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Thursday
Nov292012

Nationalizations Take Off In France

The nationalization debate has been sizzling on France’s front burner since last week when Industry Minister Arnaud Montebourg lashed out at the world’s largest steelmaker, ArcelorMittal. He threatened to nationalize its plant in Florange where some old blast furnaces had been shut down for a year-and-a-half. At stake were 2,500 jobs. “We no longer want Mittal in France,” he told the Indian owners—though the company has 20,000 employees in France.

Breaking into a cold sweat, executives around France reevaluated their investment plans. Just then, unemployment hit a 14-year high. Creating jobs was needed more than anything. Scaring off investment was not. Whether his threat was a form of extortion or an announcement of a hostile takeover remains to be seen. But it opened the door for unions at another troubled company to demand nationalization, and the socialist government might not be able to resist.

The three unions—CFTC, Solidaires, and Force Ouvrière—that represent the workers at the shipyard Chantiers de l’Atlantique at Saint-Nazaire on the Atlantic coast demanded in a joint statement today that the government “must become totally involved  to guarantee the future of the shipyards” and must become “a majority shareholder.” Jean-Marc Perez, Deputy Secretary of the Force Ouvrière, clarified: “Nationalization is unavoidable.”

Chantiers de l’Atlantique is famous for building the largest cruise ships and supertankers in the world, including the Queen Mary 2, the largest ocean liner ever. But it’s in trouble. Its future is uncertain. Its order books are empty; no new orders are coming in. By 2013, after finishing the current projects, it will be practically without work.

MSC Croisières, its largest customer, put on hold any further investments in cruise ships. Last April, Viking Ocean Cruises cancelled its two cruise-ship orders that had been announced with fanfare just a few months earlier. And a proposal for new ferries for SNCM, a ferry operator in the Mediterranean, isn’t likely to go anywhere—SNCM was privatized in 2006, though the French government still owns 25%. And if the shipyard wants to diversify into offshore oil and gas rigs and windmills, two of the few sectors still doing well, it will face competition from companies around Europe that have specialized in it for a long time.

Employment at the shipyard is down to 2,100 workers, the lowest in its history. Of those, about 1,000 are on partial unemployment. Of the 4,000 subcontractors who still worked there a few months ago, only a little over 1,000 are left. It’s tough for companies in France [Stimulating The Public Sector, Suffocating the Private Sector].

In their desperation, the unions appealed to Montebourg for help, initially last June. Over the summer, they asked for another meeting. Without response. To draw attention to the “silence of the government,” 500 workers went on a one-hour strike at the end of September. Voilà, on October 15, when Montebourg was in Nantes for another event, the union leaders got their meeting.

Afterwards, instead of making earthshaking announcements, he only said that the government would do “its utmost” to defend the shipyard. “Our position is to find economic solutions, in other words, work,” he said. That was a bit too wishy-washy for the union leaders.

But they did sense that he was determined to maintain the shipyards and the special skill sets. Hence hope that the shipyard might not be closed and that a government sponsored program could retrain workers to build offshore oil and gas rigs or windmills. But diversification, if at all possible, would take time. The immediate solution was nationalization. Once the state owned it, closing the shipyard and laying off workers would become, for a socialist government, politically infeasible.

But ownership is already complicated. One of the largest shipbuilders globally, STX Europe owns 66.66% of the shipyard. Headquartered in Oslo, it owns 15 shipyards around the world. It, in turn, is owned by the Korean group, STX Corporation. And who owns the remaining 33.34%? The usual suspect: the French government.

The unions are blaming the majority owners, “the Koreans,” a convenient and distant target. “We don’t see the Koreans, they have done nothing. It’s the state, a minority shareholder, that finds itself playing substitute boss, even though that’s not its role,” said several union sources.

