Europe as a Market
BEFORE the war, American export to Europe consisted in the delivery of certain products, mostly grain and crude materials, at the ports of the Old World. Since the peace, the American salesman has come to Europe and has taken on the Continent as part of his territory. The difference is revolutionary.
Before the war, selling to Europe was a simple transaction. The classical American exports were cotton, wheat, copper, tobacco, lumber. Trade was carried on on the basis of samples, with relatively few clients on the various produce exchanges. The use to which the exports were put was no concern of the person selling them; they were practically all producer’s goods, destined to undergo immediate transformation. The purpose which led to their purchase was irrelevant to the American seller; he could consequently get along quite well on a minimum of European representation. To-day this type of trade is falling into the background. Exportation of raw materials is the sign of either a colonial or an agricultural country, and the United States is ceasing to be either. Every industrial nation is seeking to control, on a national or imperial scale, as many as possible of the raw materials necessary to its economic system, and to use them within its borders. Faulty agricultural methods in the Southern States are partly to blame, but the fact that in 1929 the sales to England of
American cotton dropped half a million bales, while those of Indian cotton rose by almost the same figure, is in no small degree significant.
Yet, at the very time when this change in the world marketing of raw materials is going on, the total United States export to Europe has enormously increased. The average for 1910-14 was $1,333,800,000; in 1927 the total was $2,279,800,000. Where the change has come is shown by the figures below.
The total American export to Europe in 1910-14 was divided among the four great classes of foreign trade according to the following percentage:—
In 1927 these proportions had become: —
In other words, while the proportion of foodstuffs and of semi-manufactures remained relatively constant, that of finished manufactures very nearly doubled. The money value of finished manufactures has almost quadrupled. The world export of American finished manufactures in 1910-14 averaged $654,000,000; that of 1929 was $2,532,000,000. Since Europe took about the same proportion of each of these amounts, — i.e., 30 per cent, — it is clear that Europe alone is now taking slightly more of the finished manufactures of the United States than the world export of the United States in that class at the beginning of the war.
Next to ensuring a secure supply of raw materials, the chief aim of the modern industrial community is to find markets for its manufactured wares. Yet as soon as it goes in for this type of export, it is forced to face the fact that it is no longer dealing in producer’s but in consumer’s goods. Unlike the classical American exports to Europe, the new type of goods becoming prominent to-day are sold to their ultimate consumers in the form in which they arrive. The selling end is no longer a simple transaction. All the problems which have engaged the American producer at home — the stimulation of wants, the grasp of national psychology, the spread of mass purchasing power, and the rendering of service after sales, to cite only a few — reappear as problems of his European market. To deal with these problems it has proved necessary for the American business man to be on the spot, and, in the course of the last decade, to Europe he has come.
The most powerful single agency in facilitating the entrance of American business into European markets has unquestionably been the office of the American commercial attaché in the various capitals. There are twenty-two of these offices in various parts of Europe, with a staff of seventy-one trade commissioners, and $719,800 of the total Congressional appropriation, which for the Foreign Department in 1928-29 was $1,862,563, is spent on the European area. With their single purpose of developing trade contacts, they have been able far to outdistance what was previously accomplished by the consular offices with their multiple other functions; and while the European consulates still coöperate in industrial work, the more important trade contacts are now generally made through the commercial attachés. Though classed as attached to the United States Embassy, these offices head up, not to the State Department, but to the Bureau of Foreign and Domestic Commerce of the Department of Commerce, and their post-war development under the Secretaryship of President Hoover bears out the first part of his definition that the function of government is to chart the channels of foreign trade and keep them open. The support of the business community is whole-heartedly behind the commercial attachés; they work in close coöperation with the Foreign Commerce Advisory Commission of the Chamber of Commerce of the United States, and with the National Foreign Trade Council; and at the last hearings of the Congressional Appropriations Committee they could point to requests from two hundred representatives of trades which desired to have various markets charted in their interest.
