The end of the Swedish Car Industry?

This blog has followed recent events in the car industry closely, with an eye to the long-run viability of car manufacturing in mature economies. The last week has seen massive changes affecting Saab and Volvo, Sweden's two biggest car manufacturers.

Last Friday the majority US government owned GM, the owners of Saab, which is trying to restructure itself as a precursor to an IPO, announced that it was unable to find a buyer for Saab and would wind the company down. Saab, which stands for Svenksa Aeroplane Aktie Bolag, which actually means Swedish Airplane Corporation was established in 1938 as an aircraft manufacturer to build planes for the Royal Swedish Air Force. After 1945 the company diversified into car production, focussing on affordable cars, eventually selling its car subsidiary to GM in 2000. GM had owned a 50% stake in Saab's car subsidiary since 1991; however this investment has turned out to be a very poor one as Saab cars have failed to make a profit since 2001. Now Sweden's government have rightly refused to bail out Saab, although attempts are continuing to sell the company to a performance car maker, Spyker of the Netherlands. Such a sale would however probably mean the end of Saab as a volume manufacturer.

Over at Volvo, established in 1927 as a spin-off company from the ball bearing manufacturer SKF the future of the company as a volume manufacturer in Sweden also looks dubious. Volvo was purchased from the rest of the Volvo group, which continues to make commercial vehicles and construction equipment, by the Ford Motor Company in 1999. Volvo had continued to be a strongly independent subsidiary within Ford, continuing to specialise in safety and engineering innovations in-house. However Volvo's continued reputation, particularly for making high end family cars has not been sufficient to sustain its position in the western market, with sales falling 18.3% in 2008. Ford, itself struggling with the downturn, has now decided to sell on Volvo to Geely, a Chinese manufacturer. While Geely may choose to keep Research and Development in Sweden, with production costs, particularly wages, being very high in Sweden it seems unlikely to keep Volvo manufacture in Sweden for long.

No doubt some manufacturing will continue in Sweden for the European market, but as Volvo production is increased at lower cost for the Chinese market for how long can this be expected to continue? Or could Volvo be a rare case in which the country where the product is made counts, given Sweden's general reputation as a country which manufactures quality products? Not if the case of furniture retailer IKEA, a company which for many consumers embodies Swedish design and quality, is taken into account; it has successfully sold 'Swedish' furniture made in China, among others, for many years now.

Cadbury - end of ethics?

This week the UK chocolate and confectionery manufacturer Cadbury, manufacturer of the iconic Dairy Milk brand among others advised its shareholders to accept a hostile take-over bid from US food conglomerate Kraft Foods. With Kraft's US rivals Hershey also entering the fray it would appear that Cadbury's existence as an independent is likely to come to an end after 185 years. British chocolate eaters will fear that the distinctive taste of Cadbury's products may be under threat; however the ethical stance of Cadbury's, something relatively rare in the food market, may also be under threat.

Quaker Chocolate maker John Cadbury first opened a shop in Birmingham in 1824 to sell drinking chocolate. By 1831 he had started manufacturing; the company remained a family concern and by 1879 Cadbury's sons established a new factory on a green field site at Bourneville, on the outskirts of the city, where it continues to manufacture today. At Bourneville the company established one of the 'model villages' of the nineteenth century for its workers, building detached houses with gardens (unusual in what was otherwise a crowded industrial city), as well as providing pension schemes, education, training and health schemes for employees.

It seems likely that such benefits were not extended to the firm's suppliers in the then British colony of Ghana in West Africa; but under ethical pressure in early 2009 the firm announced that it was moving to Fairtrade certification of its Dairy Milk brand. The Fairtrade Foundation aims to guarantee that farmers working for Cadbury in Ghana receive a fair living wage. Cadbury are rare among mid market chocolate makers in adopting Fairtrade, which is usually reserved for the high end manufacturers. It will be interesting to see whether or not Kraft or Herschey will value the Dairy Milk brand enough to retain its Fairtrade status; if they are wise they will continue with this as part of a premium international image for Dairy Milk, as well as continuing its manufacture at Bourneville, a crucial part of its 'Made in Britain' image.

