Taking Bull by the horns: State aid may not be enough to save France's biggest computer group, says Tim Jackson

THE name of Sir Leon Brittan strikes terror into the hearts of industry ministers all over the European Community. As the Commission's competition tsar, the former British trade secretary has a reputation for ruthlessly nosing out their attempts to give hidden subsidies to their champions, and preventing them from doing so.

So it was no surprise to European big business when Sir Leon's investigators opened an inquiry into subsidies at the French state- owned computer maker, Groupe Bull. Bull, with Siemens and Olivetti, is one of Europe's big three computer companies. The firm had not made a franc in profits since 1988, and it had lost Fr10bn ( pounds 1.1bn) in 1990 and 1991 alone.

The French government had already carried out two significant injections of capital worth Fr4bn, and was proposing to put another Fr2.68bn into Bull to stimulate its research and development.

However, Sir Leon has not lost his capacity to surprise. Last week he agreed the capital injections already carried out, and made no immediate complaints about the planned further contribution.

Had the commissioner gone mad, asked furious managers in rival computer companies?

The answer is no. The way the investigation has been handled shows once again a rare appreciation of the explosive mixture of politics and business that competition issues represent. And in industrial terms, Sir Leon's conclusion makes perfect sense.

His starting point was to decide whether the money that the French government had put into Bull was state aid, as its critics claimed, or simply the behaviour of any rational shareholder, as Bull itself insisted.

It soon became clear that the French were being disingenuous. With Bull's appalling financial record, and with the uncertainty facing the company in the future, it was clear that no private investor would have risked his money in Bull as the French state did its Fr6.68bn. So the contributions were unquestionably state aid.

But this was not just money being poured down the drain. As the investigation showed, Bull's policies have changed dramatically over the past five years.

After being run as an arm of the French state, with commercial considerations rarely being allowed a look-in, the firm seemed to have been making genuine efforts to turn itself into a real computer company.

Under the chairmanship of Francis Lorentz, 50, the firm had shed 18 per cent of its 51,000 workers. It had closed seven of its 13 factories. And it was making efforts throughout its business to cut costs and think more carefully about what its customers wanted.

In terms of products, that meant one thing: instead of making proprietary systems, which would work only with other Bull computers, the firm began to move towards 'open systems' - computers that could save clients money by working in tandem with hardware made by other companies.

Bull also changed tack in its approach to the all-important market for personal computers. After years of failing miserably to produce machines that customers wanted at prices they could afford, it finally gave up and bought an American company that could do the job instead.

By acquiring the ailing Zenith Data Systems, once the world's leading maker of portable computers, Bull gave itself a bigger foothold than any other European company in this crucial market.

Under the leadership of Joe Salari, an Italian-American with experience in the European and US computer markets, Bull's Zenith arm found a new way of selling computers in Europe. To make sure that its machines remain competitive with those of the 'clones' - the no-name makers who sell at rock-bottom prices - Zenith asked its dealers to slash their margins on basic models.

To earn their loyalty, however, it allowed them to keep high margins on the more upmarket models. Three weeks ago, this strategy was cemented as the firm unveiled a new range of notebook and desktop computers in front of 900 European dealers at a glittering show at Euro Disneyland.

More significantly still, however, Bull has forged two strategic alliances that are certain to change its future. First, it has sold 4.7 per cent of its shares to NEC, Japan's biggest computer company. Not much has yet come of the shareholding, but the relationship gives Bull a chance to tap into some of the Japanese company's technology in exchange for helping it to distribute its products in Europe.

The other strategic alliance - with IBM - is more surprising. IBM has for years been the bete noire of nationalist French governments, and the symbol of the American economic colonialism they wanted to escape.

Nevertheless, Bull has forged a wide-ranging deal with the world's biggest computer firm, in which Bull will sell IBM, for resale under IBM's own label in the US, up to 150,000 notebook computers.

In return, IBM will take a 5.68 per cent stake in the French company and will give it access to one of its most closely held secrets: the technology behind Reduced Instruction Set Computing.

This technology, known for short as Risc, makes computer chips work blisteringly fast by restricting to an absolute minimum the number of different instructions they can be given. With its help, Bull will be able to make notebook and desktop workstations that can compete with the best offerings from the US.

With all these changes combined, Sir Leon believed he was justified in concluding that the money pumped into Bull by the French government was not a mere subsidy for its current losses, but part of a drastic long-term restructuring that will make it more competitive and hence more able to offer good products at reasonable prices.

His decision to carry out the investigation, however, is a shot across the bows of other governments. State aid may be permissible under some circumstances, it shows; but governments should not think they will get away with covering them up.

Where does that leave Bull, though? Despite his efforts to reform the firm, Francis Lorentz was the victim of a coup last month when the French government decided not to renew his position as Bull's chairman, and to replace him with Bernard Pache, 57, until now the head of the French coal industry.

Mr Pache's qualifications are clear: having cut the French coal workforce by 60 per cent in six years, he will have no hesitation in wielding the hatchet again at Bull if necessary. But he knows little about the computer industry.

The computer industry's price war in Europe is likely to enter a new phase after the announcement by the US firm Compaq of a new line of notebook and desktop machines at rock-bottom prices. As a high-cost producer, Bull will be hard pressed to keep up. Its efforts to modernise so far are admirable. But the question for Mr Pache will be: are they enough?

(Photographs omitted)