President Hoover, when laying the corner stone of the new $13,500,000 building which the Department of Commerce is erecting in Washington to be the largest office building in the world, said, ‘While there may be complaints over the expansion in other directions, this Department cannot be the subject of them, for it is devoted solely to aid and foster the development of higher standards of living and comfort of our people.’ It may well be asked whether this building is not the real Foreign Office of the United States. America is after all a business country, and the department whose men are forming the spearhead of the American thrust into foreign markets is very near indeed to the centre of national life.
The commercial attaché is, of course, not the only agency through which American firms establish themselves in the European market. Stories are not uncommon in Germany, for instance, of immigrant sons, grown affluent on their American ventures, returning to capture still larger markets with their old home towns as a base. Contacts made through the American chambers of commerce in European cities, chance acquaintances, or even unheralded fliers taken without any formal introduction, have all been responsible for firms getting a foreign foothold, and even the most partial list of what they are selling makes Alice in Wonderland’s ‘shoes and ships and sealing-wax’ sound like a monotonous assortment.
Whatever the sources of their initial contacts, the end of the first post-war decade has seen both American goods and American firms established as a definite part of the European scene.
There are, naturally, many instances where the disposal of American goods takes place as it did before the war, where the goods come to Europe by themselves. Such transactions are usually effected through the establishment of an agency arrangement with a local firm already engaged in the line in question. In Germany there are some 1600 German agents who carry American goods, while in England over 6000 American firms distribute their products through some 3500 to 4000 British representatives. But in the more important lines American goods are sold in Europe because American industrialists are themselves at work there.
In the case of finished manufactures, the satisfaction to be obtained from a given object is directly related to the method by which it is used. American machines of all sorts, from steam shovels to electrical washing apparatus, have been modeled and remodeled to fit a given way of doing things. Possession of the machine, without familiarity with the way to get the best results from it, is only half an advantage. It is for this reason that the exportation of American machinery requires the exportation of American technique, and the exportation of American office equipment requires the exportation of American administrative methods if satisfied customers are to be procured. American firms have realized this, and have repeated in Europe the institution of the ‘service man.’ If a foreign firm agrees to manufacture an American machine tool under license, someone from the American factory accompanies the blueprint to translate trade terms, explain procession detail, and establish in the European shop practices as nearly as possible like those of the American factory in which the original of the design was developed. If a client desires to install an American card cataloguing system, an expert is sent to survey his particular situation, in order to give advice before sales on the apparatus most suitable to the given circumstances. Indeed, most of the office equipment concerns, such as Burroughs or Multigraph, have instituted training schools for operatives, so that not only are American appliances installed on the basis of American expert advice, but the appliances themselves are equipped with a personnel trained according to American systems.
The next step beyond the agency and the service man in the establishment of American business in Europe is the formation of a subsidiary firm, directly related to the American parent. As soon as this happens, all real distinction between domestic and foreign trade, so far as the American company is concerned, is broken down. Europe becomes an area, differing from regional divisions of the United States such as the Pacific Coast, the South, or the Middle Atlantic States, or from Oriental territories such as Japan or Ceylon, only in the nature of some of its problems. They all head up to the same final control: a salesman from Austria is on a par with one from Alabama; the company is thinking in world terms, and in the interests of administrative economy is bent on treating them all as nearly alike as possible. When General Motors held a gathering of its salesmen at a Delaware country club in the summer of 1929, representatives from twenty-three different countries, nine of whom were Europeans, sat down to talk sales policy as a common problem.
American firms approach Europe as virgin territory; the technique of organization which they bring with them is that which has been successful in organizing their own continent; they put it to work without regard for existing practices. Where possible, they attempt to offer a quid pro quo which will ensure to them the advantages of certain specialties already developed in the countries concerned. In Germany, for instance, they have made a practice of offering royalties on large-scale development in return for patent rights on laboratory processes. The understanding worked out in 1929 between Standard Oil and the German Dye Trust, whereby the former is to take charge of the development of the latter’s process for coal and oil hydration, is a case in point. In England, on the other hand, the trade relationships built up with all parts of Europe and the world, in the course of last century, by an English-speaking people are an advantage which incoming American firms have not overlooked. A very large per cent of the agencies for all Europe, or indeed for all the world outside America, established by firms which have not themselves come abroad, are English agencies, and London (though closely pressed by Paris) is the first choice for headquarters of American firms seeking a location for their European Division.
