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Issues basic to the development of a European information technology
27
The Market Perspective R.W. WILMOT * Chairman, International Computers Limited, Bridge House, Putney Bridge, Fulham, London, SW6 3JX, England
1. ESPRIT: Only the First Step!
The test of a competitive European IT industry can only be made in the marketplace - the global marketplace - and not in the laboratory. We must avoid ESPRIT becoming a program run by technologists for technologists, convincing ourselves that all is well and all the problems have been solved. Unfortunately, the reality is that already, more than half the IT production in Europe is done by Japanese and American companies. Meanwhile, our national and regional governments continue to offer 40% subsidies to already cash-rich critical mass inward investors in order to increase their market share, at a rate which could leave European industry with less than a third of its own market by the mid 1990s. A competitive IT industry in Europe is one that is increasing its share of the European market, and is making profitable inroads into Japan and America from its strong European base. This is certainly not what is happening today. This is what winning is all about, protecting our markets in the early phases, as Japan and America do, ensuring that we grow a few critical mass suppliers in each segment. Winning is also about having zero tariffs so that the resulting critical mass industries are forced to be globally competitive, with a cost base capable of supporting profitable penetration of America and Japan. It certainly means ceasing the ridiculous inward investment subsidies. A strategy for winning is much more than ESPRIT. Winning requires a total commitment,
* Now with European Silicon Structures North-Holland Future Generations Computer Systems 2 (1986) 27-31
not just "doing better." Winning means understanding with absolute clarity what it is you're trying to beat. Representing the two extremes of what we're trying to beat, on one hand is the organizational capability of the Japanese for international targeting; and on the other is the American venture capital industry with its potential for creating entrepreneurial companies which can achieve critical mass without even needing to sell beyond their state boundaries! Winning is as much about critical mass and organizational capability as it is about technology - probably more so, since Europe has always had a credible technological capability. When all things are considered, precompetitive research is a small part of the total problem. We have to win across the total battlefield, not just in the labs. Many organizations in Europe lack the capability to even execute a perfect strategy. Many organizations do not comprehend the fierceness of the battle between the U.S. and Japan, and all its implications, including the fact that Europe is caught in the crossfire. Our history, naturally, is as suppliers to national markets, or to strange parts of the world, rather than targeting the U.S. and Japan from critical mass market shares gained in Europe. We should not be embarrassed to put the resulting problems on the table and share the solutions, just as we are promoting technology diffusion through the ESPRIT program. I am a strong supporter of ESPRIT and its potential for bringing together the disparate European research community, and for bringing industry and universities together. It is an absolutely necessary first step, but it is totally insufficient on its own. Here are some questions to consider in critizing ESPRIT: • ESPRIT still has the same population of IT researchers, but there is a lot more administration, travel and bureaucracy. Is more research actually being done? • Are the complexities of collaboration causing all research to proceed at the pace of the slowest collaborator, when speed is of the essence? • Since, by definition, there is no such thing as a free lunch, if ESPRIT funds were raised by a direct tax on our participating companies, would
0376-5075/86/$3.50 © 1986, Elsevier Science Publishers B.V. (North-Holland)
28
R.W. Wilmot / The Market Perspective
we all be as enthusiastic? • In our companies today, do we have more people doing ESPRIT administration.., or analyzing our Japanese competitors' strategies for gaining market share in Europe - and which is more important? And possibly the most telling question of all that I have asked a lot of people over the past few weeks: • If I have a completed IT technology, totally researched and ready to go into production and worldwide marketing, and I license it to three companies, one Japanese, one American and one European - in five years, who will have the largest world market share? I believe the answers to these questions are well-known. I cannot state too strongly that technology, vital though it is, absolutely will not solve Europe's IT industry problems on its own. Our competitiveness will be governed by the rate at which we can build up the capability of our organizations, which is a slow, difficult process (certainly when compared to the rate of technology diffusion).But it is not impossible: after all, why are many of the best managers in America European? My point is that ESPRIT is fine as a fabric on which to weave a winning strategy. It has given us an existence theorem that collaboration works. It is promoting technology and idea diffusion, which is an essential element of winning, but a l o n e it will not solve the problem.
