Tag Archives: Schumpeter

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.

 

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Why do Finnish paper companies prefer to close mills rather than sell them? – Some thoughts

(Originally posted 9.2.2012)

Today in the Finnish news a surprising win for the French labour movement of the M-Real mill in Alizay. Through a wide range of resistance, the local section of the French CGT labour union pressured M-Real into re-considering the possibility to sell the mill.

This blue-print of what to do with ‘unprofitable’ or ‘undesirable’ mills is well-known in Finland. The Voikkaa paper mill was closed in 2006 (the first non-bankruptcy closure in Finland) and subsequently dismantled. The Summa paper mill was closed in 2008, its factory halls sold to Google for the use of servers and two of the three paper machines were dismantled and scrapped, the third on sale. Also in Kajaani the paper machines were dismantled and one was sold to India. The most recent case, the Myllykoski mill, also follows the same blue-print: the machines are in the process of being dismantled. Currently, they are planned to be stored locally, no other plans for the machines are known publicly. Also in the case of the Kemijärvi pulp mill, Stora Enso rather closed the mill than sell it.

Why do these companies prefer to dismantle working mills rather than sell them? The examples of Lohja Paper and the Kirkniemi paper mill (bought respectively by Mondi Ltd and Sappi Ltd) show that it can happen differently. At least for the former the explanation might be that it was a family-owned mill, with relatively old paper machines and lowish annual production volumes of special paper.

One thought, which is expressed also in the news article, is that paper companies don’t want production capacity falls in the hands of competitors. The apparent reason for this is that the production capacity might be used against the former owner. As also expressed in the previous post, in a situation of near-oligopoly (in Europe), it is not beneficial for company X to divest of a mill by selling it to Y, which means that either X has less advantage of the competitive restructuring relative to total production capacity on the market or that Y might gain an advantage for when demand is stronger.

There is, however, a problem with that argument (even if the market situation is more competitive than presumed) – if company X doesn’t want that a certain paper mill does not benefit a competitor, e.g. through a sale of the mill to that competitor, then it must mean that the paper mill has more potential than the company X wants to admit. True, it might be that a mill needs additional investments or some other reorganization, but perhaps in the not-so-immediate future paper mills that are not competitive to company X might be so for company Y.

One big question of course is the existence of overcapacity in (Western-) Europe. This does provide something of a rationale to permanently remove capacity from the market. However, this overcapacity is also the Finnish companies’ own doing in part.

So are Finnish companies doing their competitors a favour by closing paper mills? This is impossible to say without serious analysis (for which there might not be sufficient data). In any case, this is not the creative destruction advocated by Joseph Schumpeter; it is just capital destruction. A sale of a mill to a competitor might in the end seal the fate of a paper mill, but Finnish paper companies are not the sole possessors of wisdom, and especially considering the nature of Finnish paper industry communities, these companies have to show more responsibility for the fate of their employees. If the sale to a competitor in the somewhat longer term leads to the conclusion that the mill is not, in fact, economically viable, then that is the end of the story. But the social responsibility of the paper companies demands that a sale of ‘unwanted’ paper companies is at least seriously considered (especially regarding Stora Enso, in which the Finnish state has a majority stake through an investment company and the the Social Insurance Instution (KELA)).