Marital Trouble in Europe

A BELIEF arose in Europe in the mid-1960s that the best way to fight the competitive challenge of U.S.-owned multinational firms was to create giant European companies capable of competing on a world scale. In Britain, France, Italy and to a lesser degree West Germany, governments encouraged such mergers, sometimes acting as a marriage broker. Today the European merger movement is running into deep trouble.

Too often weak managements merely compounded their problems by enlarging them. Further, many of the mergers were on a 50-50 basis, giving neither side control. National policies often required the merged companies to continue unprofitable operations to save jobs or prestige.

In Italy, the Montedison industrial combine is losing hundreds of millions of dollars yearly, and the government will almost certainly have to bail it out by having state agencies increase their investment in the company and by making government loans easily available. Among the reasons for failure: poor internal accounting, which has prevented Montedison from adjusting production fast enough to meet demand, political interference when executives want to close inefficient plants and generally weak management in the past.

Another troubled company is British Leyland, the greatest monument to the merger-brokering attempts of the former Labor government. The company, which is barely profitable, still offers too many models, and cannot produce enough of them to meet rising demand. British Leyland's market share is declining in the face of imports. Problems also afflict Germany's combine of Volkswagen and Audi NSU Auto Union. The basic trouble has been the declining popularity of the Beetle--in the first ten months of this year sales of Volkswagens in the U.S. have fallen to 398,000, compared with 463,000 in the equivalent period last year, and VW sales have been slipping worldwide. The job of finding a fast-moving successor to the basic VW has not been made easier by the task of integrating into the company the very different NSU and Audi lines.

The greatest troubles afflict the ambitious transnational combinations of companies. Two years ago, Britain's Dunlop and Italy's Pirelli pooled interests to form a tire, cable and rubber giant, with sales of $2.3 billion. At the time, Leopoldo Pirelli, chairman of his family-run Italian company, said, "This is a marriage from which there is no turning back." Yet last week the partners had divorce in mind.

One problem is that they stopped short of full merger. Instead they exchanged shares in each other's subsidiaries, giving each partner an equal voice--and equal veto--in the operation. Management is by consensus, which often means uneasy compromise reached through a maze of committees. The partners thought that this arrangement would provide economies of scale as well as savings from joint research, diversification of geographical risk and worldwide marketing coordination. But Dunlop Chairman Sir Reay Geddes also warned that "partnership will, in the short term, bring burdens to both of us."

Those burdens are now being felt. On sales of $1.3 billion in this year's first half, profits were only $171,000. In its Italian operations, Pirelli had a deficit of $25.5 million as a result of rising costs, labor unrest and loss to rivals of some orders from automaker Fiat. Last spring the combine became the target of the first big international strike, when some Dunlop and Pirelli workers staged joint work stoppages in Britain and Italy to protest layoffs.

The unwieldy management structure has also hurt. Pirelli suffers from creaky accounting. Dunlop executives have been urging Pirelli men to provide more figures faster as a guide to cost cutting, but to little avail. Geddes is discussing with Dunlop's bankers possible changes in the union; the choices are few. The British could try to persuade Pirelli to pull its Italian operations out of the world-spanning combine; yet that would hardly appeal to Leopoldo Pirelli. Or Geddes and his executives could continue trying to help Pirelli, at the risk of having rising losses entirely submerge Dunlop profits.

Another troubled situation is the four-year-old liaison between Fiat and France's Citroen, which are supposed to exchange technology and share plants. Amid rumors of boardroom squabbles, Citroen plans to sell additional stock, but Fiat General Manager Umberto Agnelli says that Fiat will buy none of it. As in the Dunlop-Pirelli alliance, neither side can move without the other's consent. Says Agnelli: "Our objectives are very ambitious--to produce the automobile of the future for a worldwide market." Citroen, he adds, has "failed to follow these objectives."

The Dunlop-Pirelli and the Fiat-Citroen difficulties do not mean that transnational alliances are bad. But the troubles do cast serious doubt on the concept of what Dunlop's Geddes calls "a marriage of equals." If the Europeans are to create many vigorous multinational companies, they will have to swallow nationalistic pride, aim for complete mergers and accept unified managements--like those of their American rivals.

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