Rich Smith of the Motley Fool has an interesting post on the move by the European Community to rein in what credit card providers can charge. Smith notes that it appears to be an attack on US firms, and it fits in with a European pattern:
But after reading all these numbers the Commission is bandying about: "$1.6 trillion," "six times" this, and "12 times" that, I notice that nowhere have I read -- in any of the press reports on the Commission's witch hunt -- an actual number being put to these "outrageous" profits.
So I turned to Capital IQ, the Oracle of financial data we use here at the Fool, to find out, and it turns out that American Express nets just 6% of its revenues as profit. MasterCard earns a 9% net margin. Only the 14% margin that Visa boasts even shares a zip code with "outrageous."
Don't get me wrong. Fourteen percent is certainly respectable, but I was sure there were companies out there making better margins than that. With a few more clicks, I dug up a handful:
Coca-Cola (NYSE: KO): 21% net margin
Intel (Nasdaq: INTC): 22%
eBay (Nasdaq: EBAY): 24%
Google (Nasdaq: GOOG): 24%
Microsoft (Nasdaq: MSFT): 32%
Now, these companies all have a couple things in common -- both with each other and with the major card providers as well. First, they've all been targeted for criticism by European authorities in recent years -- Coke for out-competing other pop vendors for shelf space, Intel for controlling too much market share, eBay for failing to do the European Community's tax collecting for it, Google for getting too inventive with its advertising, and Microsoft seemingly for every single thing it does.
And the second thing they have in common: They're all American companies.
The fact that Europe is attacking America is nothing new. The US goes after European companies from time to time; sometimes it's justified, sometimes it's not. What's fascinating to me is the continuing creep toward socialism. European economic growth is at best sclerotic. Apart from immigration, its population is imploding. It features unfunded pension programs that cannot be sustained. The continent is headed for a crisis, and its leadership fiddles while Rome burns - or worse - throws on kerosene.
On the heels of Europe's unwillingness to open its markets in the current Doha Round trade talks, of France's refusal to allow private employers to fire new workers with cause, the EU is now talking about growing its own credit company:
"We need a European card payment system that can rival Visa and MasterCard...Those companies are welcome in Europe, as long as they conform to European competition rules, but there is evidence that [they] appear to be abusing the system at the moment."
How do they propose to create such a company? Probably the same way they created Airbus - government subsidies and protection. But that is no way to create wealth. Airbus is strong today, after receiving billions in government subsidies. But it is beholden to its host governments for those subsidies, and is hampered by them. For example, Airbus would like to reduce input costs by sourcing parts outside of Europe - but it is prevented from doing so by France and other governments. How long can Airbus stay competitive with firms that can buy parts wherever they are cheapest? Or alternately, what will it cost in terms of taxpayers subsidies to keep them competitive in a changing market?
What will it cost to create credit company? Will the money come from consumers or taxpayers? After all, those are the only choices. And of course they are the same people - so it doesn't really matter.
Only about 15 years since the collapse of communism as an economic model, Europe is slowly creeping in that direction. And they are doing so in the face of the Irish tiger - Europe's strongest growth economy for more than a decade, and one of its strongest market models. It is doing so even as increasing government intervention in the market causes slower and slower growth.
What can they be thinking?
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