SWEDES CHOPPED
Sep 6th 2001
From The Economist print edition
Finland, Ireland and Sweden have been
differently affected by the tech bust
THE “new economy” may
not have pushed deeply into
Europe, but it has certainly
had an impact on the
European periphery.
Ireland, Finland, and
Sweden, ranked by
consultants
PricewaterhouseCoopers as
the top three information
and communications
technology (ICT) economies
in Europe, have been testing
their parachutes as the
technology market has
taken a dive.
Sweden has come off worst. Only a year ago,
tech-savvy Swedes were bubbling with
enthusiasm for their new economy. And with
good reason. In a few short years Sweden had
changed from being an unsustainable welfare
state in the grip of recession into one of the most
vibrant centres of ICT activity outside Silicon
Valley.
Drawn by a unique combination of high Internet
and mobile-phone penetration (around 50% and
70%, respectively), technology companies from
all over the world chose Sweden as a
testing-ground for third-generation (3G)
telecoms products. Sweden's market leader,
Ericsson, enjoyed some fat years in the world's
telecoms-infrastructure business. And many
young Swedes, degrees in hand, eschewed
stable jobs at large companies in favour of
chances with risky Internet start-ups.
But faster than you can say irrationell glädjeyra
(irrational exuberance) the mood turned sober.
Business confidence in future activity has
plummeted to its lowest in eight years. Ericsson,
which alone accounts for 8% of Sweden's GDP, is
having a terrible time. It has announced plans to
cut about 20% of its workforce, and is on the
verge of spinning off its beleaguered
mobile-phone division.
An enormous outflow of capital has weakened
the already depressed krona, which has put the
Riksbank, Sweden's central bank, in a pickle. It
has been the only rich-country central bank to
raise interest rates this year.
By contrast, the outlook in Finland and Ireland
remains good. GDP growth is expected to slow to
about 3% this year in Finland and 8% in
Ireland—less than they have enjoyed in recent
years, but rates to be envied by Sweden, which
will be lucky to reach 2%.
Part of the reason is that the technology boom
was less bubbly in Finland and Ireland because it
was more or less confined to producing goods. In
Sweden, on the other hand, a glut of venture
capital helped it spread to more speculative ICT
investments. For Ireland, the moderation was
more by accident than by design. Its success has
been based on attracting foreign direct
investment by multinationals, whose focus is on
producing ICT equipment for the European
market. Moreover, its telecoms infrastructure
remains undeveloped—Internet penetration is
only 30%—which has inhibited the rise of
Internet start-ups.
Finland is a different case because it could have
taken Sweden's route. To understand why it did
not, look at Nokia, the company to which Finland
owes much of its rise to new-economy stardom.
Nokia's management has exerted a strong
centripetal force over the Finnish high-tech
sector, drawing a vast network of suppliers into
the company as partners. Likewise, most
managers recruited by Nokia have stayed with
the company. That is quite different from
Sweden's Ericsson, whose management has
sprouted a string of entrepreneurs eager to
branch out, frequently with unfortunate results.
The Swedish consumer has also been more
exposed to the ICT downturn. Roughly two-thirds
of Swedish households own shares, perhaps
more than in any other country in the world.
When the Swedish telecoms operator, Telia, was
privatised, 1m of Sweden's 9m citizens bought
shares. It was a bad investment as it turned out:
Telia shares have fallen to 50% of their issue
price.
Stockholm's OMX stock index has lost 50% of its
value since its peak last year, wiping out a
quarter of Swedish households' net worth.
Consumers have recoiled—consumption grew by
a scant 0.1% in the second quarter. Finnish
households have been less hit by fluctuations in
the stockmarket, despite the fact that the
Helsinki index (of which Nokia accounts for
roughly two-thirds) has crashed even more
spectacularly than the OMX. The reason: 90% of
Nokia is foreign-owned, mostly by Americans.
Finland and Ireland may yet follow Sweden
down, but if they do it will be because of an
accumulation of job cuts. Ireland is starting to
get worried. Recent plant closures by Gateway
and General Semiconductor have made the Irish
Development Agency nervous because they
involve not only job losses, but a loss of capital
for Ireland.
To date, about 4,500 jobs have been cut in the
foreign-owned ICT sector, out of a total of
55,000. But unemployment has yet to rise
because new job offers have continued to arrive.
For example, three days after General
Semiconductor announced 680 job cuts, 380 new
offers were on the table.
Finland's fortunes depend on Nokia, which has
weathered the downturn relatively well. It has
increased its market share at the expense of its
rivals during the past year, even as overall
demand for mobile phones has plummeted. It
now produces one in every three mobile phones
sold in the world. Finland may have all its eggs in
one basket, but so far the basket has proved
quite sturdy. |
