Are American Companies Better than European Ones?

There was a piece about European companies in The Economist last month, under a headline describing “the land that ambition forgot.” Inside was the claim that “American and Chinese businesses have left their European counterparts in the dust.”[1]

The article starts off by quoting a 29-year-old “young upstart” during a trip to France in 1984. Steve Jobs then suggested that European government bureaucrats were “lousy investors”, and The Economist – seizing this quote as an opportunity to create hindsight causality – remarked “and nearly four decades later, the company founded by that young upstart is worth more than the 30 firms in the German blue-chip DAX index, combined.”

Admittedly, it was a great hook; but in our view The Economist has it all wrong.

Jobs’ point was certainly interesting - and alluring to us Americans - but we suspect he may have been thinking more about tech companies and entrepreneurs than about other sectors. And while we might have ultimately been “right” about technology entrepreneurship and leadership in the US, it perhaps was not for the reasons he guessed at the time, nor for the ones The Economist went to great pains to draw allusions.

When Jobs made those comments in 1984, Nokia was still making car tires.

Fifteen years later, the Finnish company had reinvented itself and was the fifth-largest tech company (behind only Microsoft, Cisco, Intel, and Lucent[2]),and indeed the ninth-largest company by market cap, in the world. Meanwhile, SAP (founded by Germans who left IBM) became the largest enterprise software company by revenue. During this time, a global technology champion arose in the UK (ARM Holdings), but it was bought by Softbank; and in the same year that Jobs made his comment (1984), ASML was founded in Holland, which today has a $300 billion market cap.

Yet despite these successes in European techland, they are undoubtedly limited and comparatively rare, as the draw for techies to the West Coast of the US (from inside the country and out) was always strong due to the clustering around Silicon Valley. It got even stronger after Google (1998) and Facebook (2004) invented themselves in their metaphorical (and in Google’s case, actual) garages.

Amazon did the same thing up in Seattle just four years before Google. Moreover, during this same ten-year period, Apple nearly went bankrupt (so much for those pesky European bureaucrats), then reinvented itself with great effect, after which Microsoft pulled off the same trick.

Those same five companies are now the five largest companies by market cap in the world (well, outside of Saudi Arabia). Other stars such as Tesla (Palo Alto) and Nvidia (Santa Clara) aren’t far behind.

We do think the introduction of these new and brilliant American companies has been nothing short of incredible – but where we disagree with The Economist is that we don’t think that their success necessarily has anything to do with European government bureaucracy or demographics. Nor is it because “America is the spiritual home of free-market capitalism” or because of a “striking decline incorporate Europe.” Nor have the Europeans been “outmanaged” as The Economist also claims, nor do they lack “the economies of scale to grow quickly” or are suffering from “linguistic and cultural differences”. Sure, they have them, but they aren’t suffering from them in global markets – if anything, they are benefitting.

Indeed, The Economist states that the American firms only generate 30% of their income abroad, whereas in developed Europe, it is nearly half. This to me is an argument in favor of the Europeans, but The Economist instead spins this fact negatively, as “(this makes) managing European companies a case of constantly putting out fires in far-flung subsidiaries.”

In our view, the fact that US companies dominate the top five and ten global league tables for market cap is, very simply, a FAMANG thing. There are nearly 57.5 million square miles of land on Planet Earth; and Google, Facebook, Apple, and Netflix are all within 40 miles of each other. Of course clustering isn’t the only reason that US companies have been particularly successful in technology, but it certainly a significant part of the reason.

The same goes when evaluating start-ups. So many of them are technology-related now, and – naturally - since the industry is clustered on the West Coast of the US, many of these start-ups naturally didn’t happen elsewhere. So, yes, they didn’t happen to the same effect in London, Frankfurt or Paris; but they also didn’t happen to the same effect in Chicago, Miami, or Washington DC. This isn’t something that is awful about Europe, it is something that is great about Silicon Valley (unless you are trying to buy a home there).

Very simply, the success of US technology stocks does not mean that European companies might not be good investments. In some cases, nothing could be further from the truth. Sure, the Europeans don’t have any FAMANGs, but they dominate luxury (think LVMH, L’Oréal, Hermes) and spirits (Diageo, Heineken, Pernod Ricard, and Anheuser Busch, which is no longer American), and then there is IKEA, which basically has no peer.

Meanwhile, for every P&G there is a Unilever, for every Mondelēz a Nestlé, for every Boeing an Airbus, every Nike an Adidas, every Cargill a Vitol, every GM a Volkswagen, every Costco a Lidl, every GE a Siemens, every Pfizer a Roche, every Southwest a Ryanair, and for every ExxonMobil or Chevron or Phillips, there is a BP, Shell, or Total. 

European companies aren’t worse than their American peers. They’re just as good, and in some cases they are much better. To think otherwise maybe a little naïve.

If we again go back to the 80s, and start the clock on January 1, 1980, and stop it thirty years later on December 31, 2009, we see that the S&P 500 generated annual returns of 11.5%. During that exact same period, guess what the annual returns of the MSCI Europe were?

Also 11.5%.

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There was nothing structurally wrong with Europe, they were not “outmanaged”, and they did not suffer from “linguistic and cultural differences.”  

This last decade, however, things have gotten out of whack. The US has trounced Europe, with the S&P 500 generating over twice the annual return of the MSCI Europe. At least part of this - maybe more - has been driven by the dramatic outperformance of the FAMANGs and their tech brethren. These shares may or may not be ahead of themselves from valuation perspective, but in either event, they surely have captured global attention and flows, arguably at the expense of European shares.

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Additionally, we suspect some of relative Europe underperformance has nothing to do with their lack of FAMANGs, but instead it has been driven by narratives built on false assumptions about an inferior opportunity set.

After re-reading the piece in The Economist, it became even more clear that they were guilty of shaping that false narrative, and suffering from severe anti-European bias throughout the article.[3]

Sure, Europe isn’t perfect, but neither is anywhere else. Our suggestion is that folks should ignore the attention-hungry claims of folks like The Economist, and more objectively consider the investment opportunities outside of our borders.

I get it, the US stock market has dominated Europe for over 10 years, and that can be a strong disincentive to explore opportunities across the pond.  But that inertia may already have engendered an interesting setup for the next decade. It may be that the valuation differences between the two regions are so stark that investments in good US companies at premium valuations won’t yield as strong a return as we earned historically, nor as good as we can get by investing in good European companies at discounted valuations.

And in the event that Europe tracks back up toward that long-term 11.5% annualized return, and the US reverts back down – this would mean there are some very exciting European investment opportunities waiting to be discovered.

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