Can Scotland really be economically self sufficient?

On November 30th, the Scottish First Minsiter, Alex Salmond, marked St. Andrew's Day by unveiling his Government's plans for a referendum on Scottish Independence. Scotland has been part of the United Kingdom since 1707, when the Scottish Parliament voted to join the English parliament. The Scottish Parliament was subsequently reformed, within the Union, and with limited powers in 1999. While political historians continue to keenly debate the reasons for the Union, there is no doubt that it was gainful in the long run, and its hard to imagine the Industrial Revolution, so dependent on inputs from both sides of the border, being so successful without Scottish participation. The Union also gave Scotland, a country typical of Braudel's thesis of mountain nations less able to support their population, the access to the 'British' Empire that it had long craved.

One of the reasons for Union was that Scotland's own imperial adventure of the 1690s, the Darien scheme, had ended in an abject failure. This was a scheme that saw the formation of the Company of Scotland, which raised at least £400,000 in Scotland, as well as some funds in England, totalling roughly a fifth of Scotland's wealth at the time. The company sent colonists to claim territory in Panama, despite its being territory claimed, though not occupied by, Spain. The attempt to establish a colony called New Edinburgh failed abysmally, with only 300 of the original 1,200 colonists surviving the attempt, with tropical fever claiming the lives of most of the Scots. Tragically a second ship was despatched from Scotland because, in an era before electronic communication, it was not known that the first had failed, with similar results. The loss of savings through the scheme was not surprisingly catastrophic and union with England allowed Scots access to the Empire without incurring future risk. As I demonstrated in my PhD thesis, Scots went on to become very successful foreign investors, in agriculture in Australia and New Zealand, and in mining and cattle ranching the US, among ventures in many other industries and countries (note - the link is to a shorter seminar paper). It seems unlikely that these ventures would have occurred without the long run economic recovery made possible from Union through the agricultural and then industrial exports of the 18th and 19th centuries, many of them to a growing London economy.

Salmond has long claimed that Scotland would be better able to allocate its own resources if it were independent. To do this he has previously pointed towards smaller independent countries in Europe such as Luxembourg, Ireland and Iceland. Both of the latter have suffered disproportionately from the credit crunch, with top-heavy property based economies collapsing while creditor nations, themselves under pressure, sought recompense. The collapse of Iceland's banking system forced it to seek a £6bn emergency loan from the International Monetary Fund; unfortunately much of this will end up being spent recompensing savers abroad. Had Scotland been independent during the present crisis, then with RBS alone loosing around £24bn in 2008 the country would also have been driven to seek aid from the IMF; the whole of Scotland's GDP was £86bn in 2006 (although this excludes oil and gas revenue). To cover this loss alone Scotland would have been forced to spend a more than a quarter of its GDP. Oil and gas revenue might provide some temporary boost but are unlikely to remain substantial in the long term; a smaller economy would also provide more limited opportunities for the profitable reinvestment of these revenues. While the UK is struggling with national debt created by the recession, with the bailout of the banks not even shown on the national balance sheet, the chances of the UK economy growing significantly seem much greater than that of Scotland's alone. Nicholas Crafts writing in 2005 showed that Scotland had a market potential only around 35% of that of London in 1985, because the country continues to find itself on the European periphery. An independent Scotland would undoubtedly be pushed further to the periphery as European business activity centralises further into the London-Brussels-Ruhr-Zurich corridor; surely better for the country to continue to take advantage of its continuing connection to the wider UK so that it can have a more active stake in this centralisation.

Further Reading:

Crafts, N.F.R., 'Market Potential in British Regions, 1871-1931', Regional Studies issue 39, pp. 1159-1166.

Prebble, J., The Darien Disaster (London, 1968).

Tennent, K.D., Owned, monitored, but not always controlled: understanding the success and failure of Scottish free-standing companies, 1862-1910, unpublished PhD thesis, LSE, 2009.

