Investments and Financial Analysis An investigation of the capital formation in the Swedish Machinery and Metal Industry Segments

Abstract

By constructing capital stocks for two distinct industry segments within the Swedish manufacturing industry, this study explores the overtime development of the physical capital formation in manufacturing capabilities while it key factors affecting investment decisions are discussed. The research of this study which was based on the 1987-2004 timeframe partially shows that predominant companies with persistent poor EBIT-margins across the 18-years period also tend to reduce capital tied in machinery and equipment simultaneous to rationalizing headcounts. Additionally, as revenues steadily increased in these companies, the effects of increased capital turnover and capital utilization showed insignificant profit improvements. Appropriate explanations could be the lack of cost control, ineffective manufacturing capabilities and squeezed sales margins forcing companies to poor profit margins. By contrast, companies in both segments that yielded an all time high profitability also continued investing in machinery and equipment as an integral capital asset needed for manufacturing capabilities as well as employing new recruits. Successful companies participating in The Machinery Industry Segment showed not only an ever sustainable and relatively higher EBIT-margins, these companies also improved manufacturing capabilities by perpetual investments in machinery and equipment. On the other hand, successful companies participating in The Metal Industry Segment were found to be relatively more machinery and equipment intensive with a continuously high share of fixed capital tied in machinery and equipment. Aside from a fraction of companies, the greater majority never recovered from the high pace of machinery investments enjoyed before the 1992 Financial Crisis. Simultaneously, other capital assets such as IT-investments were introduced to increase in significance and contributing to total productivity gains. A post-1992 comparison of the two segments showed an investment willingness upswing in the Metal Segment while the Machinery Segment continued lagging behind. Whereas a fraction of companies despite of size continue soaring in both industry segments, remaining majority studied tend to suffer from declining profits and growth far below industry average as well as showing restrains in expanding operations in manufacturing capabilities. Whereas the globalized economy continues internationalizing the Swedish manufacturing industry, new rules of competition make domestic survival questionable. This quandary also raises the question of how this development is perceived by the intentional investors’ community and whether described profitably levels advocate increased foreign direct investments into the two industry segments. Thus, thorough company level analysis is suggested to frame why some companies never manage to grow strongholds in manufacturing capabilities inside Sweden but instead are forced to shutdown or intensify offshoring activities to combat global competition. As a final remark in this vein, the ultimate question should not address what the Swedish Manufacturing Industry should do for Sweden but rather what Sweden should do for these companies to retain a strong competitive position domestically and contribute to the Swedish economic prosperity.