Where the advantages of a combination of existing patent rights and market development could be secured, American firms have been inclined to coalesce with companies already in the field. The purchase of Vauxhall in England and Opel in Germany (and rumors are persistently rife regarding Citroën in France) by General Motors is an example of this type of organization; a more far-reaching one is the current agreement between General Motors and the Allgemeine Elektrische Gesellschaft of Berlin. Their present arrangement is the outgrowth of a long history.
In 1884, Emil Rathenau, the father of the German statesman of the war and post-war period, entered into an agreement with Edison for the German rights on his patents. A mutual exchange was continued until 1929, when the present closer relationship was agreed upon. Under this arrangement, the General Electric owns 50,000,000 of the 230,000,000 marks capital of A. E. G. and has four members out of thirty-three on the board of directors. The mutual exchange of processes and technique goes on; each company has a representative attached to the head office of the other to foster this exchange, and a definite market agreement is entered into between them. The world markets are divided as follows: the American market is reserved for the General Electric; Germany, Scandinavia, and all of Central and Eastern Europe (except Poland — an exception made out of deference to the Harriman interests there) are reserved for the A. E. G.; elsewhere the two companies compete. The A. E. G. thus acquires an exclusive market more than five and a half times the size of its domestic territory, with the right to make and sell there both all of its products and all those of the General Electric. The American firm, on the other hand, has a means of getting its products disposed of through an organization already familiar with the Eastern European sales territory, — for the A. E. G. had made considerable progress in the Balkans before the war, — and reaps profits thereon through its stock participation.
Other firms, by contrast to General Motors and General Electric, have preferred to build up their own organization from the bottom. The most conspicuous of these is Ford. If the Ford Company of Detroit can rightly be taken as the most advanced example of economic organization in the United States, the Ford Motor Company, Ltd., of London certainly merits equally the name of the most advanced example of American economic organization in Europe, in the sense that more than any other American firm there it has overcome the tendency to think in compartments of foreign and domestic trade, and is treating Europe and America alike as partial elements in a single selling field.
It began in a small way, in England just before the war and in the other European countries shortly after, setting up sporadic subsidiaries each directly connected with Detroit. But it then, in common with General Motors and a host of other companies, saw the advantages of treating Europe as a continent, paralleling the continental organization of previous experience at home. In the autumn of 1928, the Ford Motor Company, Ltd., was founded with headquarters in London, to take over the various independent companies previously set up. With a capital of 7,000,000 pounds, it now controls plants from Cork to Constantinople, from Finland down to Spain. Most of these are assembly plants and warehouses, but important factory sites have recently been acquired at Cologne and Constantinople, and at Dagenham in Essex work is well under way on what will be the largest motor factory outside America. The unified finance of this system of undertakings shows, according to the directors’ report of the first year of the company’s operation, a net profit of over a million pounds, and so strong is its position that the same directors’ report announced that so far as the Ford Motor Company, Ltd., was concerned, the 33⅓ per cent safeguarding duty which British manufacturers in general have regarded as a primary condition of building up the motor industry could be abolished.
There are several other companies in Europe which have used a continental form of organization to get above the compartmentalism of Europe’s twentyfive national units. But within the last two years Ford has taken two steps which are so far unique among American practices. He has ceased to publish any statistics of production except world statistics, and he has given the Cork tractor factory for the present the right to make all the Ford tractors required by the entire world. And through the Ford Motor Company, Ltd., he has applied to the International Labor Office at Geneva to work out a system of real wages for the various European countries in which there are Ford plants, so that the same real wage, based on the Detroit scale, can be paid throughout the entire system of production, irrespective of the geographical situation of a given plant. These two moves place him at the forefront of producers conscious of the North Atlantic area.
