The TransAtlantic Partnership and its Implications for U.S. and E.U. Economies

The TransAtlantic Partnership’s Implications for U.S., E.U. Economies summarizes coverage of the EEC International Conference—Talking with the Ambassadors of the World’s Largest Trading Relationship and the CEOs of Four Global Enterprises.

Three eminent diplomatic leaders and CEOs from Baxter, Financial Dynamics, ITW and Philips briefed Midwest executives on the current status and future directions of the world’s largest trading relationship at the Executives’ Club of Chicago’s International Conference November 15. The half-day program featured several presentations, a CEO panel and a media round table. All speakers sought to impress upon the audience the pivotal importance of the transatlantic alliance for the United States and Europe, and most warned chief executives neither to take it for granted nor to be passive in the face of rising protectionism.

The fact that the importance of the E.U.—U.S. alliance had to be emphasized brought into sharp relief the relatively sudden rise of Asia as well as the shift from the Industrial Economy to the Knowledge Economy. Both megatrends pose opportunities and threats for the world’s largest economies and enterprises, and the concomitant uncertainty emanated from the assembly hall. I will summarize speakers’ remarks and question and answer sessions before adding conclusions.

The TransAtlantic Partnership through the Eyes of Policy and Government—E.U. and U.S. Ambassadors

His Excellency John Bruton, Head of the European Commission Delegation to the U.S. and former Prime Minister of Ireland during the “Irish Miracle,” began by outlining some of the European Union’s political and economic progress on integration. Most Americans are familiar with the E.U. as a trade confederation with 12-15 countries, but the nature of the union has been changing rapidly in recent years. Since 2004, the number of member countries will have almost doubled when Bulgaria and Romania join in January 2007—to 27 countries. In concert with this, the E.U. has been working hard to “federate” key political and economic functions by empowering the European government (Parliament, the Commission and the Judiciary). Ambassador Bruton emphasized that the E.U. was the world’s only multinational democracy, as its Parliament was directly elected, and a key goal, in his opinion, was to govern globalization. Globalization should be a resource; it could be managed, so people would not be its victims. He emphasized that the U.S. and the E.U. shared common interests and values and that the transatlantic alliance could serve as an example for the rest of the world.

Ambassador Bruton is self-admittedly passionate about statistics, and he shared these (most 2005): together, the E.U. and the U.S. produce 57% of the world GDP. The E.U. represents 75% of the foreign investment in the U.S. About 66% of U.S. foreign R&D operations are in Europe due to its legal system and intellectual property protection. European firms accounted for 58% of $24 billion total foreign investment as well as for $8.5 billion of manufactured goods, services and commodities from Illinois, about one quarter of the global total. He underlined that U.S. companies obtain five times as many profits from their investments in The Netherlands than they do from all their investments in China. In other words, all the focus on China and India may lead U.S. business leaders to take their eyes off the ball and underestimate the value of the E.U. opportunity (more on this below). From a European perspective, U.S. limitations on foreign investment are intolerable because the U.S. is a free market beacon (several key sectors limit foreign investment, like airlines and telecoms). He warned against protectionism.

Discussing the E.U.’s protracted struggle with Microsoft during a Q&A session, Ambassador Bruton remarked that the E.U. was not keen on monopolies, that there was broad support for the idea of nurturing innovation. Jonathan Evans added that the Microsoft case was not representative of the E.U.’s competition policy and enforcement; a better example with the G.E.–Honeywell deal, which was ultimately scuttled in 2001. These days, E.U. and U.S. competition authorities are far better coordinated, and U.S. corporations are far more savvy about what to expect.

Responding to our questions about Europe’s reaction to the waning of the Industrial Economy in favor of the Knowledge Economy, he emphasized that Europe was in an excellent position to leverage its industrial strength to supply Russia, China and India with industrial goods to build their infrastructure as well as consumer goods for their growing economies. He admitted that Europe was somewhat handicapped in the language-based Knowledge Economy by all of its members’ languages.

The Honorable C. Boyden Gray, Representative of the U.S. to the European Union, echoed Ambassador Bruton’s assertion that the relationship was critical to each party and that it was too easy to take it for granted. He focused his introductory comments on the importance of continued cooperation between the U.S. and the E.U. on harmonizing regulation because different regulations leech value out of economic transactions. For example, Sarbanes-Oxley is a significant problem for E.U. companies that operate in the U.S. He would like to see the central (European) government get more power to carry out reform of the regulatory issues. He also urged executives to oppose emerging protectionism by talking with government leaders.

