Technology Industry Finnish Economic Situation and Outlook June

Technology Industry / Finnish Economic Situation and Outlook June 2015

The Technology Industry – the Largest Export Sector in Finland • 50 % of total Finnish exports. • 75 % of private-sector R&D investment. • Almost 270, 000 employed directly in the sector, 700, 000 employed in total, equalling about 30% of the entire Finnish labour force. • The Federation of Finnish Technology Industries has over 1, 600 member companies. 2 8. 6. 2015

The Finnish Technology Industry Is Comprised of Five Sub-Sectors Electronics and Electrotechnical Industry ABB, Ensto, Microsoft Mobile, Murata Electronics, Nokia, Planmeca, Polar Electro, Suunto, Vacon, Vaisala… Metals Industry Boliden, Componenta, Kuusakoski, Luvata, Norilsk Nickel, Outokumpu, Outotec, Ovako, Sacotec, SSAB … Mechanical Engineering Abloy, Cargotec, Finn-Power, Fiskars, Glaston, Konecranes, Metso, Meyer Turku, Normet, Oras, Patria, Pemamek, Ponsse, Stala, Valmet, Valtra, Wärtsilä… Information Technology Affecto, Basware, Bilot, CGI, Codebakers, Comptel, Digia, Efecte, Enfo, F-Secure, Fujitsu Finland, IBM, Innofactor, Knowit, Microsoft, Nixu, Tieto… Consulting Engineering A-Insinöörit, Citec, Elomatic, Etteplan, FCG, Granlund, Neste Jacobs, Pöyry, Ramboll, Rejlers, SITO, SWECO, WSP. . . 3 8. 6. 2015

The Finnish Technology Industry is Comprised of Five Sub-Sectors Electronics and Electrotechnical Industry • Data communications equipment, electrical machinery, medical technology products • Turnover (2014): 15. 1 billion euros • Personnel (2014): 42 300 Information Technology • IT services, applications and programming • Turnover (2014): 10. 0 billion euros • Personnel (2014): 53 000 Mechanical Engineering • Machinery, metal products, vehicles • Turnover (2014): 27. 2 billion euros • Personnel (2014): 118 900 s Consulting Engineering • Expertise for construction industry and infrastructure • Turnover (2014): 5. 0 billion euros • Personnel (2014): 46 300 4 8. 6. 2015 Metals Industry • Steel products, non-ferrous metals, castings • Turnover (2014): 9. 2 billion euros • Personnel (2014): 15 300

Turnover of the Technology Industry in Finland 5 8. 6. 2015 Source: Macrobond, Statistics Finland

Export of Technology Industry Goods from Finland by Area in 2014 Total goods exports 26. 2 billion euros* North America 2. 6 billion € 9. 8% Western Europe 13. 1 billion € 50. 1% Africa 0. 5 billion € 1. 8% Central and Eastern Europe 4. 5 billion € 17. 1% Middle and Central East 0. 5 billion € 2. 1% South and Middle America 0. 9 billion € 3. 3% 6 8. 6. 2015 *) In addition to goods exports the sector exports services worth about 11 billion euros. Source: National Board of Customs, Statistics Finland Asia 4. 1 billion € 15. 8%

Turnover of the Industry and Technology Industry in Finland 7 8. 6. 2015 Source: Macrobond, Statistics Finland

Turnover of the Technology Industry in Finland 8 8. 6. 2015 Source: Macrobond, Statistics Finland

Value of New Orders in the Technology Industry* in Finland 12, 000 11, 000 10, 000 9, 000 8, 000 7, 000 6, 000 5, 000 4, 000 3, 000 2, 000 1, 000 0 Million euros, at current prices Combined Export Domestic 2005 Change: Export: Domestic: Combined: 9 8. 6. 2015 2006 2007 I, 2015 / I, 2014 -12% -5% -9% 2008 2009 2010 I, 2015 / IV, 2014 -19% +2% -14% 2011 2012 2013 2014 2015 *) Excluding metals industry and game industry companies. Source: The Federation of Finnish Technology Industries’ order book survey’s respondent companies, latest information January-Mach 2015

Value of Order Books in the Technology Industry* in Finland Million euros, at current prices 24, 000 22, 000 20, 000 18, 000 16, 000 14, 000 12, 000 10, 000 8, 000 6, 000 4, 000 2, 000 0 Combined Domestic Export 2005 Change: Export: Domestic: Combined: 10 8. 6. 2015 2006 2007 2008 31. 3. 2015 / 31. 3. 2014 +9% +30% +15% 2009 2010 31. 3. 2015 / 31. 12. 2014 -4% +6% - 1% 2011 2012 2013 2014 *) Excluding metals industry and game industry companies. Source: The Federation of Finnish Technology Industries’ order book survey’s respondent companies, latest information 31. 3. 2015

