Electrolux: Sweden, Juarez, Quebec, Memphis....

[molly]

This article analyzes the decisions of one company to move
manufacturing operations to different places based on labor costs and
other factors. It's a really excellent look at a complex topic. I
talked to the reporter during his research for the story. molly

http://www.commercialappeal.com/news/2011/sep/18/straberg-strategy-cutting-costs-electrolux-memphis/
Straberg's Strategy: cutting costs led Electrolux to Memphis
By Daniel Connolly

Sunday, September 18, 2011

Hans Straberg had fired hundreds of people before. But shutting down
the Electrolux vacuum cleaner factory at Vastervik in southern Sweden
was different -- it was Straberg's hometown.

He was born in Vastervik and grew up on a farm nearby. And he had
worked as the plant's manager.

Now, as worldwide CEO of AB Electrolux, Straberg was leading the
process of eliminating about 500 jobs in high-wage Vastervik and
moving production to low-wage Hungary.

Electrolux has cut thousands of workers around the world in recent
years as it searches for low-cost manufacturing sites. Even though the
company is based in Sweden, it has shown no more attachment to its
workers there than anywhere else on the globe.

Shutting down the Vastervik plant wasn't an easy choice, Straberg
said, but Electrolux had to face facts -- wages in poor countries were
in many cases less than a tenth what they are in the industrialized
West, competitors were making cheap products in China and other
countries, and ordinary customers wouldn't pay extra for a product
just because of where it's made.

Straberg said he'd met the Vastervik workers, union representatives
and managers, according to a 2004 transcript of a presentation.

"I understand their concern," he said. "But the major cost differences
speak a language of their own."

As Electrolux CEO from 2002 until last year, Straberg would oversee at
least 16 plant consolidations or shutdowns, most of them in the
wealthy world, as well as the construction of new plants in developing
countries such as Mexico and Thailand.

One of the last steps in the cost-cutting process was the company's
2010 decision to shut down a unionized kitchen appliance plant in
L'Assomption, Quebec, and build a new one in Memphis, where unions are
weak and wages and transportation costs will likely be lower.

Memphis is benefiting from Straberg's strategy.

For now.

The company's history suggests that if its leaders ever concluded that
leaving Memphis would boost profits, they would do so.

The contract that local and state officials signed last year with
Electrolux after a round of secret meetings blocks governments from
recovering most of the money invested in the project if Electrolux
fails to create the desired number of jobs or leaves early.

If Electrolux leaves, local officials would have a modern, high-
quality factory and a developed industrial park to sell to another
company, said Mark Herbison, senior vice president for economic
development with the Greater Memphis Chamber.

But the city has struggled in the past to get new manufacturers to
move into abandoned industrial property. For instance, officials had
hoped in the 1970s that a division of General Motors would move into a
plant that television manufacturer RCA had left behind, but it didn't
happen.

The Memphis market currently has 24.4 million square feet of vacant
industrial space, including warehouses, according to a report from
data company Xceligent.

However, local leaders have sometimes succeeded in finding new uses
for abandoned factories. Incentives led Birmingham Steel to build a
mill here in 1995, but the plant closed in January 2000. More than six
years later, successor Nucor Corp. announced plans to revive the mill,
and has since done so.

"These are risky deals. But they have huge payoff and huge benefit,"
Herbison said.

Through a spokesman, Straberg declined an interview request.

Another Electrolux representative said Memphians shouldn't worry --
the company's investment here is simply too large for a quick exit.

"Once we make that massive investment from our side, it's very
difficult to pick up and move," said Thomas A. Vining, a vice
president of engineering. "You're talking about years and years and
years before a company will reconsider moving a manufacturing plant
that they've put in place."

The current estimated cost of building the factory is $190 million.
State and local governments are expected to contribute $137 million in
immediate construction costs, more than twice the company's
anticipated contribution of $60 million.

For years, Straberg and other Electrolux executives openly discussed
the strategy of moving to low-cost areas. But Memphis officials who
lobbied legislative bodies to pump tens of millions of dollars into
the project rarely mentioned how their city fit into the company's
broader plan. Instead, the focus was on Electrolux the good corporate
citizen: Promotional materials for the project mentioned various
awards the company has won for social responsibility and building
environmentally friendly products.

Electrolux's pattern of cost-cutting and consolidation isn't unique.
Other competitors have followed similar strategies. Whirlpool, for
example, recently closed a refrigerator plant in Evansville, Ind., and
moved the jobs to Mexico.

