"European Companies Boost Spending On Technology Despite U.S. Slowdown"
Written by David Woodruf
Paris - It is still way early to predict with any certainty, but if Europe escapes the tech-stock maelstrom that has overwhelmed the U.S., it may owe its safe passage to Old Economy businesses.
Initially skeptical about the Internet, many of Europe's traditional firms are now spending to boost their Web capabilities, despite the U.S. meltdown. A few companies, such as French car maker Renault SA and some banks, continue to invest in consumer-oriented Internet projects.
However, the prime aim of many firms is to use high-tech tools to boost efficiency in a wide range of back-office operations, from human resources to the purchasing department. Some industrial companies are investing in technology to put their factory production systems online to boost productivity.
Many companies across Europe say they are undeterred by the grim state of many online businesses in the U.S. ING Group, an Amsterdam financial services company, recently decided to increase spending on Internet operations by 300 million euros ($268.4 million) to 2.3 billion euros over the next three years. ABB Ltd. of Switzerland is spending about 500 million euros annually on electronic-business and on industrial applications for information technology, a pace it plans to continue, says company President Jorgen Centerman.
At Italian oil company ENI SpA, the e-business budget this year jumped threefold to 400 billion lire ($184.8 million or 206.6 million euros), while the tab at Siemens AG, a Munich industrial company, will hit one billion euros through 2002.
"Traditional companies were a little slower to get out of the starting blocks," says Christian Schaak, head of e-commerce initiatives at Fortis NV, a Belgian-Dutch financial group. "But we're convinced the Internet is going to change the way we do business, so we're going to continue to invest."
Weathering the Storm
That confidence should be good news for Europe's economy, which is being hurt -- though there are disputes as to how much -- by weakness in the U.S. Over the short term, many economists say, companies' continued investment should at least temper a European slowdown. Moreover, down the road, adding new technology could introduce productivity increases that would help support strong long-term growth.
"We expect Europe to come through this dramatic U.S. slowdown relatively unscathed," says Paul Horne, European equity market economist at Solomon Smith Barney. Mr. Horn predicts the Euroland economy will grow 2.3% this year, compared with 1.6% in the U.S., then rebound in 2002.
From the start, European companies have been less enthusiastic about the benefits of information technology and the Internet than their U.S. counterparts, particularly in places such as Italy and Spain, where computers have been much slower to penetrate the workplace. But after studying the costs and potential benefits, managers increasingly are convinced that the payoff can be big.
Siemens, for example, aims over the next three years to use e-business software to revamp the way it operates, including linking itself more closely with suppliers and big industrial customers via the Internet. In one initiative, the company plans to boost online component purchases to 50% from 10% of the 35 billion euros total in three years. The three-year program could generate savings of up to 1.6 billion euros.
There is evidence that firms selling e-business software and know-how in Europe also are weathering the storm. Last month, Paris-based Cap Gemini Ernst & Young SA said European businesses continued to invest in technology and projected a 14% increase in sales this year. Business Objects, a California maker of corporate extranets that does more than half of its business in Europe, posted a 35% increase in sales in the first quarter and an even bigger jump in profit. That is a stark contrast to U.S.-focused sellers of e-business software.
Some of the free-spenders come from the old-fashioned factory crowd. In Western Europe, outlays by manufacturing companies on computer hardware, software and services will grow to $97.5 billion (109 billion euros) in 2004 from $67.4 billion last year, according to a forecast by Gartner Dataquest. Spending across all industries in Western Europe will grow at a 13% annual clip over that period, the consulting group projects.
Benefits for Industry
UPM-Kymmene Group is an example of the kinds of benefits Internet technologies are bringing to the industrial world. The Helsinki forest-products company owns five hydroelectric plants and its paper mills generate some of their own electricity. Risto Viitanen, the company's energy-production manager, uses a sophisticated management system to decide when it is cheaper to use UPM-Kymmene's own power, buy it on the open market, or sell excess electricity to others.
Mr. Viitanen monitors production at nine paper plants and energy prices on an hourly basis. He schedules pulp production and even opens and closes sluice gates at the company's hydroelectric plants from the firm's energy control room. UPM-Kymmene is now adding new software that will allow more accurate forecasting of power needs and energy costs.
Until now, the dream of a wired, interconnected company has often been stymied by incompatible computer systems. To clear that hurdle, ABB in October paid $135 million for a 53% stake in SKYVA International, a Medford, Massachusetts, software company. SKYVA specializes in bridging the gap between systems that control production with those geared toward business planning.
There is even European technology spending on the business-to-consumer sector, which has been flagging in the U.S. Despite the mediocre performance of pure online banks, ING believes the Internet will be an important distribution channel for banking and insurance products. Two-fifths of the 2.3 billion euros the Dutch group plans to spend on new technologies over the next three years will go to ING direct, which the company is using to reach new markets. Another two-fifths is earmarked for bringing existing back-office operations online.
Of course, if the economy slows dramatically and profits in Europe nose dive, corporations will likely rein in technology budgets. But European consumer confidence remains strong, which bodes well for consumption. Moreover, economists such as Julian Callow at Credit Suisse First Boston argue that because European firms didn't engage in the kind of investment frenzy their U.S. counterparts did, they are likely to keep on spending, too. That is especially true if they see a quick payback.
"Companies are still spending because they're getting some fairly compelling return on investments," says John Moore, vice president of e-business consulting at ARC Advisory Group in Dedham, Massachusetts. "They can show considerable savings in six months. That's something that companies are willing to bite off, regardless of cost."
Write to David Woodruff at david.woodruff@wsj.com
