Managing Director & Partner
By many measures, the economies of Denmark, Finland, Norway, and Sweden are among the most envied in the world. The nations boast some of the highest per capita incomes and health and education standards, and they consistently score at or near the top in international competitiveness and innovation rankings.
But these four Nordic nations also share an economic vulnerability: manufacturing sectors that are in serious decline.1 Notes: 1 For the purposes of this report, the terms “Nordic” and “Nordic region” refer only to Denmark, Finland, Sweden, and Norway. Without urgent policy action on a number of fronts, the erosion of manufacturing in Denmark, Finland, Norway, and Sweden is likely to continue—and may well accelerate. If it does, the potential economic and social impact on the region would be considerable: manufacturing has historically been a critical driver of economic growth, employment, and strong trade balances for most Nordic economies.
Nordic governments have for years shifted their focus to the service sector, hoping to create new, higher-value jobs through measures such as increased investment in education. So far, however, new service-sector jobs have failed to offset job losses in manufacturing. This has led to higher overall unemployment in all four Nordic economies, but the impact has been especially severe in smaller manufacturing towns, where workers tend to be less well educated and less mobile than in urban areas.
A decline in manufacturing employment is hardly unique to the Nordic region, of course. Factories have been shedding workers for years virtually everywhere in the world—China included—as production lines become automated and services assume a greater share of the economic pie. But the prospects for Nordic manufacturing are particularly disturbing and stand in stark contrast to those of other developed economies, particularly Germany and the U.S. Indeed, research by The Boston Consulting Group suggests that reshoring and higher exports could add 2.5 million to 5 million jobs to the U.S. economy by the end of the decade because of improved cost-competitiveness. (See “Why America’s Export Surge Is Just Beginning,” BCG article, September 2012.)
Part, but not all, of this divergence is due to key structural differences between the Nordic economies and other industrial powers. The U.S. and Germany have large domestic markets that consume a major share of manufacturing output, for example. Nordic manufacturers, with the exception of those that produce for the domestic oil-and-gas market, generally rely heavily on exports. U.S. manufacturers have also benefited from a weak currency.
The chief handicaps of Nordic manufacturing are declining cost competitiveness and relatively inflexible labor rules in most countries. Manufacturing labor costs in Germany are around 20 percent lower than the Nordic average, while in the U.S. they are around 40 percent lower. Eastern European labor costs are around 80 percent lower than the Nordic average. Regulation of the labor market, meanwhile, is less flexible in Sweden, Finland, and Norway than in the rest of Western Europe. A key result of these labor regulations is that companies, particularly small and midsize enterprises, avoid new permanent hiring unless absolutely necessary. This trend is evident in the rapid aging of manufacturing workforces.
Other factors are also weakening the competitiveness of Nordic manufacturing. The region’s cost advantage in energy is starting to diminish. Logistics costs for goods shipped within Europe from Nordic countries are higher than for goods shipped from competing economies. The returns from Nordic investment in research and development are declining. And global demand for manufactured goods is shifting from mature Western economies—the prime markets for Nordic producers—to rapidly developing economies in Asia.
The combination of shifting demand and lower production costs in emerging markets provides a strong incentive for Nordic companies to keep moving production jobs offshore. The continued escalation of manufacturing wages in the Nordic economies suggests that policymakers and unions underestimate the long-term consequences of high costs to the region’s manufacturing sector.
Without action to address these challenges, the impact of the continuing exodus of Nordic manufacturing is likely to be severe. We project that Nordic economies stand to lose 200,000 manufacturing jobs over the next five to seven years under a business-as-usual scenario. That would correspond to around 13 percent of the nearly 1.6 million total manufacturing jobs in these nations at the end of 2011 and to 2 percent of total employment.
We see the need for a “new deal” for manufacturing in the Nordic region. The priorities for each economy are different. But the overarching objectives should be to ensure competitive conditions for domestic companies, to create an attractive environment for next-generation manufacturers, to maintain and expand skilled workforces, to promote the growth of midsize companies, and to help entrepreneurs commercialize their innovations and start new companies.
The starting point for this new agenda is to appreciate both the critical economic role that manufacturing still plays in the Nordic region and the contribution it can make to ensuring vitality in the future.