Tag Archives: investment

It seems the Eurocrisis has reached the core of the core: Germany

Or so Marcel Fratzscher, director of DIW Berlin, argues in the Financial Times. The recipe to correct this (or to begin to correct this) is investnment, investment and oh, fiscal expansion. Who would have thought?


Banking freeze-up: Vicious circle for Finnish SMEs

Update – here is a reaction by a representative of a co-operative banking group on the apparent banking freeze.

I have occasionally reported on the state of the Finnish economy in relation to the Eurocrisis, and e.g. last week I posted a link on new forecasts by the Bank of Finland that are very grim. Also some Finnish key economists have very divergent views on how they propose Finland gets out of the current recession (which is the third since 2008). But they agree on one thing: the Finnish economy is looking bad. So far, the economy has been mainly supported by domestic demand, but I have seen news items that indicate this is something from the past as well.

The weekly ‘technology and economy’ journal Tekniikka&Talous quite often has much more significant news on the Finnish economy that e.g. Helsingin Sanomat, the main Finnish daily newspaper. Especially its frequent updates are a feature that is extremely valuable. Today T&T has a very important piece regarding small- and medium sized enterprises. It is based around data on bankruptcies, bank functioning (including Basel III), loan guarantees and other issues regarding the functioning of SMEs. The interviewed persons work for Fennia, a large Finnish insurer and ETLA, an important economic research institute. [correction applied]

In this post, I don’t want to go into the reasons why Finland used to be one of the most competitve countries in the world and now it is sinking fast. But I do say that, agreeing with the reasoning on this Finnish economics-blog, it was a cardinal mistake for Finland to join the euro. And perhaps the hard line Finland’s goverment has taken in recent years regarding the Eurocrisis will bite it in the behind soon.

One knows that the situation is bad when a news article opens with the sentence: “The ability or will of banks to finance is at its lowest since the recession of the early 1990s.” I recommend this book for insight on the crisis, which was a kind of Greek crisis but fortunately Finland was not shackled in the EMU then. The article mentions that SMEs are not able to secure finance from banks and therefore they look elsewhere – e.g. to other financiers or capital investors, but often in vain. The author states that the lack of economic growth burdens companies, and that this year is going to be (even) tighter than last year. But the big problem is still finance, because it limits new investments as well as working capital.

The vice CEO of Fennia Eero Eriksson posits that this Autumn looks bad regarding repayment problems and bankruptcies. Until the beginning of the year, the amount of bankruptcies was on the same level as the same period last year, but April was very bad all of a sudden.The research director of ETLA Markku Kotilainen states that it is not likely that the number of bankruptcies will explode, if the ‘expected international recovery will happen early enough.’ To this I would say – the forecasts by IMF and in particular the European Commission have not been exactly reliable. In most cases, especially regarding the EC, they have been wildly optimistic. Of course, stranger things can happen, but I for one am not too optimistic about a timely recovery in Europe.
Kotilainen also repeats something some economists here mentioned: that wage moderation is needed. ETLA is indepentent but generally seen as pro-business.

The most important worry though is the financing system in Finland, to this Eriksson says that they just don’t work (or work properly) and that also government involvement should be considered to get things afloat again. He calls this a vicious circle, because with undersized own capital it is not possible to get loans to even sensible investments.

In this process, it is possible to see the effects of new rules on bank capitalization – according to Kotilainen banks try to compensate for the costs of these measures by raising marginals, and these in turn influence both the availabilty of loans for SMEs and the costs of loans.

Regarding non-bank finance the article mentions the Finnish state-owned specialized financing company Finnvera, TEKES, business-angels and tax decreases (starting next year) as possibilities for SMEs to survive and get financing elsewhere.

But although there are possibilities to get financing elsewhere, the will to invest has decreased since the beginning of this year, the article states. And in those cases firms want to invest, risk capital is unlikely to be found for SMEs. Eriksson states that banks do not want to take any risks at the moment. Although this should be analysed in a broader context, this freeze-up of the Finnish capital market for firms is not a good sign. Basel III is also said to reduce the amount of risk banks are willing (or allowed) to take on.

Eriksson states something very important in relation to the whole Eurocrisis: “The stimulating monetary policy of the central banks doesn’t show in the SME-sector, because the price of money is high for them: pricing by banks is based on risk. Banks are exceptionally over-prudent in risk assessment right now.” And: “Regardless of the record low interest rates in relation to the central banks’ monetary stimulus, the price of money/financing is too steep for SMEs, or financing is simply not available.” He continues to state that the guarantee loan instruments of various Finnish institutions such as Finnvera should be used.

There you have it. I have written a lot about the state of the Finnish economy, which is worse that somehow is acknowledged in the European policy discussions (as also is the case with the Netherlands). I have not previously written about banking issues, because I don’t know enough about that. I do know that the government continues to assure that Finnish banks are in a good shape – this may be, but that is not now where the problem is. So, similarly to what is written e.g. here, also in Finland the money supply is too tight, regardless of what is said about the risks of inflation etc. I do hope, for the sake of all those people who work in SMEs (and not only in Finland) that some kind of solution can be engineered soon.

Newark Group divests European units to private equity group – and you know what that means!

This news caught my eye. To quote the CEO of Newark Group:

“Our European and North American operations benefited from more than a decade of best practices that allowed both regions to grow, prosper and position themselves for the future,” said Frank Papa, President and CEO of The Newark Group. He added, “Now, however, we believe it is the right time to separate the two entities and re-dedicate our energies and resources in the geographic markets in which we have historical strength while providing the means to pursue growth in new products and new markets.”