The favorable balance sheets exhibited by most of the American firms which have come to Europe in the last decade seem all the more extraordinary considering the depression from which European firms have suffered more or less continuously since the break of the post-war boom. The American firms, however, have entered the field with three important initial advantages. First of all, they have come well supplied with capital. They have been able to carry initial investments and the losses of the expansion period on the accumulated profits of the home market. They could afford to wait, if necessary, a very long time before showing a return, a very much longer time than any firm whose entire assets were involved in the new venture. Secondly, the products which they have come to introduce have in general exceptional advantages of design. The research of which they are the results is the costly kind which can only be supported by a mass market. A company producing four thousand steam shovels a year can take a minute fraction of the profit from each to develop plans for a still better model; a firm producing only two hundred cannot spare enough to make such research pay. The third advantage is the American manner of business organization. The methodology which American firms have brought with them is perhaps their greatest intangible asset. They have carried over the flexibility of structure, the eagerness to meet the existing needs of the consumer on the one hand and beguile him into experiment on the other, and the capacity to view things in the large which were bred into them by the American market. Their unfamiliarity with the difficulties inherent in a world of highly differentiated jurisdictions has made them appear at times naïve; but their innocence of such limitations has not infrequently supplied them with an optimistic inventiveness, impossible to anyone but an outsider, in bridging over difficulties at which the more informed throw up their hands.
The American business man’s unwillingness to recognize national divisions has enabled him to treat Europe as a continent. Even where the exigencies of European organization have forced him to proceed country by country he has not given up the wider continental point of view. The advertising policy of a considerable number of the firms now operating in England and on the Continent is a clear indication of this.
When General Motors, for instance, decided to go into the European market they arranged with the J. Walter Thompson Company of New York to go with them and set up branch offices in each of the cities where they established themselves. Such a combination provided an opportunity for a centralized selling strategy to be worked out according to the geography and expressed in the vernacular of the place of sale. Supposing the American office decides that the key idea for a campaign should be that a certain car will appeal to young people because of its speed; under such an arrangement a cut exhibiting dark-haired youngsters climbing effortlessly up a mountain will be prepared for Switzerland or Greece, while in Holland blondes are shown impressed by quick pick-up on the flat. And the texts will not be translations of each other: Paris has more than once regaled itself over little unintentional changes of meaning when firms have tried to do that. General Motors copy is put out by the European Thompson offices in some twenty-five different languages.
The unwillingness of the American business man to recognize social divisions is enabling him to treat whole populations as well as whole areas as a market. A very great number of the American goods now in general use in Europe began as luxury goods. The companies making them have by and large not been content with the limited, high-class market of their original appeal, however, but by persistent advertising have created a market in classes whose traditions did not include the article in question in their standard of living, and whom the native firms have never made any effort to reach. The two following texts, taken from adjoining pages of Punch and advertising respectively an English and an American car of well-known make, show the dynamic behind the latter’s publicity: —
1. The English car. ‘There are men and women whose cultivated tastes admit of no pretense or insincerity; whose trained minds judge values fairly; who demand, simply and decisively, the best. They may be few, but it is for them that the — car is built.’
2. The American car. ‘Constantly striving for the goal of perfection, never resting on past laurels, — again forges ahead. The spirit which led to the introduction of the first Twin Six in 1915 and the Eight-in-line Motor in 1923 moves on to greater achievement. In the two new eights which have just been introduced, — presents to the public the concrete result of thirty years of manufacturing fine motor cars. Your inspection of the new models is invited.’