2. A Firm European Approach But what exactly is the problem? I would like to address this by provocatively stating what I believe the problem is not and, therefore, what some of the solutions are not. The problem is not caused by fragmented markets, but more by fragmented supply. It is true that differing standards and border procedures are a problem, but not enough of one to halt our Japanese and American colleagues If anything, removing these barriers might make it relatively easier for them than for us, since we ought to be more familiar with how to deal with these problems. I don't believe we have a severe shortage of technologists. Europe has a significant population of very capable technologists. What is true is that a high proportion of our expensively trained tech-
nologists end up working for non-European companies, and many of the rest are designing public switches and telephone network equipment, or other sub-critical mass activities. There is no shortage of community and government funding. Arguably, any increase in governments' support for the IT industry is likely to perpetuate the status quo, a status quo of declining market share. I obviously do not believe in subsidizing inward investors. I do not favor, either, policies such as those adopted for instance by the British government in the 1970s, of having three or four IT suppliers in every product area to create competition. Competition has been severly damaged globally by governments trying to use procurement to promote competition nationally. Equally, emerging government policies of procuring some requirements from globally competitive (i.e., American or Japanese) suppliers, to put pressure on the already fragile national suppliers, are also clearly not solutions. This is just the strategic gap our competitors have been waiting for. Why else do we have Japanese and American computer, communications and semiconductor facilities under construction all across Europe? Many of these also get sizeable subsidies, often as high as 40% of total investment. These subsidies are paid for by our taxes. Do America and Japan treat European companies in this ridiculous way? Absolutely not. So, what is the problem? I put two propositions forward. Firstly, most IT companies in Europe are national, with over half their sales in their domestic market. Few have critical mass, often judged to be a five percent world market share, which is needed to compete profitably with Japan and America in global markets. This does not mean such companies can't be very successful niche players, but we are discussing mainstream IT. Secondly, and this point stems from the first, in companies with backgrounds as national companies, the organizational capability to win in a global marketplace is often missing - the ability to think big, take risks, target competitors, manage complexity, use profits in one market to finance market share gains in another, and so on. All this is greatly aggravated, of course, by the speed of change in our industry. Europe's industry has a strong historic culture as national suppliers - but culture, be definition, resists change. As market
R.W. Wilrnot / The Market Perspective
after market goes from being national to global, the culture which has stood us so well for most of this century may no longer be competitive. It is not just IT. It touches everything from consumer goods to cars to financial services, but IT is the cutting edge of this fundamental change, and IT itself is the basic tool which allows industries to become globally managed. Winning in this global marketplace requires a fundamentally different set of organizational capabilities than we are used to in Europe. Thus my two key points are: critical mass in a market sector, and organizational capability to win globally. Critical mass is hard to come by in Europe because of the fatal desire of every country to have its own national champion, and of bigger countries to have several (believing that it creates competition). This crowding out process means that it is very difficult for any European company to achieve more than a one or two percent world market share. Even a good national company can fail to grow if it is crowded out of other nations by equally good national companies. Japan limits its number of players to three or four in each new market segment, so that each can achieve 5% world market share. Californian start-ups can achieve 5% world market share simply by gaining 20% of the market in the state of California. Europe's strategy is frequently to ensure at least ten players, so that none can sustain the investment needed to keep up with competitors five times their size. This strategy led inevitably to the subsidies. I believe the solution to this problem must be true European companies, nationless enterprises if you like. We call ourselves European companies, but in many ways American subsidiaries look more European than we do. IBM, for instance, although it is head-quartered in Paris, has European vice presidents from all nations, sited in all major countries, and takes great care that its activities, its presence and politics, and its decision making are well balanced across the Community. IBM Europe often claims to be more European than most of our companies and indeed, as many of us know, this is not easy to refute. We do not think IBM Europe is French just because its headquarters is in Paris. I believe a true European company should operate in a very similar way to the European subsidiaries of major U.S. corporations, with the key difference being that the major wealth creation for
29
shareholders and management and the strategic decision-making and source of technology would stay in Europe. On the second point, capability, without doubt we all have to work hard to upgrade our culture and develop the capacity for winning in our present companies, but I think equally we should not rely totally on our present infrastructure. I strongly believe that it may be possible to build winning capability and culture in critical mass enterprises in green fields rather quicker than by completely changing the existing status quo. It may be impossible or even counter-productive to try and force a predominantly national company to become a nationless European company. But it is equally difficult to envision entrepreneurism in Europe suddenly rising up, with European start ups running along the lines of Californian start ups (but treating Europe as the home market). Clearly this requires rather more than a good technical idea; it requires a degree of organizational capability more typically found in the major Japanese companies. It also requires the governments of Europe to abandon the "every country must have one" strategy, and to stop competing to see who can give the biggest subsidies to American and Japanese companies. By late 1984, I had personally come to the view that one solution to this problem could lie in a mixture of the