Hamish McRae: Airbus shows European co-operation can work but demand is the problem

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The Independent Online

The Airbus super-jumbo is a great technical triumph - and an even greater commercial gamble, for we simply cannot know what the final market size will be. From a business perspective, it could hardly turn out to be a catastrophe like Concorde, but then it will not be a sure-fire success like the Boeing 737 either.

The Airbus super-jumbo is a great technical triumph - and an even greater commercial gamble, for we simply cannot know what the final market size will be. From a business perspective, it could hardly turn out to be a catastrophe like Concorde, but then it will not be a sure-fire success like the Boeing 737 either.

But there is another story here, a wider one about European competitiveness. Airbus is a European conglomeration. Not only is the plane built all over Europe but the company is multinational too. Unusually for such ventures, it has been commercially successful up to now, displacing Boeing as the world's largest commercial aircraft manufacturer. As such it has done a world of good for the airline industry. Even airlines that end up buying Boeings are delighted to have Airbus around, for it enables them to negotiate down the price of the planes.

So it has demonstrated that for all the guff about Europe's lack of competitiveness, the way manufacturing will leave for low-wage parts of the world, and the economic challenge from China and India, the fact remains that there are only two places in the world that can build large commercial jets. One is the US, the other is Europe.

This raises two further issues. One is whether the European economy is structured appropriately to take advantage of its undoubted excellence in high-end manufacturing. The other is whether being good in this segment of the world economy is enough.

The President of France, Jacques Chirac, raised the first of these at the launch of the A380, suggesting that Airbus could be a model for further European commercial integration. It is an important idea as well as being a politically seductive one, and needs to be taken seriously. There are other areas - stock exchanges, perhaps? - where it would be natural for there to be greater cross-border co-operation. But in practice most of the key commercial links forged over the past decade have been between European corporations and US ones, rather than happening within Europe. The oil and pharmaceutical industries are good examples of this, while the extremely successful venture between Renault and Nissan shows that a Japanese partner can bring strength to a union. Would Renault have done better had it used its financial resources and management to rescue Fiat instead of Nissan? Surely not; better to leave that one for a more gullible General Motors.

To take two other examples, when BMW looked to expand it turned to Britain and Rover. While it has extracted itself in OK shape, still owning the Mini, the experience was not a happy one. When Daimler-Benz looked to expand, it turned to Chrysler in the US, and while that too has been a bumpy experience, on a medium-term view it looks more likely to be successful.

So the experience of integration within Europe is not particularly happy; it may be that Airbus is an exception, rather than a model. But President Chirac is right to highlight its success.

The "is it enough?" question is easier, for the answer must surely be a clear "no". It comes hard to acknowledge but manufacturing in general and high-end manufacturing in particular is not a big business. For all its glamour and for its impact on the way we live now, the commercial aircraft business is quite modest in size.

Take, for simplicity, the company making the engines for half the A380s, Rolls-Royce - though as an aside, it was notable that Air France chose the alternative American engines, made jointly by GE and Pratt & Whitney. The engines account for between one-third and half the value of a civil aircraft.

Now look at the size of the company. It is doing well and its value has come up to £4.4bn, which is comparable to the £4.0bn of Associated Newspapers, the Daily Mail group. There are only three companies in the world making large jet engines - actually more like two and a half as Pratt & Whitney has been losing market share - but there are an awful lot of newspaper groups. Top-end manufacturing is important but it is not nearly enough to sustain an economy.

This paradox is evident if you look more generally at the European economy. There are many areas where European companies, particularly German ones, do lead the world. But they do not between them generate enough jobs to employ Europe's workers, unemployment remains high and consumption growth low.

The first graph shows the latest consensus estimates for growth in the G7 economies that came out yesterday from Reuters. Surprise, surprise, the two countries that exemplify manufacturing excellence, Germany and Japan, are bottom of the growth league. The next graph shows how dependent the eurozone economy is on exports. The Purchasing Managers' Index reports give an early feel for the overall level of activity in manufacturing. As you can see, there is a very close relationship between that and the index for export demand. When exports do well, European manufacturing does well, and vice-versa.

Some countries, however, are more dependent than others. The next graph shows the divergence of retail sales in Germany and France, the former falling and the latter rising. The French economy is not doing too badly because there is some domestic growth, whereas Germany, for all its brilliance as an exporter, is stymied because its people won't hit the shops. Yes, Germany is creating some net new jobs (final graph), but not enough to stop unemployment rising to the 4.5 million mark.

It is worse that that. Goldman Sachs, which pulled together these graphs on Europe, points out that many of the new jobs are low-wage ones, offered under various job-creating schemes. The high-wage ones in manufacturing are increasingly either being exported to Eastern Europe, or the terms changed so that workers work longer hours.

AMN-AMRO has looked at what is happening to wage negotiations in German industry. Some 55 per cent of industrial companies have increasing hours as part of their wage strategy, and 33 per cent are in negotiation for longer hours without extra pay.

On the one hand this is good news for German companies, for they are clawing back their competitiveness against other developed countries. But having to work longer for the same amount of money is not conducive to creating a more ebullient workforce, eager to spend.

And that surely is the central issue. Europe's problem is not that it lacks centres of excellence, for it has huge competence in many areas, including top-end manufacturing. It has done very well - the UK has done very well - in maintaining as much manufacturing as it has. There may well be scope for further pan-European co-operation, and though that works only if it is commercially led, at least governments have a role in removing road-blocks.

No, the key point is that Europe's problem is a lack of demand. The supply side is gradually being reformed: German companies, which have the highest labour costs, are attacking those more successfully than has been appreciated. But it is very hard for an economy to grow swiftly if consumers are too frightened to spend more in the shops. And if you want to be unkind to our European political leaders, you would say they should not be claiming for themselves some element of the success of Airbus, which really has very little to do with politics. Instead they should be paying more attention to the things that are within their control, such as the efficiency of the public sector and quality of the regulatory and tax regimes of Europe.