(FORTUNE Magazine) – HOW FAT, or fit, is European industry? Are Europe's big manufacturers, as protectionists there would have you believe, a bunch of nymphs, soon to be victims of invading satyrs in the form of foreign competitors? Or are they, as the free-marketers maintain, the lurking Tarzans of the global business jungle who need only beat their chests and ululate to repel intruders? The question matters more than ever now because the emergence of a unified market has turned Europe into a such a furiously competitive battlefield. Entire sectors are being fought over by local companies and foreign multinationals. Hundreds of thousands of jobs are at stake and so, arguably, is Europe's enviably high standard of living.

The past few months have lent credence to the nymph scenario. Rover, the British car manufacturer, and France's Peugeot announced their retreat from the U.S. market. Britain's Rolls-Royce lost a $700 million British Airways jet engine order to American archrival General Electric. Philips, the Dutch electronics giant, pulled out of two big markets in Europe in favor of U.S. companies, selling its home appliance business to Whirlpool and its computer systems division to Digital Equipment. No wonder Euro-skeptics are beginning to outnumber the optimists. Even a generally bullish Swiss like Gilbert de Botton, chairman of Global Asset Management, one of London's leading money management firms, sounds a cautionary note: ''I'm a bit worried about the big European industrial companies and their ability to take advantage of the future. There seems to be a lack of momentum, in some cases even a demoralization.'' Sir John Harvey- Jones, former chairman of chemical giant ICI, now chairman of the Economist and deputy chairman of Grand Metropolitan, cites a ''poverty of ambition'' among many of Britain's companies, especially midsize ones. IT DOES TAKE ambition to be competitive, and it helps to be big, brave, and nimble. Big because huge spending in R&D and new equipment is needed to develop new generations of products -- it costs $1 billion for a new generation of semiconductors. Brave because marketers must offer their products to the most demanding customers all over the world if they hope to keep their quality up to global standards. And nimble because the pace of change is accelerating; product cycles shorten as new technology makes existing products obsolete, putting a premium on speed and flexible manufacturing. Sort Europe's industrial giants just by size and you find towering arrays of global vigor (see table). Europe shows power in food, pharmaceuticals, and ; oil, where companies like Nestle, SmithKline Beecham, and Royal Dutch/Shell are worldwide leaders. It has less clout in industries fractured along country lines, such as aerospace and telecommunications. Large local players, or so- called national champions, predominate but rarely compete beyond their own borders. But bigness, bravery, and nimbleness by themselves can't guarantee competitive advantage, as the Germans can testify. Once thought to be invincible in mass-produced and heavily engineered products, they have taken a whipping in recent years in computers, office automation, and aerospace equipment. According to a study by the European Community: ''The performance of these industries could even be described as catastrophic.'' Germany, like the U.S., has also lost market share in machine tools, household appliances, electrical equipment, and motor vehicles, primarily to Japanese and other Asian competitors. The scope of the problem became apparent in the first half of this year when Toyota, Honda, and Nissan outsold Mercedes and BMW in the U.S. luxury car market only five years after offering their first models. The EC report warns: ''The main challenge for the strong sectors of German manufacturing will not be the completion of the internal market. It will continue to be the technological challenge from Japan and partly from the U.S.'' Many Europeans still believe technology will solve all their problems. Maybe. But technology can help achieve competitiveness only when it is properly applied. The billions General Motors spent on robotics in the U.S., after all, have not saved it from erosion of its domestic market share. The Europeans have some of the world's most technologically advanced factories (Fiat's plants at Termoli and Cassino in Southern Italy, for example, and Volkswagen's Wolfsburg Hall 54), but even these will not keep them abreast of the Japanese.