Tokyo consensus approach and the California venture approach, with some unique European flavors thrown in. This is exactly the recipe that has been developed for European Silicon Structures, the first major European IT start up of this nature. European Silicon Structures will be organized exactly as described above, with its vice presidents from five different countries and its facilities deployed across the Community. It is incorporated in Luxembourg. It will exist to service the fast prototyping needs of the European system houses, with state-of-the-art compiled 2-micron CMOS with two week turnaround, followed by cost-effective low volume production in the tens of to a few thousands of quantities typically required by our system industry. European Silicon Structures will also have design portability with several volume foundries in Europe so that high volume VLSI can be proven in modest volumes first, then transferred to a volume foundry for mass production. The company will deploy an all E-beam direct write wafer fab, and plans to build up the most
30
R.W. Wilmot / The Market Perspective
capable silicon compiler design automation team outside the U.S. The company will be critical mass, targeting over 20% of the European market, with $65 million of financing from across the Community. It will have organizational capability from an exceptional team of executives with multinational experience who have come together to win, by giving outstanding service at low cost to its European customer base. But more importantly, it will provide a mechanism for the existing companies to win. Setting up a prototyping and low volume foundry in every country is plainly ludicrous, and this problem has remained unresolved for many years. The existing system and semiconductor companies who invest in European Silicon Structures participate in a critical mass European enterprise that is organized to win, without the risk of national fragmentation. The enterprise was started on venture capital raised from six countries, but will receive its major financing from the existing industry, which makes it possible to bring in significant additional finance from institutions, like the banks. In my view, it is an ideal mix of California and Tokyo and one possible model for resolving the two basic issues I raised - but I am sure there are others. Corporate investor in the company will own a part share of a critical mass enterprise with a high probability of rapid growth and good profit, and of becoming globally competitive with Japan and America. This has to be a better deal for their shareholders than owning 100% of a good but sub-critical, national effort which is crowded out of the rest of Europe by a multitude of other national efforts. Clearly this philosophy applies only in certain market sectors of IT, and in no way am I suggesting it as a mechanism for the entire industry. But, for certain segments which are extremely economy-of-scale sensitive, or where the marketplace really wants standardized products, it just does not make sense to develop them ten times over, wasting our precious technical resource. In such cases I think this is a very viable approach. The Siemens/Philips project is another equally viable model for very large joint ventures. 3. Recommendations for Further Developments In pursuing this project for the last year, it has become clear to me just how difficult a thing we
are trying to do. It has required an unbelievable amount of willpower and commitment to plough the furrow of the first major European IT start up. Therefore, I have put forth some specific recommendations to the Commission and to governments on actions that would make the process more attractive to all the parties involved, and provide a more conducive environment for the ventures. Creating the right environment is, after all, government's major role in this whole situation. I strongly believe that our present companies are going to have to join together commercially in equity-based ventures such as European Silicon Structures if we are to reap the maximum benefit of what ESPRIT has started. Indeed, ES2 is sometimes referred to as a "child of ESPRIT." Highly focused initiatives like this, or like the megaram project, are far more likely to succeed than a total industry restructuring. I would like to see the concept or a Qualifying European Enterprise, or QEE, introduced. These could be joint ventures between existing companies or start ups like ES2, but they must meet the broad criteria of a true European company as I outlined earlier. To stimulate the creation of critical mass QEE's, five steps are proposed: 1. Legislation allowing European incorporation must be completed rapidly, including equalized tax treatment of founder's equity or options across the European Community. Personal wealth must be synonymous with Community wealth-and encouraged. 2. Governments could jointly agree on a European Enterprise Scheme (modelled on the British BES), permitting both private and corporate tax deductibility for investment in QEE's. At the moment, a national champion is tax deductible and at the same time subsidized for internal sub critical mass investments, but not for equity investments in critical mass, jointly owned nationless QEE's. This motivation needs reversing. 3. The European Investment Bank could introduce non-resource leasing for QEE's, where the underlying value of the equipment is used as the guarantee, rather than other assets as typically happens in Europe today. Japan's low interest rates, and America's non-resource leasing industry, are formidable competitive weapons in the capital intensive technology market segments. 4. Governments could jointly agree to eliminate
R. W. Wilmot / The Market Perspective
all inward investment subsidies and focus on creating indigenous wealth because this is the only long term solution to Europe's employment and regional problems. 5. Tariffs in the technology sector should be brought down to Japanese and American levels, but a public sector "Buy Europe" and "QEE set aside" should apply to all member EEC states, at price preferences exactly matching those in the Buy America Act for State procurement, and the small business set-aside for U.S. Federal and state procurement. The Community must nurture QEE's to competitive competence, just as Japan does. Market forces will determine the right number of QEE's in a particular market segment; governments needn't pick winners, which they're not equipped to do. High European tariffs lead to high costs and a resulting inability to profitably target the low tariff markets of the U.S. and Japan. Invisible tariffs work; financial tariffs don't. Europe must install competitive invisible tariffs alongside the QEE mechanism to protect emergent enterprises until they're ready to fight internationally. In parallel, we must have mechanisms to protect against dumping and below cost targeting-but these should be product-specific.
