What Europe can teach Uncle Sam
In the second extract from his eagerly awaited new
book, Will Hutton reveals why the American
economic miracle is not all it seems
Monday April 29, 2002
The Guardian
Volkswagen should be a basket case. It makes cars and trucks
in high-cost Germany, has a highly unionised workforce who
work a 28.8 hour week for up to £23 an hour, and its largest
shareholder is the state government of Lower Saxony, owning
18.6% of the company's shares. Its directors only have a small
number of share options, and its chief executive is paid less
than £700,000 - a tiny fraction of the £22m and £15m made by
his opposite numbers at Ford and General Motors. The total
value of stock options available to every VW employee in 2000
was £1.2m: when Jacques Nasser lost his job as CEO of Ford,
he had over £11m of unexercised share options alone. Worse,
its shareholders voting rights are limited to 20%, so the
company can neglect to promote shareholder value, allowing it
to become schlerotic and uncompetitive.
There is scarcely a canon in the conservative free-market
rulebook that Volkswagen does not offend. Yet Volkswagen
remains Europe's largest car maker and has increased its
market share from 16% to 19% since 1993 - largely at the
expense of Ford and General Motors. Even in the US, its market
share has jumped by 2% over the same period. It is the most
internationalised car company in the world. It has revived the
near-bankrupt Czech car manufacturer Skoda. Its Passats and
Golfs, redesigned VW Beetle and range of new cars are the
envy of its rivals. Its engineering prowess and innovativeness are
streets ahead of its American competitors. But according to the
predictions of American conservatives, none of this should be
happening. It should be down and out.
Then there is Finland's Nokia, the world's leading mobile phone
company. This is another corporation that should not exist, and
has dared to challenge the principles of capitalism as set out by
the ideologues of the enterprise culture. Originally a
wood-processing and rubber-boot company, Nokia started the
1990s worrying about how its toilet-paper sales would hold up in
its main market - the former Soviet Union. High levels of Finnish
taxation should have deterred this company's ambitions from the
start, and if that didn't trap it, powerful trade unions should have
finally sealed its fate. Nearly half of its 60,000 global labour force
work in high-wage Finland, encumbered with monstrous charges
to finance its generous and incentive-depleting welfare state.
Nor does it pay especially high executive salaries which, even
with share option schemes on top, are severely reduced by
penal Finnish tax rates on high earners. Chief executive Jorma
Ollila was paid £860,000 before stock options: GR Wagoner Jnr,
his opposite number at its nearest rival in the mobile phone
market, Motorola, received over £1.7m, with some £6m in
unexercised stock options. Yet Nokia has managed to keep the
senior management team together that over the past decade
has directed the company's exponential growth.
Nokia's success is legendary; it has 35% of the world market -
twice that of Motorola - and its track record for innovation,
commitment to design and effective management is second to
none. Yet for the conservative theorists, companies like this
have no right to such success. So what is the moral of all this?
Could the gospel of American market-driven capitalism be losing
its lustre?
American economic success has been dazzling, validating its
belief in enshrining liberty at the heart of economic and social
organisation. The recent bursting of the stock-market bubble has
shaken it, yet the basic message stands: the US has
essentially got it right, and British politicians such as Gordon
Brown and Tony Blair want its enterprise culture here.
In some respects, it would be surprising if the US was not
successful. It is a continent of 280 million people who share the
same language, government, unified market and legal system.
Throughout the 20th century, its companies have produced on a
scale unknown in other countries, taking advantage of the
simple rule that the more you make, the lower the unit cost.
Yet in reality the US is no more productive than many European
economies. Although little reported, during the past 20 years,
output per hour worked in France, the Netherlands, Belgium and
the former West Germany has risen so that it is now higher than
in the US, because the Europeans have invested more and
organised their businesses more effectively. It is only fractionally
lower in Ireland, Austria and Denmark. And recent figures show
the trend to be continuing. The only European country not to
have significantly closed the productivity gap is Britain.
The reason for this is that corporate America now no longer
principally seeks to create value by building businesses over
time through marshalling human capital, investment and
innovation. Instead it tries to extract value by financial
engineering and sweating assets in an increasingly feral form of
capitalism. Wall Street, always an uneasy ally of US business,
has become its master. In the 1960s, 44 cents in every post-tax
dollar of profit was distributed as dividends; in the 1990s, the
proportion had nearly doubled to 85 cents as companies sought
to please the hawkish financial markets and support their share
prices to which directors' remuneration, via stock-option
packages, was so tightly linked. Around half of directors
remuneration now comes from stock options.
The institutional investors - the pension and mutual funds - who
own more than half the shares traded on the market are restless
in their own search for higher performance to please their own
demanding customers; on average, they turn over 40% of their
portfolio in a year, looking for higher returns. By contrast, in
1960 Wall Street turned over only 12% of its entire
capitalisation. Every corporation does everything in its power to
keep the fund managers happy, promising to deliver ever higher
profits every quarter, topping up their efforts with stock
buy-backs and financing as little investment as possible with
calls for cash from the markets. The story, from the
commanding heights of the Harvard Business School and the
Wall Street Journal, is that this new environment is the principal
explanation for the recovery in American productivity and growth.