Ambassador Gray pointed out that the E.U. was plagued by persistent unemployment, and here it could learn some lessons from the U.S., namely: 1) make immigration more a part of the culture in Europe as it is in the U.S. so that immigrants could succeed more and add more value to the economy; and 2) encourage growth of high technology by creating links between business and the universities. Although most U.S. government and university officials complain about how seldom technology commercialization succeeds, the E.U. has a far lower rate. Part of the challenge is that universities are largely free in most European countries. They do not have to conduct fund-raising as in the U.S., where business imposes its commercial point of view but also infuses universities with the importance of profit and accountability for meeting goals. In Europe, this dynamic is largely absent, which keeps university-led innovation too far removed from the commercial sector.

Jonathan Evans, Member, The European Parliament and President of The European Parliament Delegation for Relations with U.S. Congress, reiterated the dangers of protectionism and taking the E.U.–U.S. relationship for granted, but he added an interesting twist. The current European Commission (executive branch of the E.U. government) is the most free-market ever, and Europe is trying to emulate U.S. practices, so it is especially poignant to perceive that the U.S. may be succumbing to “economic patriotism” (the new term for protectionism). Free-market Europeans are alarmed about the U.S. legislators’ vociferous reactions to the Dubai company’s proposed contract to run six U.S. ports and their apathetic action on the trade bill with Vietnam, to which opposition in some quarters had a political (“they were the enemy”) tone. He contrasted those attitudes with the U.K.’s vis à vis the NASDAQ’s proposed acquisition of the London Stock Exchange (LSE). U.K. Economic Secretary Ed Balls has proposed legislation that would safeguard the hegemony of U.K. regulations in the event a foreign exchange (i.e. NASDAQ) would buy a U.K. exchange (LSE). The point is that it is less important who owns the LSE than who has regulatory authority over it, a thought-provoking idea to which we’ll turn in more detail below.

A proponent of free-market principles, Mr. Evans sees that the U.S. and the E.U. have an opportunity to remove obstacles to trade, to prosper and hold up the example to the rest of the world. He criticized France’s designation of strategic industries as a rationale for preventing foreign investment (i.e. M&A) as well as the U.S. restrictions on foreign investment in sectors considered strategic. He echoed Ambassadors Bruton and Gray by urging executives to stamp out economic nationalism and to press their legislators to simplify regulation. He held out the example of the fact that Heathrow was run by a Spanish company, despite significant protectionist opposition on nationalistic grounds. Another hopeful front was the progress of the E.U.’s Services Directive, which will facilitate the liberalization of the services sector across the E.U., albeit with significant restrictions. Much of the E.U.’s liberalization thus far has concerned manufactured goods; the adopted directive should make it much easier for service providers to conduct business in another E.U. member. Consumers will have more choice when they choose a service provider, and costs should fall.

On the political front, he urged U.S. executives to remember to not fret over polls that showed the U.S.’s falling popularity in Europe due to the U.S. and E.U. policies in Iraq. He reminded the audience that Europe had been deeply divided on Iraq and remarked that President Bush’s initiatives to reach out to Europe after his reelection had been very effective. Most important, business is separate from politics on both sides of the Atlantic: the same way that Europeans cannot assume that U.S. foreign policy is supported by all Americans, Americans should not assume that E.U. business leaders think ill of the U.S. He did fret over some U.S. legislators’ “lack of engagement,” remarking that 70% of the members of Congress did not even have passports. (!)

The TransAtlantic Partnership through the Eyes of Business—The CEO Panel

The CEO panel gave the audience an appreciation for how four global enterprises saw the U.S.–E.U. relationship, from historical, current and future perspectives. CEOs from Baxter International, Financial Dynamics, Illinois Tool Works and Royal Philips Electronics each gave prepared remarks about their companies’ experiences with producing and selling globally before they fielded questions from the audience. As expected, they chorused the need in Europe to harmonize standards, but U.S. also garnered some items on their wish lists: more harmony among state regulations and taxes as well as Sarbanes-Oxley, which represents a significant cost on doing business. Fortune Senior Editor-at-Large Andrew Serwer moderated the session.