4. Conclusion In summary, time is not on our side. Information technology is on a price performance trajec-
31
tory of "ten times every five years," and is touching new market segments all the time. It has made the global economy possible, which is increasingly about pre-emption. We must attack, not defend; look outwards, not inwards The five points suggested herein could be quickly implemented with resolve from the European governments. The competitive gap is getting wider than our understanding of it but a few QEE's would rapidly provide real learning, and an experimental adoption of the QEE strategy for a five-year period would provide a base of experience for fine-tuning in the 1990's. This absolutely need not be a two-horse race between Japan and America. These recommendations, adopted aggressively by European governments, would create an environment which sent a clear signal to market forces and enterprises to get to work. It would also indicate an abdication of the desire for the mathematically impossible national initiatives to conquer our global competitors. There are plenty of people in Europe, and people who would return to Europe, to organize for global success, generate personal and Community wealth - and be a product of their environment, if the environment is the right one and that means a market-led, not technology-led, environment.
The Market Perspective R.W. WILMOT * Chairman, International Computers Limited, Bridge House, Putney Bridge, Fulham, London, SW6 3JX, England
1. ESPRIT: Only the First Step!
The test of a competitive European IT industry can only be made in the marketplace - the global marketplace - and not in the laboratory. We must avoid ESPRIT becoming a program run by technologists for technologists, convincing ourselves that all is well and all the problems have been solved. Unfortunately, the reality is that already, more than half the IT production in Europe is done by Japanese and American companies. Meanwhile, our national and regional governments continue to offer 40% subsidies to already cash-rich critical mass inward investors in order to increase their market share, at a rate which could leave European industry with less than a third of its own market by the mid 1990s. A competitive IT industry in Europe is one that is increasing its share of the European market, and is making profitable inroads into Japan and America from its strong European base. This is certainly not what is happening today. This is what winning is all about, protecting our markets in the early phases, as Japan and America do, ensuring that we grow a few critical mass suppliers in each segment. Winning is also about having zero tariffs so that the resulting critical mass industries are forced to be globally competitive, with a cost base capable of supporting profitable penetration of America and Japan. It certainly means ceasing the ridiculous inward investment subsidies. A strategy for winning is much more than ESPRIT. Winning requires a total commitment,
* Now with European Silicon Structures North-Holland Future Generations Computer Systems 2 (1986) 27-31
not just "doing better." Winning means understanding with absolute clarity what it is you're trying to beat. Representing the two extremes of what we're trying to beat, on one hand is the organizational capability of the Japanese for international targeting; and on the other is the American venture capital industry with its potential for creating entrepreneurial companies which can achieve critical mass without even needing to sell beyond their state boundaries! Winning is as much about critical mass and organizational capability as it is about technology - probably more so, since Europe has always had a credible technological capability. When all things are considered, precompetitive research is a small part of the total problem. We have to win across the total battlefield, not just in the labs. Many organizations in Europe lack the capability to even execute a perfect strategy. Many organizations do not comprehend the fierceness of the battle between the U.S. and Japan, and all its implications, including the fact that Europe is caught in the crossfire. Our history, naturally, is as suppliers to national markets, or to strange parts of the world, rather than targeting the U.S. and Japan from critical mass market shares gained in Europe. We should not be embarrassed to put the resulting problems on the table and share the solutions, just as we are promoting technology diffusion through the ESPRIT program. I am a strong supporter of ESPRIT and its potential for bringing together the disparate European research community, and for bringing industry and universities together. It is an absolutely necessary first step, but it is totally insufficient on its own. Here are some questions to consider in critizing ESPRIT: • ESPRIT still has the same population of IT researchers, but there is a lot more administration, travel and bureaucracy. Is more research actually being done? • Are the complexities of collaboration causing all research to proceed at the pace of the slowest collaborator, when speed is of the essence? • Since, by definition, there is no such thing as a free lunch, if ESPRIT funds were raised by a direct tax on our participating companies, would
0376-5075/86/$3.50 © 1986, Elsevier Science Publishers B.V. (North-Holland)
28
R.W. Wilmot / The Market Perspective
