U.S. Firms Must Also Be Ready for the Change
Susan Kirchhoff expects to usher in New Year’s Day 1999 with 1,000 fellow employees of J.P. Morgan Co.’s London office, managing the conversion of billions of dollars’ worth of financial data from 11 national currencies into a new currency known as the euro.
A more mundane New Year’s weekend is planned for Marco Cruz, president of California-based Superior Foods International. The only change he expects when he walks into his office in the new year is an extra row of figures popping up in the accounts for his frozen food sales to Europe.
Kirchhoff and Cruz represent two vastly different American perspectives on what is arguably one of the biggest financial events of the century: the creation of a European currency unifying 290 million people in a vast economic bloc representing 18.6% of world trade.
Globe-straddling J.P. Morgan’s immersion in the great euro conversion--a project the firm estimates will cost it $60 million to $65 million this year--is to be expected. But many U.S. executives have scarcely given a second thought to the euro’s impact on their business, according to Europe experts--a lapse that poses both short- and long-term dangers.
The advent of the euro has already begun to rearrange the economic playing field in Europe, pushing the 11 participating nations closer to a single trading and financial market, reducing the cost of cross-border transactions, increasing competition.
For U.S., Japanese and other foreign companies, perhaps the greatest impact will be longer-term and gradual: If the euro is a success, it
should create an economically stronger and more powerful Europe. But these changes will also unmask weaknesses in Europe’s national economies and corporate strategies, opening doors for alert outsiders to walk through.
And those European companies that survive the turbulence will emerge as tougher economic competitors both on their own turf and abroad--bad news for any U.S. firms not paying attention. Indeed, some say this has already begun to happen as monetary union takes shape.
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The stakes in a smooth transition are high: The United States and Europe have built a $1-trillion transatlantic relationship. In 1996, Europe accounted for 59.1% of all direct foreign investment in this country, and the U.S. accounted for 43.7% of investment in Europe. The two regions purchase about 20% of each other’s merchandise exports.
Although the fast-growing economies of Asia and Latin America have dominated California’s attention in recent years, Europe is also a major investor and trading partner for the state. Europeans purchased 19% of the state’s manufactured exports in 1997, according to the California Trade and Commerce Agency.
Meanwhile, there are myriad short-term pitfalls for U.S. firms that haven’t done their euro homework. Experts say they are leaving their firms vulnerable to a year-end crisis that could throw their financial systems into disarray and jeopardize deals.
They could face delays in the processing of bank account data and confusion over billing or payments from European clients who may or may not be making the transition immediately. Money managers will have to reconcile billions of dollars in government debt that will be re-denominated into euros.
“If [U.S.] companies aren’t already focused on what’s going to happen to their operations and making conscious decisions on what they’re going to do Jan. 1, they could be hurt,” warned Stephen Wilder, a senior vice president in charge of global currency management at Chase Manhattan Bank.
Even leading U.S. politicians, economists and business executives have until recently refused to believe that this complex financial convergence would take place, given Europe’s long-standing political and cultural animosities, according to Bruce Stokes, a senior fellow at the Council on Foreign Relations.
“My guess is that the majority of the establishment economics fraternity in this country has not taken it seriously,” he said.
This skepticism was compounded by the lack of visibility the new European currency will have in the lives of most Americans, unless they are traveling to Europe, are sophisticated international investors or do business there.
For U.S. firms, the euro’s impact will vary widely according to the size and type of company, the amount of financial exposure it has in Europe, and whether it is an employer as well as a seller in the region.
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But it would be a grave mistake to assume that the euro is simply a currency issue, according to Bob Leaper, director of business development for Portia-TradeView, a division of Boston-based Thompson Investment Software.
The euro has significant implications for treasury operations, portfolio management, law, financing, taxes, marketing and sales.
Although many questions remain about how widely the euro will be used in its early days, most U.S. multinationals aren’t waiting until Jan. 1 to make their operations euro-friendly.
During the three-year transition period before the euro is in full circulation, bridging the gap will require using an awkward formula known as triangulation, which converts amounts from a local currency to the euro and back to another currency.
Companies are switching over to computer software systems that can handle triangulation, creating regional financial centers to reduce overhead and manage euro transactions, developing euro-friendly prices for goods and reexamining legal relationships.
