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Thursday, July 31, 2014

Policy Reforms Needed for Nordic Manufacturing

scandinavia

Credit: Chris Sharp for freedigitalphotos.net.

Four Nordic countries — Denmark, Finland, Norway, and Sweden — could lose 205,000 additional manufacturing jobs by 2020, if factors affecting their industrial competitiveness do not improve vis-à-vis regional competitors in Europe and elsewhere, including the U.S.

These losses would come on top of a 30-year decline in manufacturing jobs due to high labor costs, rigid hiring rules, and costly transportation and logistics, among other factors, according to a recent report from the Boston Consulting Group (BCG) titled “Revitalizing Nordic Manufacturing.” Unless the situation changes, these countries will lose businesses and tax revenue and experience growing trade deficits, to say nothing of the social costs of higher unemployment and under-employment — especially among the young — in a sector that traditionally paid well and offered good job prospects.

Moreover, many buyers worldwide that rely on Nordic manufacturers for supply may have to look elsewhere for a number of products.

Yesterday, as part of a periodic examination of business conditions that affect procurement and supply chain sourcing, I looked at manufacturing in the Nordic countries, taking data from the BCG report. Here, I look at recommendations the consultant makes for reviving Nordic industry’s prospects.

BCG notes that Nordic manufacturers will continue to set up production in developing parts of the world to meet growing demand. But the consultant adds that Nordic countries can stem the flow of capacity to elsewhere in Europe if policymakers take steps to restore cost competitiveness.

Among efforts BCG proposes is removing growth barriers for small and mid-sized enterprises (SMEs). The viability of SMEs is essential to maintaining a strong manufacturing base in each country. Policymakers should “lower barriers to new hiring, increase labor flexibility and reduce administrative burdens” on these companies. They should also make certain that SMEs outside large urban areas “access … a strong talent base.”

More R&D investments — public and private — should go to promising companies with no access to private capital. BCG states that current funding is channeled “through fragmented vehicles that focus on different things.” A direct approach that promotes the commercialization of products would be a better way of encouraging manufacturing growth and development.

BCG also recommends that the administrative costs of such investments be reduced. In one example the report cites, management costs are almost 10 percent of invested capital at a venture capital company owned by the Swedish government.

Policymakers must ensure the availability of skilled personnel. As noted yesterday, labor regulations have resulted in fewer full-time workers being hired in each country. As a result, workforces are aging. Rather than look offshore for skilled people, government and business need to provide employment opportunities for more young workers, especially those 18 to 26, promote enrollment in vocational schools, and raise awareness of the benefits of technical and vocational careers.

[This concern is not unique to the Nordic countries. ThomasNet’s annual Industry Market Barometer of North American manufacturing finds members of Generation Y (18 to 30 years old) underrepresented in companies with aging workforces.]

The real question, of course, is whether the Nordic countries are sufficiently aware of the problem and, if so, have the political will to deal with it. “The challenges are daunting,” BCG acknowledges. Each country, however, has assets that can be leveraged “to preserve manufacturing as a key driver of economic dynamism and diversity,” as well as provide good jobs and “create the next generation of major global companies.”

All that remains is for substantive action to be taken.

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