Technology died today. Not the machines, but the paradigm. The belief that delivering high-tech creates jobs, prosperity and shareholder value got killed. The news hit this morning in Sweden’s newspaper SVD among others, that Sweden’s flagship, Ericsson, is shedding thousands of jobs and shutting down manufacturing in Sweden. The decision is sending shock-waves through the municipalities where Ericsson units are one of the largest employers. The likely effect is that whole communities will suffer in a domino effect decimating local suppliers then local services then house prices. And it’s probably the best thing to happen to Sweden for a long while. More on that later. First to the situation.
The decision comes on the back of falling share prices and the loss of market share to competitors like the Chinese Huawei that had hardly got started when I worked for Ericsson in the early 2000’s.
This new landslide into unemployment follows the record numbers shed last year– 2,400 according to SVD. One thing Ericsson did not shed though was its R&D. Being at the forefront of technological development was central to Ericsson’s strategy. In a nutshell, the big idea with Ericsson was to be at the leading edge of technology, and to be large enough (twice the size of the nearest competitor) to enjoy economies of scale and size of market.
You need to be incredibly nimble to play this game: considering that early in the life-cycle products are just costs, the product that is sold today will probably not be really making any money until it hits volume and manufacturing costs can be slashed. This is just before new products come on the market that can replace it.
This means getting everything right in time: time to market, time to volume, time to profitability, time to obsolescence. And this means everyone – and I mean everyone – from the marketing departments to manufacturing to logistics to development to strategy to be in step. You need to be able to juggle products: enough in development, coming onto the market, dominating the market and earning good money, and enough ready to leave the market to make way for the next cash cow. Get that mix wrong and you are on a slippery slope downhill.
Technology too, flits from distribution channel to channel consistently unfaithful to shareholders. Consider that you once bought a telephone answering machine from an electrical store. You buy it from your mobile provider today. Only yesterday you bought it from your fixed line supplier. The same too, with television: once provided by national ”stations” as they were called, television now comes via the internet. So any high tech provider needs to be ”channel fluid” ready to sell via new channels in new ways. That requires some really crafty channel marketers who have forged relations ahead of the product. The collegian spirit of Ericsson – where you had access to everyone through knowing someone who knew someone – was central to keeping Ericsson nimble. Things that could not be solved by new processes, strategies or directives were solved over a cup of coffee in informal meetings or through bumping into people in the corridor. Regardless of the challenge, there was always someone in the organization who had world class knowledge or world class relationships with customers.
From reading the papers, especially comments from union leaders, it seems the collegian spirit has been purged from the company partly thanks to a highly effective American HR director. This leaves Ericsson’s owners looking for a new CEO who can craft a strategy both internal and external to bring Ericsson back from the brink. And owners are as unfaithful to Sweden as technology is to their channels so they have no ultimate aim to keep Sweden prosperous or at the forefront of technology and manufacturing.
The question is; are they looking to do the impossible? Could it be so that Sweden and Swedish industry has reached the point where a once perfectly good paradigm is not working? Could it be that the best thing is just to cash out and sell – after owning the company for 150 years?
The political reactions this morning show little awareness of paradigm shift. Rather, both sides of the political spectrum are touting more of the same of their standard recipes. The left are calling for Ericson to “take responsibility” and are planning job creation programs, the right are calling for changes to make Sweden more competitive. The right is asking why a 150 year-old, world leading company is no longer functioning in Sweden, wanting labor cost and tax cuts.
And yes, you could look at management, labor costs, competition from planned economies and you will probably find explanations. But you could take a hard look at the paradigm, too. Maybe that product juggling game is just too hard to play without some extremely deep-pocketed long-term thinking owners.
The basic paradigm of industrial capitalism is those with money invest into listed corporations and get a return via a dividend or by selling their shares at a higher price than they bought them. Corporations compete by producing more per unit of labor by investing in technology. The Swedish socialist paradigm is to be supportive of large corporations (including providing health care, education, benefits to employees) paid for by demands on a fair share of the profits via taxes and to expect corporate responsibility in return.
This paradigm no longer works in the globalised world. The very paradigm of shareholding – and I don’t blame any shareholder for this – is to demand that operations move to countries where costs are lower. Replacing labor with machines boosts profits too. The whole thing is fueled by bank credit, where owners and corporations borrow furiously to invest in new technology. However, there are only so many corporations to put your money into. So corporations have to compete with each other to appear attractive to investors. Governments are stuck with boosting national competitiveness by legislating or allowing lower wages, it tempts them to demand less tax which in turn undermines the original social contract.
When you look at it this way, you see corporations competing themselves into oblivion, buoyed up by governments eager to be “competitive as nations”. The result has been a global dwindling of corporate profits, dividends paid out rather than invested back into new market and product development, lowering of wages and increase in income gaps as corporations fight to retain core talent. (If you don’t believe the above just go and check.) With taxes being lowered by nations or corporations simply hiding taxes via tax havens, the ability of government to provide for its people declines. And with less and less money in their pocket, citizens buy less, causing corporations to have to compete harder, lower prices, which in turn leads to further cuts in labor and so on.
I said in the introduction that the breakup of Ericsson’s cozy relationship with Sweden was probably the best thing to happen for ages. It is, because it offers a chance for everyone at every level of society to sit down and talk about framing a new paradigm. It is patently clear that Sweden as a nation is not going to be able to “be competitive” in the global economy having let ownership go of so many of its high-tech darlings; SAAB, Volvo, ASEA and its steel industry to name a few. It is also clear that this cold, mostly infertile land lacking any fossil fuels reserves will not be able to provide the high standard once enjoyed by even the poorest Swede.
Swedes are socially innovative as well as being good industrialists. There are many ideas out there including basic income, localization, redesigning the monetary system and creating biomass-centric municipalities. They all however require shifting away from the industrial capitalist paradigm. Sweden has changed before. From warrior vikings to accomplished traders, from feudal lords over wretched serfs to a pinnacle of socialist welfare Once upon a time, union representatives, industry and government sat down at the same table regularly and talked. They had coffee together, knew each other quite well and had great respect for each other. They talked about important stuff because they all genuinely cared about people and Sweden beyond their immediate pay check.
It’s time we had those conversations because with Ericsson going away the challenges are just mounting up by the day. The whole world needs to find a way to go fossil-free in an equitable way fast. The industrial capitalist paradigm is not up to the job. If Sweden can’t hack it I doubt any other country can. I tell you what. I’ll book the room. Will you come if I put the coffee on?
Stephen Hinton Consulting 