Why not? Because the Japanese have drastically changed the way goods are made. A landmark five-year study of the automobile industry by the International Motor Vehicle Program at MIT shows that the techniques of ''lean manufacturing'' developed in Japan have made traditional mass-production methods as obsolete as the Model T. With the new system, teams of skilled workers use flexible, automated machinery to produce customized products of endless variety to exacting quality standards quickly and at amazingly low cost. Though long aware of the threat from Japan, Europeans have yet to embrace the new methods. The MIT study puts it bluntly: ''European companies have sought to perfect mass production as the Japanese have continued to perfect leanness, and they are much further behind than the Americans were in 1980 -- off the pace by a factor of three or four in many countries in terms of fundamental productivity.'' THE SERIOUSNESS of this lag cannot be overstated. Europe's competitiveness in manufacturing will largely determine the quality of life for its people and its status as an economic power. Here's how Europe stacks up today against Japan and the U.S. in three of the world's most valuable industries: motor vehicles, electronics, and chemicals and pharmaceuticals. -- MOTOR VEHICLES. The industry in Europe employs nine million people and accounts for 9% of manufacturing output. The EC runs a trade surplus with the rest of the world largely because it restricts Japanese imports and because Ford and GM build cars in Europe rather than import them from the U.S. Productivity (output per employee) increased about 39% between 1980 and 1988, thanks to restructuring and a heavy investment in robotics and new manufacturing processes. It hasn't been enough. The Japanese competitive advantage is well known but bears repeating: They make cars with fewer defects, in smaller spaces, with workers who have twice as much training as their European counterparts and exhibit less than half the absenteeism. According to the MIT study, using data from 1989, the Japanese take 16.8 hours on average to produce a car in Japan; the Americans require 25.1 hours; the Europeans need 36.2 hours. Perhaps most worrisome is the difference in product development times. The Japanese can design, develop, and deliver an entirely new car in 46 months, using an average of 1.7 million hours of engineering effort. The Europeans and Americans take 60 months and three million engineering hours. This means that product life cycles are shortening, which puts profit pressure on smaller, regional producers -- the Europeans -- who come to the market with fewer new models and older designs. Worse, it means that Japan's competitive advantage in cars is accelerating. Currently the Japanese hold 11.6% of the European market, vs. 30% in the U.S. Stymied by quotas, they have just 3.5% in France and 2% in Italy. For how they might do, look at their share in countries without restrictions, such as Belgium (20.1%), Denmark (35.9%), and the Netherlands (26.7%). Japan's share in Europe as a whole is expected to reach 16% (including 9% of the French market) by the end of 1991 when, in theory, all restrictions will lapse. Each of Europe's carmakers defends a market share of 9% to 15%. If Japanese companies take another 6% to 10% of the total, industry experts expect Fiat, Peugeot SA, and Renault to be hit hardest. Peugeot's recent retreat from the U.S. market, where it sold two luxury models, the 405 and the 505, underscores its problems. The competitive crucible of the U.S. market gives carmakers the experience and discipline needed to achieve worldclass standards, if they can take the heat. The $105 billion automobile components industry suffers from a similar affliction. According to a study conducted for the EC by the Boston Consulting Group and PRS Consulting International, Japanese producers have higher productivity and product quality, and faster design-development-delivery cycles. They also achieve more product variety at a lower cost. A few automotive niches are healthy. Says Garel Rhys, an auto expert and professor at the University of Wales: ''Cars get all the publicity, but Europe's real competitive advantage is in heavy trucks. It may be our best multinational industry.'' Daimler-Benz, Volvo, and Renault together have nearly 50% of the U.S. market. European buses sell equally well. -- ELECTRONICS. The electronics industry, broadly defined, should grow faster than any other in Europe through the end of the century. On a worldwide basis its revenues should increase some 9% annually, or almost three times the rate predicted for the world economy. It is also the largest single industry in Japan, South Korea, and Taiwan. In 1988 Europe ran a $29 billion trade deficit in electronics. As in carmaking, the plethora of national champions handicaps Europe: Siemens in Germany, Bull and Thompson in France, Olivetti in Italy, Philips in the Netherlands. Most lost money in 1990, and only Alcatel Alsthom, Siemens, and Philips have sales of more than $15 billion. In computers, the largest segment of the industry, the Europeans have paid a high price for being small and parochial. Customer loyalty and national allegiance count for little when it comes to buying computer equipment. Over the past decade high-volume global companies like IBM, Compaq, Digital Equipment, and Apple easily took away most of the European market from local competitors. The story isn't much happier in microchips, the heart of the electronics ^ industry. Europe is fighting back with a government-backed consortium of companies known as Jessi (Joint European Submicron Silicon Initiative). The hope is to develop top-notch semiconductor know-how by 1996, in time for such new technology as high-definition television. And individual companies are launching joint ventures with foreigners on the principle if you can't beat them, join them: Siemens and IBM to build DRAMs, Philips and Matsushita to develop a remote-control device to operate different brands of TV sets, compact disk players, and video recorders. Europe's electronic giants do excel at telecommunication and medical equipment. And European household appliances get high ratings for their design features and