How Europe is twisting the fate of business

As global businesses lose confidence in Europe, the ripples are shifting requirements for Australian growth and even overhauling traditional management models.

The president of one of Europe’s top business schools has delivered a frightening warning on the fate of Europe.

Major multinationals are pulling out. On a recent trip to Taiwan, Dominique Turpin, president of Swiss based business school IMD, spoke to a number of leading chief executives about the fate of Europe. “We don’t trust Europe any more,” they told him. “We are going to divest.”

Turpin believes it will be five to 10 years before Europe finds a clear way out of its problems. Poor policy choices are causing a rise in nationalism or regionalism in countries like Greece and regions like Catalonia in Spain, and starving entrepreneurship in countries like France where the top tax rate was lifted to 75 per cent.

“Economic growth is not going to be in this part of the world,” he says. “We are in a downward spiral. For the first time in my career of 27 years, trust in Europe is [gone].”

If Turpin is right and Taiwanese firms are giving up on Europe, then that is a clear sign that the main market for Asian manufactured goods, and a key component that underpinned Australia’s mineral exports, will continue to suffer.

Europe is the largest market for Chinese exports and, according to researchers from the Reserve Bank, Chinese manufacturing is as big a component of Chinese mineral demand as is domestic construction.

We are already seeing the impact of the end of the investment boom on mining services companies (Contractor collateral in mining's stark retreat, May 21), which have seen their share prices fall by 19 to 30 per cent following big earnings downgrades. What we know now is that the mining boom was very clearly a ‘once-in-a-lifetime’ event that was mainly fuelled by China enacting a huge infrastructure-led stimulus of the economy during the financial crisis. What may have been propping up the price for commodities like iron ore is the assumption that Europe’s demand for Chinese manufactured goods would continue.

If it is the case that consumer demand in Europe will be stagnant or falling for the next five years, then commodity prices will continue to see downward pressure and our high-cost miners will have to cut more deeply.

Dominique Turpin believes that Europe will continue to hold off on consumption. “[They] are delaying purchases,” he says. “In mature markets, people are waiting...It’s a market of replacement. They don’t need to buy new TVs or cars or household goods because they already have them.”

Ross Garnaut warned last week that Australia could be facing a deep recession because of the end of China’s resources boom. He predicts that investment in Australia’s resources will fall from 8 per cent of GDP to less than 2 per cent in the next few years, as China moves from infrastructure building to creating a consumer society.

If he is right, then shifting the nation’s attention from mining to goods and services, directed at China and elsewhere in the region, becomes more urgent. But the window to grow Australia’s opportunity will not be guaranteed for long.

Turpin says that he could easily fill his entire class of MBAs with students from China or India, and says that the number of people taking the global entrance test for business schools – the GMAT – is now in decline in the US and Europe but growing rapidly in Asia. Western management and productivity advantages will quickly be eroded.

Expect to see more global companies emerging from the region. As president of an MBA program created by the merger of business schools formed by Nestlé and Alcan, Turpin believes that MBAs designed with the needs of industry in mind are far more effective than those that focus on finance. MBA students from Asia can return to fast-growing manufacturing firms. In Europe and the US, many of the best and brightest ended up in finance, something that has not worked for the UK, he says.

“The country has lost its manufacturing base. It bet on its financial services industry. When the financial services industry becomes bigger than GDP then you have a problem.”

That won’t be a problem for Asian countries any time soon. Growth in Asian consumption of household goods may offset the ongoing stagnation in Europe but ultimately a new paradigm in global economics is emerging.

Turpin says that to cope with that fact, a new type of manager is also emerging.

In Europe, the management acronym of the moment is “VUCA” – volatility, uncertainty, complexity and ambiguity.

IMD is training its future managers to deal with a more complex world and, like other business schools, bumping up its campuses across Asia to help its students become familiar with the region.

It’s a trend Australian managers should follow.