, where the tilt to emerging markets is long established. It has also begun to manifest itself in services, including financial services, the sector in which Europe was thought to boast a competitive advantage.

Having cut costs in Europe by about $450m, Nomura, Japan’s leading investment bank, decided in September to further reduce its presence and focus more on fast-growing Asian markets. Citigroup, the US bank, has recently announced a wave of job cuts across the globe, including 350 in Spain and Greece.

“The cash balance of US companies is very high, particularly in the high-tech industry. But overall, they are not investing that cash [in Europe],” says Walt Shill, a senior director at Accenture. The US consultancy interviewed more than 450 executives from large business for a survey of global investment to be published in the coming weeks. “What we do hear is that folks are continuing to invest in fast-growing emerging markets.”

The data show that only 3 per cent of US executives have increased investment in the eurozone since the crisis began, while 25 per cent have boosted spending in emerging markets. Just over half say they have either already started to, or are about to begin, cutting costs by shifting business to emerging markets.

Shrinking investment in Europe raises the question of whether the continent, which some leaders claim is finally emerging from its financial and sovereign debt crisis, is entering an equally risky economic crisis. So far the bulk of economic suffering has been focused on “peripheral” countries such as Greece and Spain, which have been forced into severe austerity programmes.

But a broader scaling back in foreign investment in Europe could deepen the double-dip recession that appears under way. Foreign direct investment has shrunk at a rate of 10 per cent a year since 2008, according to European Central Bank data. Merger and acquisition activity in Europe last year was down 34 per cent on 2011, and down 70 per cent from a 2007 peak, according to the OECD, a club of mostly rich nations.

“In 2010 and 2011, several non-Europeans looking at the continent were saying: ‘Well, companies are getting hammered over there; let’s go buy stuff’,” says Michael Gestrin, senior economist at the OECD. “But this sentiment has changed in the last year as scepticism returned.”

The eurozone crisis has also exacerbated concerns that foreign companies have had in Europe since before the crisis about regulation and a failure to come up with a coherent restructuring plan.

Sergio Marchionne, head of Fiat in Europe and Chrysler in the US, last March urged the EU to follow Barack Obama’s approach to US car makers. In 2009, the US president took a hands-on approach to the overhaul of the industry.

“There needs to be a structural fix which is local, and which needs to be managed and addressed by the EU as the holder and repository of the notion of the single market,” Mr Marchionne said. But executives say little has been done to this day.

A common criticism is that the EU has paid a lot of attention to austerity – which most agree was needed – but made little effort to open markets to stimulate investment and growth.

“The underlying problem ultimately lies in the competitiveness of Europe, and there are many regulatory burdens that must be addressed,” says Mr Hudson at DuPont. “If it takes longer to create a business, to build a plant ... in Europe versus elsewhere around the world, then Europe is, of course, at a disadvantage.”

Hendrik Bourgeois, a vice-president at GE Europe, says the crisis has played an important role in forcing countries to tackle significant structural problems such as closed labour markets in southern Europe. But the pace of reform has been slow.

. . .

There have been exceptions. Liberty Global, the US cable operator, has been selling non-EU assets and expanding its presence in northern Europe. With demand unexpectedly holding up, it has invested more than €7bn in the past two years through three acquisitions. “Our sector has been crisis- resistant,” says Manuel Kohnstamm, the company’s senior vice-president. “We plan to invest more in the future.”

In addition, is a growing trend among emerging market companies – particularly Chinese groups – of using today’s volatility as a strategic opportunity to build their presence in Europe. Huawei, the Chinese telecommunications group that has run into national security barriers in the US, has been aggressively expanding in Europe. Since the end of 2010 it has invested more than €6bn and hired more than 2,000 people.

“For a Chinese company like us, Europe is still a very attractive place to do business, partly because there is still a lot of demand in our [technologies] and because the macroeconomic and political environment is fairly stable for us,” says Leo Sun, president at Huawei in Europe.

But Adrian van den Hoven, director of international relations at Business­europe, the EU’s main employers’ lobby, says that in the short term, emerging market investors cannot make up for the loss caused by the retrenchment of US companies. “There is a growing amount of investment from emerging markets but a lot of it is not so relevant because it’s so small,” he says.

Chief executives and analysts for foreign companies are adamant that Europe remains an important part of their business, even if it becomes a smaller portion of their global footprint.

But multinationals in developed economies appear simply too scared the quagmire in which Europe now finds itself is going to be the new normal. For Mr Hulsmans and his 4,300 colleagues, who will soon be out of work, the prospect of finding a secure job with a big company is not promising.

“The future is dark for Europe,” he adds.

This article is subject to a correction and has been amended.

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