Winning: The Answers: Confronting 74 of the Toughest Questions in Business Today (3 page)

W
hen we were in Paris one weekend in November 2005, the riots were raging, and they were raging stil when we left for Stockholm a few days later. It was there—in Sweden, where immigrants make up a fifth of the population, and about 40 percent of this group’s younger adults are unemployed—that a journalist urgently asked us to comment on the fierce debate that erupted along with the violence:

What, she wanted to know, should the leaders of France do to stop the bleeding? And what should the leaders of other European nations do to make sure it doesn’t start?

Our answer, very simply, was that European governments needed to work together with private enterprise to create jobs. Not make-believe jobs in civil service, but real jobs in new companies. This can be achieved, we said, through tax and employment laws that encourage and reward entrepreneurialism, risk taking, and investment.

You would have thought we’d called for the public drowning of puppies and kittens. The journalist was apoplectic.

“You are
wrong
!” she said. “The way to solve this problem is for the government to give unemployed people more money and benefits. Why do you oppose that solution?”

We oppose that solution because it is not a solution.

Look, we may never know exactly what caused the riots in France, but we can be sure of one thing. People who believe their future holds upward mobility and financial security rarely set cars on fire. Riots are an expression of frustration and anger. They are the outcry of the desperate.

There will be much less chance of riots in Europe when its underclass has hope.

Hope comes from many things—freedom and dignity foremost among them. But hope also comes in large part from work that has meaning and
opportunity
. Which brings us back to jobs—real jobs.

Now, government jobs are all well and good. They must be, since one in five French people hold one, and a recent survey found that 76 percent of all French people aged fifteen to thirty consider civil service jobs “attractive.”

But no country can have a perpetually stagnant economy and at the same time feed more and more people into the civil service while continuing to support a generous social system of health care and education, as is the case in most developed European nations. With everyone working in dead-end positions, who would be left to pay the taxes necessary to fund the machine?

The facts are, Europe needs jobs in the private sector, and it needs them in a big way. Consider this stunning statistic, reported recently in a
Wall Street Journal
op-ed piece by Joel Kotkin of the New America Foundation. Over the past thirty-five years, Kotkin wrote, the U.S. economy has created fifty-seven million new jobs. Europe—with a combined GDP about the same size as that of the United States—has created just four million.

Four million! What is going on?

What’s going on are laws and regulations that make investment costly, to put it mildly. In countries like France and Germany, there are few tax incentives for risky investments. And employment laws make it so expensive to lay people off that companies are loath to hire people in the first place.

And what’s also going on is a pervasive European attitude, which can be summed up in one phrase: severe risk-aversion. When we were in Germany not long ago, we met many businesspeople and talked about that country’s economic situation. All agreed that balance sheets in Germany—and Europe in general—had never looked healthier. And despite what appeared to be political logjams, underneath it all, corporations were “restructuring” to make existing businesses more competitive. That’s healthy—but in most cases not good for new jobs. But when we asked why cash-rich companies weren’t investing in new ventures and pumping up their M & A activity, you could practically see the beads of sweat forming on foreheads around the room.

“Oh, no, no—we invested in Internet companies in the late nineties,” one executive said, “and we lost a lot. We don’t need or want that kind of mess again!”

With all due respect, we said, it’s time to get over the trauma. Business is about managing risk—not running from it. The best thing about the Internet bubble is what business learned from it. Traditional venture capitalists see losses as just part of the process.

Later, a pension fund manager in Sweden defended the lack of investment on the part of European companies by pointing to the growth of private equity across Europe. Yes, that trend is happening, and it is a good thing, but far from sufficient.

Private equity provides a transfusion to a sick patient—frequently a laggard division bought out of a large company. The first part of the “cure” is often to
reduce
employment. Now, restructuring is very good for competitiveness. And it’s also very good for the company’s country, as a healthy company will contribute to tax receipts. But to be clear, if and when private equity ever creates jobs, the growth is rarely explosive and usually takes quite some time.