The most vivid examples of the democratizing process are those in which any sale whatsoever of the given product has had to be preceded by the conversion of the consumer. The development of a market for American labor-saving household devices is a case in point. As a result of optimism and advertising, the European sales of a certain electric ice box were in 1929 about 14½ times their total in 1924 when the product first began to be pushed. Beguiling a country like England, where the domestic use of ice is rare, into the purchase of an electric ice box necessarily began with the luxury class. The earlier cuts displayed the satisfaction of the haughtiest of butlers in serving an exquisitely refrigerated repast. Then an attack was launched upon the more important butcher firms by advertisements in journals of the meat trade, stressing cleanliness, constant temperature, and the luxury of not having to come down to the shop on Sunday morning to let the iceman in. As a result, in 1929 eighty-three of the eighty-five butcher shops on a London street devoted to the trade carried the—sign in the window. The company could then turn to the ordinary consumer and say, ‘For the sake of health buy where you see our sign,’ and, once this campaign was finished, urge him not only to buy where the meat was kept at a proper temperature, but to keep it that way after it came from the butcher’s to his own home. The final step in democratization is demonstrated by the company’s very latest advertisement, which calls upon ‘lodgers, pressmen on night duty, aldermen in reduced circumstances, and all others’ to urge their landladies to install — so that the chops of their weekly board may be more palatably kept.
One of the most powerful aids to American business in its democratization of wants in Europe, an aid which is no less effective for being unintentional and indirect, is the American film. Itself the symbol of the democratization of amusement, by picturing what is at least the Hollywood version of American ways of life it popularizes a host of American goods among wide masses of European people. The quota restrictions placed on the importation of American films by the various European countries during the last four or five years and the recent concentration of American producers on the ‘talkies,’ whose distribution has to be largely confined to the English-speaking market, have weakened the quasimonopoly of the movie trade enjoyed by American companies in Europe during the years just after the war, but in 1928, 558 of the 778 films shown on the British market, 205 of the 520 on the German, and 313 of the 583 on the French were American films. In the same year, the seating capacity of the regular-run houses in England was increased 90,000 by the erection of new theatres and that of Germany 125,000. The continual vicarious enjoyment of the American type of product presented on the screen inevitably puts the European movie-goer in a mood to receive the American salesman who presents the real thing at his door. The European royalties of American motion-picture producers in 1928 amounted to $65,000,000. How much came to other American producers as a by-product of this sum cannot be estimated, but it was certainly no small amount. IV
The establishment of the American firm as a definite part of the European scene is too recent an event to permit a discussion of its long-time consequences to the world of American trade. There are certain effects, however, which are already beginning to be discussed. Trade with Europe was started in order to dispose of the expanding margin of production on which America depends to keep prosperity on the upgrade. In other words, the foreign departments of American firms were set up to stimulate the exportation of things. When subsidiaries were established in foreign capitals, it was to aid in the distribution of products received from overseas. The articles so received were made in America as part of the regular domestic production; the value which they represented was distributed to different elements in the American productive system, and became part of American purchasing power. But development has not stopped there. Partly for the sake of cutting down on transportation, especially ocean freights, partly because of the lower cost of labor abroad, and partly in order to gain the good will assured to a firm offering jobs in countries carrying a burden of unemployed, the distributing subsidiaries have, in many cases, expanded into assembly or even manufacturing plants. In Germany, at the close of 1929, there were known to be sixty-four subsidiaries of American companies which had set up their own establishments for manufacturing or assembly. In England, the number was approximately seventy-three.
As soon as an article is manufactured in this fashion abroad, however, what the American firm is really doing is no longer exporting things, but capital and design. Now a great many people see this as the future of American foreign business. They point out that the possibilities of research and experiment offered by the American mass market mean that American firms will always have the advantages of improved design. And they point out that the exportation of capital is a normal process in a mature industrial country such as the United States has become. They suggest that royalties on design, taken either directly or in the form of stock participation in the foreign manufacturing company, are the desirable return from American business abroad.
