Roland Berger Vortrag SAMBA Europa Schweiz

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29. Deutscher Vertriebs- und Verkaufsleiterkongress, München, 30. März 2006 HOW CAN EUROPE BECOME MORE COMPETITIVE? Dr. Martin Wittig CFO Roland Berger Strategy Consultants SAMBA meeting with Roland Berger, 25 January 2007, Zurich

Europe’s development resembles a seesaw movement – great success …: 

Europe’s development resembles a seesaw movement – great success … COMPETITION POLICY European Commission eliminates numerous market distortions DOMESTIC MARKET Single market provides an additional economic achieve-ment of EUR164 bn for the EU in 20021) EUROPEAN CURRENCY UNION Common currency enhances the intra-trade within the European zone more than 5% 2) Source: European Commission 2006; Deutsche Bundesbank 2006 1) Compared to the basic scenario without the domestic market and liberalization of network industries 2) Depending on appraisal up to 29%

… alternates with big failures: 

… alternates with big failures SERVICE GUIDELINE EU Parliament mitigates the Commission draft in spring 2006 by 213 changes LISBON AGENDA Commission cancels European ambition of becoming the "most competitive region worldwide by 2010" in 2005 CONSTITUTIONAL REFERENDUM 55% of the French and 62% of the Dutch dismiss draft for European constitution in 2005 Source: Euromonitor 2006; European Commission 2006 > … 'what helps us on?'

Additionally, Europe is an entrepreneurial topic – our motivation for Best of European Business: 

Additionally, Europe is an entrepreneurial topic – our motivation for Best of European Business THE DREAM Europe as the most competitive region in the world THE VISION Diversity boosts creativity and competition advance THE STRATEGIC NECESSITY Companies need strong domestic markets in order to develop the power to lead globally

Content: 

Four observations about Europe today Four observations about entrepreneurial reality Four observations about CEE countries Conclusions Content

A. Four observations about Europe today : 

A. Four observations about Europe today

Observations 1: Europe is better than its reputation: 

Observations 1: Europe is better than its reputation Europe is large Europe is technologically strong Europe is successful in the world markets

Europe is large: EU-25 is the biggest economic area in the world: 

Europe is large: EU-25 is the biggest economic area in the world REAL GDP 2005 [USD bn] Residents 2005 [m] EU-25 Japan China CH EU-25 Japan China CH 10,450 5,083 11,173 1.851 296 127 459 1.307 Source: EIU 2006 USA 350 USA 7

Europe is technologically strong: High percentage of research intensive industries : 

PERCENTAGE OF VALUE ADDED BY RESEARCH INTENSIVE INDUSTRIES IN OVERALL VALUE ADDED [%] Europe is technologically strong: High percentage of research intensive industries Source: OECD 2005

Europe's economy is successful in the world markets : 

Europe's economy is successful in the world markets EU CHN IND USA 38.5 8.9 7.5 0.9 EU USA CHN IND Source: EIU, German Federal Statistical Office 2006 PERCENTAGE OF GLOBAL EXPORTS 2005 [%] EXPORTS 2005 [% of GDP] CH 47.8 37.3 36.8 21.2 10.4

Observation 2: Europe has first class businesses: 

Observation 2: Europe has first class businesses European companies are set up globally European companies have competitive advantages European companies have a head start in growth in important industries

Europe's companies are set up globally: 

Europe's companies are set up globally 56 Europe1) 3 Switzerland2) Regional allocation of the 100 biggest (non-finance) companies in 2004 Source: Unctad 2006 1) Without Switzerland; 2) Nestlé SA, Roche Group, Novartis

European companies have competitive advantages : 

Germany Israel US France Switzerland Belgium Denmark UK Netherlands Austria Italy Luxembourg 1. 2. 4. 5. 7. 9. 10. 11. 12. 13. 19. 20. European companies have competitive advantages World Economic Forum ranking 2006 [ranking among 117 countries] Japan Germany Switzerland US Belgium Denmark Luxembourg France Sweden Austria Netherlands Italy 1. 2. 3. 5. 6. 7. 8. 9. 10. 11. 13. 15. UNIQUENESS OF THE COMPETITVE ADVANTAGE INNOVATION CAPACITY EFFICIENCY OF PRODUCTION PROCESSES Germany US Switzerland Finland Austria Denmark France Belgium Sweden Netherlands UK Ireland 2. 3. 4. 5. 6. 7. 8. 10. 11. 14. 18. 20.