Declan Kelly, CEO of Financial Dynamics (U.S.)

Mr. Kelly shared his unique perspective on the transatlantic partnership: he is an Irish national who manages the U.S. division of a global consultancy that he was instrumental in forming. In addition, he advises numerous global firms in marketing and public relations. Financial Dynamics is founded on the idea that global communications need to be executed locally, and the Firm has offices in financial centers around the world due to the hands-on nature of their business.

American firms face internal and external threats. The high cost of doing business in the U.S. continues to drive manufacturing to China, India and other countries. Knowledge jobs are growing much more quickly in China and India: according to the McKinsey Global Institute, life science researchers in China and India will reach 1.6 million by 2008 while the U.S. number will shrink to less than half of that. Mr. Kelly also cited Alan Greenspan, who pointed out that central banks are moving to the Euro, away from the dollar, while the combined GDPs of E.U. members now exceed that of the U.S. However, U.S. productivity significantly outpaces that of the E.U.

In today’s global economy, enterprises cannot tie themselves to the economic interests of one country or even a group of countries, and the expansion of free trade creates value; it’s not zero-sum. He advised executives to keep two things in mind: define a clear and strong global brand that they adapt to local markets. “Being relevant locally doesn’t mean giving up your American identity or your global brand. But it does mean being close to your local customer, and nuancing your messages and ways of doing business to suit local norms.”

Mr. Kelly offered some interesting reflections on “the Irish miracle” from 1994-1997, during which Ireland became known as the “Celtic Tiger” and its economy grew at an annual average rate of 8.7%. First, the miracle had started twenty years before, with the government’s significant investments in higher education, which positioned its young population to become knowledge workers. Second, the government had the foresight to cut the corporate tax rate to 12%, which drove very high foreign investment, dovetailing with the well educated workforce. The point is, the impact of these policies multiplied over time; you have to take a long-term view. Third, Ireland proves that a country doesn’t have to be large to succeed: Ireland is “a blip on the map,” yet it has seen great success.

Executives can mitigate any political fallout of their home countries’ foreign policies by presenting themselves as global countries rather than identifying themselves with the home country nationality. U.S. business executives especially need a more sophisticated approach in China. Mr. Kelly predicts that younger executives will increasingly run global companies: “We’ll see an increasing number of companies run by people with no gray hair.” To this end, he selects twelve people for Financial Dynamics’ “Leadership Academy” to mentor for high achievement. He later added that many older executives do not appreciate the tremendous change that is currently happening in the world, and younger executives will step in to fill in the gap. Another example: in China, all business leaders are young.

Robert L. Parkinson, Chairman, CEO and President of Baxter International

Baxter International designs, manufactures and delivers medical equipment and supplies globally, and for than 75% of its revenues come from Europe and the U.S. One thing that would be of immense help to Baxter is the harmonization of standards and patents, for that would enable them to increase efficiency in Europe. It would enable the company to speed the pace of innovation as well.

Baxter is such a diverse company that it is difficult to leverage R&D investments among business units. Forty percent of Baxter’s science groups are in the E.U., but encouraging sharing and efficiencies is difficult because their core disciplines are different.

Some U.S. executives still have a mindset in which they assume the U.S. is very free-market when the E.U. is less so. Both partners have to work hard to harmonize regulation that currently adds resistance to trade.

When asked about directing one’s career in the new global environment, Mr. Parkinson strongly suggested to get involved with international assignments as soon as possible in one’s career. “It will help to develop you as a person as well as a professional.”

David B. Speer, Chairman and CEO of Illinois Tool Works

Illinois Tool Works (ITW) operates globally with a decentralized model that enables the company to work through local companies that are close to customers. ITW designs, produces and sells at the local level, which affords them some insulation from tariffs. A major concern is the need to liberalize regulations; for example, the E.U.’s Restriction of Hazardous Substances (RoHS) Directive, which restricts the use of six hazardous materials in the manufacture of various types of electronic and electrical equipment (lead, mercury, cadmium, hexavalent chromium, polybrominated biphenyls {PBB} and polybrominated diphenyl ether {PBDE}). RoHS affects several of ITW’s products. In addition, getting patents in the E.U. is not centralized; therefore, patents must be filed separately in all countries (think of the different languages), resulting in significant delays and costs.

