By Ben McTernan
Over the past decade, European investors have assumed a growing presence in the material handling industry in the United States. Prominent European players on the manufacturing side include Germany’s Mannesmann Dematic, which acquired Rapistan Systems in 1992, and BT Industries AB, the Swedish company that purchased The Raymond Corporation in 1997. More recently, European investors have become active in the distribution realm, notably in the purchase of two distributorships by Pon North America, an affiliate of Netherlands based Pon Holdings, B.V.
Rising European investment in the U.S. material handling industry is in line with a general trend of increased inflows of foreign direct investment in the United States since the mid-1990s. While much of the increase stems from the rapid development of investment opportunities in high-tech and information-related industries, traditional economic sectors have also attracted growing attention from foreign investors. The most noteworthy mergers and acquisitions in recent years took place in the automotive and petroleum industries, but virtually all sectors, including equipment manufacturing and retail sales, drew higher levels of investment in the latter half of the 1990s.
Consolidation Attracts Investment
Significantly, the rise has not been limited to investment in existing U.S. affiliates of foreign firms. Foreign direct investment in fresh acquisitions and the establishment of new businesses in the United States has also experienced substantial growth.
The surge in investment by foreign firms became especially pronounced beginning in 1998. According to a June 1999 report from the U.S. Department of Commerce’s Bureau of Economic Analysis, the chief cause of the sharp rise in investment in the United States is an increase in merger and acquisition activity. Heightened global competition is spurring businesses worldwide to seek ways to reduce costs through economies of scale and to combine complementary strengths, contributing to pressure for consolidation and creating new opportunities for investment.
European countries have long been among the top investors in the United States, so it is not surprising that European capital has played a significant role in the recent surge of foreign investment. Investment levels generally have trended upward in both directions across the Atlantic, although the movement of capital from Europe has increased at a more rapid pace. According to figures updated by the Bureau of Economic Analysis in March 2000, capital inflows from Europe grew from $29.2 billion in 1994 to an estimated $232.7 billion in 1999, an increase of almost 700%. Investment from the developed economies of the European Union (sidebar) grew at an even more impressive rate of close to 900% over the same period, as capital inflows rose from $23 billion to more than $227 billion. (Table 1)
Appeal of the U.S. Market
Several specific characteristics of the U.S. market enhance its attractiveness to foreign investors, including:
- Large and growing market for a wide range of consumer and commercial products and services;
- Highly developed distribution and communications infrastructure;
- Flexible capital and labor markets;
- Highly educated and productive work force;
- Leadership role in technological innovation and implementation.
Further adding to the market’s appeal for foreign investors more recently is the convergence of a strong U.S. economy and the reduced attractiveness of investment in previously favored emerging markets in Asia and Latin America. The United States has come to be viewed as a “safe harbor” market, a perception that is bolstered by the presence of three of the pillars of international investor confidence— low inflation, healthy growth and fiscal discipline. Moreover, the prospect of higher interest rates will create further incentives for foreign capital until investors see signs of slowing growth rates.
In addition to the particular characteristics of the U.S. market, important “push” factors appear to be directing the flow of investment from Europe to the United States. A chief indicator of this phenomenon is the weakening of the euro, the currency of the European Monetary Union (EMU). Countries within the “eurozone” began conducting non-cash business transactions in the new currency in January 1999. National notes and coins continue to be used for cash transactions, with the value of individual currencies defined in relation to the euro. Euro notes and coins will be put into circulation no later than 2002.
The euro has lost 13% of its value since it was introduced, falling through parity with the U.S. dollar in early 2000. On the one hand, the weaker currency has given a boost to European exports, contributing to higher growth levels in key economies of the EMU. On the other hand, the capital outflow that lies at the root of the euro’s depreciation stems in part from perceptions of weaknesses in the EMU model that create disincentives to investment in the eurozone.
The single currency and the coordination of monetary policy across member states through the European Central Bank (ECB) are intended to produce several benefits. Chief among these are the creation of a larger, integrated European market, open access to that market by companies operating in the eurozone, and the elimination of cash-management costs associated with doing business using a multitude of currencies.
However, the divergent agendas of low growth/low inflation economies such as Germany and high growth/high inflation economies such as Ireland have called into question whether it is possible for the ECB to develop coherent policies for the entire monetary zone.
Doubts also persist about the willingness of member countries to carry out a reform of overburdened pension systems that is viewed as essential to establishing the budget controls necessary for monetary stability. Structural rigidities in labor markets within the eurozone further diminish the attractiveness of the region for investors.
Each of these factors contributes an element of uncertainty, in the process diminishing the interest of foreign and domestic investors alike. The numbers illustrate the difficulties that have emerged since the single currency was launched. In net terms, the outflow of direct investment from the EMU rose by over $40 billion compared to 1998, an increase of 43%. The net outflow of equity investment grew to over $50 billion after coming close to balance in 1998.
Follow the Money
The higher levels of European investment in the United States during the 1990s are the result of numerous factors, including fresh opportunities, changing perceptions of risk, long-term strategic planning and short-term expediency. Many of those same factors come into play when looking specifically at investment trends in the material handling industry.
Whether the European presence continues to grow, holds steady or recedes will depend on a number of developments. An expected closing of the growth differentials between the United States and the eurozone economies, combined with a hoped-for integration of European capital markets, could very well enhance the investment climate in Europe, prompting a shift in capital flow back across the Atlantic. Whether that shift includes capital invested in the material handling industry remains to be seen.