Any manufacturer based anywhere in the world, that does business in Europe will be impacted by the euro. Major European corporations are already writing to their suppliers — not just in the "euro-zone" but also globally — to say that from 1999 on they want to be invoiced only in euros, and that they want to receive price lists and tenders denominated only in euros.


The cost of the euro

Changing your company's product pricing into euros can affect product size, packaging, labeling, shipping, retail shelf space, retail inventory control and ordering systems. It can affect units of pricing, materials sourcing, and even change decisions as to where manufacturing facilities should be located. Every link in the supply chain can be affected, as each link's success depends on the state of readiness of each other link.

Common pricing shows up anomalies in manufacturers' business practices. A recent European Commission study identified a differential of 20 percent in the pricing of the same automobile across the different European countries, and in some cases the same product in one European country can cost twice as much in another European country. One major car manufacturer that tried to block its distributors in one country from selling cars at cheaper local prices to foreign car buyers has recently faced heavy legal penalties. An example has been set — such practices contravene the principal aims of the European Union.

The euro will also show up national taxation differences. If Value Added (local) Tax in one country is charged at a lower rate than in another, retail customers can save money by shopping in the lower-taxed country. Markets can move from one country to another. With the increasing availability of commercial information via the Internet, customers in one country who used to be "creamed" for out-sized profits can quickly buy elsewhere, changing business models and manufacturing plans.


The ripple effect

At first sight, "going euro" may just look like a currency conversion — change the old product price to a new euro price by applying the appropriate conversion rate. But that can result in a price that your marketing department doesn't like. That nice "1.99" price could become an unattractive 42 euro-cents. You could round the euro price up to 49 euro-cents, to make it more psychologically appealing — but then you would have to increase your 1.99 price too, because it is illegal to sell products in the European Union at a price differential between the euro and the old currencies. You could round your price down to 39 euro-cents — but then you might be wiping out your profit margin. Bottom line: The euro changes the economics of manufacturing.

If you change the product price, you may have to change the product size as well. This will in turn also affect the product wrapper, the carton, the truck loading plan, distribution logistics, your shelf-space allocations in retail outlets, etc. This is a reality that some of the most forward-thinking manufacturers are already planning for.

Beware of anyone who tells you, "The euro is just another currency." Most multi-currency systems cannot cope with it today. Manufacturers in Europe are racing to prepare their production systems and their IT systems to meet the new business demands resulting from the euro — because the euro problem cannot be solved by the IT Department alone. It is not just a mathematical price conversion — it's a whole new way of conducting business in Europe. And changing the way that your company does business in Europe can change the way that your company does business worldwide.


Y2K or euro

Your IT Department is most likely currently attacking the "Millennium Bug" — yet for many companies the euro arrives a full year earlier. Not only will prices have to change but computer programs, databases and systems will all have to be re-engineered to meet the euro challenge. And the euro doesn't only change your company's future — it changes its past.

Take your business' forecasting models. The marketing department may take the last five years of international sales analysis and use that as a basis for predicting future corporate sales. This is used for planning future production and capacity. The sales analysis data may be stored in the currencies of the individual markets involved, or it may have been re-valued into your home currency to make it easier for corporate headquarters to understand and to form comparisons. That data is unique to your company, and has been built up over the years. Converting that historical data unthinkingly at today's euro exchange rate would result in a false image of past performance. A business forecast of the future based on that data would only compound the errors involved. Converting your historical data is a "thinking exercise."

Similar to the Year 2000 problem, implementing the euro involves a cost for every company that is affected. But unlike the Year 2000 problem, the euro can also bring commercial benefits — and threats. With a single economic market defined by a common currency, there are potential economies of scale, and not only for companies in those countries that are adopting the euro. In Sweden, which has elected not to participate in the first wave of euro conversion, one major manufacturer has already announced that it will be adopting the euro as its in-house currency, and that it plans to reduce its number of suppliers from 4,000 to 400. Some U.S. companies are known to have already prepared their "shopping list" of European companies that they aim to potentially acquire, and are restructuring their global operations based on the manufacturing and distribution advantages that the enormous single-currency market will bring.


Are you ready?

The vast majority of companies are poorly prepared for the arrival of the euro, as can be judged by the lack of readiness of their IT systems to support the euro. Many IT departments have been so blinded by the Year 2000 problem that they will be unable to deal with the euro until their old national currencies are on the point of being withdrawn in 2002. They are often unaware of the legal environment surrounding the euro, which specifically excludes some of the "work-around" that would allow their existing systems to continue to operate as before. Few manufacturers have looked at the problem of how they ensure that all of their systems — from PCs and spreadsheets up to their mainframes — all deal with the euro in a consistent and compatible manner.

Banks, brokers and investment managers have to be able to deal with the euro after Jan. 1, 1999, when the European stock exchanges convert overnight to trading in euros only. Manufacturers have a business decision to make: Be "the early bird that catches the worm," or be on the acquisition lists of their competitors.

Whether you are into technology or not, you must have seen the "El Nino" effect that the Year 2000 problem is expected to have. The most serious industry analysts have been sending out warnings for months that implementing the euro within a business can be four to five times more complex than the Year 2000 problem. And some of those analysts have recently up-rated their "hurricane warning" to a complexity factor of 10.

