Nokia's woes cast doubt over Finnish model

HELSINKI Fri May 18, 2012 6:01am EDT

HELSINKI (Reuters) - Troubles at Finland's Nokia Oyj (NOK1V.HE) aren't just bad news for the company, its staff and shareholders. They're also a warning sign for the small Nordic country's welfare model.

Just as Nokia's sure touch with well-designed, consumer-friendly products seems to have deserted it, fears are growing that Finland, whose reputation for innovation rested largely on the handset maker's success, may be losing its competitive edge.

While Finland remains one of the few triple-A rated countries in the euro zone, its reputation as an egalitarian society with a stellar education system belies worries about a decline in once-mighty export manufacturers and a rapidly ageing population.

For the 5.4 million Finns, the message is stark: prepare for tougher times, later retirement or lower pensions. And for government, the need is to encourage business growth beyond traditional mainstays like forestry while balancing social commitments with economic realities.

On Tuesday Finland reported a second straight monthly current account deficit. For 2011 as a whole, it posted a deficit of 1.3 billion euros ($1.7 billion) due to slower export growth.

"It's useless to dream of achieving the same levels that we had between the booming years of 2001 and 2007," said Handelsbanken economist Tuulia Asplund, referring to the years of strong industrial growth.

Economists expect the economy to contract or barely expand this year. Many forecast growth of just 1 or 2 percent in the next few years - not bad compared with some more troubled European economies, but not enough to alleviate strains on the pension system in one of the region's fastest-ageing societies.

With its baby-boom generation retiring and living longer, and without Norway's oil or Sweden's diverse and internationally successful corporate sector, Finland's welfare model looks particularly vulnerable.

NOKIA RELIANCE HARD TO SHAKE

Nokia's downfall has hit business activity as well as national pride. At its peak, Nokia accounted for 4 percent of Finnish GDP and supported a myriad of companies as suppliers. Today it contributes closer to 1 percent, according to analysts.

Electronics maker Elcoteq, which lost the bulk of its business when Nokia switched to cheaper Asian suppliers, filed for bankruptcy last October. Software firm Digia Oyj (DIG1V.HE), another Nokia supplier, reported a 45 percent fall in first-quarter profit.

Many Finns are still hopeful for a turnaround at Nokia, a former rubber boots maker whose rise helped transform Finland from a Nordic backwater. At a recent shareholder meeting in Helsinki, some investors were sentimental.

"It probably has nothing to do with numbers. I have to believe in it since it is this famous Finnish company," said one shareholder, Tomi Lahti, when asked why he still held shares.

The stock is down over 95 percent from its 2000 peak. It fell to around 2.20 euros on Wednesday, a level not seen since 1996.

Some younger Finns, however, are eager to move on from Nokia.

"I think we generally need to start thinking with our own brains and not just rely on relics of the past that others built," said Vilppu, a university student in Helsinki who didn't give his family name.

NO SAVIOUR

One ray of hope has been fast-growing Rovio, maker of Angry Birds, a simple yet addictive game in which players use a slingshot to attack pigs who steal birds' eggs. Sales grew tenfold to $100 million in 2011.

Last year it attracted $42 million from investors led by U.S.-based Accel Partners and it is aiming for an overseas stock market listing.

Yet games companies don't hire or spawn a chain of suppliers in the way Nokia and other manufacturers do. Rovio's headcount has risen by around 200 from 20 over the past year - an employment pinprick compared with the thousands of job cuts at Nokia and its suppliers.

Last year, Nokia laid off around 3,000 workers in Finland.

Economists say there's no "silver bullet" solution. Some say looser bankruptcy laws would aid entrepreneurs, but it's hard to see such a measure having a dramatic short-term impact. There's also resistance to such a reform in Finland where fiscal responsibility is considered a virtue.

The government is already investing heavily in encouraging new business. In 2011, it spent 610 million euros on research and development projects through state fund Tekes, in addition to efforts at universities and other institutions.

Despite such funding, not a single company, excluding spin-offs from existing listed entities, has gone public on the Helsinki Stock Exchange since the 2007 listing of construction group SRV (SRV1V.HE).

Some wonder if the state does too much.

"The government should be geared to operate only where the market fails," said Otto Toivanen, a Finn and professor of managerial economics, strategy and innovation at Katholieke Universiteit Leuven in Belgium. "There should be more of an exercise, at least a mental exercise, of how businesses and entrepreneurs will act without government."

JOBS LOST FOREVER

The state has played a particularly big role in traditional industries such as forestry and metals.

State shareholdings, however, have not protected paper mills or steel makers from global competition. Papermakers Stora Enso (STERV.HE) and UPM-Kymmene (UPM1V.HE) have been closing mills and cutting jobs in recent years due to pricing pressure and weak demand.

With some exceptions, such as the sale of Stora's Summa Mill to Google Inc (GOOG.O) for a server farm, mill closures are often permanent. Finnish unemployment is not too high for Europe at 8.5 percent, but is at 24 percent for people under 24.

"Many of these jobs are lost forever," said Sampo Bank Chief Economist Pasi Kuoppamaki. "We need real industry to replace what we've lost."

The opposition Finns Party took advantage of such insecurity in last year's elections. Its call to preserve a Finnish way of life appealed to rural voters in particular.

The government, led by conservative Prime Minister Jyrki Katainen, is well aware of such sentiments.

While it recently announced budget cuts for the next few years, it also mixed in stimulus measures such as corporate tax breaks to encourage R&D spending and adopted an English-language buzzword: "growsterity".

Most economists believe Katainen will need to make tougher choices if the economy remains weak.

"We will need to prolong working life. It could mean raising retirement age, or it could mean starting working life earlier," Kuoppamaki said, referring the long years Finnish youth stays in school. "In any case, it would be difficult."

(Additional reporting by Eero Vassinen; Editing by David Holmes)