So begins another melancholic chapter in the deindustrialization of France. While privatizing state-owned companies has been all the rage since the mid-nineties, by socialist and conservative governments alike, the current morass in the private sector has stopped that process. The dominoes are lined up. Nationalization is being brandished as a solution.

The government, once it owns a controlling share, could force companies to continue operating and employ people, whether or not they have any work. But it’s an illusory solution. The government already owns a third of Chantiers de l’Atlantique, as it owns major stakes in many large companies, such as mega-utility EDF (84.4%). Others, it owns outright. Despite—and cynics say, because of— this profound government ownership, the private sector is in deep trouble, and even more government ownership is unlikely to cure its ills, but might strangle it altogether.

In France, socialism isn’t a political movement that swept the elections. And it isn’t an economic philosophy that moved once again to the forefront. But it’s part of the DNA of much of the population. And it produces some classic reactions. Read... Nationalizing Companies Is Part Of The French DNA

And here is another government-company saga: the folks at Gazprom, majority-owned by the Russian government, are reveling in the mockery that has been made of a Ukraine-Spain gas deal that would have loosened Russia’s stranglehold on Kiev. But this is what happens when you mess with Gazprom. Read....  Ukraine Crushed in $1.1bn Fake Gas Deal.

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Reader Comments (12)

The French are really great in messing the thing up for everybody else. It mainly concerns old industies (like the car one) and what they are doing is keep overcapacity. So ruining the thing also for more advanced companies in other countries. Plus the French cies are most of the time the worst around (very expensive to produce and not having much added value. Made in France works for wine and luxury goods, but for not much else.
The funny thing being that the EU considers to use its 'R&D' budget to keep some of these zombies alive.

My guess was that European countries would take 2 direction in the crisis the right (say Irish) way and the French way. Meaning higher taxes, little cutting and this kind of stuff. The French way destined for collapse further on up the road, but not very much further. The good thing about Hollande is he speeds up the process.

Anyway strange to see that investors still see the country as a sort of safehaven and for 1 or 2% annually take all the risk attached to it. Especially as collapse could be right around the corner (most of the risk is in the first period). You must be pretty desperate to do that imho.
November 30, 2012 | Unregistered CommenterRik
I cannot see what is wrong with nationalisation so long as the companies are run at at a profit and the major share holders are the general population. Part of the profit to maintain the company and part into the national coffers. Part of the wealth of the nation that governments have been busy destroying. And these governments wonder why they are running out of money.
November 30, 2012 | Unregistered Commenterme
@me
The problem with France is that non of the 3 (sorts of) companie(s) are profitable or even close.
-We wont see much shipbuilding as there have been built way to much the last couple of years.
-Peugeot is a basket case that needs urgently to be reorganised and move upmarket (you cannot produce non-luxury cars that people simply see as average at best, at wages that are 3 times higher than in Korea and in factories that are outdated. It simply doesnot work that way);
-Steel has a huge oversupply also for the coming years. Which means that from an economic pov the most expensive to operate and most outdated plants should be shut down. France ticks both those boxes. Not reorganised as labour could not be fired so no use to modernise as you still would have to pay for the surplus labourforce. Result old stuff with expensive labour.
November 30, 2012 | Unregistered CommenterRik
@me
Nationalization of companies in need is a sign of intelligent governing. It should occur on the down side of the business cycle as it may happen now in Florange, France. Silly investors usually buy companies on the up business cycle because they see good company results at the time and are unable to estimate when the end of the business cycle will occurr. When the down side of the business cycle is imminent they rush to sell. Much the same as traders of financial instruments use stops to limit losses or savegard profits.

Government intervention is a stabilization factor in the society. Since the government is by far the biggest player in any economy it is able to reduce the volatility (social disruptions,loss of technological advantage) resulting from buying, selling or dislocating companies during the down side of the business cycle.

The french shipyards Chantiers de l'Atlantique (http://en.wikipedia.org/wiki/Chantiers_de_l%27Atlantique) are amongst the most modern in the world. The lack of orders for these shipyards can only be temporary due to the global business cycle going down. To dismantle them would be a disaster - look at what happend with the UK automobile industry in the 70s - 80s.

