Europe's Slumping Industries

On the surface, European life seems glossier than ever. The roads leading to Rome are crammed with shiny new cars, the pricey restaurants of Paris are crowded with smartly dressed diners, and shops from Stockholm to Seville do a brisk pre-Christmas business in luxury items. But there is a dark underside to this bright picture. Unlike the U.S., the industrial nations of Europe never really recovered from the 1974-75 recession, in part because they avoided rapid-growth policies for fear of aggravating inflation. A consequence, as well as a continuing cause, of the sluggishness is the decline of three basic industries--steel, textiles and shipbuilding--that provide 4.3 million European jobs. Many companies in these ailing sectors have grown too unwieldy and inefficient to compete in a changing world. To survive, they must shrink, evolve and innovate. Says West German Economics Minister Count Otto Lambsdorff: "There is no reason for losing our heads, but the seriousness of the situation is not to be underrated."

The wrenching industrial changes are stirring worker protest. Last week, their jobs in jeopardy, West German steelworkers were threatening to strike to back up their demands for shorter hours. Meanwhile, the Belgian government took over a large part of that country's steel industry. In September, French steelworkers called a one-day strike against a government plan to rescue their industry from bankruptcy by, among other means, eliminating up to 30,000 jobs over the next five years. Textile workers in France's Vosges region earlier staged an angry march through factory towns to protest the downfall of the once mighty Boussac textile empire. In Toulon and Hamburg, shipyard workers held demonstrations for government action to prevent further closures.

The main cause of European concern is the aggressive entry into world markets of South Korea, Singapore, Brazil and Mexico, which have mastered the basic technology in some relatively unsophisticated industries.

Last year 43% of the cotton products bought by Europeans were made abroad, in many cases by firms set up by European manufacturers. The most prominent suppliers were Hong Kong and South Korea. All these countries were simply taking advantage of the high wages earned by European textile workers. In Belgium the average hourly wage is $9.17; in West Germany, $8.80; in Italy, $5.78. Textile workers get 98-c- an hour in Hong Kong and 62-c- in South Korea.

The Third World is also moving into steelmaking. Brazil and Mexico have already become exporters. Argentina and Chile are increasing their capacity. By the early 1980s some of the oil-producing Arab countries will be turning out steel. In shipbuilding, South Korea and Brazil have some yards that are more modern than Western Europe's. Along with Poland and Taiwan, they can produce bulk carriers even more cheaply than Japan can.

Bad planning and negligent management also play important roles in the decline of Europe's industries. Many companies developed more production capacity than they could have hoped to use in the foreseeable future. Says Henri de Bodinat, a Paris-based industrial expert for the Arthur D. Little consulting firm: "One of the basic rules of capitalism is that industrial sectors reach a limit of growth as they mature and then begin to decline. It happened with railroads; it is now happening with steel, and in ten years the auto industry will have problems." What has turned an industrial adjustment into a crisis, in De Bodinat's view, is that the declining industries are not being replaced. "Capitalist economies have lost their flexibility," he charges. "In France, for example, it has become far too difficult to launch a new business." Governments often discourage entrepreneurs with mazes of administrative formalities. Banks hesitate to lend money for new ventures.

Business leaders also complain that for social and political reasons it has become too difficult to fire redundant workers. One result is that companies with diminishing production cannot cut their costs; their profits fall, and they must borrow money, not to invest in new techniques and equipment but merely to keep the factories turning. "If a small-or medium-size enterprise runs into temporary cash problems," says De Bodinat, "chances are it will go bankrupt. But a big, dying industry can generally count on government subsidies. This is the opposite of survival of the fittest. It is maintaining dinosaurs while killing off the mammals."

How damaging has all this been to European industry? A sampling:

Steel. In steel-producing regions such as France's Lorraine, Belgium's Charleroi and Liege, West Germany's Saarland, south Wales, northern England, and Scotland, unemployment is sharply higher than national averages. Over the past three years, 61,000 jobs have been lost in the industry, leaving a worried work force of 690,000.