The kind of job growth that Europe needs must give people hope—that is, opportunity—and that can come only from new businesses, the kind that pop up in the United States every day.

They pop up for many reasons.

First, the government makes it easy for them. The tax laws put in place in the 1980s and enhanced by President George W. Bush encourage capital formation. And employment laws make a flexible workforce possible.

Second, the U.S. culture celebrates risk taking. Entrepreneurs are national heroes—people who start huge job-creating machines, like Bill Gates, Michael Dell, Steve Jobs, and a host of others. During the U.S. publicity tour for our book,
Winning
, we spoke with about twenty thousand newly minted MBAs at thirty-seven schools across the country. According to our (unscientific) estimate, some 20 percent of these students told us that they were planning on starting their own businesses.

By contrast, finding an entrepreneur in Old Europe—especially one young and fired up—is a rare event. (We have certainly encountered more of this breed in Eastern European countries like Slovakia and Hungary.)

Finally, the United States has vibrant capital markets. There are investors everywhere with money, looking for new ideas and the passionate entrepreneurs who go with them.

The U.S. business environment, while by no means perfect, offers a stark contrast to the one in Europe right now.

Now, some people say that as awful as the riots were in France, they are bound to stop. And they won’t start elsewhere either. The reason they give is that Europe’s slowing population growth will, in time, create employment opportunities for all.

Reality isn’t so easy.

Employment opportunity in Europe will come when governments and companies work together to create work—real work—in the form of exciting new jobs. Tax and employment laws will have to change, as will other government policies. And attitudes will have to change too—toward risk taking. Companies will need to take the plunge and invest in new ventures. Entrepreneurs will need to come out of their caves and start building the future.

Yes, some new ventures will fail.

But many will win. And with them, so will Europe.

G
iven everything happening in Europe—every economic, political, social, and demographic trend, not to mention one million French people taking to the streets to protest one little labor reform—it would be very easy to write the whole continent off as dead.

But Europe isn’t done for, and it won’t be either.

Now, without doubt, Europe has been treading water for the past ten years. In fact, as the rest of the world has rushed to globalize and become more competitive, Europe has just kept its head above the waves of change.

We don’t mean
all
of Europe, of course. Two decades ago, the UK faced the reality of the emerging global marketplace and liberalized its economy to stay competitive. And several countries in Eastern Europe, such as Hungary and Slovakia, have thrown off the shackles of Communism with effective pro-business reforms.

But the promising economic news coming out of these countries is dwarfed by the disturbing news coming out of France, Germany, and Italy. With their aversion to capital investment and risk taking, the three pillars of Old Europe are practically paralyzed by the arteriosclerosis of their welfare-state economies.

Consider a few statistics.

Over the past thirty-five years, according to Joel Kotkin of the New America Foundation, the U.S. economy has created fifty-seven million new jobs. In the same period, Europe—with a combined GDP about the same size as that of the United States—has created just four million (and most of those were in government). Meanwhile, the European unemployment rate hovers around 10 percent, double that of the United States.

Nor is Europe positioned to reap the gains of the growing science and technology sectors. R & D spending per capita in France, Germany, and Italy, for instance, is about half that of the United States. Demographic statistics are similarly bleak. France, Germany, and Italy all have shrinking populations that (naturally) are also aging.

Perhaps most worrisome of all, the continent seems to be suffering from a collective bad mood. Asked, “How satisfied are you with your life?” by a Harris Interactive poll, around 18 percent of Europeans (from France, Germany, and Italy) answered “very,” compared to 57 percent of Americans. Worse, these Europeans said they felt stuck in their rut. Asked, “How do you expect your personal situation to change in five years?” only a third predicted improvement. By contrast, two-thirds of Americans expect a better future.

So, if Europeans themselves seem ready to write an obituary for the continent’s future, why aren’t we?

Three main reasons.

