THE TALE OF THE NON-INNOVATIVE, THE LAZY... OR MAYBE THE UNLUCKY

Martin Ellingham

Have you ever noticed that an American chain of restaurants, which sells overpriced bowls and mediocre burritos, has a higher market cap than one of the biggest European automotive manufacturers, despite having 13 times less revenue and, again, a much smaller net income? If you’re not actively involved in finance, the answer is probably no. I am talking about Chipotle and Mercedes, and yes of course someone could argue that we also need to look at other things, such as margins, debt, cashflows etc., however, the fact of the matter is that even when it comes to the Enterprise Value (EV) of the firms that takes debt and cash/cash-equivalents into account Mercedes is only slightly ahead.

What is clear is that since 2008, not only has the US found a way to create a self-sustaining bubble, in which it is normal for companies to have very high multiples, but at the same time Europe has also fallen behind. In 2008, the GDP of the Eurozone was on par with that of the US ($14.2 and $14.8 trillion, respectively), while that of the EU was 110% of that of the US when measured in current prices; now, the Eurozone is less than 65% of the US economy. Is this a result of Europe lacking innovation, or is it that Europeans are lazy and unproductive? Personally, I think it’s both, but I’d like to add one more factor into play: luck.

Europe is still enormous in certain industries, such as pharmaceuticals, general industrials, agriculture, fashion, and, more recently, defense. From these, only the firms in Aerospace & Defense can compete with US firms when it comes to the multiples at which they’re trading. On the contrary, US biotech is valued significantly more by investors relative to traditional European pharmaceutical giants, while at the same time, industrials are considered a more stable industry with less growth potential compared to TMT.

It is indeed true that Europe lacks innovation; as the saying goes, the US innovates, China replicates, and the EU regulates. An exemplary case is when AI was in its early stages and was starting to get widely adopted; the EU rushed to create an EU-wide AI act that only stifled innovation. Further examples are the GDPR as well as the Corporate Sustainability Reporting Directive, which forces every publicly traded company to have an ESG compliance department. In addition, one of the driving forces of the US economy, Private Equity, is less willing to invest in Europe as a result of these regulations. For example, a gender quota in corporate boards provides less flexibility for these funds to restructure firms and make them succeed, providing shareholder value as well as crucial job positions to the general public. Recently, the US has also seen a private credit boom, which has not been evident in Europe, mainly as a result of unnecessary regulations.

Moving on to laziness, it is true that the work culture in European countries vastly differs from that of the US. While it is true that economies like France have very high levels of productivity despite having a 35-hour work week, this is the case due to the fact that people have been used to working less and have become more efficient in their work. Nevertheless, when compared to the US, the difference is truly staggering. Knowing the financial sector well, I can attest that European bankers are a joke in the US. While American bankers get a maximum of two weeks of paid leave per year and have very few (if any) sick days, while also working 70-90 hours a week, European bankers work a maximum of 50-60 hours with weekends without any work, and at least 22 days a year of paid-leave, which can go up to 26 should they donate blood every 6 months (I’ve heard one European firm does this), and almost infinite sick days. So yes, Europeans, at least those in finance, are extremely lazy.

Furthermore, there is one more factor that I think is important to mention. Europe is extremely unlucky as its industries are focused on producing items that are usually found at the beginning of the supply chain rather than the end. As such, the US has emerged victorious by absorbing all the benefits of the strongest self-sustaining bubble mankind has ever seen by being at the end of supply chains, especially when it comes to tech. A great example is logical semiconductors; while someone would expect all three major participants to have benefited equally from the explosion in AI use, the reality is the fact that Nvidia (at the end of the supply chain) has benefited a lot more in the eyes of investors than the Dutch ASML, as well as the Taiwanese TSMC. Since ASML has a monopoly on advanced lithography systems, it would be expected that they would have disproportionately high multiples, as investors would see a lot of value there. Instead, it is Nvidia, an American company, that has come out victorious when it comes to trading at really high multiples.

Europe is indeed unlucky to some extent; however, it is obvious that overregulation, as well as a malfunctioning work culture, are also to blame for Europe’s troubles.