You can count on the next few years of dramatic change hitting your company broadside. However, you still have some time to evaluate what the euro will mean to your own manufacturing operations, your supporting IT systems, and the long-term business future of your company.

Chris J. Pickles is the Euro Solutions Manager for Viasoft, Inc. Viasoft's Euro solution enables IT organizations to manage dual currencies, move to a single currency, and take advantage of the strategic business opportunities the euro affords. For more information on Viasoft's products and solutions, visit the company's World Wide Web site at http://www.viasoft.com

Herein a brief overview of the euro and the EMU.

The EMU — Economic and Monetary Union — and the euro are not strictly the same of course, but one leads to the other. By the way, euro has no capital letters, and no plural form. That's official. It does have its own symbol and its own ISO code — EUR. There is quite a lot of fuss about these issues, mainly by way of excuse for delaying action. The euro symbol is readily available and can be mapped to a computer keyboard.

The Economic Union is the centralization of control of interest rates and the money supply — in the 11 countries of Europe that have been admitted to membership under the terms of the Maastricht Treaty — under the control of the European Central Bank (ECB) which came into being in June of this year. The UK, Denmark and Sweden have decided not to join EMU; Greece wanted to join but didn't meet the economic convergence criteria.

Monetary Union refers more directly to the replacement of national currencies with a new one, the euro, which will have an artificially determined value. We will know what this will be at around 2 p.m. (European time, of course) on 31 December when the European Central Bank, based in Frankfurt, Germany, makes the decision. Thus EMU happens at the end of this year and it is then the euro will be born.

If you are a corporate treasurer you may have noticed that euro contracts have been available in the financial markets for several months now to help you hedge your exchange risks.

To be technical for a moment, we already know what each of the participating currencies will be worth in terms of each other. The list of bi-lateral rates was determined and published in May of 1998. That means we already know how many French Francs there will be in a German Mark from the beginning of next year. What we don't know yet is what each currency will be worth in terms of the euro.

And of course the euro will float against other currencies — but NOT, it must be remembered, against the 11 member currencies. Those rates will be fixed, irrevocably, from the end of this year. The Central Banks of the participating countries, aided by the ECB, are charged with ensuring that their interest rates converge, and that the free market exchange rates likewise converge on the bi-lateral rates, by the end of December.

Behind all of this is not only a considerable amount of thinking, planning and documentation; there is also an enormous exercise to ensure that mechanisms are in place to handle both the changeover and also the new payment systems that have to be put in place. The banking industry has been under enormous strain to understand and implement the rules. There is the phenomenal challenge of "le weekend" when most of the major banks will test their systems and find out whether they will be ready to trade in euro on the first day of next year. There will be no New Year revelry for thousands of bank staff around the world who will be on tenterhooks for several days on end.

In addition to this is a huge political effort to gain popular support for the decisions taken by politicians several years ago. The Single Currency remains misunderstood — even by those who will be required by law to react to it. The French will lose the Franc; the Germans will lose the Mark. The Italians are supposedly looking forward to swapping the Lira for the euro because they see it as a stronger and more stable alternative to their own highly volatile and weak currency.

The British are not affected in the short term, but are being encouraged by the media to get enraged because the Queen's head will not appear on euro notes.

The introduction of the euro happens in two stages — just to complicate matters. From next year, 11 national currencies become "sub-denominations" of the euro. Thus the euro becomes the official currency overnight. The 11 national currencies lose their status. But the national currencies will still exist — and you can continue to use them — until the end of 2001.

From January 1, 2002, euro notes and coin will be available — and within a maximum of six months thereafter, all national currency notes and coin will be withdrawn.

All this is detail. And there is plenty more, as 100 or so internet web sites will tell you. Much more significant is the impact at a global level of 11 countries (and possibly more) adopting a single currency.

Business typically has a different view compared with that of the man in the street. Many countries will have to deal with decimals for the first time — there are no sub-units of Pesetas, and this has important technical consequences for IT and the accounting systems.

The British will remain outside EMU (for the time being) but — and this is a key point — will be seriously affected by it from the outset.

Very soon prices across Europe will be in euro — one single currency — and thus differences in costs in the supply chain will become immediately apparent — the "price transparency" effect. Large multinational companies have been planning their reaction to EMU for several years — they expect to be ready to make inroads on new markets, having restructured their pricing and rationalized their supply chain. Those businesses that are not ready could well find their markets taken away from them.

North American companies will be expected to offer prices in euro — and receive payment accordingly — from the beginning of next year. They must anticipate rejection if they do not. This is not fantasy, nor is it speculation. It is the logical consequence of the implementation of EMU.

Rather like that other unpleasant matter — the millennium problem which is creeping up on us day by day — EMU is something which many would rather was postponed or cancelled. Its timing is unfortunate — to put it politely — but it will not go away. And looking the other way is a dangerous strategy that could spell disaster for many businesses.

I have met a few people who understand EMU and who have the power to do something about it. The emphasis is on "few." These are the captains of large industries. Regardless of the merits, as far as big business is concerned, the euro will arrive on time, and will change the scenery dramatically. They understand the issues and are deploying the appropriate resources. Are you?

Roderick Jones is editor of the ITelligence EMU Tracker monthly subscription newsletter. He has a background in international investment banking and now runs his own businesses. He is a Director of The TRUST Group, a large network of IT and business consultants. He can be contacted on +44 181 949 4024 or b y e-mail at [email protected]