One of ITW’s key strategies is acquiring companies with $30-50 million in revenue. ITW made 43 acquisitions in 2006, 21 of which were international. They use local management teams to find, acquire and integrate acquired companies. Today, ITW has 750 separate businesses. When asked his secret for successfully running such a diverse portfolio of companies, Mr. Speer replied wryly that he does not run them, they run themselves. ITW has only centralized certain corporate functions like financial reporting, legal and intellectual property. He added pointedly that Europe is tremendously important, but “Asia is the future.”

ITW bought Chicago-based B2B software company Click Commerce this year, with an eye on deepening and extending its client relationships. Click sells supply chain and networking solutions to industrial customers and, although some of Click’s and ITW’s clients overlap, many do not. ITW is interested in Click’s competency in creating and extending real-time networks to boost efficiency and responsiveness. Mr. Speer emphasized, though, that the tough part is deciding what information needs sharing; you have to invest in the thought process. When I asked him whether ITW has plans to leverage Click’s competency to increase collaboration among its companies, he remarked that they would consider it but that wasn’t the driving force behind the acquisition.

Paul J. Zeven, CEO North America of Royal Philips Electronics

Philips was founded in The Netherlands in 1891 and operates globally today, producing a large part of its $37 billion in revenue in the U.S. Philips has long had a global footprint, and investing in people, sharing values and maintaining an external focus have been key to their success. Mr. Zeven shed some light on how companies can change their value propositions in light of commoditization: for years, Philips had strong lighting and consumer electronics businesses, both of which have been increasingly pressured by low-cost manufacturing in recent years, specifically China. Two of Philips’ responses: 1) grow its medical equipment business due to its stable margins and the aging demographics of rich countries; 2) reorient its lighting business. Philips has been paring back its household lighting in favor of highly specialized lighting niches such as sports stadiums and hospitals. They are also steadily de-emphasizing the consumer electronics business; however, it extends the Philips brand, and its competency is valuable for other businesses: from a design standpoint, consumers want rich features and simplicity, and these competencies are valuable in medical equipment, for example.

For Philips, harmonizing the standards for the exchange of medical information is critical to improving patient care. Currently, innovation is hampered in Europe due to separate regulatory processes. Philips has been in China since the 1980s, and it sees explosive growth potential across the spectrum. From the producer perspective, China is extremely attractive: it has very high investments in higher education and R&D as well as growing foreign investment and low cost labor. It is already a vital supplier base to most large economies. Philips has 15 R&D centers, which are linked to top universities and three intellectual property academies in China. Mr. Zeven predicted that China would become an innovation powerhouse, and it would become increasingly concerned with protecting intellectual property. From the consumer viewpoint, China has an immense consumer market that is becoming international very quickly. It is also a potential threat to the TransAtlantic relationship.

Mr. Zeven emphasized that “the world is your market” to career-minded executives. In his observation, global companies are giving managers international exposure much earlier. Also, the age of top management is dropping, and this trend will accelerate. “Youth is the future” and new blood must challenge management. Senior management may push back at first, but he encouraged young leaders to have the courage of their convictions; in many cases, he predicted, they would listen and respond much better than one might expect. Mr. Kelly is living proof of Mr. Zeven’s prediction of younger executives running global companies, as he’s in his thirties and a top executive of a $540 million global enterprise.

Analysis and Conclusions

As in all gatherings of such a political and economic ilk, what was not said was as interesting as what was, and I shall take the liberty to address both here. Let us make no mistake that the E.U. and the U.S. represent concentrated world influence, and the relationship between the two entities is of enormous importance. That said, developments outside the TransAtlantic Partnership are significant and have direct bearing on the partners’ continued influence in the world. Although this point was not made directly, the conference clearly reflected that major shifts in the global balance of power were underway (mostly reflected by remarks about China’s growth), and all parties were trying to discern what the future would hold. The situation is as if someone changed the music in the dance hall when no one was looking: hoop skirts and top hats are fine for waltzing, but they are difficult accoutrements to manage when jitterbugging. No one linked the emerging Knowledge Economy as a driver for global change, but I will tackle that after some reflections on the partnership itself.

