Europe’s trade balance in electronics goods is turning increasingly negative as its manufacturers lose market share even in their home countries. Perhaps the most telling measure of the competitive challenge facing European electronics companies is the fact that they hold less than one-third of their domestic markets for computers. These markets are dominated by American and Japanese companies, which each control at least three-quarters of the business in their own home markets.

Successful US and Japanese electronics manufacturers clearly lead on productivity and growth in each of the industry segments we recently examined: consumer electronics, computers, and industrial equipment. Indeed, in terms of value-added per hour worked, European companies fall short of world-class standards by more than 40 percent and, in some cases, by up to 60 percent (Exhibit 1). Worldwide, the best electronics companies maintained or increased their return on sales over the three years from 1989 to 1991, depending on the segment, by between 2 and 18 percent. The Europeans, however, saw their average ROS fall during the same period from 7 to 2 percent.

The reasons why

There are three main causes of this unsatisfactory situation:

• An...