Value of New Orders in the Electronics and Electrotechnical Industry in Finland 7, 500 7, 000 6, 500 6, 000 5, 500 5, 000 4, 500 4, 000 3, 500 3, 000 2, 500 2, 000 1, 500 1, 000 500 0 Million euros, at current prices Combined Export Domestic 2005 Change: Export: Domestic: Combined: 11 8. 6. 2015 2006 2007 2008 I, 2015 / I, 2014 -14% +25% -8% 2009 2010 2011 2012 2013 2014 I, 2015 / IV, 2014 -24% +26% -18% Source: The Federation of Finnish Technology Industries’ order book survey’s respondent companies, latest information January-March 2015

Value of Order Books in the Electronics and Electrotechnical Industry in Finland Million euros, at current prices 8, 500 8, 000 7, 500 7, 000 6, 500 6, 000 5, 500 5, 000 4, 500 4, 000 3, 500 3, 000 2, 500 2, 000 1, 500 1, 000 500 0 Combined Domestic Export 2005 Change: Export: Domestic: Combined: 12 8. 6. 2015 2006 2007 2008 31. 3. 2015 / 31. 3. 2014 -1% +53% +6% 2009 2010 2011 2012 2013 2014 31. 3. 2015 / 31. 12. 2014 -18% +33% -11% Source: The Federation of Finnish Technology Industries’ order book survey’s respondent companies, latest information 31. 3. 2015

Value on New Orders in the Mechanical Engineering in Finland Million euros, at current prices 4, 500 4, 000 3, 500 3, 000 Combined 2, 500 2, 000 Export 1, 500 1, 000 500 0 Domestic 2005 Change: Export: Domestic: Combined: 13 8. 6. 2015 2006 2007 2008 I, 2015 / I, 2014 - 9% -9% 2009 2010 2011 2012 2013 2014 2015 I, 2015 / IV, 2014 -12% -10% Source: The Federation of Finnish Technology Industries’ order book survey’s respondent companies, latest information January-March 2015

Value of Order Books in the Mechanical Engineering in Finland Million euros, at current prices 15, 000 14, 000 13, 000 12, 000 11, 000 10, 000 9, 000 8, 000 7, 000 6, 000 5, 000 4, 000 3, 000 2, 000 1, 000 0 Combined Export 2005 Change: Export: Domestic: Combined: 14 8. 6. 2015 2006 2007 2008 31. 3. 2015 / 31. 3. 2014 +14% +45% +20% 2009 2010 2011 2012 2013 31. 3. 2015 / 31. 12. 2014 +3% +4% +3% Source: The Federation of Finnish Technology Industries’ order book survey’s respondent companies, latest information 31. 3. 2015 2014 2015

Value on New Orders in the Consulting Engineering in Finland Million euros, at current prices 320 300 280 260 240 220 200 180 160 140 120 100 80 60 40 20 0 Combined Export Domestic 2005 Change: Export: Domestic: Combined: 15 8. 6. 2015 2006 2007 2008 I, 2015 / I, 2014 -13% +4% +2% 2009 2010 2011 2012 2013 2014 2015 I, 2015 / IV, 2014 -28% -12% -14% Source: The Federation of Finnish Technology Industries’ order book survey’s respondent companies, latest information January-March 2015

Value of Order Books in the Consulting Engineering in Finland Million euros, at current prices 550 500 450 400 350 300 250 200 150 100 50 0 Combined Domestic Export 2005 Change: Export: Domestic: Combined: 16 8. 6. 2015 2006 2007 2008 31. 3. 2015 / 31. 3. 2014 -5% +12% 2009 2010 2011 2012 2013 31. 3. 2015 / 31. 12. 2014 -9% +4% +2% Source: The Federation of Finnish Technology Industries’ order book survey’s respondent companies, latest information 31. 3. 2015 2014 2015

Value on New Orders in the Information Technology in Finland 850 800 750 700 650 600 550 500 450 400 350 300 250 200 150 100 50 0 Million euros, at current prices 2005 Change: Combined: 17 8. 6. 2015 2006 2007 2008 I, 2015 / I, 2014 -18% 2009 2010 I, 2015 / IV, 2014 -11% 2011 2012 2013 2014 *) Excl. game industry companies Source: The Federation of Finnish Technology Industries’ order book survey’s respondent companies, latest information January-March 2015

