15 December 2013

Is France the Sick Man of Europe?

When I moved to Paris almost ten years ago, I expected to be enchanted with what I assumed to be the best synthesis of capitalism and an egalitarian society with impeccable living standards.

Up to that point, I had been reading how the French system was superior: Their healthcare system was exemplary, frequently elected the best in the world. Their school system produced solid managers, innovative engineers and world class thinkers and literary figures. They had an amazing social safety net, their minimum wage was more than decent and they believed in leisure society, as everyone enjoyed at least four full weeks of vacation time.

Add to all that excellent food, very good and affordable wine, a mild climate with barely a speck of snow all year around and you could picture me giving myself virtual high-fives all the way to Paris.

Imagine my surprise when I discovered that the superior French system was a mirage, a holographic picture taken a couple of decades earlier.

The Real France

By the time I arrived, France was running continuously a budget deficit for at least 30 years, unemployment had reached double digits, the influx of expats pushed food and accommodation prices so high that ordinary French people were simply unable to maintain a reasonable middle class life style (at least not in Paris and certain other popular regions). Their minimum wage (known as SMIG, which stands at €1430.25 as of July 2012) wouldn't be enough to pay the rent for a one bedroom apartment.

The healthcare system was falling apart. The education system was crumbling and the students were disillusioned with their job prospects.

Having lived through the Thatcher-Reagan revolution, it was obvious to me that the system had a number of structural problems. And unless they were fixed (and fixed rapidly), sooner or later capitalism would fix it for them, as it did in the UK and the US under those two hapless luminaries.

But I also knew that if the correction was left to capitalism, the French system would become something else entirely. It would look like today's America or Britain, that is, a polarized society with massive income disparity and a sharp winners and losers perspective permeating everything, including the distribution of vital services. (If you doubt that vision, think of the American system today with Obama and the British system with Cameron and tell me the difference).

I could also tell that France had never gone through the North American IT-based productivity revolution. Most computer systems were archaic, inventories were still taken by hand, banks operated on a batch processing system and most custom software packages were written with simplistic languages like Visual Basic.

But when I voiced my concerns about productivity, my French friends always defended their system by citing the OECD statistics that place France very high on the productivity scale. I know that their numbers can look high.  But I think these high figures are mostly based on the industrial sector. It is a capital-intensive and highly automated sector and I am sure French industrial workers work their tails off. But the service sector is a different ball game.

If you look at the period where the IT-led productivity took off in the US and the UK, France is at the bottom of the scale.

And since then, the productivity gap has remained a major issue.

Mittelstand or Does Size Matter?

You might have heard that a category of German companies known as Mittelstand are credited for the economic health of the country. These companies of up to 500 employees (or €50 million annual turnover are the stuff of legends.

And the French business press routinely bemoan the fact that France does not have a similar structure. That is because the French economy is structured to discourage Medium Enterprises, the ME in the SME. It is a peculiar system.

On the one side there are tiny companies, one or two person family firms. They don't hire much and they have a high failure rate (twice as many bankruptcies as Germany).

On the other side, there are large enterprises, most commonly in fashion and food & beverage sectors. And there are state-championed giants in high tech fields like aerospace and nuclear energy.

In the middle, you find French style SMEs but they are much smaller than the German Mittelstand: They are characterized by their constant effort to never have more than 49 employees. (Beyond 50 they have to spend on training and provide additional benefits.)

In OECD countries, SMEs are usually the main source of employment and you can see from the above picture why unemployment has remained stuck around 10 percent for the last four decades. However, in my humble opinion size is not the decisive criterion.

There are other factors at play.

Management, Innovation and Tools of Productivity

The primary characteristics of Mittelstand companies is to promote innovation and target export markets. Better products do not compete on the basis of price and they command higher margins. And opening up to foreign markets gives companies more independence and flexibility: if you have more outlets, you can weather cyclical crises with relative ease.

To achieve this, Mittelstand companies maintain a lean management structure, emphasize continuous on-the-job training, encourage in-house innovation, invest in Research and Development (R&D) and they promote Information and Communication Technologies (ICTs).

Let's start with lean management structures:
Jean-Daniel Weisz (...) compares the way German firms and their French counterparts operate. French middling companies, he says, have twice as many layers of management between the boss and the shop floor: usually 18, compared with a German maximum of nine.
Think about that: Average of 18 layers of mid-management versus a maximum of 9 levels.

Moreover, these managers are the product of elitist Grandes Ecoles, which means that they are convinced that they already received all the training they will ever need. According the an early Harvard Business Review study, they view management not as a set of techniques but as a state of mind. It sounds like a line from a Godard movie but that's what passes for business perspective in France.

The same study also found that French businesses are overly hierarchical and sharply compartmentalized.

Perhaps more importantly, change and innovation are almost actively discouraged by the system. Let me give you a concrete example.

You are an engineer or a researcher in a French company and you have just invented something new. Maybe a new method to produce more with less or a brand new product. And your invention directly benefited the company's bottom line, with increased revenues, lower expenditures and higher stock value. Can you guess what your reward will be?

You will get a bonus of €500 to €2500. Before taxes. That's it.

Do you know how much a German engineer will get if she or he comes up with a better method or product? Since 1957, companies are legally required to give such innovators a proportion of the revenues generated by their innovation. The more the company earns, the more the inventor/innovator collects.

Even in China, since 2010, the person who comes up with a better product is given 2 percent of the additional revenues and if the invention is licensed to another company, they collect 10 percent of the royalties.