The TransAtlantic Partnership: A Worthy Vessel…

All speakers firmly established the importance of the TransAtlantic Partnership in terms of the past and the present. The E.U. and U.S. economies and political sensibilities clearly are interdependent and resemble each other. Most U.S. and E.U. companies develop and sell a large portion of their products in each other’s markets. The partners ‘ political agendas often coincide, and they continue to make significant progress in eliminating costly over-regulation.

• The TransAtlantic Partnership is a model of cooperation in which both parties are proving out free-market principles and working to increase the wealth of each other. Its work serves as an example for trade negotiation: how do the two paragons of western power make changes in their agreements so that the benefits accrue to each party more or less equally?
• It is cliché that “the world is growing smaller.” The Earth has ever fewer resources to exploit freely, and this represents a turning point for humankind: most power has been created thus far according to Industrial Economy rules in which wealth is produced by transforming raw materials into products. The survival of our (and all other) species will depend on our ability to collaborate, negotiate and compromise so that we distribute resources and wealth equitably.
• The E.U. itself represents a cooperative essay in increasing wealth by harmonizing policy, law and standards. It is also an experiment in selectively and cooperatively dismantling the hegemony of the nation-state. It recognizes and institutionalizes the collective destiny of its members. As such, it is a laboratory for the world.
• Europe’s key mission is to strike a balance between the power of its member states and the federated entity, and the U.S. can add the most value as a partner by doing what it can to aid in the integration process. Europe is in the process of becoming a collective entity.
• The U.S. is struggling to find its way in the post-Cold War world. It coalesced as a nation during the Industrial Economy and created unprecedented wealth due to its possession of highly motivated labor, abundant natural resources and lack of threatening neighbors. Its democratic ideals, aid in resolving European wars and stand against Communism have given it a moral high ground in much of the world. However, in the absence of a recognizable foe with which to compare its model (National Socialism and Soviet Communism were political systems; “terrorists” are too different to be compared), it is now in the uncertain position of being the world’s only superpower and risks being feared and isolated in this regard. As more nations become “democratic,” its championship of democratic ideals is becoming relatively less poignant and its mission somewhat less certain.
• The U.S. needs a new mission, or a new reading of the old one. It will have to learn to listen more and champion collaboration. The E.U. can add the most value as a partner by serving as a mitigating voice as well as a model for collaboration.

…Heading into Uncharted Seas

The future of the TransAtlantic Partnership is less certain because the Industrial Economy in which its economics and politics were dominant is on the wane. The global context is changing significantly, and the partners will adapt to the changes at different speeds. I predict that the partners will help each other to grow into the new global economy that the Knowledge Economy is serving up, but there will be some uncertainty and turbulence along the way.