“They must go through all their legal relationships and see if the change of currency has an impact on them,” explained Pierre Revault, who is based in Chicago and heads the French desk for Ernst & Young, the accounting firm.
Get a euro-savvy lawyer, in other words. Under European law, the euro transition will not affect contracts now in effect, but all contractual obligations will be automatically converted into euros as of Jan. 1, 2002, according to a briefing paper by the law firm Jones, Day, Reavis & Pogue.
Although U.S. companies initially feared the creation of a fortress Europe when the concept of monetary union arose in the 1980s, many are now convinced that the move toward regional economic integration will reduce the costs and risks of doing business by removing internal trade barriers and lowering foreign-currency-related costs.
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That has already led to stepped-up foreign investment in Europe. To bolster their presence and take advantage of the lower costs of doing business inside the euro zone, U.S. firms are establishing regional centers on the Continent, acquiring smaller European competitors and building manufacturing facilities aimed at regional sales.
France and Germany are jockeying to become the financial center for the semi-united Europe, since Britain is not joining the organization immediately.
Federal Express Corp. recently announced plans to locate its European hub at Paris’ Charles de Gaulle Airport, and Atmel Corp., a San Jose electronics company, recently purchased a semiconductor firm with wafer fabrication plants in Heilbronn, Germany, and Nantes, France. Avery Dennison Corp., the Pasadena-based office supplies giant, is opening a $25-million film materials plant in Gotha, Germany, this year to supply its European customers.
U.S. financial giants such as Citicorp, BankAmerica Corp., Chase Manhattan and J.P. Morgan are among the best-positioned to reap the benefits of Europe’s financial convergence, given their global reach, their technological sophistication and a decade of experience in operating lean and mean, according to Europe watchers.
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Wilder, head of global currency management at Chase Manhattan, argues that only half a dozen financial institutions--the others being Hongkong & Shanghai Bank and the Dutch ABN-AMRO Bank--are equipped to handle euro-denominated financing, bank accounts, bonds and other transactions on a global basis.
Beginning Monday, Jan. 4, Chase’s customers, for example, will be able to enter a branch anywhere in the world and make a euro transaction. That information will be transmitted to the bank’s Frankfurt facility, the bank’s main clearinghouse for euro payments. From there, the data will be fed into a centralized processing facility in Britain that is connected to a number of national and pan-European payment systems.
“A large-scale financial institution or investment bank has no choice but to be ready on a ‘big bang’ basis from January 1999, because they have to deal with other institutions,” Wilder said.
Outside the financial world, U.S. firms have more flexibility to decide when they switch to the euro system. Brian Rundle, an executive vice president at BankAmerica and head of international operations, said larger corporations are more willing to incur the costs and hassles of switching over because they can reap immediate benefits.
As the larger U.S. multinationals transfer over, he said, they will start to “drag along the smaller corporates” because they will be forced to do their invoices and accept payments in euros.
Dearborn, Mich.-based Ford Motor Co., which has 47 manufacturing facilities in Europe and is the region’s fourth-largest seller of cars, is prepared to operate a dual currency system for pricing, invoicing and payments beginning in January.
Ford expects its top 250 suppliers to shift to the euro system by the second quarter of 1999, according to Henry Wallace, the company’s chief financial officer and vice president of strategic planning for Europe.
“Obviously, it requires us to dramatically change a lot of our administrative functions,” he said.
As the euro grows in popularity, it will become easier for buyers to compare prices, increasing the pressure on firms operating in Europe to offer competitive rates and prices across the Continent. That, in turn, should mean tougher competition for U.S., Japanese and other foreign firms on products that increasingly are made and traded around the world.
John Kilby, an international tax partner in the New York office of accounting firm Deloitte & Touche, said European suppliers are already stepping up to the plate, offering discounts of 25% to 30% to subsidiaries of U.S. firms.
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Similarly, Cruz, of Watsonville, Calif.-based Superior Foods, which sold about $100 million worth of frozen fruits and vegetables last year, is bracing for tougher competition, having seen signs that European food companies are already gearing up to take advantage of the easing of internal barriers to boost business with their neighbors. “As they get more and more integrated, it makes it a lot easier for them to do business among themselves, and it makes it more difficult for us to sell into those markets,” he said.