The first is that Europe is simply too large and established an economy to collapse. Remember 1980? Japanese competition was going to put America out of business. The U.S. unemployment rate approached 10 percent, inflation was at 14, and the prime rate was more than 20. As with Europeans today, Americans back then were so morose, President Jimmy Carter declared the country in “malaise.”

But too much was at stake for surrender. Americans elected a new president whose defining characteristic was optimism. He galvanized national pride (and defense-sector spending) by taking on Communism, and he reduced taxes and released the entrepreneurial spirit that revived the American economy.

Europe similarly has too much history, infrastructure, and promise to slide into nothingness. Its workforce, for instance, is among the most highly educated in the world. And while tepid, there are some signs of emerging discontent with the status quo. The quasi reformer Angela Merkel was elected chancellor in Germany. And the French government, hoping to spark job growth, did attempt to change an employment rule. That reform was shot down by protest, but at least the government took a swing at progress. It will again—by necessity.

The second reason is Europe’s exciting new cadre of transformative business leaders: Carlos Ghosn of Renault and Nissan, Dieter Zetsche of Mercedes, and Klaus Kleinfeld of Siemens, to name just three. These individuals, and they are not alone, understand that their companies operate in a global world and are making the tough changes required to stay competitive.

And the final reason that Old Europe will survive is New Europe. The Eastern European nations, with their pro-business governments, are churning out a whole new generation of entrepreneurs who see opportunity everywhere and boundaries nowhere.

During our last trip to Warsaw, for example, we heard a businessman give a speech to about three hundred other Polish entrepreneurs. He shocked them by saying, “We are getting too expensive here. I want my company to be the outsourcer of Europe, so I’m putting all my new operations in Ukraine—and you should too!” After a collective gasp, the group, albeit small, was electrified with excitement. And that, we would suggest, says more about the future of Europe than an opinion poll of French, German, and Italian grousers.

So, where will Europe be in five years?

It won’t be thriving. But it will be better. In fact, drawing on the energy of its new business leaders and entrepreneurs, and increasingly cleansed of the calcifying effects of the socialist system, Europe will be well on the road to a positive economic future that apparently—and sadly—many of its own people don’t foresee today.

W
e can’t—and we shouldn’t.

Look, the debate over outsourcing should be over by now. It was pretty much all about politics to begin with. The question now is not how do we stop outsourcing, but how do we use outsourcing to enhance competitiveness in what is, and forever will be, a global marketplace.

Of course, outsourcing has not been painless; layoffs really hurt. Still, they have to be seen as part of a broader picture, one in which outsourcing is not only integral to the world economy, but crucial to our own.

Integral because economies, by definition, respond to consumer demands. People have come to expect the lowest price and the highest quality in one package. And companies can’t deliver on that expectation without moving around the world to capture cost advantages and innovative minds.

As for the impact of all this on the United States, well, it’s pretty hard to criticize. Since mid-2003, the American economy has grown about 20 percent. That’s more than $2.2 trillion—equal to the size of the total economy of China. Seven million jobs have been added. Wage growth has accelerated from 1.5 percent in early 1994 to more than 4 percent in the last year.

Such statistics, you can be sure, mean that outsourcing’s opponents, many of whom disappeared into the woodwork even before the 2004 election, will not be out there in the 2006 campaign. Those foes had predicted American technology jobs would migrate in hordes. In fact, tech jobs have increased 17 percent from the pre-bubble 1999 level. No wonder most politicians now tout the overall benefits of an integrated global system.

If there is a problem with the U.S. economy right now, it is not the loss of jobs because of outsourcing. It is the shortage of skilled labor because of immigration restrictions. Indeed, if Congress really wanted to make our economy more competitive, it would be to raise the limits on H-1B visas, making it easier for educated foreigners to work here. Ideally, the whole program could be replaced by a permanent green card system that would draw skilled workers into a more positive, long-term relationship with the American culture—and ultimately build a better economic future for all of us.

So, to your question then, forget outsourcing. America’s labor challenge today is talent insourcing.