• From a producer perspective, the U.S. is a costly environment and the largest E.U. members even more so, especially considering relatively low-cost and high-value expertise and services that are emerging in BRIC (Brazil, Russia, India, China) and similar countries. From a consumer viewpoint, the E.U. and the U.S. are large markets, and mature, with the exception of the Eastern Europe region. Hyper-growth in demand for agricultural and industrial products will occur in other regions, which could threaten the TransAtlantic Partnership, as each party increasingly orients itself to new customers.
• The nature of “Europe” is changing profoundly as it continues to integrate, which offers member countries tremendous promise and risk. As an integrated economy, the E.U. is the largest in the world by some measures, and it could displace the U.S. in some instances. Although no one would predict that, with such a shared heritage and with so many common core beliefs, the E.U. and the U.S. would ever become hostile rivals, it is disconcerting for some in the U.S. to face a united Europe. The Europeans, the U.S. and everyone else are trying to figure out what exact form the E.U. will take and what it will mean.
• The key risk for Europe is the tremendous cost of integration at a very inopportune time: E.U. leaders are necessarily internally focused at a time when the non-European world is changing profoundly—and rapidly. Just ask the CEO of any company going through a major merger whether its external responsiveness diminishes. This will probably cause Europe to delay its transition to the Knowledge Economy, thereby losing competitiveness.
• The E.U.’s integration will cause it to remain in the Industrial Economy longer than the U.S. It will devote considerable attention on harmonizing industry and agriculture and maximizing synergies offered by its new members, notably eastern European countries that offer lower production costs and new consumer markets.
• E.U. members already lag considerably in information technology-led innovation, and Europe risks not having a competitive infrastructure to transition to the Knowledge Economy. As such, it risks losing relevance within the global context.
• Of the two partners, the U.S. is more flexible and able to maneuver to take advantage of profound shifts in producer and consumer markets. The U.S. economy has enjoyed strong, consistent productivity growth, much of which is increasingly attributed to information technology. The U.S. is far better able to embrace the Knowledge Economy in the near term. E.U. leaders are justified in their concern that the U.S. could be drawn knowledge-oriented producers as well as emerging consumer markets, potentially causing the E.U. to lose influence.
• However, Europe has a tremendous advantage in its cultural literacy; its leaders and workers are experienced with multicultural collaboration. The U.S. will be hampered in the global Knowledge Economy due to its limited understanding of culture, which is mostly limited to immigration. The immigration process involves rejecting the original culture and adopting the U.S. culture, which can lead U.S. leaders and workers to fail to take other cultures seriously. The U.S. immigration tradition is relatively efficient at assimilating people, while the European tradition is not. For more on this, see Rethinking Immigration in the Knowledge Economy.
• Ambassador Bruton stated that the bedrock of the TransAtlantic Partnership has traditionally been economics. Moving forward, the partners’ shared political beliefs and traditions will probably play a stronger role: as more nations achieve wealth, many will look to the major democracies as leaders to learn how to collaborate and distribute wealth equitably.
• Jonathan Evans’ discussion of ownership versus regulation is prescient. Generally speaking, allowing foreign ownership potentially means loss of control and, when the context is a nation, loss of sovereignty. However, limiting foreign investment prevents the market from finding the most appropriate owner of a company, which limits wealth. Regulation could be a means to retain control or influence while allowing more foreign ownership, but it carries a risk all its own: most speakers mentioned the need to lessen or harmonize regulation.

World Turning

The bigger story here is that the world outside the TransAtlantic Partnership is changing dramatically around it, and this was the white elephant at the conference. The liberalization of trade, the proliferation of information technology and the digitalization of work processes is creating a global human capital market and hastening the shift to the Knowledge Economy. Europe is greatly hampered in its ability to deal with this shift due to its current internal focus. The U.S. will have to become far more externally focused to succeed.

• The West has fashioned the global stage in a western image, as it has dominated most parts of the world during the last 200 years. This will change in the medium-long term as other nations’ influences grow.
• The U.S. and the E.U. became world powers playing by exploiting natural resources. Colonization was one means to this end, and it still colors “First”–”Third” World relations.
• The U.S. can learn from Europe how to truly collaborate with other countries because collaboration implies interdependency and shared destiny. The U.S. has learned to thrive through self-reliance. It is accustomed to the moral high ground and doing as it pleases to a high degree. Europeans have less absolute power and gain influence through diplomacy, a skill that they have honed for centuries.
• China and India are playing by different rules, which serve as alternative examples to “Third World” countries with significant people resources and low economic and political influence. India is showing that it is possible to create significant wealth through people, services and knowledge work without achieving industrial power. Declan Kelly’s remark about Ireland being a blip on a map also reflects this reality. China is playing by different political rules as it is a Communist government using capitalist policies as the means to an end. It began achieving industrial influence by leveraging people as cheap industrial labor inputs, but its value proposition is already morphing to innovation, which involves more knowledge value-add. No one knows what will eventually come to pass in China from a political standpoint.
• China was referenced many times at the conference. Its growth is the most disconcerting development in the TransAtlantic Partnership because it will certainly change the rules of global economic and political power. China could potentially destabilize the TransAtlantic Partnership by causing one of the partners to (relatively) lose interest in the other relative to China. Each partner is trying to assess how it can turn China’s growth to its advantage. China’s growth will probably make the U.S. and E.U. less relevant in terms of economic influence.
• It is striking how seldom India was mentioned at the conference. I can only infer that India’s growth was seen as less relevant or noticeable relative to China in terms of the TransAtlantic Partnership. India may pose less of a threat due to its democratic tradition. China represents an economic and political rival, where India’s growing rivalry is chiefly economic.

