The FINANCIAL -- 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
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,” said 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,” he added.
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, according to the report.
“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. And the cost gap with Germany and the U.S. is likely to widen,” explained coauthor Ian Colotla, who leads BCG’s Operations practice in Denmark.
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. Sweden, Norway, and Finland rank in the bottom twentieth percentile of 144 countries in terms of flexibility in setting wages, according to the Global Competitiveness Report2012–2013 by the World Economic Forum. 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,” said 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 explained.
“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.