Other equally informed observers see the matter differently. They point out that American prosperity is based upon the spread of purchasing power among the widest possible number of American consumers. But, where only design and capital are exported, the American provider of raw materials and the American worker are deprived of the income which would be theirs if the thing itself were exported after being made in the United States. Furthermore, the per cent of the total selling price of the product which does return to America comes back as royalties or interest. The class to which it comes will reinvest rather than spend that money on the consumption of the goods which are the backbone of prosperity, for the simple reason that it is already supplied with all the things it can consume within the limits of its leisure. For a great many articles America excels in design at the moment, but her progressiveness is due to the fact that she has still an expanding market. Only the knowledge that the country has the purchasing power necessary rapidly to replace a given model with a new and better one makes the American manufacturer press his research. A check to that purchasing power means a crystallization of American production on its current level.
In speaking of branch plants abroad, the Committee on Recent Economic Changes says: —
The first type of barrier, the high tariff walls erected against American products, are in some cases being scaled; but, what is vastly more disconcerting, many of these are being permanently avoided by the establishment of American-controlled factories on the other side. Thus, substantial portions of our most highly developed and most profitable industries are actually migrating to foreign countries, carrying with them not only American organization and methods but also American talent, with all the resultant loss of purchasing of American domestic products and of the stimulus to American business in general.
The arguments for and against American branch plants, however, are both based on the assumption that it is going to be permanently possible to maintain America’s relative prosperity as compared with other nations. The balance of international payments between Europe and the United States conceived of by the average business man as ideal is one in which the United States should receive the principal and interest of the war debts, the principal and interest of the post-war public and private loans, royalties on all American patents used abroad, and prompt payment for an increasing total of American exports, while preserving the American market as nearly as possible for American goods by means of an increasingly high tariff. Unfortunately that is not a balance. At some point or other, in the course of the next years, it will have to be made a balance. The American tariff is maintained because foreign goods are regarded as a menace since they are made at a lower labor cost than American; because, to put the same thing quite differently, purchasing power is less widely distributed in Europe than in the States. Any move which stimulates a high-wage policy and the democratization of consumption in Europe automatically limits the degree in which European goods can undercut the American market, and weakens the case for the present tariff wall. American branch plants, especially when they adopt a wage policy comparable to Ford’s, are a very real dynamic in this direction.
America’s success in selling her products abroad has so far been unquestionable. There is no doubt that America wants Europe as a market. There is more doubt as to whether America wants to accept implications of her present activities, that if she wants to have a foreign market she also has to be one. During the preliminaries to the recent passage of the Hawley-Smoot tariff bill, Congress treated the official protests of some forty other governments as irrelevant. The American manufacturers engaged in the export trade knew they were not irrelevant. When Mr. Ford and Mr. Sloan spoke of the danger to American commerce entailed in the revision of schedules upward to a height certain to cause reprisals, they were thinking in very concrete terms of the bills introduced last autumn in the French Chamber of Deputies whose passage would mean the closing out of the American motor industry in France. Owing to a lobby formed by all the American motor interests in Paris, under the name of the Automotive Club of Europe, and to certain negotiations by Ambassador Edge, these bills were tabled for the time being; the chances of their staying tabled in view of the new rates on various important French exports to the United States seem, however, slight.
Since last November, the automotive interests of all Europe have been working out means of presenting a united front to the American invasion; the simultaneous lobby which they plan in their respective legislatures now appears likely to find willing ears. The same applies to films and a host of other European products with which American goods are in sharp competition.
The movements whose base is larger than that of a single industry, whose aim is the creation of general customs unions comparable to America in size, are likewise using the passage of the ‘Grundy’ tariff as proof of the necessity of taking immediate measures for defense. Both the idea of a United States of Europe and that of an Empire Economic Union in the British Commonwealth are receiving an impetus from the erection of the new American barriers; Canada, America’s best customer, has already revised her tariff upward against the United States and downward towards Great Britain.
The essence of trade is exchange; the prerequisite to sales is purchasing power. America cannot sell abroad if she does n’t buy abroad; foreign countries cannot pay for American goods unless they can dispose of their own. It seems highly probable that within the next few years America may discover that, for a country at her present stage of economic development, protection and prosperity do not necessarily go together.