The new European currency unit, the euro, had a rocky first year in world monetary markets. Initially valued at $1.18 in January of 1999, it had dropped to parity with the dollar by this past December, a decline of 15%. It fared even worse against the Japanese yen, falling 25% by year-end.
Financial analysts ascribe the euro's weakness to a number of problems, including a generally volatile European economic environment influenced by global Y2K computer worries, and money managers backing away from their initial bullish prognostications for the euro. In any case, many observers see the valuation drop-off as a reflection of a lack of confidence in either the currency unit itself or the ability of European economies to achieve sustained growth.
But lurking off in the wings is another potential problem that has many European business and industry leaders even more worried: What's going to happen in January 2002 when European manufacturers, including those in the electrical industry, will be compelled to issue price lists in euros in every country where they do business?
Welcome to Euroland. Key to the issue is the fact that 11 countries (Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain) have signed on to be partners in the euro currency venture. At the beginning of 1999, euro equivalents were locked in against the currencies of all these countries. Almost as common in Europe today as the ubiquitous cell phone is the hand-held calculating device that automatically keys in euro valuation against any of these national currencies.
An indicator of the seriousness and sensitivity of this situation for the European electrical industry is the fact that all of the electrical manufacturers interviewed for this article-and a number of wholesalers as well-participated only on the condition of anonymity. Many declined to respond at all. One multi-national manufacturer said, "With reference to questions regarding the euro, we are unable to respond as our company does not wish to make its views widely known."
Joao Bencatel, managing director of wholesaling firm Electro Rayd, Porto, Portugal, sees the situation this way: "To date, there has been little or no impact from the introduction of the euro. However, over the longer term, I believe the effect will be negative for both wholesalers and manufacturers because purchasing will use as a point of reference the lower and more competitive levels. Flexibility in regional sales policies will be substantially curtailed, and consequently there will be a reduction of profits, especially for wholesalers."
According to Markku Waltari, executive director of the Finnish Electrical Wholesalers Federation, prices, rebates and margins will all be lower in the electrical marketing channel when europricing really kicks in.
"The real winner in the euro race is the end user," he says. "Both wholesalers and manufacturers must operate more effectively than they are now. The consolidation of the market will continue at an accelerated pace on every level of the supply chain."
Cross-border bargains. "When the euro lists come in, it will be possible to see exactly where the supplier sells at the lowest price," observes one Dutch electrical wholesaler. "That will create a downward pressure on prices because distributors, contractors and others will find out where the lowest prices are. Since many of these companies already do business across borders, there will be a tendency to buy in the country offering the lowest prices."
Given the closeness of distances in Europe, and the removal of trade and tariff barriers by the European Union (EU), the prospect of cross-border bargain-hunting would seem to be a consummation of every electrical distributor purchasing manager's fondest dreams. It will allow him or her to compare the offers of suppliers in different countries.
"We're already starting to see this happen," notes one multinational manufacturer. "In many businesses as well as our own, cross-border shopping is taking place. Generally speaking, Italy offers the lowest prices for many electrical products, but we are also seeing trading from France to Germany, Germany to Italy, among the Nordic countries, and from Germany to the U.K."
"Europricing will in all likelihood lead to an increase in the already substantial volume of cross-border trade for products standardized throughout Europe," says Thomas Neesen, secretary general of Europacable, the Brussels-based European confederation of associations of insulated wire and cable manufacturers. "In the cable industry, one has to remember that there are different national codes and installation regulations, and these will continue to exist for some time. The manufacturer will have to thoroughly investigate the costs associated with adapting his manufacturing processes to conform to various national specifications vis-a-vis the sales volume he may actually achieve."
"Product differentiation remains in place in many of the EU countries, and there are different costs associated with these situations, and therefore different price lists, but price convergence is inevitable in time," observes a distributor from the U.K. "But I don't see any manufacturer or wholesaler rushing to be first."
Downward price trend. The consensus seems to be that europricing will definitely accelerate efforts already under way to harmonize electrical pricing throughout Europe, and this would obviously mean a downward pricing pattern.
"There are still significant price differences throughout Europe for the same products," a Belgian wholesaler notes. "But there are suppliers working to harmonize their prices. As recently as a few years ago, there were differences of as much as 20% to 60% for the same item, depending on where it was purchased. There was no justification for those extreme differences in wholesale purchase prices. Then of course, there is the question, what is harmonization? Is it exactly the same price, or could it be plus or minus 5%? Given various national marketplace realities, perhaps that's permissible; but a difference of 20% is not."
Otto-Karl Heizmann, executive director of IDEE, a buying group with members in 12 European countries, tends to agree that the price spread will be reduced throughout Europe to about 10% maximum, but there will be some delays before this happens relating largely to national standards and design specifications.
Bryan Barkes, chairman of distribution firm Bemco, based in London, has mixed feelings about which quarters of the electrical industry will be most impacted by europricing: "Overall, I think it will have a positive effect, as the transparency of prices across the EU will act as an incentive to competition. But I think manufacturers will be more disadvantaged, as they have managed to achieve widely varying prices across the EU for the same product.
"As for wholesalers, the impact will be largely administrative, and on the commodity side we will be taking a much more clinical approach to purchasing. But manufacturers will be under severe margin pressure, and previously earned high returns are likely to evaporate. In the final analysis, however, a level playing field should not disadvantage any manufacturer's product."
Internet and E-Impact. But a complicating factor has to do with the virtually synchronous arrival on the scene of the euro, the Internet and e-commerce. One manufacturer says the combined impact of the euro and the Internet has resulted in a huge increase in pricing visibility. "Suppliers are greatly concerned that traditional purchasing values and relationships will become of secondary importance when trading is done on the Internet where one company looks much the same as the next," he says. "If a purchasing decision can be made by a click of the mouse on the basis of price alone, traditional channels may indeed be threatened."
Neesen at Europacable sees e-commerce impacting the way electrical products are traded simply because this system offers administrative cost reductions for both manufacturers and distributors. This would essentially apply to products standardized throughout Europe. He also points out that the EU Public Procurement Directive already in place requires that government purchasing be done via electronic tendering in order to increase the transparency of markets.
"The coinciding appearance of the euro and the Internet offers unparalleled access to comparative pricing information," says Bencatel of Electro Rayd. "This will necessarily increase the purchasing negotiation leverage throughout the marketing channel from the end-user customer all the way back to the manufacturer." It's generally agreed that the euro, the Internet and e-commerce have already started increasing pressure on price transparency, and that both manufacturers and distributors will have to anticipate and deal with this new marketplace reality. But that will most likely have to wait until January 2002 when the "euro-ization" process is complete and the new coins and notes begin to circulate throughout Europe, and all price lists will have to be in euros.
Marking time. For the time being, price lists will remain in national currencies and at different levels probably for as long as possible. One French distributor remarked with a mixture of candor and cynicism, that this is 'tres bien' for distributors: "Wholesalers do not like harmonization. We want to maximize our profitability, and if things are somewhat confused and we have certain skills, then that is an opportunity to make money." For the most part, however, players in the European electrical industry realize that January 2002 is not that far away. The step-by-step calculated pace of the introduction of the euro will give them time to prepare for true europricing. Once it's in place, the importance of national borders will be even more greatly reduced and be replaced to a large extent by the market transparency that's already emerging.
At that point, wholesalers will be pressured more than ever to concentrate on cost reduction, since far less opportunity will exist to use price as a tactical variable. And in the end, suppliers' and wholesalers' market strategies will of necessity become more European, with distributors forging new manufacturer relationships beyond their national boundaries.