UK Borders to close? The declining value of creative goods

More ructions in retail; this time one of the darlings of the out-of-town shopping sector, fast growing bookstore chain Borders, are suffering. Today its former UK subsidiary, which still trades under the name Borders froze new sales via its website while it supposedly finds a buyer; the company is losing money and does not have enough cash to survive until Christmas. Borders were one of the few US based retail chains to come into the UK at the same level of the market as its US based stores, the obvious other examples being WalMart which purchased ASDA in 1999, Safeway, which entered as long ago as 1962 but later sold its UK arm, and Woolworths, which entered the UK in 1909. The US part of Borders has also been finding life tough, having sold its UK operation in 2007, before the worst of the credit crunch hit, to concentrate on reviving its flagging fortunes in the US.

This decline is surely further evidence that diminishing returns in the once high value creative goods sector, that made up of products such as books, music, DVDs and computer games sales remains a serious problem, having already contributed to the decline of the store formerly known as Virgin Megastore, Zavvi and Woolworths in the UK. Competition from internet distributors of physical media such as Amazon has been one problem, and internet distribution via download another. Media can also store more nowadays and that has further driven the real prices consumers are willing to pay down. Physical shops that consumers actually have to visit are at a real disadvantage in this industry as browsing is not always necessary and items can easily be posted or sent digitally. As an example of the falling value of production in the industry, a long-playing album in 1968 cost around £2, which equates to around £25.99 in 2008 pounds using the Retail Price Index. Today its possible to download an album from Apple's iTunes, which probably has more tracks, for £7.99. iTunes' overheads are far lower as they don't have a distribution system or shop infrastructure to maintain, nor do customers have to spent time and money travelling there. It seems likely that the creative sector has a lot more pain ahead of it and pain which is not just a result of the present recession.

Thanks are due to measuringworth.com.

Boardroom Switches

Two UK companies previously featured on this blog have confirmed interesting management changes.

Marks and Spencer, the retailers, who two weeks ago announced the end of their own label only policy have appointed Mark Bolland, Chief Executive of competing retailer Morrisons. It will be interesting to see how Bolland copes as a newcomer to Marks and Spencer, a traditionally fairly insular organisation. Bolland has been very successful at Morrisons, managing to grow sales by 8% over the last year, and increasing market share from 10.8% to 11.8% over the last 15 months. It will be interesting to see how Bolland, a Dutchman, does at M&S; its last executive from overseas, Belgian retail expert Luc Vandevelde, had limited success during his tenure as Chairman and Chief Executive between 2000 and 2003.

Meanwhile struggling commercial broadcaster ITV have announced the appointment of former ASDA Chief Executive Archie Norman. Archie Norman has had a varied career, which also included stints as the Finance Director of Kingfisher, which owned Woolworths for many years, as well as being a Tory MP in William Hague's shadow cabinet. Norman's contribution at ASDA has probably been his biggest achievement so far. Norman remodelled ASDA, which which had pioneered the Hypermarket concept in Britain, on the US giant Wal-Mart, expanding the company's discount non-food lines and avoiding the move upmarket taken by other food retailers. Employment policies were also changed, with the introduction of new bonus structures and employee empowerment schemes inspired by those used by the fast growing Hi-Fi specialist store Richer Sounds. This strategy was so successful that when Wal-Mart was seeking to enter the UK market in 1999, but unable to do so on its own due to planning constraints, it simply purchased ASDA, which has continued to perform well under Wal-Mart ownership. Mr Norman now hopes to turn around ITV, claiming that he had even considered purchasing the company directly through his private equity company Aurigo Investment Partners. Its unclear if perhaps he will go outside of the UK to find inspiration this time, perhaps from the way that US TV broadcasting operates. It seems unlikely that with its core competency in television, which is essentially a declining technology, that ITV will be able to sustain itself alone in the long run. Perhaps Mr Norman can prepare the company so that one day it might become CBS or NBC UK? ABC's owners Disney have been mooted as possible purchasers for ITV in the past, after all.

Station Refurbishments - but the UK's worst ignored?

