Swedbank: Labor cost rise puts industry in vulnerable position

The wood industry provided a boost to Estonian exports. Pictured: Arcwood (Peetri Puit) factory in Põlva.
The wood industry provided a boost to Estonian exports. Pictured: Arcwood (Peetri Puit) factory in Põlva. Source: Jaanus Lensment/Postimees/Scanpix

Around one-third of industrial enterprises will find themselves in a vulnerable position due to continued growth in labor costs within the coming three years, Raul Kirsimae, head of the industrial companies unit at Swedbank Estonia, said.

Swedbank has analyzed the financial data of some 150 industrial companies operating in Estonia to determine the effect of growing labor costs on businesses' financial results and the sustainability of their business models, the bank said.

"If rapid wage growth continues, these companies' earnings before interest, taxes, depreciation, and amortization (EBITDA) may fall below two percent, which is critically low," Kirsimae said.

He added that if investments are postponed, economic conditions do not improve and volumes and prices fail to grow, businesses' investment capability will fall to a level where it is also difficult to finance new investments. 

"If investments are postponed, businesses' capability to cope with increased price competition will deteriorate, too," he said.

Kirsimae noted that it is crucial that technological changes be implemented at quickly in the industrial sector in cooperation between businesses and the state and using both existing and new measures.

"Investment capabilities will have declined notably in a couple of years and the competitive position will also have deteriorated. Investments are facilitated today through lower technology prices, a wider range of potential use for robots and the availability of digital solutions," he added.

While the average wage growth has been around 2-3 percent in Europe over the past three years, the corresponding figures in Estonia's industry have remained at 6-8 percent.

"What has helped so far, in addition to the smartness of our entrepreneurs, is fast revenue growth and a favorable export market situation. The negative impact of rapid wage growth has been most notable in the production of building materials and other areas of the processing industry, including the textile and furniture industries," Kirsimae said.

For entrepreneurs, rapid wage growth means that investments must be made to increase efficiency as well as to support product or brand development, which in turn would allow to increase prices.

"Statistics show that we are lagging behind the European average also when it comes to companies' use of digital technologies. Additionally, Estonia has ten times fewer robots per employee than the average in Europe," Kirsimae said.

"The time has come for changing business models; more capital-intensive enterprises are also better equipped to cope with international competition," the head of Swedbank's industrial companies unit said.


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Editor: Helen Wright

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