Why Europe Wants to Pump Up Companies to Make ‘National Champions’

(Bloomberg) -- “National champions” are back in fashion, particularly in Europe. The term is code for government support for home-grown corporate powerhouses as a way to give them an edge over outside competitors and create jobs, drive exports and fuel economic growth. The European Union worked for decades to stamp out state aid and pry open markets for electricity, phone services and air travel. But now as national leaders struggle with growing populism at home and what they see as unfair competition from China they want more leeway to act. The risk is that intervening and building barriers could scare away capital, stifle competition and smother innovation just when companies need it most.

1. What is a ‘national champion’?

A national champion can be a provider of key public services, such as electricity, transport or postal services, that states protect in an effort to make sure citizens have easy, cheap access to them. It can also be an industrial leader in its field, such as making cars or power plants, which government officials try to protect and nurture so it can generate jobs and profits at home while setting out to conquer the world. The concept has expanded to internet and technology firms and can cover any company a country deems important to its national interest or security – or pride. For example, Huawei Technologies Co. has been encouraged by China to expand globally, taking on markets previously dominated by Western suppliers.

2. What kind of support do they get?

Support can come in the form of ownership, direct state investment or aid and favorable regulation. For example, the European Union and the U.S. have been embroiled in a transatlantic row over the amount of government help they give the world’s dominant planemakers, Airbus SE and Boeing Co. Governments can also hinder foreign investment or takeovers, or be more lenient in allowing local companies to combine. In 2018, the U.S. blocked a hostile foreign takeover of San Diego-based chipmaker Qualcomm Inc. amid fears the buyer could curtail local investments and give China an edge in developing technology for next-generation wireless networks.

3. Why now?

Rising inequality and jobs lost to globalization from traditional blue-collar industries have helped fuel protectionist fears in Europe and the U.S. There’s also pent up frustration over Beijing’s market-distorting subsidies for cutting-edge industries and how it protects Chinese companies from foreign competition. U.S. President Donald Trump was elected in part thanks to his aggressive talk about China and saving American factories and jobs. In Europe, leaders including French President Emmanuel Macron and German Chancellor Angela Merkel are calling for more scrutiny of foreign takeovers and changes to EU rules so local companies can bulk up and compete on the world stage. Those views aren’t fully shared by the Netherlands or by the European Commission. Neither are keen to dismantle merger rules that might allow French or German corporations to dominate the European market. Instead they are calling for changes specifically to bolster the EU’s ability to take on big technology firms, something the French and Germans also back.

4. What are politicians doing about it?

Trump sparked a trade war with China. He’s targeted China’s technology companies partly to protect Qualcomm, Cisco Systems Inc. and other U.S. rivals. Germany tried to orchestrate a merger of Deutsche Bank AG and a local rival to keep the bank out of foreign hands. Merkel and Macron supported the creation of a European railway champion – a giant train and rail-gear maker combining France’s Alstom SA with parts of German engineering company Siemens AG – to go up against a Chinese rival. The deal was quashed by EU Competition Commissioner Margrethe Vestager earlier this year. Merkel’s government has also been pushing for EU-wide screening of outside investments amid concerns China is seeking access to sensitive technology and greater global influence by acquiring key infrastructure including ports. For now, Europe doesn’t have anything like the Committee on Foreign Investment in the U.S., which was key in killing the Qualcomm takeover.

5. Are European champions even better?

Airbus, born half a century ago of an accord between France, Germany and Britain, is hailed as a successful cross-border merging of interests to create a European champion. But building them isn’t always easy. Fiat Chrysler Automobiles NV blamed the French government when it abruptly withdrew its offer to combine with Renault SA, which would have created the world’s third-largest carmaker. The French state, owner of a 15% stake in Renault, had delayed a board decision on the deal for a second time. Earlier this year, the Dutch government caught Paris off guard by secretly buying a stake in Air France-KLM Group to match France’s holding, pledging to defend its national interests. The airline, plagued by sometimes violent labor unrest and management shakeups, lost its top ranking in Europe to Deutsche Lufthansa AG in 2018.

6. Wasn’t state intervention a bad idea?

National champions became popular after World War II as countries worked to rebuild their economies and industries. But problems surfaced over time. Such big, protected companies weren’t always good at adapting or innovating. So national champion became a by-word for industrial decline in the 1970s. Europe spent decades deregulating state-owned monopolies for energy, phone services and transport over concerns that big firms were inefficient, badly run and offered poor services for high prices. Has it worked? Ask the millions of Ryanair and EasyJet customers who can afford air fares once out of their reach. But deregulation and privatization also has its detractors. Britain’s rail commuters contend with crowded trains at high prices compared to state-subsidized rail in most of continental Europe.

The Reference Shelf

• How Huawei’s billionaire founder is defiant in the face of existential threat.
• Merkel on how EU antitrust rules are naive about China’s threat.
• Dutch minister’s plea for antitrust powers to curb big Internet giants.
• France’s message for capitalism: Adapt or die.
• A QuickTake on how fear of Huawei killed $117 billion deal.

To contact the reporters on this story: Viktoria Dendrinou in Brussels at vdendrinou@bloomberg.net;Aoife White in Brussels at awhite62@bloomberg.net

To contact the editors responsible for this story: Ben Sills at bsills@bloomberg.net, Melissa Pozsgay, Nikos Chrysoloras

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