Meanwhile, the losses continue to pile up. As steel prices plummeted by about 50% between 1974 and 1977, Europe lost $30 or so on every ton sold. The overall deficit last year was about $3 billion, with the nationalized British Steel Corp. accounting for $1.6 billion of the total. The French industry, saddled with a $10 billion debt--Europe's highest--was in effect taken over reluctantly last September by the government. West Germany, Europe's biggest steel producer, has lost the least (about $625 million), perhaps because in the past three years it laid off the most workers (30,000).

Textiles. Still the biggest employer on the Continent (2.9 million workers), the textile industry has suffered the most. Over the past five years, at least 3,500 enterprises have been closed and more than half a million jobs lost. In Ghent alone, home of Belgium's cotton industry, unemployment levels have reached 11%, roughly equal to those in France's eastern Vosges region. In all, a million more workers are expected to be laid off by 1985.

Shipbuilding. Western Europe's share of the world shipbuilding market plunged from more than 80% in 1950 to an estimated 37% last year. In the past four years, Common Market governments have spent about $650 million annually in subsidies to keep the yards busy and 214,000 workers on the payroll. Even so, more drastic cuts are ahead. By 1980 the yards in the European Community are expected to build only half of last year's 5.4 million tons, and the number of workers will probably be reduced by 75,000.

Autos. The road ahead is pitted with potholes, even though European automakers this year expect to produce 11 million vehicles, just under their 1973 record of 11.25 million. The most imminent threat comes from the Japanese, whose share of the Western European car market has jumped from .6% to 6% in the past ten years. The Japanese onslaught has also hurt European export sales, especially in the U.S. For the longer run, the U.S. automakers may pose a more formidable danger, now that they are making smaller, gasoline-sparing cars of the type that sell well in Europe.

Though West Germany continues to stand firm for free trade, pressure for protectionist measures is growing among other European nations. Last year the Common Market demanded that all its foreign steel suppliers freeze 1978 deliveries at 1976 levels. Also, 13 petrochemical companies formed a cartel in man-made fibers, carving up markets and agreeing to joint cuts in production. Says Fiat Chairman Giovanni Agnelli: "I don't at all like the idea of closing Europe off, but we must do it just for a while on condition that we emerge with a more competitive industry."

With the time gained by temporary protectionist measures and a subsistence diet of subsidies, Europe's threatened industries must accomplish a formidable task of rejuvenation. In West Germany, Strukturwandel (structural change) is constantly on the lips of industrialists, politicians, economists and union bosses. The term covers a variety of measures: a switch to profitable products, heavy investment in machinery, "rationalization," or reduction of labor forces where warranted, the retraining of surplus workers, even a shift of emphasis in the education system away from the humanities to technical training in new industries. "Our industry must manufacture goods that others are not yet capable of marketing and will not be able to produce in the next ten years," says Chancellor Helmut Schmidt. The French hold the same view. "To get out of this bind," explains Industry Minister Andre Giraud, "we must resort to innovation, manufacturing goods that others don't produce or don't produce as well."

Indeed, amidst the gloom there are striking success stories. In northern Italy, small and efficient steel mills using modern electric-arc furnaces turn out low-grade construction steel at bargain prices, and have captured three-fourths of Europe's construction-steel market. In shipbuilding, the West Germans are switching from simple cargo carriers to more advanced container ships, icebreakers, refrigeration vessels and floating factories. Switzerland offers the encouraging example of a country that persistently refuses to bail out money-losing industries. When watchmakers began losing their market to Japanese electronic models, the Swiss closed obsolete plants and accelerated their move into electronics. Now Switzerland is a major and competitive producer of quartz watches.

Swedish Economist Assar Lindbeck foresees the time when standardized industrial production, invented in Europe, will shift significantly to the developing countries. By the end of this century, he predicts, Third World manufacturers may be producing 20% of the world's industrial goods, vs. 7% today. That would enable them to buy more from other nations, which would bring only benefit to Europe.

Inevitably, coming to grips with the enveloping sea change of industry will heighten tensions of all kinds in Europe's tradition-bound societies. The longer the hard decisions are put off, the more painful the transition will be. The old is, indeed, dying, but Europeans still have time to improvise their way into a new industrial revolution.

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