SOURCE: The Boston Consulting Group

The Boston Consulting Group

August 19, 2013 00:01 ET

Manufacturing Exodus From Nordic Economies Is Likely to Worsen Without Urgent Action to Boost Competitiveness

High Costs and Shifting Global Demand Could Cost 200,000 Production Jobs and Worsen Youth Unemployment by 2020 in Denmark, Finland, Norway, and Sweden, Predicts The Boston Consulting Group

STOCKHOLM, SWEDEN--(Marketwired - Aug 19, 2013) - Weakening cost competitiveness and shifts in global demand from developed markets to emerging markets are expected to force manufacturers in the Nordic nations of Denmark, Finland, Norway, and Sweden to cut around 200,000 production jobs over the next five to seven years unless the region acts decisively, according to a new report by The Boston Consulting Group (BCG).

The report, titled Revitalizing Nordic Manufacturing: Why Decisive Action Is Needed Now, warns that such continued erosion of manufacturing -- a foundation of Nordic economies since World War II -- would have significant economic consequences. The region has already lost nearly 1 million production jobs, a decline of 40 percent, since 1980.

Further job losses could exacerbate already high unemployment among Nordic youth and weaken the future competitiveness of key Nordic manufacturing industries -- such as electronics, machinery, wood products, and transportation equipment -- the report says. Nordic service industries would suffer, too, because many services jobs are connected to manufacturing.

"Manufacturing has historically been a critical driver of economic growth, employment, and healthy trade balances in the Nordic economies," says BCG partner Andreas Alsén, a coauthor of the report. "Urgent policy action is required on a number of fronts to keep the region's competitiveness from eroding further."

The biggest challenges for Nordic manufacturing are relatively high labor costs, explains the report, which elaborates on research previously released in Denmark and Sweden. Despite rapid wage increases in emerging markets, average manufacturing labor costs remain 80 to 90 percent lower in China and Eastern Europe. Average manufacturing labor costs in Germany are around 20 percent lower than in the Nordic region, while in the U.S. they are around 40 percent lower.

"Because Nordic wages are also projected to keep rising for the rest of this decade, the cost gap with emerging markets is unlikely to shrink enough to improve the region's competitiveness in the near term," explains coauthor Ian Colotla, who leads BCG's Operations practice in Denmark. "And the cost gap with Germany and the U.S. is likely to widen."

An aging workforce that will likely lead to a future talent shortage and rigid labor rules in three out of four Nordic countries also undermine Nordic competitiveness. According to the Global Competitiveness Report 2012-2013 by the World Economic Forum, Sweden, Norway, and Finland rank in the bottom twentieth percentile of 144 countries in terms of flexibility in setting wages. Sweden and Norway also rank in the bottom twentieth percentile in hiring and firing practices. Denmark is the exception because of its flexible labor rules.

The combination of factory downsizings with labor rules that encourage older employees to hold onto their jobs as long as possible effectively excludes young Nordic workers from the manufacturing workforce.

"Many companies, particularly small and midsize enterprises, avoid new permanent hiring unless absolutely necessary," says Børge Kristoffersen, a BCG partner based in Oslo. "Instead, they are hiring offshore." Partly as a consequence, the average age of Nordic workers is rising steadily. "If today's youth can't get entry-level jobs now, Nordic industries could face shortages of trained labor in the future as veteran workers retire," Kristoffersen explains.

A shift in global demand from developed markets to emerging markets -- especially in Asia -- increases incentives for Nordic manufacturers to relocate production. Consumption of manufactured goods in mature European economies is flat, for example, while in China it has been rising dramatically. Relatively high corporate taxes and regulatory costs also discourage investment in manufacturing capacity in Nordic economies.

Despite these handicaps, Nordic economies still have many advantages that can be leveraged. Each of the four economies ranks among the top 15 nations in the World Economic Forum's Global Competitiveness Index and scores high in international rankings of education quality, political stability, and ease of doing business. Sweden, Denmark, and Finland are also among the world's biggest spenders on research and development as a percentage of GDP.

The BCG report urges Nordic policymakers, private industry, and labor organizations to craft a "new deal" to strengthen manufacturing. The region should ensure that wage levels remain competitive, lower corporate tax rates, invest more in skills training, and improve programs to translate public investments in R&D into innovative products and new industries. Governments should also increase support for small enterprises to help them develop into the globally competitive manufacturers of the future.

"By taking decisive action now, the region can also ensure that manufacturing will remain a powerful contributor to future economic growth and job creation," says Pekka Vanne, a partner based in Helsinki who leads BCG's Industrial Goods practice in the Nordic region.

A copy of the report can be downloaded at www.bcgperspectives.com.

To arrange an interview with one of the authors, please contact Eric Gregoire at +1 617 850 3783 or gregoire.eric@bcg.com.

About The Boston Consulting Group

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