we all be as enthusiastic? • In our companies today, do we have more people doing ESPRIT administration.., or analyzing our Japanese competitors' strategies for gaining market share in Europe - and which is more important? And possibly the most telling question of all that I have asked a lot of people over the past few weeks: • If I have a completed IT technology, totally researched and ready to go into production and worldwide marketing, and I license it to three companies, one Japanese, one American and one European - in five years, who will have the largest world market share? I believe the answers to these questions are well-known. I cannot state too strongly that technology, vital though it is, absolutely will not solve Europe's IT industry problems on its own. Our competitiveness will be governed by the rate at which we can build up the capability of our organizations, which is a slow, difficult process (certainly when compared to the rate of technology diffusion).But it is not impossible: after all, why are many of the best managers in America European? My point is that ESPRIT is fine as a fabric on which to weave a winning strategy. It has given us an existence theorem that collaboration works. It is promoting technology and idea diffusion, which is an essential element of winning, but a l o n e it will not solve the problem.
2. A Firm European Approach But what exactly is the problem? I would like to address this by provocatively stating what I believe the problem is not and, therefore, what some of the solutions are not. The problem is not caused by fragmented markets, but more by fragmented supply. It is true that differing standards and border procedures are a problem, but not enough of one to halt our Japanese and American colleagues If anything, removing these barriers might make it relatively easier for them than for us, since we ought to be more familiar with how to deal with these problems. I don't believe we have a severe shortage of technologists. Europe has a significant population of very capable technologists. What is true is that a high proportion of our expensively trained tech-
nologists end up working for non-European companies, and many of the rest are designing public switches and telephone network equipment, or other sub-critical mass activities. There is no shortage of community and government funding. Arguably, any increase in governments' support for the IT industry is likely to perpetuate the status quo, a status quo of declining market share. I obviously do not believe in subsidizing inward investors. I do not favor, either, policies such as those adopted for instance by the British government in the 1970s, of having three or four IT suppliers in every product area to create competition. Competition has been severly damaged globally by governments trying to use procurement to promote competition nationally. Equally, emerging government policies of procuring some requirements from globally competitive (i.e., American or Japanese) suppliers, to put pressure on the already fragile national suppliers, are also clearly not solutions. This is just the strategic gap our competitors have been waiting for. Why else do we have Japanese and American computer, communications and semiconductor facilities under construction all across Europe? Many of these also get sizeable subsidies, often as high as 40% of total investment. These subsidies are paid for by our taxes. Do America and Japan treat European companies in this ridiculous way? Absolutely not. So, what is the problem? I put two propositions forward. Firstly, most IT companies in Europe are national, with over half their sales in their domestic market. Few have critical mass, often judged to be a five percent world market share, which is needed to compete profitably with Japan and America in global markets. This does not mean such companies can't be very successful niche players, but we are discussing mainstream IT. Secondly, and this point stems from the first, in companies with backgrounds as national companies, the organizational capability to win in a global marketplace is often missing - the ability to think big, take risks, target competitors, manage complexity, use profits in one market to finance market share gains in another, and so on. All this is greatly aggravated, of course, by the speed of change in our industry. Europe's industry has a strong historic culture as national suppliers - but culture, be definition, resists change. As market
R.W. Wilrnot / The Market Perspective
after market goes from being national to global, the culture which has stood us so well for most of this century may no longer be competitive. It is not just IT. It touches everything from consumer goods to cars to financial services, but IT is the cutting edge of this fundamental change, and IT itself is the basic tool which allows industries to become globally managed. Winning in this global marketplace requires a fundamentally different set of organizational capabilities than we are used to in Europe. Thus my two key points are: critical mass in a market sector, and organizational capability to win globally. Critical mass is hard to come by in Europe because of the fatal desire of every country to have its own national champion, and of bigger countries to have several (believing that it creates competition). This crowding out process means that it is very difficult for any European company to achieve more than a one or two percent world market share. Even a good national company can fail to grow if it is crowded out of other nations by equally good national companies. Japan