I believe this statement should be read as: the market for paperboard and solidboard is not going to recover anytime soon, so let’s get rid of the European units. This lack of recovery (until way into 2014) is predicted by the Finnish Forest Research Institute as well, and in general, as the World Paper Markets up to 2025 by Jaakko Pöyry Oy also estimates, growth markets for these products can be likely only found in China and the rest of Asia (excl. Japan). Nonetheless, as packaging material it is probably ending up in the US and Western Europe anyway eventually.

On behalf of Newark, this is perhaps a pre-emptive step to cut losses, as also the expected situation of the North American market is not so rosy. But, what is a private equity group going to do with all these paperboard and solidboard mills? A PE company is not able to change the market dynamics, obviously, so they are probably trying to ‘enhance productivity and profitability.’ Most likely, when the deal is sealed, there is not anymore going to be much public information on the doings of the mills. But I wouldn’t be surprised if they eventually close the mills or before that, reduce the workforce AKA fire people in the name of restructuring.

Non-creative destruction: Stora Enso plans to reduce its personnel by 520 persons in Europe

Here’s a question: if you operate a business in a difficult market, what should you do?
Stora Enso thinks it should reduce its personnel to increase profitability.

Read that again.
How do companies manage to stay ahead of the curve? Yes, cost containment is one part of the equality. But to stay afloat, innovation is needed. Perhaps both process-innovation and product-innovation. Look at Lada – no innovation of either kind, and it fell way behind the curve. Not even the influx of Western capital (investment, innovation, get it?) could help. Or look at Microsoft – it had working processes and a market advantage for its software, but with the advent of smartphones and tablets a new, smaller product was needed. In the time Microsoft worked on Windows Phone, Android and Apple staked out significant claims for their operating systems.
Making paper is  very capital-intensive, but that doesn’t make labour less important. There are at least two reasons why Stora Enso’s decision is a stupid strategy (besides that it is a general strategy of Finnish forest companies by now).

  1. Labour is not simply a cost, as the CEOs of the Finnish paper companies seem to think – employees have intense knowledge about work processes and machinery. Instead of ignoring skills and knowledge, companies could acknowledge the incredible advantage they would have from updating machines instead of reducing the workforce.
  2. Labour is not nearly the biggest cost for the Finnish paper industry. Raw materials, energy and transport are much more significant.

Furthermore, a reduced labour force again increases the pressure on employees to do their duty. The Finnish paper industry does not have a very great record in terms of workers’ well-being, so increases in the workload do not sound like a great development. Even if individual workers may benefit in salary terms from a more diversified job, this is a meagre consolation if one’s health suffers as a result.


The markt for paper in Europe is in decline, and there is still over-capacity, which hinders profitability. But European over-capacity is to some extent the fault of the Finnish paper companies themselves, which used European aid to make new investments. These units have often both greater production capacities and newer technology, which makes them more valuable in accounting terms AND relative to competitors (see this post). The core problem for the Finnish paper companies is that the European market is in decline. Finland’s location (with resulting transport costs) and reduced value of raw materials (pine, spruce, birch relative to eucalyptus) do not amend this situation.


Reducing its personnel is destruction, not creative destruction which is the process by which the ‘old’ is replaced by the ‘new’. If Stora Enso is serious about improving profitability, it should come up with innovative products, investments which reduce the relative cost of Finnish raw materials for paper production and preferably in this way also increasing its energy self-sufficiency by using more biofuels for its energy needs. If Stora Enso has no such plans but instead continues to reduce its workforce, then it is clear that the company does not have a serious commitment to continue operations in Finland.


‘The Government betrayed the export industries’

…or so this Paper Workers’ Union press release says. I have absolutely no time at this moment to follow the debate on the budget negotiations, but apparently the government intends to aid the industry by somehow financing installations that clean sulphur emissions from ships and industry.
The president of the Paper Workers’ Union says that ‘we are afraid, that because of this decision [of limited assistance to the industries, presumably – PJH] investments and production will be transferred from the Finnish forest industries to competing countries’ (my translation).

There is probably more than a grain of truth in that statement, but there is also this:

  • At least since 1999, the percentage investments abroad by Finnish paper companies has been 50 to 75%
  • Finnish pulp and paper production has been slashed by already nearly 3.500.000 t/a since 2006
  • Interest levels are extremely low, so lack of investments is more likely due to lack of demand than dissatisfaction with public policy. On a broader scale, demand for pulp and paper in Europe will likely remain weak for years to come – growth can be found elsewhere and the Finnish paper companies know this.
  • As I have mentioned in a contribution to the debate in a Finnish daily newspaper, the Sulpur Directive can also be seen (at the somewhat longer term) as a great incentive to invest in biofuel technology which has the potential to a) create a new high tech industry and b) make the Finnish industry competitive for a world in which the Sulpur Directive is in effect. The low interest rates of this moment should make rapid investment a no-brainer, even when considering the uncertainty regarding the Eurozone economy, euro etc.

But yes, there might be more transfers of production abroad and less investments in Finland (in the traditional paper industry) but that has far less to do with public policy than with demand in Europe, overcapacity in Europe and the technical age of Finnish paper mills in comparison to elsewhere in Europe and the world.
Such are my thoughts this evening.