Tag Archives: competitiveness

Simon Tilford: Debunking German arguments about trade surplus

In this article by Simon Tilford. This has a lot of relevance for me regarding on-going research on the topic of ‘competitivess.’

Ilargi puts it clearly

Ilargi often has quite “grand” writings, which sometimes exaggerate things, but this post quite nails it. Of course it is still one aspect of the whole eurocrisis but it is one from which a lot of things follow and have followed.

Link

“Unveiling DG ECFIN Thinking On Competitiveness”

“Unveiling DG ECFIN Thinking On Competitiveness”

A wonderful post about competitiveness, revisiting many of my favourite themes – quanitity versus quality, process versus product innovation.

Hollming Works Oy Redundancies and thoughts on competitiveness

Today the Finnish Broadcasting Service YLE informs that the co-decision negotations at Hollming Works have ended, and that as a result 195 people will be made redundant and 55 will be temporarily laid off. The news item informs that the background to these ‘dramatic’ changes lies with the permanently changed operating environment of the company’s five workshops. It states that ‘the demand for the workshops’ production and the compatitiveness have weakened permanently.’

Hollming Works is a company that according to its website:

…is a company made up of five separate business units, which together offer a comprehensive range of services to the mechanical engineering industry. Our focus is on the manufacture of medium weight and heavy engineering products.

Our strength as a supplier lies in our ability to handle turnkey projects, ranging from serial production or customized batches to single production. In addition to the manufacture of components, our services include mechanical and electrical assembly, as well as hydraulic installations. To complete the package, our products come with functional testing, trial runs and, if required, on site installation.

This link provides a bit of history for the company.

A press release from 2012 regarding a new investment mentions a few of its bigger global clients, which include General Electric, Siemens and Atlas Copco. The website of the company gives a picture of a very all-round supplier, which provides a complete package of both manufacturing and services. This link provides (partially in Finnish) a list of processes and industries they have expertise in.

From the profile of this company it is clear that it is a typical provider of high-skilled jobs (in both manufacturing and services) and it is very sad that the company is downsizing so much. The writing has been on the wall though. The Finnish newspaper Kauppalehti has published since 2009 some news on the company in relation to its results. In 2009, its turnover declined significantly, but regardless of that (in the words of the newspaper) its ‘result’ (profit?) increased by some 63%. In 2010, its turnover was nearly half of 2009, i.e. a drastic reduction. The result for 2010 turned into a net loss, but the so-called gearing ratio was satisfactory still. In 2011 turnover declined only slightly but losses increased by some 80% according to the press release. The results for 2012 are behind a paywall,  but earlier this year the co-decision negotiations were initiated, where it was said that the Loviisa unit (which had the investments) was outside the scope of these negotiations.

It is very hard to make solid conclusions on the basis of a single case. But I want to consider two issues that I think influence ‘competitiveness’ a lot. Competitiveness is a relative position, and I do not know in what kind of market Hollming mainly operates (i.e. Europe or global). If the latter, then the development of the euro against the dollar has been very negative for export-oriented firms. Simply put: the euro is simply too expensive. In the case of intra-European competition, the question is not one of exchange rate but of final price (if we now leave out the importance of quality and service around the product). The yearly change in producer prices for the metal industry in Finland (2000=100) looks like this:

Producer prices (2000=100). Source: Statistics Finland

Producer prices (2000=100). Source: Statistics Finland

 

 

 

 

 

 

 

 

 

 

This graph shows the yearly change in producer prices, i.e. prices are still rising but slower. The same graph until 2011, with 2005=100 looks like this:

Producer price index, metal industry. 2005=100. Source: Statistics Finland

Producer price index, metal industry. 2005=100. Source: Statistics Finland

So, apart from the ‘obvious’ drop in 2008-2009, producer prices have increased, although they are currently nearly flat and declining slightly. For all the talk about high wage costs in Finland (which in terms of Real Unit Labour Costs are worrying in that they are higher than Germany’s), this is one thing we should talk about in terms of competitiveness – companies set the prices for their products and services, and that is what customers see. Producers may set higher prices because of higher costs (and certain profit targets) but higher prices mean lower turnover when demand is weak. And then, inside the company, the balance of costs becomes important, which useally (in industry certainly) leads to cutting costs where it is easiest: personnel.

In a case like Hollming’s it is very difficult to say what is the exact source of the lack of competitiveness. Most likely it is a combination of all factors together – demand, rising producer prices, relative share of wage costs, exchange rates. And it is entirely possible that Hollming is very competitive in terms of services and the quality of its products, but exchange rate issues suffocate the company. And no, I don’t think the current Employment and Growth agreement will do much for this kind of company.

Beyond these general issues regarding competitiveness I think it is a bad sign that such an all-round company, which is able to operate in many industries, is in trouble. I hope this is not the ‘canary in the mine’ but I do wonder about the situation in similar companies that are supplier to other industries. This is the industry sector Finland has been very strong in, and it is not quite encouraging that there is not enough demand (in Finland/Europe/worldwide) for this kind of company to operate successfully. Time will tell.

 

 

 

 

Germany’s awkward position in the EMU

Via Marshall Auerback /Social Europe Journal:

Put another way, Germany’s economic performance is tied to external developments because of its reliance on exports. According to Eurostat, exports were equivalent to roughly 52 per cent of Germany’s GDP in 2012. Moreover, Europe is Germany’s largest customer, so the German economy depends on the strength of the European consumer base. According to estimates of the German IFO think tank, if the Eurozone were to break up, and if the five countries that have received aid were to go insolvent, Germany would lose some 530 billion euros. In essence: Germany’s economy relies on the free trade zone and on exports, which the rest of Europe can buy only if it can afford to do so.

And the harsh austerity that has been imposed on the formerly non-competitive Southern nations has led to a dramatic collapse of the prevailing wages in those nations which now means that Germany no longer looks as competitive in trade.  Which probably means that the next stage will be that German industry will demand further wage concessions from its own workers with the implied threat that they will move their manufacturing facilities to other parts of Europe.

This last issue is very easy to monitor. Keeping eyes open. Finnish industry is probably beyond this phase already to some extent (the industries that don’t perform well).

Finland: Competitiveness, wage moderation and the Eurocrisis

Currently I am reading this, and it strings together a lot of issues I have been thinking about lately.

A quote (p. 16): “In economies with an export share of GDP far below 50% wage moderation strategies are counterproductive if there is no perspective of achieving a huge current-account surplus over an extended period of time and of raising export share beyond the 50% without retaliation from trading partners.”

Finland’s export share of GDP since 1992:

Finland got close to 50% between 2006-2008, but otherwise not. And there is certainly no perspective of achieving a huge current account surplus (not with Finnish Unit Labour Costs higher than in Germany at least!). Just to point it out, this means the relevance of the domestic sector for GDP growth is greater than that of the export sectors.

So, also for Finland, it would seem that (p.16) “Under normal circumstances, it would therefore be impossible to successfully emulate the strategy followed by Germany during the first ten years of EMU [i.e. wage compression].”

Link

Germany is being crushed by its export obsession

Germany is being crushed by its export obsession

‘The country’s recent success has been based on cutting wages’, writes Adam Posen
 
This is in one sentence what I intended to show with yesterday’s post. It is also quite a different message than today’s editorial in Helsingin Sanomat, where it is said that ‘Maybe we’ll see the day that the austerity policies practiced in Europe and guided by Germany will get thanks.’ (in relation to a possible recovery led by Germany).