limits its number of players to three or four in each new market segment, so that each can achieve 5% world market share. Californian start-ups can achieve 5% world market share simply by gaining 20% of the market in the state of California. Europe's strategy is frequently to ensure at least ten players, so that none can sustain the investment needed to keep up with competitors five times their size. This strategy led inevitably to the subsidies. I believe the solution to this problem must be true European companies, nationless enterprises if you like. We call ourselves European companies, but in many ways American subsidiaries look more European than we do. IBM, for instance, although it is head-quartered in Paris, has European vice presidents from all nations, sited in all major countries, and takes great care that its activities, its presence and politics, and its decision making are well balanced across the Community. IBM Europe often claims to be more European than most of our companies and indeed, as many of us know, this is not easy to refute. We do not think IBM Europe is French just because its headquarters is in Paris. I believe a true European company should operate in a very similar way to the European subsidiaries of major U.S. corporations, with the key difference being that the major wealth creation for
29
shareholders and management and the strategic decision-making and source of technology would stay in Europe. On the second point, capability, without doubt we all have to work hard to upgrade our culture and develop the capacity for winning in our present companies, but I think equally we should not rely totally on our present infrastructure. I strongly believe that it may be possible to build winning capability and culture in critical mass enterprises in green fields rather quicker than by completely changing the existing status quo. It may be impossible or even counter-productive to try and force a predominantly national company to become a nationless European company. But it is equally difficult to envision entrepreneurism in Europe suddenly rising up, with European start ups running along the lines of Californian start ups (but treating Europe as the home market). Clearly this requires rather more than a good technical idea; it requires a degree of organizational capability more typically found in the major Japanese companies. It also requires the governments of Europe to abandon the "every country must have one" strategy, and to stop competing to see who can give the biggest subsidies to American and Japanese companies. By late 1984, I had personally come to the view that one solution to this problem could lie in a mixture of the Tokyo consensus approach and the California venture approach, with some unique European flavors thrown in. This is exactly the recipe that has been developed for European Silicon Structures, the first major European IT start up of this nature. European Silicon Structures will be organized exactly as described above, with its vice presidents from five different countries and its facilities deployed across the Community. It is incorporated in Luxembourg. It will exist to service the fast prototyping needs of the European system houses, with state-of-the-art compiled 2-micron CMOS with two week turnaround, followed by cost-effective low volume production in the tens of to a few thousands of quantities typically required by our system industry. European Silicon Structures will also have design portability with several volume foundries in Europe so that high volume VLSI can be proven in modest volumes first, then transferred to a volume foundry for mass production. The company will deploy an all E-beam direct write wafer fab, and plans to build up the most
30
R.W. Wilmot / The Market Perspective
capable silicon compiler design automation team outside the U.S. The company will be critical mass, targeting over 20% of the European market, with $65 million of financing from across the Community. It will have organizational capability from an exceptional team of executives with multinational experience who have come together to win, by giving outstanding service at low cost to its European customer base. But more importantly, it will provide a mechanism for the existing companies to win. Setting up a prototyping and low volume foundry in every country is plainly ludicrous, and this problem has remained unresolved for many years. The existing system and semiconductor companies who invest in European Silicon Structures participate in a critical mass European enterprise that is organized to win, without the risk of national fragmentation. The enterprise was started on venture capital raised from six countries, but will receive its major financing from the existing industry, which makes it possible to bring in significant additional finance from institutions, like the banks. In my view, it is an ideal mix of California and Tokyo and one possible model for resolving the two basic issues I raised - but I am sure there are others. Corporate investor in the company will own a part share of a critical mass enterprise with a high probability of rapid growth and good profit, and of becoming globally competitive with Japan and America. This has to be a better deal for their shareholders than owning 100% of a good but sub-critical, national effort which is crowded out of the rest of Europe by a multitude of other national efforts. Clearly this philosophy applies only in certain market sectors of IT, and in no way am I suggesting it as a mechanism for the entire industry. But, for certain segments which are extremely economy-of-scale sensitive, or where the marketplace really wants standardized products, it just does not make sense to develop them ten times over, wasting our precious technical resource. In such cases I think this is a very viable approach. The Siemens/Philips project is another equally viable model for very large joint ventures. 3. Recommendations for Further Developments In pursuing this project for the last year, it has become clear to me just how difficult a thing we