At the beginning of this millennium Peugeot was the most sold european car manufacturer in front of Volkswagen AG. It has been and continues to be one of the most advanced technologically. Both Daimler and BMW considered joint ventures with Peugeot which did not succeed mainly because the family that controls Peugeot did not want the deal. Instead Peugeot did the right thing and invested oversees in the emerging markets. Iran is one of the biggest emerging markets for cars and Peugeot has been king overthere until the EU Iran sanctions arrived. Peugeot was forced to close down all activities with a loss of 20-30% of the annual output over the last 4-5 years.

On the upswing of the business cycle (2005-2006) Mittal bought all the steel works in France, Belgium and Luxembourg. These are the most advanced in Europe and most likely in the world. Mittal, an overindebted indian speculative investor, wants to split the Florange (France) works in two: he would keep the part that continues to provide a good profit and close down the other. This in spite of his undertakings on the basis of which he was given the right to purchase these works 5-6 years ago. The french government does not want the split because both parts are viable and one cannot be sold off without the other. It cannot allow 2000 people to loose their livelihood because Mittal has a funding problem he's trying to hide behind a steel glut. More so when there are buyers for the entire facility.
November 30, 2012 | Unregistered CommenterTon
Thanks for the discussion.

I think on this particular slice of salami, regardless of how thin you slice it, there will always be two sides to it.

If a country decides to “save” an important company, it should let it go bankrupt first, with investors losing their shirts, then offer financing (similar to DIP, debtor-in-possession, financing) to put the company back on its feet and privatize it as soon as possible. This would require restructuring, layoffs, etc. But it would make the company competitive again.

In shipbuilding, when you run out of orders, you have to drop your prices.... You’re competing with shipyards in Korea, China, and Brazil, and not all of them are out of work. To survive that, costs have to come down.

This is not what the French are doing traditionally when they nationalize. Instead, they protect jobs, “parachute” out-of-work ministers into executive positions (that they know nothing about), and protect the company against competition. Hence their efforts to stymie startups. In return, the company supports various politicians. It’s a prescription for decline.
November 30, 2012 | Registered CommenterWolf Richter
Too many people are wedded to an outmoded vision of nationalisation. Why can this company not be bought by the employees and traded as a co-operative? Could the government not buy the company and "lease" the assets to the workers?
In the UK several of our strongest businesses are run on a Co-operative basis and they work both for the employees and the customers. ( see Co-operative Bank, Co-operative Food, John Lewis Retail, Waitrose)
December 1, 2012 | Unregistered CommenterPaul Hillyard
i pick no sides in this discussion simply because the politics and finances of nations is beyond my level of education.i don't know the difference between socialism and communism.what i did notice is that China seems to have a better balance sheet than the rest of the world.they are communist.it is possible they are moving in the direction of socialism or perhaps capitalism.What is more important is that their standard of living is moving toward the higher standards of living of more developed countries.
at any rate .this recession is bull---the population of the planet has not went down---demand is building.i have no idea of what will trigger the return to normal.my guess 4 years ago,was that it would take 10 years,at best.But because of the new energy finds all over the globe,i'll go with less than 7 years.
in case you missed it,China has the largest reserves of natural gas on the planet.the U.S. will become the largest producer of energy on the planet by 2020---2017 by some estimates.
now i hope to tell you that cheap energy makes populations double and more if you look at what happened when oil replaced whale bluber
December 1, 2012 | Unregistered Commenterrogeratplay
@Wolf
1. Problem in France is simply with all 3 examples they have no viable businessplan. Companies should have moved on a decade or more ago but they didnot. Cruiseshipbuilder into other niches or shootingstuff, when it becomes a major market you can never compete with Korea/China. Peugeot simply volumes are too small, crap brandimage (it could be the best car in the world according to journalists if nobody wants to pay for the stuff in it that is completely useless). Same sort of problem with steel (I understood it is the publicity project of Hollande, they had a programm on that before the election, simply looked old and with too many people running around).
Anyway difficult to see how these things could get profitable in the next half or whole decade.
2. Problem with French interventions is that they ruining the whole EU Common market this way. Simply let a huge overcapacity exist while normally it should be cleaned up. Healthy companies say VW will effectively feel the unfair competition from what will be state subsidised companies, same with steel.
Another weakness very doubtful if they will forbid France to give effectively statesubsidies. There are even plans to help eg Peugeot from the innovation/R&D budget (in the same category as the agriculture).
3. Extremely difficult to let a company go bust in Europe in general in the way you suggest. Insolvency law is often very archaic. It is getting better but it is still mainly creditor focussed.
December 1, 2012 | Unregistered CommenterRik
Rik: You point #2 is an excellent one.

