Doing business in Europe won't be the same for automakers, suppliers, dealers or consumers after Jan. 1. That's the date that prices come out in the open.
Under Economic and Monetary Union, virtually all of Europe will become a true, single marketplace when the euro is adopted as the official currency beginning Jan. 1.
That means profound change for any company doing business in or with Europe, whether or not it is conducted within the 11 countries participating in the first wave of the transition.
'The biggest advantage from monetary union is that it removes exchange-rate uncertainty from our business decisions, including pricing, sourcing, financials and contracts,' said Mustafa Mahatarem, General Motors' chief economist. 'It reduces the risk of doing business within the euro zone. It forces the convergence of both economic variables and economic policies.'
But EMU also means that no one will be able to hide higher prices behind the cloak of exchange-rate differences. No longer will vehicle manufacturers or suppliers be able to cloak pricing differences with exchange-rate fluctuations, specifications requirements, dealer margins, standard equipment levels or taxes.
Thus, pricing transparency - the ability to compare price directly for a car or components in any country in the EMU - emerges as the single most critical change of monetary union, a change that promises to put enormous pressure on automakers' profit margins.
Prices likely to drop
'Pricing will be more transparent with common currency - it will increase the volume of sales because prices more than likely will be pushed down,' Mahatarem noted. 'But it also will increase the degree of competition. We will have to make up on volume what we lose in revenue.'
Suppliers will face the same pressure. As vehicle manufacturers become able to compare prices across borders in one currency, the euro, the downward pressure on prices will cascade through the entire supply chain.
'The original equipment manufacturers eventually will be forced to come into line,' said Sunny Dogra, a manager with consultants A.T. Kearney & Co. in London.
Impact on local economies
On the other hand, a single currency will eliminate the natural balancing effect between economies of variable exchange rates. If an economy loses competitiveness against another due to higher inflation or lower productivity, variable rates allow a depreciation of the exchange rate that restores the equilibrium by changing the relative terms of trade.
Without that mechanism, economists say, it will be vital to create other ways to cure the imbalances that might arise over time among European countries.
'What if you don't get convergence (of national economies)?' Mahatarem asked.
'Suppose you get an oil shock that is external to the system. France, which relies largely on nuclear energy, would be much less impacted than Italy and Spain, which rely on oil for energy. That could create problems and make it more difficult to adjust.'
But some convergence already is taking place ahead of unification. In the 11 countries that will adopt the euro first, for example, interest rates already are converging to the level of rates in Germany, Europe's biggest economy.
The traditionally poorer countries of the European Community - such as Ireland, Spain and Portugal - already are emerging as the greatest beneficiaries. Their interest rates have dropped to less than 6 percent from more than 10 percent, largely because interest rates in the 11 first-wave euro countries are converging on rate levels in Germany.
This bodes well for new-vehicle sales, analysts say.
In the long term, Dogra said, labor mobility across Europe also will become a key outgrowth of monetary union as comparisons of social benefits becomes easier along with a degree of convergence.
As the euro makes it easier for labor to move across borders, Dogra said, workers will be more likely to move from areas of recession to areas of growth, thus rebalancing the labor market and the overall European economy more quickly than is possible now.
Similarly, companies may migrate to areas promising the best lifestyle, the way American companies migrate to the Sun Belt states.
The euro's impact will be felt well beyond the European labor market, of course.
Some multinationals operating in Europe plan to begin using the euro immediately to simplify their accounting. They may expect suppliers to do the same.
Honda Motor Co., for example, already has announced that its systems for external invoicing must be capable of handling dual currencies starting in 1999. By next April the company will begin invoicing and financial reporting in euros.
U.K. delays euro adoption
As other companies do the same, businesses in non-EMU countries such as the United Kingdom quickly will feel the change.
Many senior industry executives voice concern about Britain's delay in adopting the euro. They foresee declining competitiveness and a chilling effect on investment as a result.
'It may be difficult for Britain to arrive at a consensus on the euro within four years,' said Giorgio Bodo, Fiat S.p.A.'s senior vice president and group treasurer.
'By then, it may be out of step with the economies on the Continent. The U.K. economy is more sensitive than any other European country to fluctuating interest rates, and it could well be slowing down significantly just as the rest of Europe picks up very strongly.'
Peter Hill, director of European purchasing for Nissan Motor Manufacturing (U.K.) Ltd., Europe, concurs. 'What is alarming to me,' said Hill, whose company will switch to euro accounting Jan. 1, 'is how few companies in the U.K. have prepared for the changeover.'
John Gildea, director of supply for Vauxhall, says British companies have been hiding behind a strong currency, which has yielded a price advantage.
'But the cost has been a slowdown in productivity,' he said. 'If they cannot solve that problem, then they will lose business.'
Indeed, BMW Group says the strength of sterling could force it to shelve some $1.7 billion in investment it has planned for its Rover subsidiary. BMW is telling component suppliers to Rover and BMW to be ready to operate in the euro from the start of 1999.
Impact on suppliers
Suppliers will have plenty of preparing to do whether they are inside or outside the EMU.
The impact on automotive suppliers will vary by their size, position in the supply chain and whether they or their customers are based inside or outside the EMU. Every permutation and combination may apply for Tier 1 suppliers. The relative strength of the domestic currency when it is locked in against the euro will be a factor as well.
Tier 1 suppliers providing high value-added components, system integration or engineering services may be spared some of the pressure to cut prices. But no one in the supply chain will be immune.
Price transparency will be particularly apparent on commodities, raw materials and components with relatively small added value, says Judith Abbot, finance manager for Visteon Europe.
One likely benefit, she says, is renewed supplier focus on productivity improvements and adopting industry-best practices.
Ultimately, analysts say the euro should have a positive effect on automakers and suppliers by creating a vast domestic market almost overnight. If the industry can capitalize on the economic benefits of one currency, the outcome should be a more standardized European market with lower operating costs for the industry.
'I'm a real optimist about the EMU,' GM's Mahatarem said. 'I very strongly support this. The bottom line is that it will make Europe a more competitive location to produce cars or any other goods.'