‘Look for potential buys in Europe'

In spite of the current crisis scenario in the Euro Zone, it is unwise for Indian companies to ignore Europe, says Mr Hans-Paul Bürkner, president and chief executive officer of the Boston Consulting Group (www.bcg.com).

As for the options before Indian CEOs, now is probably the right time for Indian companies to look at potential acquisitions, especially of technologically strong companies with deep capabilities.

“There are also very interesting fund-raising options. One, needs to de-average across the various countries, industries, etc, to identify the right opportunities.”

Excerpts from the interview.

First, a brief description of the euro crisis.

The successful haircut imposed on private holders of Greek debt in early March 2012 has led some observers to conclude that the Euro Zone is finally on its way toward solving its debt problems.

This move follows other measures taken, such as the new longer-term refinancing operations offered by the European Central Bank and the decision to implement a permanent European Stability Mechanism by June 2013.

However, these measures are really only a short-term fix. They fight the symptoms but do not cure the disease.

The real issue facing the Euro Zone is dealing with three fundamental problems: unsustainably high debt levels, the lack of competitiveness of some member countries, and an adverse demographic shift.

Euro Zone governments have to acknowledge the necessity to substantially reduce the current unsustainable debt burden.

Assuming that a government debt-to-GDP ratio of 60 per cent represents the upper limit of sustainability (based on criteria in the Maastricht Treaty), there is an excess debt of €3.7 trillion that needs to be eliminated for the government sector alone.

But, the Euro Zone countries do not have just a government debt problem. They have substantially over-leveraged private sectors that are also in need of restructuring. Spain and Ireland, for instance, have a massive corporate debt problem.

Adding to this is the diverging competitiveness with the countries of the periphery failing to rein in excessive wage increases which, in the past, could be addressed through currency devaluation.

Having lost the ability to adjust through exchange rate devaluations, the countries of the periphery can now only resort to painful internal devaluation by increasing productivity or salary cuts.

The adverse demographic shift, with a higher ratio of old age population to working-age population, exacerbates the fiscal challenge. If the mounting costs of providing for the elderly are included, the debt levels of most governments would be significantly higher.

What are the dimensions of the euro crisis that are of relevance to Indian enterprises?

Globalisation has resulted in the integration of economies across the globe. The European Union contributes almost 27 per cent of the global GDP; and 83 per cent of the global trade touches European Union, the US and Japan.

Given this context, it is not possible to isolate Indian enterprises from the crisis in Europe, which will continue to impact global currencies, capital markets and foreign investments. The impact, of course, will be much more direct for enterprises having an asset or sales presence or which source the inputs from the Euro Zone.

How have businesses around the world responded?

For many companies, the last four years have been volatile and difficult. Many Western companies have resorted to hoarding cash and shying away from long-term investment in the face of uncertainty. However, there are some companies that have emerged as winners even during this crisis. A recent study by BCG has categorised these winners in three categories, as follows:

There are companies that are relatively young and growing rapidly by commercialising innovations.

The second category is the market leaders, serving high-growth emerging markets, even in the context of high competitive dynamics.

The third category of companies repositioned for growth by migrating a low-growth portfolio toward external-growth exposure.