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Wednesday, September 3, 2014

Manufacturing Woes Loom for Nordic Suppliers


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Surveys routinely put four Nordic countries — Denmark, Finland, Norway and Sweden — at or near the top of “happiest countries” in the world, based on per-capita income, education levels, wellness, and citizen sentiment. Forbes magazine, for example, recently listed Norway No. 1 in this category, followed by Denmark (2), Sweden (5) and Finland (7).

Trouble could be brewing, however, in one area critical to economic health: manufacturing. A recent report by the Boston Consulting Group (BCG) finds that all four countries are in “serious decline” when it comes to manufacturing. If the outlook doesn’t improve, each could face serious economic problems caused by growing unemployment, shifting trade balances and a further diminishment of manufacturing.

As part of a periodic examination of business conditions that affect procurement and supply chain sourcing, I will look at the state of manufacturing in the Nordic countries and its future.

Nordic manufacturers confront a number of issues that affect manufacturing. These include the declining cost competitiveness. BCG reports that manufacturing labor costs in Eastern Europe are 80 percent lower than in Nordic countries. In  Germany, labor costs are 20 percent lower than in Nordic countries; in the U.S. such costs are 40 percent lower.

Labor market regulations are stricter than in Western Europe, and as a result fewer full-time hires take place, which means the workforce is aging. Returns from R&D are less robust. Energy cost advantages, fueled by offshore oil, are declining; and, of interest to procurement officers, shipping costs from Nordic countries are higher than other European countries — not a good sign considering that most global demand for goods is from developing countries and markets farther afield than Europe.

BCG predicts that if no measures are taken to deal with these and related issues, Nordic economies could lose 200,000 manufacturing jobs in 5-7 years. This equates to 13 percent of the 1.6 million manufacturing jobs that existed in these countries at the end of 2011 and 2 percent of the countries’ employment.

The U.S., in contrast, is forecast by BCG to gain 2.5 million to 5 million manufacturing jobs by the end of the decade from reshoring and by improving cost competitiveness. Factors affecting competitiveness include lower energy prices and economical shipping and logistics costs.

The extent of what could be lost if the Nordic manufacturing decline continues is seen in national fiscal data. Manufacturing accounts for 75 percent of Denmark’s exports, half of the country’s GDP. In Sweden and Finland, manufacturing exports have since 1990 risen by half to 30 percent. (In Norway manufacturing exports have been relatively flat at about 15 percent since 1990.) As a result, BCG notes, each country has low public-debt levels — less than 55 percent of GDP — and collects tax revenues of 43-48 percent of GDP compared with a global average of 35 percent.

Large companies are offshoring jobs, mostly to Eastern Europe and China, and manufacturing employment in the Nordic countries by these firms has been declining 1-2 percent per year since the mid-1990s. Small and medium-sized enterprises (SME) consequently account for larger proportions of manufacturing workers — 51 percent in Sweden, 55 percent in Denmark and 62 percent in Norway. Only in Finland are more than half (52 percent) of manufacturing workers employed by large companies, though this number has declined almost 9 percent since 1996.

Next time, I’ll discuss what actions BCG recommends to protect manufacturing in the Nordic countries.

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