Global firm takes form

If you were to create a company that's emblematic of the global
economy, it might look a lot like Electrolux. It's based in Sweden,
but holds its board meetings in English, the world's common language.

Top managers come from countries that include Brazil, Jamaica and
Germany. The CEO who took over when Straberg left last year is a U.S.
citizen named Keith McLoughlin who graduated from West Point.

Electrolux is generally regarded as the world's second-largest home
appliance maker after Whirlpool. It sells products in 150 countries
and recorded 2010 revenue of $106.3 billion Swedish kronor, or $15.9
billion.

The company traces its history back to a kerosene lamp company called
AB Lux that was established in 1901. In 1919, a deal between
predecessor companies led to a new company, Elektrolux. The company
later changed the "k" to a "c".

Even in 1928, the company had 350 worldwide offices, according to the
International Directory of Company Histories.

The company's international reach had much to do with the efforts of
the man credited as its founder, a Swedish entrepreneur named Axel
Wenner-Gren.

With interests in everything from newsprint to matches to weapons of
war, Wenner-Gren became one of the wealthiest men of his day and once
paid $2 million to Howard Hughes for an extravagant yacht called the
Southern Cross.

Wenner-Gren got his start as a vacuum cleaner salesman, adopting
techniques such as door-to-door sales. Company legend has it that he
even sold Electrolux cleaners to the Vatican.

For many people, the Electrolux brand is still synonymous with vacuum
cleaners, but today they make up just 8 percent of the company's
sales. Laundry and kitchen appliances make up 76 percent. In North
America, Electrolux sells its mass-market products under the
Frigidaire brand and reserves the Electrolux name for premium items.

Electrolux made hundreds of acquisitions in recent decades, and by the
time Straberg became CEO in 2002, the company had "too many factories,
too many brands, too many production platforms and too many
employees," The Financial Times wrote.

Straberg earned a master's degree in science and engineering from a
Swedish university. He briefly worked for the Swedish Embassy in
Washington before joining Electrolux and working his way through the
management ranks, according to the publication Who's Who In European
Business and Industry.

When he became CEO, he was "only 45 years old and barely known outside
Electrolux," The Economist magazine wrote.

But communities around the world would soon learn his name.

In December 2002, the company announced its first round of worldwide
cuts.

Even some facilities in low-wage countries such as China and India
faced reductions, and an air-conditioner factory in Edison, N.J.,
would close.

Between 2002 and 2011, the company's worldwide workforce shrank from
82,000 to about 52,000.

The case of Greenville, Mich., was typical.

In the early 2000s, Electrolux spent $100 million to build updated
refrigerator-making facilities there, but it faced production
problems.

In late 2003, the company announced that it was considering shutting
down the unionized 2,700-employee refrigerator factory and moving
production to Ciudad Juarez, a Mexican city on the border with Texas.

The key issue was wages: Michigan workers were earning $13 to $15 per
hour plus benefits, the Grand Rapids Press quoted Straberg as saying
in a conference call with analysts.

Straberg also said many competitors were already taking advantage of
Mexico's low wages.

In 2003, male factory workers in Ciudad Juarez were earning the
equivalent of $1.89 per hour, with women earning slightly less,
according to an article co-authored by Cesar Fuentes Flores, a
professor in the city. By 2006, the wage for men had risen to about
$2.18 per hour. Pay hasn't risen much since then, the professor said
in a phone interview.

Desperate Michigan officials pleaded their case to Straberg and other
Electrolux representatives, offering tax credits, union concessions
and a new building, a package worth a combined $182.6 million, the
Detroit News said.

But it wasn't enough. The Greenville plant cut its last workers in
March 2006.

The L'Assomption case was similar. The company began looking hard at
the plant last year. It was an old facility, and it wasn't centrally
located for its task of making ovens and other appliances for the U.S.
market, Vining has said.

Memphis vs. Mexico

The company initially looked at moving to Mexico but expanded the
search to the southern U.S., picking Memphis instead of Alabama and
North Carolina, Vining said.

So if Straberg had set a course years earlier to move to low-wage
countries, why didn't Electrolux move the L'Assomption production
straight to Mexico?

There are many reasons. First, Electrolux will likely achieve some
wage savings in Memphis.

The company has said it will pay an average of $14.65 per hour plus
benefits in Memphis. That's far more than it would pay in Mexico, but
significantly less than it is paying in Canada.

The base hourly rate in Quebec for production workers is $18.92 U.S.,
though inexperienced workers earn less, according to a union contract.

The Memphis location offers other savings.

