Businesses in Europe are bracing themselves for more pain
Oct 6th 2012 | from the print edition
At Florange, it s the end of the line
ANXIETY about Europe s continuing sovereign-debt and banking crises is almost
as intense in boardrooms as it is in chancelleries and on trading floors. Until
the spring the mood among business people was that somehow the euro area s
politicians would muddle through and that the single currency would survive.
August the fifth anniversary of the first signs of a credit crunch even brought
rays of hope for an orderly settlement. But public finances are still in shreds
and bank lending is still feeble. Demand is weak and the effects on revenues
and profits are clear. Companies are now being forced into decisions that many
of them had put off while they prayed for an improvement.
On October 1st ArcelorMittal announced the permanent closure of its blast
furnaces at Florange, in eastern France. This symbol of French heavy industry,
home to iron and steel for centuries, had been mothballed for months: in the
summer Lakshmi Mittal, boss of the world s biggest steelmaker, said his
strategy was to focus on his most productive sites, on the coast. This is the
most serious situation since the onset of the financial crisis, said Mr Mittal
in July. In the first half of the year ArcelorMittal reported an operating loss
at its main European mills, which dragged overall profits down from $2.2
billion to $1.8 billion. Steel s problems reflect those of its customers: three
carmakers, PSA Peugeot-Citro n, Fiat and Opel, are planning to close factories
and industrial output has sagged again (see chart 1).
The damage had begun to show up late last year. Our southern Europe revenues
are down, that s just the reality of how the market is, said Paul Walsh, the
chief executive of Diageo, a drinks group, last December. In the summer several
European companies blamed the euro crisis for poor half-year profits: Telef
nica, a Spanish telecoms company, GlaxoSmithKline (GSK), a British drugs group,
and Saab, a Swedish truckmaker, were notable victims. American companies, such
as Ford and Apple, made similar complaints. Quarterly results in the coming
weeks are expected to show the misery continuing.
Time to prepare
Few business chiefs like to talk about how badly their companies could be
affected by a break-up of the euro zone. A survey of Fortune 500 firms by KPMG,
a consultancy, found that half had done nothing to prepare for this. One or two
bosses are making their worries public. Diageo has created a nimbler corporate
structure that allows decisions about products, strategy and innovation to be
taken at a European level while customer relations are handled nationally.
Diageo s emphasis, according to Mr Walsh, is on protecting profit margins,
which are still around 30%. Investment plans can now be shifted swiftly from
weaker markets, such as Portugal, to stronger ones, such as Belgium.
Colin Mayer, of the Sa d Business School at Oxford University, sees a grim
picture emerging across Europe. Companies are becoming risk-averse. Access to
bank lending is drying up, and companies are looking to use their own retained
earnings. Companies holdings of cash have soared (see chart 2). They are
having to put reconstruction and repositioning on hold. They realise that what
they are living through in Europe is no longer a sudden isolated shock. It has
now derailed the European economy, he says.
Companies are rarely forthcoming about their plans for dealing with such risks,
but some examples have surfaced. Siemens, a German engineering giant, has
opened an account with the European Central Bank as a safe haven for a big
chunk of its 12 billion cash pile. Car firms in Germany, such as BMW, are
applying for banking licences so that they can follow Siemens s example and
perhaps also widen their customer-financing activities.
Every euro counts
John Thanassoulis, another Oxford economist, who is leading a study of European
corporate finance during the crisis, sees signs of companies positioning
themselves for a break-up of the euro. He notes that Cr dit Agricole, a French
bank, empties the tills of Emporiki, its Greek subsidiary, every evening, ships
the balances electronically to Paris and returns them in the morning. This week
Cr dit Agricole said it was in talks to sell Emporiki to a Greek bank for one
symbolic euro. Mr Thanassoulis also points to the sale by Carrefour, a big
French retailer, of stores in Greece also for a single euro to cut itself free
of the country s mess.
Mr Thanassoulis says that because banks are short of capital and their ability
to lend is impaired, companies are holding prices up, to preserve profits for
use as collateral for future borrowing. Another, less obvious, side-effect he
observes is that firms are seeking to shed full-time staff and turn to
outsourced contractors. They are desperate to transform labour from a fixed to
a variable cost, he says. British companies, he adds, have not reduced prices
to pursue sales growth with the devaluation of sterling, but have sought (like
Diageo) to hold prices and boost margins.
In Spain, Mr Thanassoulis notes, foreign companies are furiously scrambling to
match their assets and liabilities so as not to be caught short; they keep just
enough cash in the country, and repatriate any spare. There are similar signs
elsewhere. Visa Europe holds weekly meetings to discuss scenarios in the event
of a collapse of the euro zone. PepsiCo, an American drinks firm, is reported
to be sweeping cash daily out of euro-area countries.
So is GSK. Drug companies are in a particular bind: they face, on the one hand,
the risk that governments will not pay their bills and, on the other, public
opprobrium if they refuse to supply medicines. Merck, an American drugmaker,
has warned that its prices may have to be trimmed. AstraZeneca says that last
year Greece, Italy, Portugal and Spain accounted for $650m, or 10%, of its
payments due and that half the sum was overdue when it closed its books. In
Greece the company has had to take payment in government bonds, on which it has
lost $6m. AstraZeneca has now set up a special euro-zone credit committee to
review the implications of a fracturing of the currency zone.
AkzoNobel, a European chemicals firm, says it is conducting extraordinarily
heightened monitoring of cash balances in some euro-zone countries, checking
them nightly and drawing on its experience in emerging markets. AkzoNobel s
main worry is that the economic uncertainty caused by the crisis is affecting
sales. But it has no plans to quit southern Europe: on the contrary, it
believes it can strengthen its position there. Companies with strong
balance-sheets, such as AkzoNobel, may be able to pick up assets from ailing
rivals. One steel boss even envisages exporting steel to America from Europe if
the euro were replaced by weak national currencies in, for instance, Spain and
Italy.
The collateral effect of the euro crisis can be global, says the finance
director of a British company with a huge business in continental Europe. But
we are used to managing such risks. To be sure, he says, companies need to be
careful of liquidity, foreign-exchange exposure and effects on suppliers. He is
also less pessimistic than he was a year ago: Our general feeling is that it
will now be an orderly process, so the banks and the financial infrastructure
will be better able to handle it, whatever the outcome is.
There are gleams of light in the gloom: although bank lending has dried up, low
interest rates have revived corporate bonds as an alternative. Still, there is
a growing view among company bosses that they would like a resolution, one way
or another, rather than remain stuck in a slough of austerity.
from the print edition | Business