Today advisors to the UK's Department of Transport published a report naming the UK's ten worst railway stations, claimed to fall short of 'proposed minimum standards'. The report recommends that the stations be specifically targeted for refurbishment. The ten stations named were:

Manchester Victoria

Clapham Junction

Crewe

Warrington Bank Quay

Barking

Preston

Wigan North Western

Luton

Liverpool Central

Stockport

Five of these stations are on the West Coast Main Line, or branches of it, which was recently upgraded in a £9bn project with central government funding, although cash was clearly not found to do anything about the state of the stations. Three of the stations, Barking, Clapham Junction, and Luton are busy south-eastern commuter stations which have been unloved by their franchisees for years, although keeping these stations in a good condition must be difficult due to the sheer numbers of people passing through them. Additionally with stations owned by Network Rail, the infrastructure provider and run by the franchisees, the division of responsibility for their long term condition is difficult to determine. A company which may only operate a site for a further five years does not have a great incentive to invest in it, particularly if the station is on a commuter route that locals will use regardless of its condition.

However, this may not be the full picture. The forgotten parts of the UK railway network are the large network of regional lines in the midlands, north and west of England. Such regional lines do not go anywhere near London and effectively exist to provide basic public transport. They are also not funded as well as their Scottish and Welsh counterparts. One such station on this network is Wakefield Kirkgate. Kirkgate is the second station in Wakefield, a town of 76,886 people, but in the 2006-7 financial year only 769 people bought tickets to or from it, though 61,000 changed trains there. While East Coast services to London serve the town's Westgate station, Kirkgate, is the neglected hub for four different regional rail routes, serving places like Leeds, Sheffield and Nottingham, and there are also plans for an 'open-access' service to London. The simple reasons that so few people travel to or from Wakefield via the station are its lack of staff, and the state of abandonment of many of its buildings, built in 1854, which make it a dangerous place to enter or exit at night. Kirkgate is typical of many Victorian stations which have lost services over the years in that many surplus buildings have been left, with no use found for them, and is in such a bad condition that a wall collapsed in 2008 crushing a parked car. The franchisee Northern Rail, which relies on government subsidy, are unwilling or unable to improve the station while Network Rail and the local council have also failed to act. The Rail Minister, Lord Adonis even admitted the station is the UK's worst 'medium-large station' when he visited in July 2009; in the same week a man was attacked at the station with a baseball bat. Worse still, a young woman was raped there in October 2008. Why then, did Kirkgate fail to make today's list? It couldn't possibly be because it has no Inter-City level services or is outside the south-east, could it? A business opportunity is being missed here, as more people would surely use the station if it was a safer and more attractive place.

GM update: Germany gives up on GM

A further update in the battle for state intervention in General Motors (see here and here) - today the German Economy Minister, Ranier Bruederie told GM that they would have to fund the restructuring of their European arm, Opel, alone. It now seems unlikely that GM will get state aid in Germany, a move unlikely to be popular with the German carworkers unions. The Germans are upset that GM had called off its decision to sell Opel to the Canadian parts manufacturer Magna, which was backed by the Russian state owned Sberbank. Magna had guaranteed Opel jobs in Germany in return for state aid. GM is presently 61% owned by the US government, (and 12% by Canada, making it a rare joint State Owned Enterprise). At its most sinister the reversed decision to sell to Magna might represent intervention from a US government concerned about technology transfer in the car industry to Russia, a present growth market. At its least sinister, the US government is putting pressure on GM to hold onto their European division, with its access to the EU and the growing Russian market to make the IPO that it is desperate to hold next year more attractive to investors. In Germany, meanwhile we have been treated to the rare spectacle of a government deciding not to intervene in the car industry. Although Germany may loose jobs in the short run if GM does decide to move Opel east, in the long run it will benefit from cheaper car imports. It just depends if this is a silver lining that the German government are prepared to accept. Given their history of intervention, other EU governments still seem likely to support GM remaining in the countries as far as EU law allows. Perhaps the tax payers of Europe will loose out while US and Canadian tax payers profit.