CHAPTER THREE

The Transnational Economy

TO MAINTAIN A LEADERSHIP position in any one developed country, a business—whether large or small—increasingly has to attain and hold leadership positions in all developed markets worldwide. It has to be able to do research, to design, to develop, to engineer and to manufacture in any part of the developed world, and to export from any developed country to any other. It has to go transnational.

This new need largely explains the worldwide boom in transnational direct investments. The front-runners are the British. Since 1983, British companies have spent at least $25 billion on acquiring American businesses—the most massive British thrust into the world economy since Victorian times. The West Germans may not be far behind. Unlike the British they concentrate, however, on smaller, closely held companies. And, contrary to popular belief, many of the U.S. multinationals are advancing rather than retrenching in Western Europe and in Japan.

There is also a transnational push of small and medium-sized businesses. The vehicle often is not an acquisition or a financial transaction but what the Germans call “a community of interest”: a joint-venture, research-pooling, joint-marketing, or cross-licensing agreement.

A small specialty producer in the American Midwest with world leadership in one component of single-cylinder gasoline engines had facilities only in the U.S. seven years ago. Now it owns three plants in Japan that directly supply Japanese motorcycle manufacturers. But the firm also has entered into a joint venture in the Midwest with a similarly small Japanese specialty producer of another component of single-cylinder engines. The Japanese supply capital and technology and the Americans supply management and marketing.

Banding Together

Four small, closely held firms, an American, a Dutch, a German and a Japanese—each a leader in one narrow line of chemical solvents—have merged their separate research labs with the lab of an American university with expertise in the solvents field. Only by banding together do they have the $200 million in sales needed to support a decent research budget in a rapidly changing technology.

And then there is the Belgian producer of processed meats—the largest producer in its specialty lines within the Common Market but still with sales of only about $60 million a year. Early this year, the firm and an even smaller Spanish meat processor formed a partnership. The firms stay independent. But the Spaniards will do all the labor-intensive manufacturing for both firms and the Belgians the research, the product development and the marketing.

Such communities of interest are by no means confined to small and medium-sized businesses. Two of the world’s largest companies—GM and Toyota—are in such a partnership. The big plant in Fremont, California, is a GM plant. But it is managed by Toyota. And it produces cars under both the Toyota and the GM marques.

The world’s largest heavy-engineering company with $15 billion in annual sales will start operations next January. It is being formed by merging the electrical-apparatus businesses of Sweden’s ASEA and Switzerland’s Brown Boveri. Each of these big, old companies has leadership in important European markets. But only by combining their electrical-apparatus businesses in a joint venture can they hope to become a factor in North America and the Far East.

Going transnational is not confined to manufacturing firms. It is becoming imperative for any business that aims at a leadership position any place in the developed world. The only exceptions are businesses that by the nature of their activity are confined to a locality or region—hospitals, schools, cemeteries, electric-power suppliers—and governmental monopolies.

Banking and finance have, of course, become increasingly transnational ever since the major New York banks went worldwide in the ’60s. Now major insurance companies, foremost among them Germany’s Allianz, are aggressively expanding across national and continental boundaries. British, German and Dutch book publishers have bought major U.S. publishing houses—but U.S. publishers have similarly moved aggressively into British book publishing.

Again, a good deal of the development is not “big-company stuff” and is based on a community of interest. A highly specialized, medium-sized American asset-management firm has, for instance, recently formed a partnership with an equally specialized, medium-sized Japanese asset-manager and a somewhat larger financial house in London. Each firm remains independent, but the American firm manages all U.S. investments for the three partners; the Tokyo firm, all Japanese investments; and the British firm, all investments in Europe.

One reason leadership in any one developed market increasingly requires leadership in all is that the developed world has become one in terms of technology. All developed countries are equally capable of doing everything, doing it equally well and doing it equally fast. All developed countries also share instant information. Companies can therefore compete just about everywhere the moment economic conditions give them a substantial price advantage. In an age of sharp and violent currency fluctuation, this means a leader must be able to innovate, to produce and to market in every area of the developed world—or else be defenseless against competition should foreign-exchange rates sharply shift.

What triggered the present transnational rush was the overvalued dollar of the early ’80s. It demonstrated that currency fluctuations can be life-threatening even to the strongest business. But it also showed that there is an effective defense: a transnational leadership position across the faultlines of currency earthquakes.

U.S. exports dropped like a stone in the years of the overvalued dollar and imports soared: not one major American industry could maintain its exports in the face of a currency fluctuation of almost 50 percent. Yet only in steel, automobiles, consumer electronics, machine tools, and a few semiconductor lines did the world share of American products go down at all.

Overall, the world-market share of manufactured goods produced by U.S.-based companies stayed at the 20 percent to 22 percent level it has held since the ’60s. But this actually masks a substantial increase in the standing of American-based goods in the developed economies, since the slump in raw-material prices during the same period almost knocked out purchases by some of the U.S.’s best customers, the developing countries of Latin America. By contrast, American manufacturers with Western European ventures substantially increased their market penetration in computers and computer software, in pharmaceuticals, specialty chemicals, telecommunications equipment, and financial services. In Japan a good many U.S. companies bought out their joint-venture partners.

This remarkable, unprecedented performance may explain in large measure why the overvalued dollar, despite its disastrous impact on American exports and the American balance of trade, did not push the U.S. into depression. And because the world-market share of products made by U.S.-based companies remained steady, the American businesses with foreign affiliates and units also maintained earnings and cash flow and could thus maintain research, product development and their capacity to innovate and to grow.

For while the overvalued dollar made American exports noncompetitive, it was a boon for the foreign affiliates and units of American companies. Their parent companies’ dollars bought, during that period, almost 50 percent more—in new plants and machinery, in research, in product development, in marketing, promotion, and service, and in cash flow and earnings. The prices the Americans paid for the buyouts gave their former Japanese partners a handsome profit in yen, but in dollars they were a bargain for the Americans.

These benefits required, however, a transnational base. They did not accrue to the American machine-tool industry, for instance. Ten years ago it had world leadership. But it operated almost entirely in, and out of, the U.S. Hence the overvalued dollar sapped the industry’s ability to export and made it defenseless against imports, depriving it of the cash flow and the profits to maintain research and to develop new products.

Ford vs. GM

The automobile industry offers a similar lesson. No company was hit harder in the early ’80s by the tide of Japanese imports into the U.S. than Ford. What saved it was its leadership position in the European market. It gave Ford the profits and the cash flow that pulled it through the dismal years. And because the dollar bought so much in Europe in those years, Ford could develop there the new models for the American market that now have made Ford highly profitable again in the U.S. and a serious contender for the domestic leadership it held 60 years ago. GM, though twice Ford’s size, is essentially a one-country company—and is still floundering.

A transnational strategy is probably not compatible with diversification. Instead, it requires a concentration of efforts. An example is GE’s recent move to divest itself of its large consumer-electronics businesses in which it could not hope to attain worldwide leadership, in exchange for a substantial position in the European market for medical electronics, an area in which GE has a reasonable chance to be a world leader.

Transnational strategy, in other words, is not an easy strategy. But except for believers in miracles—and that is unfortunately what a belief in an early return to stable exchange rates amounts to—going transnational may be the only rational strategy for any business aiming at a leadership position anywhere in the developed world, whether in a mass market or in a market niche.

[1987]