The quest for high and rising profits is good for business. The
threat of takeover keeps managements on their toes. The truth
is the opposite. American growth has been largely driven by
consumer spending creating ferocious and unsustainable debts
at home and abroad, and as we have seen, the productivity
miracle is much more modest.
Moreover, evidence shows that far from creating value, takeovers
and mergers destroy it. The management consultant
McKinsey's, for example, reviewing 160 mergers between 1992
and 1999, discovered that only 12 of the merged groups
succeeded in lifting organic growth above the trends before the
merger; the other 148 failed.
But that has not stopped a tidal wave of takeovers and mergers.
There were 5,000 in 2000, double the level of a decade earlier.
They may destroy value and lower growth, but each CEO
believes that he or she will be different - and investment banks,
chasing the fees, do nothing to disabuse them. The whole
culture produces deeper economic weakness. Success in a
takeover demands that the predator is in favour with Wall Street;
the predator's market valuation must be higher for every dollar of
profit than the potential victim, so allowing the predator to pay for
the bid by the market accepting more of its shares. This
intensifies the already intense competition to maximise
shareholder value, so that economies in research, investment or
the workforce are immediately rewarded in higher short-term
profits and a higher share price.
The problem is that American conservative economists, in
assessing the causes of productivity growth, look in the wrong
direction. They want to prove that markets are economically and
morally superior to all other forms of organisation. Economic
efficiency, for them, is about the permanent freedom to complete
the most cost-effective contract and to move on to another if
there is a better opportunity; in this world the issue is to allocate
resources effectively through buying cheap and selling dear.
Yet the heart of productivity growth is what happens inside the
firm, and firms are first and foremost organisations of human
beings. Mary O'Sullivan, assistant professor at Insead, Europe's
leading business school, argues that how businesses organise
their social capabilities is the key to success; James C Collins
and Jerry I Porras, leading American business school
academics, make the same argument in their best selling study
of 17 visionary enterprising companies. What characterises all of
them, they say, is that they have an organisational reason to be
that transcends profit-making; a core purpose around which the
business is organised, motivates its people and from which it
then makes money. The current organisation of US business,
seeking to maximise profits in the shortest possible time, is
undermining its great companies. The structures in Europe that
American conservatives attack as holding back "enterprise"
prove to be fundamental in assisting Europe first to close its
productivity gap with the US, and then begin to open a lead.
Thus Europe can teach the US a lesson in enterprise.
The story of Boeing is a salutary lesson. In the mid 1960s its
organisational reason to be was clear. This was a company
dedicated to technological excellence and building the best
planes in the world - and it did. In the mid 1960s it embarked on
the then vastly ambitious project to build the 747, the jumbo jet -
in effect betting the company on a vastly expensive
technological risk. Boeing pulled it off, but not before laying off
60% of its workers and risking bankruptcy before its first sale of
a jumbo. As it reaped the rewards, in 1987 corporate raider
Texan T Boone Pickens came along, an apostle of southern raw
capitalism, a Reagan supporter and founder of the US
Shareholders Association which is committed to putting profits
first. Like other raiders, his objective was to dismantle large
organisations, stripping them of cash and assets in order to
unlock "value" and so make a profit as long the disposal
proceeds were greater than the purchase price.
Pickens was seen off, but Boeing was never the same again.
Plans for new planes were frozen, R&D spending was slashed
and close to 50,000 workers were laid off in an attempt to
prevent another takeover bid or corporate raid. Throughout the
90s, Boeing's object has been on building rapid earnings growth
rather than developing new planes; its reason to be has become
the maximisation of shareholder value, allowing it to develop
businesses outside aerospace - but so losing organisational
focus.
More seriously, it has meant that Boeing is simply unable to
compete with Airbus, now attracting half of all commercial
aircraft orders, even before the launch of its new super jumbo,
the A380 - a market that Airbus has to itself, Boeing unable to
build an American version as it did 40 years ago. It is moving
into the aviation service business, and moved its headquarters
out of Seattle to Chicago. Even if Airbus did not exist, Wall
Street would not allow it to do what it did in the 1960s. And as
for Airbus's subsidy, Boeing is no less a client of the
government.
Airbus, an organisation independent from the criteria for
profitability set by the capital markets, has been able to put the
interests of building planes, fighting for orders and pleasing
customers before the demand for dividends. Its organisational
reason to be is what Boeing's once was; to build great planes. In
the conservative discourse, this subsidised aircraft
manufacturer, free from the disciplines of the financial markets
and hostile takeovers, should be a failure. Instead, it has
become the most successful aircraft manufacturer in the world.
Europeans can be proud, and look their American tormentors in
the eye. They have a different conception of enterprise. And it
works. If the British could look across the channel with more
clearly and recognise their own European-ness, they would find
some important clues about how to build high-performance
companies.
· To order a copy of The World We're In, Published by Little,
Brown, for £14.99 plus p&p (rrp £17.99), call the Guardian book
service on 0870 066 7989. Delivery is 99p or £1.99 for 1st class.
· Will Hutton is giving a lecture at the Institute of Education, 20
Bedford Way, London WC1 on Tues, May 7 at 7.30pm. For
tickets (£6; £4 students) call 020-7636 1577, 10am-7pm
Mon-Fri.
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