How Nations Make Themselves More Competitive - Assignment Example

Was the German backlash against Nokia justified? How can nations make themselves more competitive?

Yes, the German backlash against Nokia was justified.

Michael Porter in the hugely popular “Porter’s Diamond” talks of the four major factors in the context of competitive advantage of nations. These are factor conditions, demand conditions, related and support industries and firm’s strategy and rivalry. Over the next few years, he also brought in two other important components to supplement these four factors – government and chance.

With regard to Germany, the demand conditions were favorable in view of the fact that the demand had shifted to richer nations like Germany and Britain, the consequences of the market saturation in US and Europe.

Factor conditions also were healthy since German labor was highly skilled, well educated and very productive.

Germany was the third largest economy in the world after US and Japan. It was the largest contributor of funds to EU. Adopting a socialist governance line, its economy was governed by market forces. The role of the State was to support the poor and correct market imperfections. The school of thought was that economy and society were interdependent and the corporate sector was responsible to all stakeholders and local community. The Unions and government had a say in business with employers and unions being looked upon as social partners. The unions traditionally solved problems in employees as well as social life. Collective bargaining was the management mantra with national, regional and many a time, a combination of both these structures, being the norm.

The Works Council were very powerful but were formally independent of unions. The guiding business principle was “Co-determination”. The Works Council and employees had a say in company policy and shared responsibility for the firm’s success. Information and consultancy of issues of restructuring process particularly closure of whole sites was the major task of Works Council. Usually, these bodies discouraged relocation of manufacturing facilities and were against the entry of new firms.

The labor force was one of world’s highest wage earners. Labor laws were very strict especially with regard to hiring and firing of workers. However, the reemployment rate was a dismal 40% compared to 70% in the US.

After reunification in 1990, the economy collapsed and unemployment was high. Labor costs rose and combined with lesser work hours and a higher basic corporate tax, Germany slowly started slipping in the competitive index. Co-determination made the Works Councils very powerful to its own detriment.

However, since 2001, Germany turned more business friendly with lower corporate taxes, flexible workers and a far less bureaucratic framework. Though its labor costs were less by 20% than Italy and Spain, they, however, proved to be still high compared to its competitiveness, with the situation only worsening.

60% of manufacturing was off shored by German companies from 2001 to 2006 which represented a loss of 188,000 jobs from Germany to Eastern Europe. In the first quarter of 2008, according to the European Restructuring Monitoring report, there were 268 cases of restructuring with the greatest ones being in the Post and Telecom sector. This resulted in 65319 job losses in Germany.

Nokia, was the last major cell phone manufacturer In Germany and it was often praised for this. Other corporates had off-shored production long ago. The telecom industry was not faring well. 3000 jobs were lost to the BenQ bankruptcy. Though the organization had promised all attempts a reemployment, half of them were still not reemployed. Motorola had announced closure of its Flensburg plant, while Siemens, VW and Opel also had shut down operations. It was therefore, not a surprise, Nokia chose to close down the Bochum plant and shift operations to Romania. Industry experts hailed it as a smart long term move, though in the short term is could prove expensive.

A wave of protests followed the announcement with IG Metal, the largest German union, branding the decision as inhuman and socially unacceptable. Many felt that steps were needed to avoid companies abandoning Germany and that organizations be held more responsible to its stakeholders.

In 2007, Nokia announced that it would commence the Romania operations right from the scratch with an initial investment of € 60 million and 500 people. The work force would slowly swell to 3500 in two years. Nokia believed that shifting operations to Romania would facilitate tight integration of suppliers/ partners and the overall productivity would go up. They reasoned that Bochum, even with an additional investment for renewal would not be globally competitive since labor costs including non-wage labor was high. It stated that while Bochum contributed to 6% of company global sales, it also garnered a lion’s share of 28% of costs. In Romania, the average monthly salary at € 219 was one-tenth of average wage of Germany.

The consequences of closure of the Bochum plant were 2300 job losses and a further loss of 2000 jobs at suppliers and temporary job agencies. Bochum was already reeling with an unemployment rate of 10.5% which was much higher than the average in Germany.

Nokia’s announcement triggered calls for boycott and demonstrations. The irony was that Bochum had never operated at a loss and decision condemned since Nokia reported a € 134 million profit in 2007 at an astonishing € 90,000 per production worker.

Nokia’s announcement came totally unexpectedly with no clear explanation of why such a profitable company needed to close a productive factory. Kleinebrahm, the local head of IG Metall and member of supervisory board called it a catastrophe for Bochum and that the news had hit like a bomb. They warned of punitive action and called Nokia, a seemingly uncaring company reaping globalization’s benefits at the expense of employees and local communities. Elections were round the corner which prompted politicians also to enter the fray. Nokia handsets were being returned to vendors and the organization criticized for not making attempts to reduce expenses. They argued that Nokia’s reputation would be tainted and pointed out to serious management failures and a company wedded to a new religion which idolizes shareholder value. The path taken by Nokia was wrong which smacked of ingratitude and misusing German state subsidies. Nokia had enjoyed € 88 million in subsidies and had guaranteed 2856 jobs. Against this, only 2300 jobs were provided, they contended, and demanded that it pay back € 17 million in subsidies. Nokia explained that it had offered 3200 jobs on an average from 2001 onwards.

The Romanian government was alleged to have offered Nokia higher subsidies and other non-monetary incentives to put up a plant in Romania.

It was felt that though there was no legal obligation to pay back the subsidies to Germany, as a good gesture and to loss of good reputation, it could do so.

The greatest critique of Nokia’s decision was that it had not taken the usual approach to closure of the Bochum plant. Before announcing a closure, the organization had to explain in public, the need for cuts. Subsequent to this, the work force, trade unions, local politicians would meet for possible solutions. This provided for a softening of the blow even if was found inevitable to close down the plant and would offer legitimacy to the decision in that all options were tried out and exhausted. Contrary to this, Nokia refused to enter into discussions. It went to the extent of announcing that it would adopt the same strategy in the future as well. Nokia management conceded that they knew of procedure but rejected it since it did fit into Nokia’s way of working. They said that its core values were to face tough decisions and share with employees. It also claimed that it could not adapt to German practices and they followed the culture of Finland with no public discussion of policy. It outlined that the organization had to think of global operations and international strategy not only Germany.

Reference

Michael Porter, Porter's Diamond of National Advantage - a framework for country comparative advantage, www.quickmba.com/strategy/global/diamond.