How the Knowledge Economy Affects the TransAtlantic Partnership

• The Knowledge Economy is a post-industrial economy characterized by overproduction and commoditization in industrial and agricultural sectors. As such, it is a wealthy economy in which consumers have unprecedented choice of products, services and lifestyles. In the Knowledge Economy, differentiation is achieved by focusing on customer experience, not products and services. Since having an experience is a creative process, leading companies will change their focus to helping customers to have desired experiences by configuring all aspects of products and services. The products and services become secondary. For more, see The Knowledge Economy: The Ultimate Context for Understanding the Future.
• The Knowledge Economy can develop in a producer-led or consumer-led rhythm. In the U.S., jaded consumers are the product of several generations of high consumption. Moreover, high adoption of I.T. and extensive technology innovation are producing systems and tools for consumers and producers alike to begin to explicitly focus on experience. Companies like Apple, Starbucks, Nordstrom and JetBlue are leaders in experience-led value creation.
• India and China are examples of the producer-led pattern. India’s well educated, English speaking knowledge workers are serving as the back office for scores of multinationals, leveraging strong I.T. resources and knowledge of collaborative work processes. Their wealth creates a new consumer class, which is distinct from established consumer classes in wealthy countries.
• Combining Ambassador Bruton’s remark that Europe was somewhat handicapped in the language-based Knowledge Economy with Declan Kelly’s remark that the Irish miracle began twenty years before it happened, I assert that Europe has an opportunity to encourage hyper-development of technology innovation, as information technology is the infrastructure of the Knowledge Economy. Ambassador Gray’s point that European higher education is isolated from industry is instructive. Technology innovation should be an imperative for Europe.
• E.U. members have experienced chronic unemployment due to high wages, inflexible labor markets and increasing competition in the industrial sector. As the Industrial Economy matures, more competitors enter the market and commoditization sets in. Integration will not improve this state of affairs: Europe’s high quality of industrial products will lose value as China, India and others become stronger global competitors. China will probably succeed in dominating its huge, emerging consumer markets with its own innovation-driven companies that are currently cutting their teeth serving rich countries. The longer Europe delays adopting the Knowledge Economy, the more painful the future consequences.
• The U.S. has a significant opportunity to build on its lead in technology innovation, but doing so will require reaching outside itself and appreciating non-U.S. usage contexts for technology. If U.S. companies cannot give non-U.S. customers what they want, someone else will.
• Both partners risk being left in the dust in the longer term by India and China. They are applying I.T. and collaborative work processes to their usage contexts, which differ significantly from U.S. or E.U. environments. In some ways, they are having to reinvent I.T. and collaboration for their use, which demands significant innovation.
• In the 21st century, E.U. members may disconcertingly find themselves less relevant on the global stage than they were in the 20th, but this will be short-lived if all goes well. They are undertaking the difficult task of weaving a collective destiny to enhance wealth, quality of life and competitiveness. As the world continues to shrink in terms of exploitable resources (raw materials, clean air and water), all nations will need to collaborate more. As such, the E.U. may soon find its greatest export to be the political-economic transformation process. Even the prospect of burying centuries-long rivalries to adopt collective destiny is remarkable. If the E.U. can do it, we all can.
• Knowledge workers will create the most value by understanding all aspects of customer experience. Products commoditize, but knowing how to help customers have experiences (which involve products and services) will drive value creation. Examples are: courtship in Chongqing, housekeeping traditions in Pondicherry and vocational ambitions in Ningbo. How do companies facilitate customers’ experiences? Although the majority of global consumption currently lies in western countries, this will change significantly in the medium-long term, and U.S. and E.U. companies will lose relevance unless they get plugged into emerging markets’ experience (which will not always be “wanting to be western”). See The Transformation Imperative.
• Converging social, technological and political changes demand profound changes in how organizations relate to their customers, and this begins by questioning many of the assumptions on which 20th Century businesses are built. For more, read 21st Century Drivers for Innovation and Collaboration.
• Declan Kelly and Paul Zeven emphasized that there would be an influx of younger executives to the top ranks of global enterprises, implying a widespread changing of the guard. This reflects the imminent period of discontinuous change in which many of the rules that existing executives played by—and won by—will no longer work. For example, “globalization” used to be a code word for imperialism: high value industrial goods were sold globally with minimal customization. The new era will be far more inclusive, interactive, collaborative and customer-focused. The Industrial Economy was producer-focused.