The genesis of Nokialand
The structure of Finnish industry has changed radically in the past two decades. A State-led industrial policy has given way for a market-centred one, whilst the banks have had to surrender their dominance of the financial world to the stock exchange. In principle, the process of change taking place in Finland (Suomi) is largely similar to what other western countries are experiencing, but the reconfiguration of sectors is a lot more radical and profound than anything seen elsewhere.
In the beginning of the 1980s forests and metal dominated industrial output in Finland. The electrotechnical and electronics industries played second fiddle to these main sectors. Nokia's main products were soft tissue, tyres and heavy-duty cables. The company also manufactured computers and telecommunications equipment, but the prospect that these would enjoy success was usually viewed sceptically.
The number of listed companies in autumn 2000 was 161, of which 109 were on the main list.
Of the 50 companies that were on the list in 1980, only ten are still under the same name and operating in more or less the same sector.
About one in four of the companies currently listed was established after 1980.
In 1980 the Helsinki bourse had an annual turnover of 2 billion markkas (in terms of today's money) and its capitalisation total represented around 4% of GDP. Finance was dominated by Finnish banks which, together with their allied insurance groups, held controlling interests in nearly all of the country's large companies.
The structure was similar to what was found in Germany and also Japan. These countries were proud of their system based on cross-ownership, consensus and cooperation between industry and the government. It was a capitalist economy, but hardly a market one. The system came under strain when economies began to be liberalised. Finland, however, enjoyed two advantages. The pension insurance institutions that play such a central role in capital formation and the sexy business of the final decade of the century, telecommunications, were both already fairly fragmented sectors mainly in private ownership.
From bank power to bourse power
Finnish money markets were thrown open to international competition in the 1980s. Inflation fell to an insignificant level, but the Finns still remembered the days when inflation paid their interest for them and invested heavily using borrowed money. A building boom in both the public and the private sector was fuelled by over-investment using foreign capital, in addition to which loans denominated in foreign currency were used to invest on the stock exchange.
The interest and exchange-rate risks that this created came home to roost when the economy plunged into recession in the early 1990s, a development that was further exacerbated by an international slump in real-estate prices. The stock exchange's importance in corporate financing had increased almost to the international level, but now there was a severe setback. The country's banking system fell into crisis, requiring considerable injections of funds on the part of the State and accelerating mergers.
The economic policy pursued since the end of the Second World War had been founded on boosting export industries, a high savings rate and money channelled through banks. The domestic market sector was fairly underdeveloped and too small to serve as a buffer against cyclical fluctuations. Nevertheless it, too, had invested strongly, using mainly foreign credits. Therefore the substantial devaluations of 1991 and 1992 triggered a wave of bankruptcies.
The crisis led to a successful rationalisation of the public sector and taught companies the importance of a healthy balance sheet. By the late 1990's the average gearing of Finnish companies had improved to near the 50 per cent internationally accepted as good, having been down around 20 per cent in the beginning of the 1980s. Investments have been dimensioned on the basis of cash flow and capacity to self-finance.
Stock markets are now a central source of capital. Companies have become relatively independent of banks and the banks' risk concentrations have diminished. The expectations and risks of the economy have been focused on the IT business in a new way.
IT - locomotive and risk
In the early 1990s Nokia underwent its own crisis, which led to a radical pruning operation that saw several business segments discarded. In the core sector that it had chosen, mobile phones, the company became the international market leader. As profits grew, the Nokia share price increased a hundred-fold.
Nokia shares created a large number of new very rich households in Finland and put billions in the coffers of research and cultural foundations. Several tiny companies have grown into large ones that thrive as Nokia subcontractors. Nokia and its executives who have cashed in on their options as well as shareholders who have sold out have paid an awful lot of taxes. Rarely has a single company had such a substantial beneficial effect on a whole nation's economy. In only a few years Nokia has made Finland a substantially wealthier country. This change is permanent whether or not Nokia can maintain its growth momentum for a long time to come. Whether or not Nokia's capitalisation value in 1999-2000 really deserved to exceed Finland's GDP, which after all was six times Nokia's turnover, is entirely another matter.
Since the largest privately-owned telephone company, now called Elisa Communications, and Sonera, in which the State still has a majority shareholding, gained their listings, Nokia and the two largest telecoms operators have between them accounted for nearly 80% of the Helsinki bourse's total capitalisation (when their share prices were at their highest levels). Share launches by IT companies have been spectacular successes. Their PE ratios have been as high as 100 at a time when those of companies in traditional industrial sectors - which have likewise been growing and profitable - have been as low as 10. A fall in the price of IT shares that began in autumn 1999 continued in a pretty managed fashion in 2000 and without panic, as in other parts of the world. IT and telecoms are already "basic" industrial sectors. It is important from the perspective of balance in the markets to shed some of the romanticism that has surrounded them.
The phenomenon that has been dubbed "napsterisation" (copying without paying royalties) could move a part of the "new economy", i.e. e-commerce, into an area where the traditional safeguards that have protected industrial rights and a steady cash flow become irrelevant and risks increase to the point where "old-fashioned" industry and commerce possibly regain some esteem in the minds of investors. Pension funds - which account for the bulk of the money invested through bourses - should be kept, at least partially, in something more tangible than a virtual economy. Manufacturers will not lose in a situation like that, either. And a manufacturer is what Nokia is.