Sweden Fights To Come In From The ColdRichard A. Melcher
In the background, floor-to-ceiling windows offer spectacular views of Stockholm's harbor. Inside, scores of people sit at rows of desks and computers that stretch back the length of a football field. The nerve center of some Swedish corporate titan? Quite the contrary. It's a job-retraining center, where laid-off white-collar workers take business courses. And even this busy complex will soon fall victim to Sweden's economic woes and be sharply cut back.
Not long ago, Sweden thrived as one of the West's most generous nations, where human welfare mattered at least as much as the bottom line. But today, unemployment--virtually unknown in postwar Sweden--is soaring, while output is sinking. Stockholm's real estate market shows plenty of vacant, dusty shops and empty office buildings. Unusually early snows in October herald a bitter winter ahead. Says Jacob Palmstierna, chairman of Nordbanken, a state-owned bank: "This is symptomatic of the economic climate we have."
HARD-PRESSED. It's certainly cold out there for such Swedish multinationals as carmaker Volvo, telecommunications innovator Ericsson, and appliance maker Electrolux. For a nation of only 8.6 million, the worldwide reach of these giants has long been crucial to its prosperity. But now, nearly all of them are in the midst of wide-ranging cutbacks and are being forced to make major reassessments of their strategies, if not their identities as Swedish companies. To draw back the multinationals and lure in new investors, the conservative government is embarking on a bold gamble to cut taxes and social benefits.
Yet, with domestic conditions so depressed, there's uncertainty over whether some of the proud old corporate names can go it alone. Volvo, for example, has seen the Swedish market for cars shrink from 350,000 to 160,000 over the past four years. Now, it may shutter two modern Swedish plants at Kalmar and Uddevalla, which operate at just 60% of capacity. Volvo's leaders have concluded that its salvation as an auto maker depends on deeper ties with France's Renault. Loss-ridden Saab Automobile, which on Oct. 20 announced production cuts at three Swedish plants, has already sold a 50% stake to General Motors Corp.
Another shining star may be too small to stay independent. Ericsson has grown into a world leader in digital mobile phones and public-telephone switching and is pumping a hefty 20% of sales into research and development. But with key markets slowing and competition stiffening, it will be hard-pressed to keep up the pace. Profits were down 83% in the first half. "My strategy is to try to go it alone," says CEO Lars Ramqvist, who admits he's up against "some of the most competent companies in the world."
The government hopes that its grand experiment to send the economy along the free-market path of the U.S. and Britain will make Sweden more competitive. Individual and corporate taxes have been sharply reduced, to among the lowest in Europe, while the public sector, which accounts for 37% of all jobs, will be dramatically shrunk. The goal: build a wide-open economy that's prepared to enter the European Community in 1995.
The architect of the makeover is a straight-talking author of three books on Europe and free markets, 43-year-old Prime Minister Carl Bildt. In office just a year, Bildt has fought off an assault on the krona, engineering an incredible rise in short-term rates--to 500%--to beat back speculators. In late September, he achieved a stunning political compromise with the opposition Social Democratic Party on a sweeping economic-crisis package that cuts sick pay, days off, and pensions.
Central to Bildt's strategy is reversing nearly 20 years of eroding industrial competitiveness, which has included a steady flow of investment into Europe and the U.S. Some claim, for example, that Sweden's social security puts it at a 10% cost disadvantage to key European competitors. For the most part, polls show that Bildt enjoys broad popular support. Business executives say this signals a decisive turn. "This is becoming an interesting place in which to invest, " says Erik Belfrage, a senior adviser in the giant Wallenberg group.
In the short run, certainly, the adjustment will be painful. Interest rates are now a lofty 14.5% in the aftermath of a campaign that has beaten inflation from 9.3% in 1991 down to just 2% today--the lowest in Europe. Real estate values have plummeted by 50% in Stockholm since 1990.
DELAYS. The consequences for the banks--and the government--could be dire. Bad bank loans totaled nearly $6.4 billion last year and are likely to be up two-thirds in 1992. The government has already taken full control of No.3 Nordbanken and the parent of No.4 Gota Bank. With markets down 25% this year, Bildt has been forced to shelve temporarily his plan to raise $26 billion by privatizing some 35 state industries.
The key question: When will all the pain start yielding a new competitive advantage? There are some positive signs on the horizon. After years of productivity gains that lagged behind others in Europe, Sweden is likely to be among the leaders for the next two years. Combine the improving labor market, lower social costs, and a drop in personal and corporate taxes, and suddenly Sweden becomes a far more attractive place to invest. Take Electrolux, the world's No.3 appliance maker, which like most Swedish multinationals has been shifting investment abroad for years. Now, Electrolux will be doing all its refrigerator production for Northern Europe and much of its vacuum production for the Continent at two sites in Sweden.
In the meantime, Bildt can do little more than hope for a boost that a worldwide recovery would bring--perhaps in a year. Still, Sweden's competitors are hardly standing pat. Economists are worried about a spate of bad export numbers. Such pressures are certain to force even more change.