That’s why the EU has outlawed certain state intervention, such as straightforward subsidy programs. But Dexia was nationalized by France, Belgium, and Luxembourg. In Belgium it was done with huge subsidies (huge for this small country), ongoing capital infusions, and guarantees. Most of it was nodded through (with minor modifications). In other words, when push comes to shove, the EU will allow it.

Rogeratplay: I think you (we all) will see that there is no such thing as “cheap energy” when it comes to “fracking” – the method used massively in the US and starting to in China. It’s a very expensive process, well decline rates are steep, and environmental problems can be expensive to deal with.

In the US, natural gas (dry gas) has been produced below the cost of production for several years now, and it has torn up the industry. Prices for dry gas have gone up this year, but they haven’t gone up nearly far enough to restart the drilling boom. Drillers are still drilling below the cost of production, and they’re still bleeding. Just because there is a lot of quantity, doesn’t mean that it’s going to be cheap. Another example: there is a huge amount of hydrogen in the world (in water and elsewhere), but hydrogen gas is very expensive.

While energy prices are very volatile, over the long run, they won’t be cheap.
December 1, 2012 | Registered CommenterWolf Richter
@Wolf Richter
Depending on what purpose the metaphor serves, a slice of salami may have three sides (as in geometry), two sides (as in logic, true/false) or only one side (as in "how to achieve and maintain economic prosperity").

As to the latter I see two kinds of government: (a) silly government (pure capitalism - entire economy private, no intervention - or pure communist/socialist - economy centrally controlled) and (b) smart government which intervenes to maintain the up economic cycle as long as possible and the down cycle as short as possible. The latter kind of government thus limits the economic volatility, with its negative social consequences, and provides long term economic prosperity. No investor will keep its investment intact on the down side of the economic cycle hence the need for an intelligent government to intervene before the investor loses his or her shirt. Waiting until then may imply a far bigger cost for the government: loss of tax revenue, additional expenditure for unemployment benefit and re-training, perhaps loss of technological advantage that needs to be recouped at a later stage.

An example of smart government was the UK's New Labour (Blair/Brown) in the late 90's and early 2000's. Although Brown did not exactly nationalise companies however he channelled large amounts of state capital to the North of the country thus maitaining a higher level of econmic activity than would have been possible otherwise. Who knew the UK life at the beggining of the 90's and after '97 will certainly have noticed the difference.

Reducing the costs for complex quality products such as certain luxury ships in order to sell them more easily does not work. Complex quality products have a market of their own, different from the market for the same type of product but of a lower quality or not as complex. You will never see a Porsche or a Mercedes sold at a discount however there are plenty of Renault's at 30-40% discount right now. Complex quality products are built by highly skilled people, specialised in complex technological processes specific to the product. If they are allowed to go down their know-how will be lost, the technological infrastructure will be lost, the geographical region will go down as well without a chance of recovering when the up economic cycle returns. The cost of all this to the government will be huge and may span over several government lifetimes. A good example of nationalisation, recovery and subsequent sell off is the british shipbuilding industry in the late 70's and 80's.

