Sweden Will Hear a Soft, Broken “Saab”

In its continued struggle to reorganize and avoid a disastrous bankruptcy, General Motors has announced its intent to spin-off Saab, as well as several other product lines by 2010. In response, the Sweden-based subsidiary filed for bankruptcy protection domestically. Saab’s lack of profitability under GM management can be partially explained by Swedish labor policy, a policy which seeks to minimize wage differentials and stabilize wage growth across industries. As a result, General Motors sustained persistently high labor costs in the face of shrinking sales, and therefore continued to lose money on its European investment. Furthermore, the current coalition government’s reluctance to make an equity investment in Saab is indicative of recent policy shifts regarding the privatization of state-owned assets. Ultimately, the future of Saab automobiles will have a profound influence on the structure of the economy moving forward, and cannot be ignored by the Swedish government.

In 2000, when General Motors bought the remaining half of Saab from Investor AB, the Swedish government, unions and employers were readying a guideline [wage] agreement to cover the entire labor sector for three years. One aspect of the agreement specified hourly wage increases per annum, regardless of the market environment. This disconnect between wages and the value of a workers marginal value product has long been a criticism of the Swedish welfare state and would plague General Motors throughout the new millennium. If wages do not reflect scarcity values, jobs in industries with high demand will not experience an increase in labor supply while no labor exodus will occur when profits dissipate from failing firms. In GM’s case, shrinking global demand for the Swedish automobiles was not met with a subsequent decrease in input costs due to wage stabilization efforts from Swedish labor unions. Indeed even in the previous decade, while a healthy pace of productivity increase did minimize the rate of labor cost increase the slow rate of price increases for manufactured goods in international markets still squeezed profits.

Though the benchmark for national wage growth projections is based on price forecasts for Swedish exports, the calculation of future prices has become increasingly difficult to measure, especially in volatile market environments. Therefore a set rate of growth for wages over time may lead to losses if a lack of demand drives the price of Saab cars down in world markets. And indeed, according to a press statement made by GM Europe, Saab is “suffering from a decline in demand for its products, an aging product portfolio with non-competitive lifecycles, and a narrow product offering” among other ailments. With the wage bargaining process becoming increasingly decentralized, one may think that such miscalculations may be corrected by gains derived from more specialized, highly focused research. Yet regardless of whether wage bargaining is taking place on a national or individual firm level, the fact that Sweden’s manufacturing costs are consistently among the highest in Europe is evidence that the labor unions continue to have an adverse effect on the relationship between export prices and domestic wages. The negotiations between labor unions and their employers are undertaken under the stewardship of the government, and any market inefficiency that results from these negotiations should be therefore corrected by the government.

Yet labor policy is not the only aspect of the Swedish economy which has uniquely influenced Saab’s business model. In 2006, when the coalition government led by moderate Prime Minister Fredrik Reinfeldt took office, they began a privatization policy reminiscent of Margaret Thatcher in the 1980’s. The governing party targeted six companies, either wholly or partially owned by the state, and sought to auction off capital shares to private investors. Further imitating the “Thatcher” model, Frederik pledged to use the proceeds from privatization to pay down government debt and to cut Swedish tax rates, which are among the highest in the world. The auctions can be seen as the first step away from the high level of corporatism once characteristic of the Swedish economy. It is also a vast departure from Sweden’s previous attempts to reduce capital concentration, where taxes on a firm’s “excess” profits were redistributed to investment funds managed by labor union representatives (Kennett p.174). The funds then used this money to buy stakes in the companies they worked for, with limitations on the percentage of a company that any individual fund could own.

In the midst of such a deliberate sale of state assets, the notion that the Swedish government will buy an equity stake in an unprofitable domestic auto company seems counter intuitive. This may help explain why a spokeswomen from the Swedish ministry of industry states that while Saab would be eligible to receive help through loan guarantees that all Swedish car-makers can access as part of a support package guarantees for working capital are not on the table. It seems that the Swedish government is prepared to provide debt financing to Saab during its re-organization process, in hopes that a private investor will buy an ownership stake in the company thereafter. Yet the global credit freeze and conservative investment ideologies may hinder any potential investor from taking the reins of a company that has remained unprofitable for over a decade, even through periods of strong economic growth.

Although the current governing party has taken dramatic steps to alter the country’s capital structure, it seems to be continuing the active labor market principles intended to keep unemployment low and guarantee each citizen the right to work rather than the right to income. The Swedish government has recently applied for funds from the European Union intended to support jobless claims if a collapse occurred. Such unemployment benefits could be viewed as disincentives to work if they were not coupled with Swedish restrictions. Jobless benefits are contingent on active job search and subject to strict time limits. Furthermore the government sponsored labor exchange programs which offer high levels of individual attention to each job seeker would help align the skills of displaced autoworkers with vacant positions in other industries. If no suitable vacancies exist, the government will retrain workers at their own expense. Such a program ensures that labor will flow into industries experiencing shortages, since Sweden continues to maintain some level of wage solidarity and therefore lacks the price mechanism which serves as an incentive for changing jobs. The combined EU funding and existing re-training programs are both set to ensure that distressed Saab employees would have save some type of safety net to fall back on. Yet, with 15,000 Swedish jobs believed to be at risk if the company closed, there is some concern that the existing infrastructure may not be large enough to handle such an influx of unemployed.

Under the assumption that Saab cannot find sufficient interest from private investors, the Swedish government faces the dilemma between letting a key area of its export-oriented manufacturing sector go bankrupt or nationalizing a failing automotive company in a shrinking global market. Both decisions would force the state to absorb heavy losses, although the exact amount is difficult to gauge. If Saab goes bankrupt, then the financial burden of the unemployed will fall heavily on the welfare state. The labor exchange and retraining programs would most likely suffer severe back-ups resulting in much longer spells of unemployment. The wide array of public services offered by the state are heavily dependent on high income tax rates, and the subsequent loss in tax revenue will force the Swedish government to cut funding on various programs. Furthermore, an increase in government spending done in tandem with the tax cuts proposed by Prime Minister Reinfeldt will only widen the fiscal deficit.

On the other hand, buying an ownership stake in Saab would subject the Swedish government to the same losses that plagued General Motors for almost 20 years. Furthermore, a nationalization of Saab might also result in the nationalization of Volvo, as well as other automotive brethren. Once rescinding on the “hands-off” approach that the moderate led coalition has taken, it may be difficult to turn back, thus pushing Sweden towards the more socialist side of the “middle-way” described in David Kennett’s text. The government would again have a direct hand in labor negotiations with the auto-workers union and elements of the centralized wage bargaining process may once again be resurrected.

The current state of Saab automobiles is partially a result of wage bargaining agreements between a highly unionized Swedish labor force and employer federations. The continued disparity between export prices of Saab automobiles and wage growth is evidence that such wage forecasting and negotiation is inaccurate, leading to market inefficiencies and the persistence of unprofitable firms. Although the current coalition government has made a strong move towards privatization, Saabs future should be taken under the stewardship of the Swedish government, just as they enacted the labor policies which helped shape Saab’s business model. This effort will be costly, but the alternative effects of bankruptcy on the Swedish labor system would be extremely detrimental to the country’s economic future.


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