use of advanced plastics. The EC also has strength in TV color picture tubes, which account for 40% of the cost of a set. But the competitive advantage is only at the upper reaches of the market, in the fabrication of large flat square tubes. Cheap Korean sets have all but seized the low end. Europe, led by Thorn Lighting, Philips, and Siemens, also remains world leader in light bulbs. Faster growth of imports over exports, however, in this segment suggests that Europe may be conceding its advantage. European electronics producers have a good record as innovators. Philips developed the first compact disk player and now has ambitious plans for a new generation of electronic products featuring the digital compact cassette, due out next spring or early summer. And European companies are competing hard to develop HDTV, although the Japanese are already producing hardware in limited, expensive amounts. The Europeans' best hope is to leapfrog the first generation of Japanese HDTV products. Still, important as innovation may be in this market, there is no substitute for quick, lean manufacturing. Products like CDs, camcorders, and VCRs blow into stores, reach saturation levels in a few years, and then are replaced by the newer gadgets. The Japanese are superb at playing this fast-moving game. -- CHEMICALS, PHARMACEUTICALS. Mop your brow, blow a whistle of relief. Here at last is an industry where Europe leads the world, running up a $27 billion trade surplus in the process. The chemicals sector is the third-largest industry in the EC after food and beverages, and motor vehicles. Size and financial strength are competitive advantages in this capital-intensive game because the bigger the company's global footprint, the better the economies of scale. Europe is home to seven of the ten largest chemical companies: BASF, Bayer, Hoechst (all German), Imperial Chemical Industries (British), Rhone-Poulenc (French), Norsk Hydro (Norwegian), and Ciba-Geigy (Swiss). The other three are American: E.I. du Pont de Nemours, Dow Chemical, and Monsanto. The Japanese are primarily regional operators, in Asia and the Pacific Rim. To dodge the cyclicality of their industry, most companies are expanding into specialty chemicals, where the margins are fatter and safer. Many of these products require extremely complicated manufacturing processes, as many as 30 steps for some chemicals. Oil is the chief foodstock, so there are competitive advantages to being connected to an oil company, as Shell Chemicals is with Royal Dutch/Shell Group. Europe has great strength in the world paint market, but paintmakers from the U.S., Japan, and India (UB Group), facing highly competitive markets at home, are stepping up their investments in Europe. Only one U.S. company, PPG, is among the top ten in Western Europe. Three European companies (ICI, BASF, and Akzo) are among the top ten paint suppliers in the U.S. According to Chemical Outlook International, they have 20% of the American market among them. Europe also is the world's largest producer of pharmaceuticals. The industry benefits from an exceptionally strong scientific community in many countries. The companies are well managed and are doing what needs to be done to keep their competitive edge: spending heavily ($6 billion last year) on R&D and expanding internationally. Britain's Beecham bought SmithKline Beckman of the U.S. two years ago. Rhone-Poulenc bought 68% of Rorer last year. British-based Glaxo has been doing business in Japan for some 17 years and is stepping up its efforts there despite a distribution system that has been described as ''more impenetrable than the Gordian knot.'' Says Chairman Sir Paul Girolami: ''If we hadn't entered the Japanese and American markets, we wouldn't be independent now, and we wouldn't deserve to be.'' Make no mistake, the Japanese are coming. The regulatory authorities in Japan are lowering the domestic prices of drugs, which will force companies to expand abroad. Already Japanese drug companies are taking small positions in Europe, buying up little companies that give them some local manufacturing and distribution, primarily in generic drugs. Whether the Japanese succeed in Europe depends largely on their ability to ! establish effective distribution channels. Webs of regulations in each country have kept the market highly fragmented. The key, of course, is to foster good relationships with doctors and hospitals. Local European drugmakers have a huge head start. Japanese drugmakers may gain some advantage from their facility at lean manufacturing. But Western manufacturing standards in this industry are high too, so the advantage may not be decisive. Says Richard Barker, a principal at McKinsey & Co.: ''The Japanese are not going to overrun the European pharmaceutical market in the 1990s. Over the long term, though, there is no reason why they shouldn't get their share of worldwide markets in an industry that is inherently global.'' As Europe's big producers maneuver for position in the single market emerging, there is a danger that they will overlook the landmark industrial developments transpiring in other parts of the world. They've done it before. As the authors of the MIT study write: ''Early in this century, most Europeans were unable to differentiate the universal ideas and advantages of mass production from their unique American origins. As a result, ideas of great benefit were rejected for a generation. The great challenge of the current moment is to avoid making such an error twice.'' To benefit fully from the opportunities at home and abroad, the Europeans must focus on raising their productivity and quality standards to those of the world's most competitive companies. To do that they must embrace teamwork, just-in-time inventory delivery, statistical quality control, and the other integrated techniques of lean manufacturing. And they must do so fast.

CHART: NOT AVAILABLE CREDIT: FORTUNE TABLE CAPTION: HOW EUROPE'S COMPANIES COMPARE Number of companies on FORTUNE's Global 500 by industry Bigness isn't always better, but it can provide two distinct competitive advantages -- financial strength and economies of scale. Europe remains powerful in chemicals and pharmaceuticals, food and beverages, and refining.