Services companies on balance are more productive than those manufacturing goods.
This productivity translates into higher salaries for employees and more robust returns for investors. However, services companies dominating the global marketplace is a recent phenomenon. Consider America's five most prominent companies are tech giants mainly focused on services (and in the case of Apple, some hardware), with an average of three decades existence and markets caps totaling $4.3trn between them, 35 times last year's profits.
While Europe's most prominent firms all existed in one form or another a century ago— for example, Unilever and Royal Dutch Shell, combined, they are worth under $1trn, about 23 times last year's profits.
It is not just European MNCs that are compact; the fragmented European market means there are three times as many services companies in the European Union as in the United States.
In Italy alone, Bel Paese has roughly as many firms as America, despite an economy one-tenth the size. Being undersized reduces productivity as enterprises cannot harness new technologies. Around 30% of Europeans work for a business with ten or fewer employees, three times the figure in America and over twice the rate in Japan.
Restricted market opportunities make it more challenging for companies to raise venture capital or secure favorable loans. Local, national banks can charge higher interest rates to corporate borrowers.
Similarly, markets dominated by protected national champions can get away with higher prices. This practice gives an unfair advantage against market competition as well as promoting economic nationalism domestically and global pre-eminence abroad, contrary to more traditional free markets seen in North America.
In telecoms, Europe has dozens of operators—but in no country can consumers pick from more than three or four. That means the telecoms firms have all the rent-seeking advantages of oligopolies, but none of the economies of scale available to their Chinese or American rivals.
An immediate fix would be to allow (and encourage) more European companies to merge as a first step, and then scale in Europe followed by global expansion.
"Europe's companies are too small," said Carlo Alberto Carnevale-Maffè, professor of strategy and entrepreneurship at Milan's Bocconi University in the Financial Times. "European champions could start a new cycle of exporting, not just goods but also intangibles, such as services."
With corporate Europe fostering merger enthusiasm, a strengthening economy, and a greater need for cohesiveness as a backstop against Brexit, closer organizational Europe integration is high on agenda.
Besides, the arrival of French President Emmanuel Macron and his Jupiterian vision of a "Grand Europe" has also provided a political drive to create these champions even as Chinese companies push on with potential deals.
However, there is another more matter-of-fact hurdle to creating European champions: Integrating Europe's wide range of corporate cultures that are as different as the region's cuisines.
The merger of Italian multinational eyewear manufacturer Luxottica, an exemplar of Italian family capitalism, and French lens maker Essilor to create a €50bn eyewear group is one such example.
The deal gained EU competition approval and closed earlier this summer. Reuters reports, EssilorLuxottica said it was "on track to achieve synergy targets," putting forward some 160 dedicated projects involving more than 800 employees out of a global workforce of more than 150,000.
Supply chains of both companies are to be united while the network of laboratories is reshaped to improve efficiency. The company is also searching hire a CEO by 2020.
However, even former employees and analysts are dour on the deal - mainly due to the challenges of merging cultures.
That issue is for a future post. As it is today, for the perspectives of European companies making and selling glasses, the merger of Essilor and Luxottica was a much needed positive step to make European commerce more globally competitive.
-Marc
Marc A. Ross is a globalization strategist and communications advisor working at the intersection of globalization, disruption, and politics. Ross specializes in helping entrepreneurs and thought leaders make better connections and better communications.
