Redundancies vs. Dividend?, or: What is happening in the Finnish Paper Industry?

UPDATE: METSO has cancelled its planned extra dividend.

The announcement by machinery producer Metso Oy, that it will make hundreds of workers redundant from its paper machine -making units, has stirred a lot of controversy. I would like to take a bit distance from the issues at stake and put them in a wider frame. But there are nonetheless the key issues:

1. METSO Oy will reduce its personnel by at most over 600 employees, mostly in the units making paper machines or providing services for the paper industry, and about 150 jobs will be outsourced.

2. METSO Oy announced that it plans to pay an extra dividend.
3. The Finnish state has a 11,1 percent stake in METSO Oy through its investment company, Solidium.

The question is, whether these issues are somehow related, especially the first two. METSO is one of the leading global producers of paper machines and all the parts that belong to them. Also important is their production of cardboard-making machines (which is still somewhat of a growth area). METSO produces other machinery as well, but in the context of this blog those are less relevant.
The reasons stated in the article by Helsingin Sanomat about the news are:

  • Overcapacity of paper machine-producing units, and related,
  • Weakening of competitiveness and profitability
  • Permanently reduced demand for paper machines and switch to cheapers solutions
  • Increased competition and weakened demand for foundry products
  • Diminished investments due to uncertain global economy

Before going into the details of the redundancies and the other issues, let’s tackle these first. Overcapacity is a phenomenon which occurs in relation to the the business environment. In other words, when the business environment changes, the capacity to produce goods might be either spot-on, too little or too much. Obviously there are more factors, but on a simple level you could say that profitability is best when there is under-capacity or suitable capacity. Though in the former there is clearly the situation that profitability could be better if capacity would be optimal.

Markets and economies can change rapidly, but today’s investors and business managers rely to a large extent on forecasts and various scenarios, which take into account different development paths. A good – and leading – example is Jaakko Pöyry Oy’s World Paper Markets up to 2025 – report, published regularly to be bought by the industry’s strategists. The next figure shows the development of Finnish paper industry machinery production (expressed as a monetary value).

What is visible in this figure, is mainly the international success of companies like METSO, as the domestic Finnish paper industry has seen mostly declining investments. This growth can most likely be seen as the success of Finnish (and other) paper industry companies to invest in South America and Asia. From this figure, it is also clear where the potential for overcapacity comes from: wrong estimations of the growth market in (especially but not only) Asia. Like the paper industry companies themselves, also companies like METSO had to find new opportunities for growth, given the stagnation of the European markets.

If I am allowed to speculate a bit, then the stated reasons of diminished demand for foundry products and permanently decreased demand for paper machines would refer mainly to the Asian markets (although of course, the European market is going nowhere, so yes, permanently decreased demand there, too). The increased competition might well come from other established players in this market or from ‘upstarts’ from China. In any case, the reference to ‘cheaper solutions’ might give a clue towards increasing competition from Chinese companies. A simple Google search turned up a lot of Chinese companies providing supplies for the paper industry and also complete paper machines, e.g. this one.
Overcapacity can also occur through the entrance of new producers on the market – I can’t possibly say what the market share of these Chinese companies might be, but in terms of geography and most likely price competitiveness they might well have an advantage over Finnish and other European companies.

So, basically, stating that a reason for reducing the workforce is overcapacity, weakened profitability and competiteveness is clouding the issue. The problem is not with the employees in Finland, but rather in the management of METSO. After all, if this is a globally operating company, the company’s board should be expected to know the impact of various economic developments on its business position. Of course, estimating/predicting market developments is hard, but that is what e.g. Jaakko Pöyry Oy is good at. And it doesn’t take a genius to imagine competing with Chinese companies is hard.
So, in my view,  the reasons stated indicate more of a failing of the management strategies of the company regarding the market it chooses to operate in: the global paper machinery market, where buyers are now mostly located in Asia. Reducing the workforce does not remove the fundamental problem, that METSO may have underestimate the pressure of competition from other companies. Yes, there may be overcapacity, but is this the employees’ fault? It is by itself reasonable to reduce the workforce if there are too many workers given the work that can be done, but the point here is that METSO completely confuses causes and effects. The Finnish employees’ performance has little to do with failed strategy towards the markets in Asia/China. Nor is firing a couple of hundred people going to help very much, as personnel costs are relatively marginal in machinery production.

With this in the background, the firing of more than 600 employees and outsourcing a further 150 looks especially harsh. Why should more than 750 people be displaced from their jobs, since they did what the management asked from them? This is failure of management, just like with Stora Enso and UPM in their American adventures in the early 2000s.
From this we can move on to the misguided decision to probably pay an extra dividend to shareholders (in terms of public relations at least) . This is on the basis of the apparent solid financial situation of the company. Of course, this will benefit the state-owned Solidium investment company as well, but how does that a) help the people who lost their job and b) improve the company’s strategy/competitive position?
Again, in this case, Corporate Social Responsibility is apparently some fashionable phrase. It is true that neither the responsible minister nor the labour unions can do much about this, but telling the truth may put pressure on companies nonetheless.

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