European companies grow faster – at least in important industries: 

European companies grow faster – at least in important industries Growth in sales 2000-20041) – CAGR [%] 10.4 5.9 0.1 EU Japan USA 14.1 11.2 13.4 EU Japan USA 4.5 3.2 4.0 EU Japan USA 8.0 5.3 0.7 EU Japan USA Source: Fortune Global 500, Bloomberg, Roland Berger 1) Fortune 500 companies AUTOMOTIVE MANUFACTURER CHEMICAL INDUSTRY OIL AND GAS TELE- COMMUNICATIONS

Observation 3: But – Europe is not growing fast enough ...: 

Observation 3: But – Europe is not growing fast enough ... Economic growth 2005 [%] Source: EIU 2006 IRL LUX GRC ESP DNK SWE FIN AUT GBR BEL FRA NDL DEU ITA EU-15 avg. 1.5% USA 3.5% Lisbon aim 3.0% 4.7 4.0 3.7 3.4 3.1 2.7 2.1 2.0 1.8 1.5 1.4 1.1 0.9 0.1 CH 1.9

Observation 4: Points of view of Europe: 

Observation 4: Points of view of Europe Source: Best of European Business CEO Survey 2005 NEARSHORING IS GAINING IMPORTANCE 80% of companies want to extend nearshoring within Europe 2 MORE THAN 80% OF CEOs BELIEVE IN A STABLE/ GROWING IMPORTANCE OF EUROPE 1 COMPETITIVE ADVANTAGES THROUGH DIFFERENTIATION For 86%, Europe offers advantages through differentiation 3

Observation 4: Points of view of Europe: 

Observation 4: Points of view of Europe Source: Best of European Business CEO survey 2005 SWITZERLAND IN AN EXCELLENT POSITION In Europe, senior managers only rank Great Britain higher, Germany and France lag behind 5 FAVORABLE CONDITIONS IN SWITZERLAND 95% of Swiss senior management consider current conditions in Switzerland favorable 4

B. Four observations on entrepreneurial reality: 

B. Four observations on entrepreneurial reality

Observation 1: Only growing companies are strong in substance: 

Observation 1: Only growing companies are strong in substance PRODUCTIVITY FREE CASHFLOW EMPLOYEES VALUE 7.2 53.5 12.4 19.5 4.1 43.2 3.8 12.7 Avg. growth rates triad 1991-2004 [% p.a. median] (TOTAL SHAREHOLDER RETURN) = Profitable companies with overproportional growth = Other companies

Observation 2: Only companies that are globalizing are able to grow over-proportionally: 

Observation 2: Only companies that are globalizing are able to grow over-proportionally World GDP / world exports / world FDIs [1985=100] 100 629 762 164 156 312 324 1985 90 95 2000 2005 FDI Exports GDP CAGR 11.9% 6.5% 2.8%

Observation 3: The domestic region is decisive: 

Observation 3: The domestic region is decisive Avg. share of sales of 500 largest companies worldwide in their domestic region [% of total sales] 77.2 74.3 62.8 North America Asia-Pacific Europe Importance of domestic market Easier generation of economies of scale Less geographic and cultural distance One regulatory framework Independence from exchange rate changes Better basis for estimating demand Source: Rugman 2005

Observation 4: European company management is special : 

Observation 4: European company management is special 51% Characteristics of European company management Sustainability instead of short-term profits and actionism Focus on true strategies instead of following current trends Intelligent combination of growth and restructuring Corporate social responsibility as an important part of corporate culture

