What if we’re just building the wrong products and services?

I was thinking about the economy at large today and was wondering about the role of unit costs regarding employment. Finnish politicians are obsessively trying to put together a “society agreement” that would basically state that everyone collectively agrees on a certain set of measures to get Finland back on track.

The basic premise in this agreement is that we should be able to get a 5% bump in productivity. In the beginning it was stated that (quite poorly, to be honest) that people should work slightly longer to achieve this. It has since then turned to discussion about issues related to holiday pay and other benefits that would improve the mathematical output per cost.

The argument behind all this is that Finland’s unit costs have risen the fastest in EU since the last 10 years. This can be seen in the graph below.

2015-finland-unit-costs

It is believed that if we are able to get these unit costs down, we are able to push ourselves back to the growth track.

However, if there’s one thing that I’ve learned in working with UpCloud and previous companies is that there is never really any single reason that is holding back your growth or preventing you from achieving something. It is usually a group of smaller reasons that most likely aren’t obvious in the beginning.

It dawned on me that what if our unit costs doesn’t really matter? Unit costs surely matter on the public sector which has inflated quite a bit in the last 10 years, but keeping those down doesn’t help Finland’s economy grow. We need exports. Exports only happen when there are industries and companies creating products and services the markets demand.

What if the real issue is that we simply aren’t building things that the world wants?

Nor are the products refined to such a scale that the market is willing to pay a decent amount of money for them. Much of Finland’s exports currently are to do with very basic, highly competed industries. Top 5 goods exported, according to Statistics Finland, in 2014 were chemical industry products (23.1% of total exports), forest industry products (20.1%), metal and metal products (14.4%), machinery and equipment (12.8%) and finally – electric and electronics industry products (12%).

To me, these sound awfully low level goods regarding value creation. Forest industry products is certainly something where we can have somewhat of a competitive edge, but the others not so.

Here are the top five industries exporting in the US in 2014; machines, engines, pumps: (13.5% of total exports), electronic equipment (10.6%), oil (9.7%), vehicles (8.4%) and aircraft, spacecraft (7.7%). These top 5 industries account for 49.9% of all exports.

And our dear neighbouring Sweden for 2014: machines, engines, pumps (15.5% of total exports), electronic equipment (10.7%), vehicles (9.8%), oil (8.1%) and paper (6.2%). In total, these 5 industries account for 50.3% of all exports.

The top 5 industries in Finland account for 82.4% of our exports. I think the problem, when looked like this, is pretty clear. Our economy is incredibly skewed towards these large industrial companies.

I believe our problem isn’t high unit costs, but the structure of the economy dominated by only a few industries.