U.S. Exporters’ Grand Success Story in Europe
It was a triumph in an age of unremitting global economic competition: An American company pulled out all the stops, assembled an international technical team and beat out a big-time West German high-tech firm in its own back yard.
The U.S. firm was Honeywell, but its recent success in upstaging Siemens to win a $15-million contract to supply the space-age building-control systems for the ultra-modern airport to be operating near Munich early in the next century is not as unusual as it may sound.
In short, U.S. manufacturers have found an unexpectedly green pasture in Western Europe.
“The conventional wisdom says our export growth is stalled,” said National Assn. of Manufacturers president Jerry J. Jasinowski. “Our survey sees a continued improvement next year, and we think Western Europe will continue to be our strongest market. Growth there was fabulous in the past two years, and this should continue in 1990.”
This is the Western Europe that has raised fears of a “Fortress Europe” when it completes its economic integration in 1992.
But the American companies that sell into that area see the European Community instead as a region of steady growth, expanding trade and opening markets--including a revitalized Central Europe after more than 40 years of East Bloc stagnation.
American industrial exports to Western Europe have soared in recent years, even by the Commerce Department’s restrictive counting rules. The Commerce Department, which measures trade solely in terms of goods transported by land, sea or air across national boundaries, ignores the sales of Honeywell and the many other U.S. companies that operate plants, agencies and affiliates abroad.
Since the dollar reached its peak value in 1985 and began to decline, exports to Western Europe expanded by 9% in 1986, 14% in 1987 and 25% in 1988. During that period, the U.S. trade deficit with the European Community fell from $25 billion in 1985 to $12 billion in 1988.
So far this year, the deficit has turned into a narrow surplus of $1.4 billion through September. In September alone, American exports to the EC exceeded imports by $1.2 billion.
The exports, moreover, are largely the “best” kind: high-quality, high-technology manufactured consumer goods and, in particular, capital goods--what economists call “high value-added” products that are capital- and technology-intensive and command large profits.
NAM economist Stephen Cooney estimates that 46% of all U.S. exports of computers and parts now go to EC buyers. Likewise, Western Europe buys about one-third of all U.S. commercial aircraft sold overseas and at least 35% of all American exports of scientific instruments and industrial and building control equipment, such as heating, cooling, lighting and security systems.
All these are fields in which U.S. industries maintain a global competitive edge, but they are also fields in which the Europeans themselves are leading competitors.
Traditionally Canada, with which the United States is implementing a new trade agreement, has been the biggest U.S. market. But last year the EC buyers edged ahead, taking $74.5 billion in U.S. exports compared to $73.5 billion for Canada. So far this year, the gap has widened, with $66.2 billion in exports to the EC through September, compared to $59.2 billion to Canada.
The composition of the exports increasingly favors the European market. As Cooney points out, about one-quarter of all American exports to Canada are accounted for by cars and auto parts shuttling back and forth across the border in the two-way auto trade agreement.
More than that, the export figures to Europe exclude sales of American goods by American companies that assemble their final product in plants overseas. Virtually all larger and more successful industrial exporters have followed that global economic high road--one that foreign companies are increasingly following here, to the discomfort of many congressmen.
“People in Washington get concerned when American companies invest abroad because they think that loses jobs, and then they get concerned when foreign companies invest here,” noted Honeywell’s Glen Skovholt, the Minneapolis company’s director of analysis and planning.
“It’s a sensitive and emotional question for lots of people, because it’s easier to deal with a world where all manufacturing takes place in your home country and simply gets exported across borders. But it isn’t as simple as that anymore.”
Honeywell is very much a case in point. In 1988, about $1.7 billion of the company’s total sales of $7.1 billion were abroad, and $1.2 billion of that total was to Europe. During the past two years, sales to Europe have increased by about 15% a year.
But virtually all of the European sales originated abroad. Only $19.7 million in final sales were actually “exported,” according to the conventional definition. That figure does not include spare parts and components shipped from the United States to plants in West Germany, Britain, France and Holland to be assembled, finished and delivered.
As Alfredo Maselli, vice president of Honeywell’s international division, explains it, Western Europe is a “mature market” where Honeywell has already invested heavily and must compete with technologically advanced European companies to sell to sophisticated customers.
“At the Munich airport, for instance, you have a huge building automation system appropriate to a highly advanced industrial society at the end of the 20th century,” he said. “It might be that as much as 30% of components . . . might come from the United States, but almost all the finished and delivered product--the hardware, most of the software, cabling and so forth--will be primarily originated in Germany.”
Honeywell won the Munich airport contract from German-based Siemens by mobilizing affiliates in the United States and Canada as well as Europe to offer an integrated package of goods and services.
“We are more and more a global company, integrating worldwide facilities to produce a global product,” Maselli said. “We supply different parts from different parts of the world, depending on our global strategy.”
By contrast, Maselli added, Honeywell plans to move into Eastern Europe, whose economies are far more primitive, by selling goods that are virtually all made in the United States.
“We’ve recently signed a contract with the Bulgarian government for a pharmaceutical plant in Sofia that will make antibiotics,” Maselli said. “We will supply a process control system for the plant: instrument panels, sensors, controls and the like. These will be exported from the United States.”
In that arrangement, in contrast to the typical Western European transaction, Honeywell not only sells the goods--the “hardware”--but also the training of Bulgarian workers to run the plant and maintain it.
For a big, international company like Honeywell, building on existing investment abroad is doing what comes naturally. And more and more companies selling in Europe are likely to end up manufacturing in Europe as well.
As NAM’s Cooney explained it to Congress’ Joint Economic Committee earlier this year, U.S. industrial assets in the European Community are valued, conservatively, at “book value” of about $65 billion--more than half of all U.S. manufacturing investment abroad.
While most of what these plants produce is sold directly in Europe, these overseas facilities also provide an important market for components and other capital goods made by other companies in the United States.
According to the Commerce Department’s own data, Cooney noted, “about 34% of all U.S. exports to the EC go directly to the affiliates of U.S. companies with direct investments there. For U.S. exporters, direct investments abroad are an important beachhead. . . . Typically, when a U.S. company increases its investment abroad, it will rely on U.S.-made capital goods or will use U.S.-made components and sub-assemblies in the final product.”