C. Four observations on CEE countries: 

C. Four observations on CEE countries

Observation 1: CEE countries have excellently educated human resources …: 

Observation 1: CEE countries have excellently educated human resources … 7 Czech Republic 23 Slovakia 30 Hungary 11 Germany 29 Austria 75 Poland 46 Russia German English Czech Republic 40% 70% Poland 40% 80% Hungary 47% 57% Slovakia 47% 65% Romania 11% 90% Croatia 84% 36% Source: OECD 2004; WEF 2007 1) Share of students who complete at least 9 years of school (ISCED 3) and learn the respective foreign language AVAILABILITY OF ENGINEERS 2007 [RANKING AMONG 125 COUNTRIES] LANGUAGE SKILLS IN SECONDARY SCHOOL1) [%] 6 Switzerland

… and a good ratio between cost of labor and productivity: 

… and a good ratio between cost of labor and productivity Source: EIU 2006 1) GDP per jobholder (PPP) INDUSTRIAL COST OF LABOR 2005 [EUR/h] PRODUCTIVITY1) 2005 [EU 15 = 100] CH EU 15 SLO CZR HUN POL EST SLR LTU LET RUS CH EU 15 SLO CZR HUN EST SLR LTU POL LET RUS

Observation 2: The purchasing power in CEE is growing – and will continue to grow until 2010: 

Observation 2: The purchasing power in CEE is growing – and will continue to grow until 2010 Real disposable income [USD bn] +1.8% p.a. +2.6% p.a. 1995 05 06e 2010e 30 37 36 41 +3.1% p.a. +.5% p.a. 1995 05 06e 2010e 34 50 46 67 +4.5% p.a. +4.1% p.a. 1995 05 06e 2010e 92 148 143 174 Source: Economist Intelligence Unit; Roland Berger CZECH REPUBLIC HUNGARY POLAND

Eastern European clients ask for more innovative products: 

Eastern European clients ask for more innovative products Openness to innovation1) [% of all respondents] 62 56 51 45 42 37 SLO CZR HUN AUT GER POL Source: EU Innobarometer 2005; WEF 2006 1) Share of population which is "enthusiastic" or "open" to innovative products

Observation 3: CEE countries remain the center of growth in Europe: 

Observation 3: CEE countries remain the center of growth in Europe Source: EIU; Roland Berger Average GDP growth 2006p-2010p [% p.a.] Affluence 2010p [USD per capita] BGR CZR DNK GRC HUN IRL ITA POL PRT ROM SLR ESP SWE NLD DEU CH GBR FRA BEL AUT

Observation 4: But there is need for action: 

Observation 4: But there is need for action Source: World Bank 2007; Transparency International 2006 EASE OF DOING BUSINESS 20071) CORRUPTION PERCEPTIONS INDEX 20062) Singapore Switzerland Lithuania Estonia Germany Latvia Austria France Slovakia Romania Czech Republic Bulgaria Slovenia Hungary Poland Russia 1. 15. 16. 17. 21. 24. 30. 35. 36. 49. 52. 54. 61. 66. 75. 96. Finland/Iceland/New Zealand Switzerland Austria Germany France Estonia Slovenia Hungary Lithuania Czech Republic Slovakia Latvia Bulgaria Poland Romania Russia 1. 7. 11. 16. 18. 24. 28. 41. 46. 46. 49. 49. 57. 61. 84. 121. 1) Ranking among 175 countries 2) Ranking among 163 countries

D. Conclusions: 

D. Conclusions

Conclusion 1: Europe gains impetus through enlargement : 

Conclusion 1: Europe gains impetus through enlargement Over-proportional growth within the next ten years, especially in Central and Eastern Europe (Human resources, favorable cost/productivity ratio, modern assets) EU membership speeds up structural development Central and Eastern Europe enjoys clear advantage as a production location – institutional competition (also pressure for reforms!) is increasing in the entire EU