Frankly I doubt that we know what a french government does when it nationalises companies. We may hear news and comments from different media sources each with its own interest but we need to be "sur place" to understand and analyse critically the ins and outs.
December 3, 2012 | Unregistered CommenterTon
@Ton
Next to regulating critical and dangerous sectors (like banking) a smart government should not do things that have a relatively low added value compared to the price paid for it. A good example is Blair/Brown.
If you ask me personally where do I get a better government product HK/S'Pore or the UK/France. I would definitely go for the Asians (things simply work overthere). However the price for the product is half or less. So your mr Blair at least in my perception has added stuff with no added value however that counts as extra GDP.
If any country wants to remain having a high standard of living with all the competition arising it will have to keep cutting fat not create more of that like Blair before or Hollande now.

All 3 are examples of bad management, by both the company as the government.

Shipyard. If you become a mainstream product like cruiseships (or any other) nowadays you simply should prepare for low(er) wage competition. People buy a Mercedes partly for the star on it, but with cruiseships you cannot see if they are from Germany, France, US, Brasil, Korea or China. The company should have diversified or come up with such state of the art productionmethods that it can compensate the difference in costprice (the latter would be difficult). The ones that are surviving now in the high cost world, have a niche product (with pricingpower) and a structure that allows them to reduce costs in a downturn.
A normal company prepares for a dip, so it can survive this company did apparently not. You cannot keep employing the same number of people for may be 10 years or longer if you only sell half or less from before. Set up a structure where the knowledge is with half (in practice always much less)of the people and the other ones are expendable. In a downturn you can if necessary fire the 'just hands' part and keep the knowledge aboard. But that is not what happened.

Peugeot is simply too small and everybody could see that coming. So all your R&D is spread over simply a too small volume. You cannot even compete with VW's German production for a similar sort of car as they have the numbers. Not even looking at the added value of VW towards Peugeot for consumers and from Made in Germany over Made in France.
Furthermore their brandimage is rubbish compared that of factories in other high costs countries. A French worker is more expensive than a German one, but people pay for Made in Germany', but not for a car Made in France. They should have worked on that. They didnot at least not in the perception of the buyers the only ones that count.
Small and mediumsized vehicles you can produce as well in 400 USD per month countries. You either move up the ladder or you move the factory to a low cost country or you go bust. Peugeot took the latter alternative. It even moved down the the ladder the last decade as nobody wanted to buy their topmodels.
In the process of saving his own ass, Hollande's policies are creating a structural overcapacity and ruins the game also for companies that are competitive and make even now profits. If you become part of a free trade union subsidies like proposed here spoils things for everybody.
Effectively the only economic use of Peugeot is as a mergercandidate. Either for Opel or Renault to give them numbers. But Renault doesnot want that as they donot want to see Hollande-style people in their boardroom. Or for an Asian who use it as a base to sell their cloons. As an independent company it is simply a goner even if the economy turns positive again.

Roughly the same with Steel (especially the EU part). You probably see 10 years or so of structural lower demand. The sector has simply to reduce capacity and the economic bad ones fall off first. Mittal is a very clever businessman he certainly will have picked on pure economic reasons. He will not have had a worst (read less profitable) one.

You simply cannot have perpetual overcapacity like in the airline industry in Europe, you are likely to kill also healthy well managed companies. These cannot build up reserves for bad times and slumps take much longer than necessary.
What has happened in France is that all these companies were either poorly managed or simply relying on a state intervention if it went wrong. Who do they think they are bankers? They are simply not viable the way they are set up.
December 3, 2012 | Unregistered CommenterRik
Have any you heard the dread government words:

We are here to help you!

Nationalization is the very example of it.
December 8, 2012 | Unregistered CommenterEnglish_Wolf

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