are trying to do. It has required an unbelievable amount of willpower and commitment to plough the furrow of the first major European IT start up. Therefore, I have put forth some specific recommendations to the Commission and to governments on actions that would make the process more attractive to all the parties involved, and provide a more conducive environment for the ventures. Creating the right environment is, after all, government's major role in this whole situation. I strongly believe that our present companies are going to have to join together commercially in equity-based ventures such as European Silicon Structures if we are to reap the maximum benefit of what ESPRIT has started. Indeed, ES2 is sometimes referred to as a "child of ESPRIT." Highly focused initiatives like this, or like the megaram project, are far more likely to succeed than a total industry restructuring. I would like to see the concept or a Qualifying European Enterprise, or QEE, introduced. These could be joint ventures between existing companies or start ups like ES2, but they must meet the broad criteria of a true European company as I outlined earlier. To stimulate the creation of critical mass QEE's, five steps are proposed: 1. Legislation allowing European incorporation must be completed rapidly, including equalized tax treatment of founder's equity or options across the European Community. Personal wealth must be synonymous with Community wealth-and encouraged. 2. Governments could jointly agree on a European Enterprise Scheme (modelled on the British BES), permitting both private and corporate tax deductibility for investment in QEE's. At the moment, a national champion is tax deductible and at the same time subsidized for internal sub critical mass investments, but not for equity investments in critical mass, jointly owned nationless QEE's. This motivation needs reversing. 3. The European Investment Bank could introduce non-resource leasing for QEE's, where the underlying value of the equipment is used as the guarantee, rather than other assets as typically happens in Europe today. Japan's low interest rates, and America's non-resource leasing industry, are formidable competitive weapons in the capital intensive technology market segments. 4. Governments could jointly agree to eliminate
R. W. Wilmot / The Market Perspective
all inward investment subsidies and focus on creating indigenous wealth because this is the only long term solution to Europe's employment and regional problems. 5. Tariffs in the technology sector should be brought down to Japanese and American levels, but a public sector "Buy Europe" and "QEE set aside" should apply to all member EEC states, at price preferences exactly matching those in the Buy America Act for State procurement, and the small business set-aside for U.S. Federal and state procurement. The Community must nurture QEE's to competitive competence, just as Japan does. Market forces will determine the right number of QEE's in a particular market segment; governments needn't pick winners, which they're not equipped to do. High European tariffs lead to high costs and a resulting inability to profitably target the low tariff markets of the U.S. and Japan. Invisible tariffs work; financial tariffs don't. Europe must install competitive invisible tariffs alongside the QEE mechanism to protect emergent enterprises until they're ready to fight internationally. In parallel, we must have mechanisms to protect against dumping and below cost targeting-but these should be product-specific.
4. Conclusion In summary, time is not on our side. Information technology is on a price performance trajec-
31
tory of "ten times every five years," and is touching new market segments all the time. It has made the global economy possible, which is increasingly about pre-emption. We must attack, not defend; look outwards, not inwards The five points suggested herein could be quickly implemented with resolve from the European governments. The competitive gap is getting wider than our understanding of it but a few QEE's would rapidly provide real learning, and an experimental adoption of the QEE strategy for a five-year period would provide a base of experience for fine-tuning in the 1990's. This absolutely need not be a two-horse race between Japan and America. These recommendations, adopted aggressively by European governments, would create an environment which sent a clear signal to market forces and enterprises to get to work. It would also indicate an abdication of the desire for the mathematically impossible national initiatives to conquer our global competitors. There are plenty of people in Europe, and people who would return to Europe, to organize for global success, generate personal and Community wealth - and be a product of their environment, if the environment is the right one and that means a market-led, not technology-led, environment.