To be sure, French researchers have an outstanding record and they came up with many great inventions that changed the world. But it is quite damning of the system that very few of these new ideas and products were commercialized by French companies.

French companies have another management-induced obstacle.

According to the Economist, a World Economic Forum of Davos report found that while "the French have a "stronger work ethic than American, British or Dutch employees." They're just not motivated by their managers." In fact you could call it apathy and in some cases intense dislike.
France ranks last out of ten countries for workers’ opinion of company management, according to a report from 2007. Whereas two-thirds of American, British and German employees say they have friendly relations with their line manager, fewer than a third of French workers say the same. ...
A study of seven leading economies by TNS Sofres in 2007 showed that France is unique in that middle management as well as the lower-level workforce is largely disengaged from their companies.
The disconnect is not just within corporations, it is also reflected in management attitudes towards global markets.

While German Mittelstand company managers remain very active in global markets and bring up their supply chain with them, French managers are almost entirely absent from the global scene. This is partly due to the Grandes Ecoles mentality: they know best and don't need stinking foreigners to tell them otherwise. Partly, it is the unintended consequence of the insular nature of the French elite. They rarely speak any foreign language, they almost never had any experience living abroad and they are too happy to stay within a familiar market delineated by language and history, such as France and North Africa. A French report in 2008 concluded that, unlike Germany, France had no longer any international expertise.

The insular and parochial management culture affected the productivity efforts. When the US, the UK and Scandinavian companies were heavily investing into ICTs, French companies were staying away from them.

A recent report reached this conclusion:
En définitive, les mauvaises performances françaises en termes de croissance du PIB et de la productivité peuvent être interprétées comme la conséquence d’un investissement insuffisant en éducation supérieure et en TIC, d’un marché du travail trop rigide, d’un marché des biens insuffisamment concurrentiel et d’un renouvellement insuffisant du tissu entrepreneurial. [my emphasis].
In that sense, my critical assessment of Air France, a global company run by French business elite with no regard towards productivity can be generalized to the rest of the French economy.

Just like my French friends who loved to point to high industrial productivity figures to tell me I am wrong, you could also counter with recent ICT investment figures. In Europe, Germany, the UK and France are now the top spenders on high tech tools. Point taken.

However, like high productivity figures, these numbers hide a different reality. The ICT revolution of the 90s was geared towards increasing labor productivity. These new spending programs are designed for a different purpose. The bulk of it is for new technologies like virtualization solutions and moving things up to the Cloud. They hardly make employees more productive. They are shiny new toys that will reduce corporate carbon footprint and get subsidies from the state.

There is one other point you find in the new ICT figures: In France, unlike other European countries, a large portion of that spending goes towards software development. Normally, this would be encouraging, but in this case it is largely because they need to catch up with the rest f the world and update all the primitive Visual Basic enterprise software packages that seem to be running the operations of most French companies.

You think I exaggerate. Two anecdotes to illustrate the point.

Around 2005, French IKEA was using an inventory system that was updated once a day (I asked). Therefore, during the day, each time a customer asked if an item was available at the warehouse, a clerk had to call another clerk for a visual inspection. The computer showed two but the clerk had no idea if someone bought them. Maybe it is still the case, I can't tell you. I have not bought anything from IKEA in a long time. But no US store had such a system past 1995. Including, I am sure, IKEA itself outside France.

Second anecdote. Two years ago, I went to a branch of Groupama, a large insurance company operating in 14 countries. It was to get a quote and I asked them to print me a couple of tables. The custom software package was so user-unfriendly that they couldn't do that. So, the only thing the person I was dealing with could do that was to copy various tables in to an empty Word document and print that. It took her 10 minutes. All the while she complained about how terrible the software was. The workaround was suggested by her manager. I agreed with her. The package should have done that with two clicks.

Then I asked why she simply did not click Ctrl-P on each table. She was shocked to see that you could print almost anything under Windows with that key combination. She went around the office to tell everyone that. I became a hero.

Two years later, they are still using the same software and since that person moved to another branch, the new people still copy and paste tables for customers.

You can see the unifying thread in all this.

An insular and elitist management class creating structures to penalize innovation, devalorize their own R&D, discourage employees, turn their backs to global markets and ignore lean corporate structures and new management techniques implemented elsewhere.

A Huge Missed Opportunity

What is sad in all this it was a historic opportunity to set an example.

You see, in the UK and the US, the huge productivity gains made companies very profitable. But senior management and CEOs moved quickly and appropriated everything. Executive pay shot through the roof and real wages continued to decline.

France had a historic opportunity.

If they had implemented ICTs at the same time as everybody else, valorized their own R&D, motivated their employees, copied the lean management structures and new techniques being implemented elsewhere and expanded their global horizon, they could have pushed France to the forefront of global capitalism.

Given the social democratic nature of the system and the relative power of the unions, such a system would be inclined to distribute these profits derived from productivity gains more equitably. Which would have made France a prosperous, affluent and peaceful capitalist system.

People would have used them as a stellar example of what could have been when they criticized the winner-take-all culture that emerged in the UK and the US.

They could have become the envy of the world.

Instead, with parochial and elitist managers blaming "lazy" workers for their every mistake, an ineffectual government mismanaging the economy and discouraged and alienated employees, France is on its way to becoming a second tier economy.

As a Francophile, I find this to be a shame.



This is a headline on the BBC Web site from this evening, or a full day after I posted the above assessment.

PMI surveys raises fear that France may be back in recession.

It mentions the possibility of a "triple dip" recession.

What can I tell you?

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