"You know where gasoline and diesel costs and oil costs are today,"
Vining said. "That whole Tennessee, Kentucky ... for distribution and
incoming materials is probably the lowest-cost region of the country
for appliance manufacturers from a transportation standpoint."

Electrolux can also work with suppliers that serve the Electrolux
plant in Springfield, Tenn., and competing manufacturers, he said.

Violence in Ciudad Juarez was another factor, Vining said.

Drug gangs kill for control of smuggling routes. But the city's
legitimate factory jobs also contribute to its troubles, said Molly
Molloy, a reference librarian at New Mexico State University who acted
as interpreter on the book ''Murder City.''

Most factories in Ciudad Juarez don't pay enough for people to afford
the basics, so adults work very long hours and often leave children
alone, she said.

That contributes to gang recruitment, social breakdown and what Molloy
calls "hyperviolence" -- about six people are killed each day, and
nearly 9,000 have died since January 2008.

Yet another key reason Electrolux passed on Mexico was the incentive
money that Memphis and state leaders put on the table, Vining said.

In a room high in Electrolux headquarters near a waterway in downtown
Stockholm, the company's board weighed the fates of L'Assomption and
Memphis.

One of the people involved was board member Ulf Carlsson.

Reached by phone in Sweden, he wouldn't talk specifically about what
people said about Memphis.

"You could always say that we are trying to stop closures of factories
and always tell the company to try to find another solution," Carlsson
said.

He's one of three trade unionists who serve on the global
corporation's 12-member board -- it's a legal requirement in Sweden.

Another union representative, Gunilla Brandt, said she understands
that competition is driving the move to low-cost areas.

"As a board member, we aim for the company to be profitable and
competitive. This is the goal for all of the board, including the
union representatives," she said.

Both Carlsson and Brandt say they try to help laid-off workers by
actions such as finding another company to take over shuttered plants.

Carlsson said he has personally traveled to deal with Electrolux plant
shutdowns in Australia, Denmark and Italy, and the towns of Motola and
Vastervik in Sweden.

He hasn't been to Quebec, where workers at the L'Assomption plant got
the bad news on Dec. 14.

One of the people who was there was David Chartrand, an official with
the International Association of Machinists and Aerospace Workers
union that represents the Quebec plant.

Managers asked workers to construct an improvised stage, making sure
that there was a barrier between the executives and the workers,
Chartrand said.

You can't see the stage in a blurry, shaky video posted on
youtube.com, but the soundtrack is clear.

When Electrolux executive Billy Benson starts speaking in English,
workers shout angrily -- people in this proud French-speaking region
seem to take it as an insult.

Someone quickly jumps in to interpret, and the executive continues. "I
have the very difficult task this afternoon of informing you that
Electrolux has decided to phase production out in L'Assomption," he
says.

Benson lays out the timeframe -- production would end in the last
quarter of 2013, and jobs at the research and development center would
run through the end of 2014.

"This was clearly a difficult decision to make. We understand the
impact it will have on our employees and the community," he says.

When the French-language version of this message lands on the workers,
they explode with boos and curses.

Throughout the rest of the video, workers interrupt with more shouts
and sarcastic cheers and laughter as executives struggle to continue.

A Canadian economic development agency called Investissement Quebec
had given Electrolux the equivalent of $4.7 million U.S. in 2008 to
modernize a center of excellence for new product development.

Electrolux has already given the money back.

"Yes, the contract said that if they didn't fulfill the condition by
buying the equipment, they would have to pay the amount," said Chantal
Corbeil, a spokeswoman for the agency.

It's a contract protection that Memphis doesn't have.

No regrets

Today, Electrolux makes nearly 60 percent of its goods in low-cost
areas, compared to about 20 percent in 2004, Straberg was quoted as
saying in an annual report earlier this year.

The restructuring will save Electrolux 3.4 billion kronor per year, or
$507.6 million.

The annual report shows a picture of Straberg handing a baton to
McLoughlin, the new American CEO, and there's a printed dialogue
between the two.

At one point Straberg calls his actions "forceful but entirely
necessary."

He expresses no regrets.

Herbison, the Greater Memphis Chamber executive, remains an adamant
defender of the Electrolux project.

"I haven't seen one story in any kind of in-depth nature that shows
what the positive impact of this might be.

"What might it be if there's 1,240 people working down there with six
suppliers in five years -- or 17 suppliers in five years? What might
that be?"

Chartrand, the unionist in Quebec, imagines a different scenario:
Economic development executives from Mexico approach Electrolux a few
years from now with an offer of similar subsidies and lower wages.

"What are they going to do?"

-- Daniel Connolly: (901) 529-5296


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