Value of Order Books in the Information Technology in Finland Million euros, at current prices 1, 700 1, 600 1, 500 1, 400 1, 300 1, 200 1, 100 1, 000 900 800 700 600 500 400 300 200 100 0 2007 Change: Combined: 18 8. 6. 2015 2008 2009 2010 31. 3. 2015 / 31. 3. 2014 +7% 2011 2012 31. 3. 2015 / 31. 12. 2014 0% 2013 2014 *) Excl. game industry companies Source: The Federation of Finnish Technology Industries’ order book survey’s respondent companies, latest information 31. 3. 2015

Tender Requests* Received by Technology Industry Companies in Finland 40 30 Balance figure 20 10 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 -10 -20 -30 -40 -50 -60 “Have you experienced a notable increase or decrease in the number of requests for tenders in recent weeks in comparison to the situation three months ago? ”. Balance figure = the number of companies receiving more requests - the number of companies receiving less requests. 19 8. 6. 2015 Source: The Federation of Finnish Technology Industries’ order book survey, latest information April 2015.

Personnel in the Technology Industry Some 15 000 of employees affected by temporary or parttime lay-offs 31. 3. 2015 350, 000 330, 000 310, 000 290, 000 270, 000 250, 000 230, 000 210, 000 190, 000 170, 000 150, 000 2005 2006 2007 2008 Personnel in Finland 20 8. 6. 2015 2009 2010 2011 2012 2013 Personnel in subsidiaries abroad Source: Statistics Finland, The Federation of Finnish Technology Industries’ labour force survey 2014 2015 (31. 3)

Technology Industry Personnel in Finland by Branch 160, 000 140, 000 120, 000 100, 000 80, 000 60, 000 40, 000 20, 000 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 (31. 3) Electronics and Electrotechnical Industry Mechanical engineering industry Metals industry 21 8. 6. 2015 Consulting engineering Source: Statistics Finland, The Federation of Finnish Technology Industries’ labour force survey

Technology Industry Personnel in Subsidiaries Abroad by Branch 200, 000 180, 000 160, 000 140, 000 120, 000 100, 000 80, 000 60, 000 40, 000 20, 000 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 Electronics and Electrotechnical Industry 2007 Metals industry 22 8. 6. 2015 Source: The Federation of Finnish Technology Industries’ labour force survey 2008 2009 2010 2011 2012 2013 Mechanical engineering industry Consulting engineering 2014

Retirement of Technology Industry Personnel Individuals per year 9000 8000 7000 6000 Salaried employees 5000 4000 3000 2000 Blue collar employees 1000 0 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 Number of individuals retired 23 8. 6. 2015 Number of individuals retiring (estimation) Source: Wage inquiry of the Federation of Finnish Technology Industries, Finnish Centre for Pensions, Statistics Finland

Retirement of Technology Industry Blue Collar Employees 3500 Individuals per year 3000 2500 2000 1500 1000 500 0 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 Mechanical engineering 24 8. 6. 2015 Metals industry Electronics and electrotechnical industry Source: Wage inquiry of the Federation of Finnish Technology Industries, Finnish Centre for Pensions, Statistics Finland

Situational Overview and Outlook § - Finland is in the grip of structural change. Development remains uneven between companies. § - Turnover in Finland in 2014 increased slightly compared to 2013. Turnover totalled EUR 66 billion. In the pre-crisis year 2008 it was EUR 86 billion. § - The monetary value of new orders reported between January-March 2014 was 9 % lower than in the corresponding period in 2014, and 14% lower than in the preceding quarter. § - At the end of March, the value of order books was 15% higher year-on-year, but slightly lower the value reported at the end of December. § - The turnover of technology industry companies in the spring of 2015 is expected to be slightly higher than in the corresponding period year earlier. § - Since 2008, personnel numbers in Finland have shrunk by 53, 000 employees, totalling 273, 000 at the end of March 2015. 25 8. 6. 2015

Divergence in the Development of Export Markets 26 8. 6. 2015

Industrial Production Volume 27 8. 6. 2015 Source: Macrobond

Industrial Production Volume in EU Countries 28 8. 6. 2015 Source: Macrobond

Weak Growth in Manufacturing Industry in Eurozone in Early 2015 Purchase Managers’ Index (PMI), 50 = no change from previous month 29 8. 6. 2015 Latest information May 2015. Source: Markit

Russian Economy is in Negative Circle Purchase Managers’ Index (PMI) in manufacturing industry in Russia 50 = no change from previous month 30 8. 6. 2015 Latest information May 2015. Source: Markit

Global Economy is Expected to Grow by 3. 5% in 2015 GDP growth in 2015, % 10 Rest of Asia Average growth: +3. 5% 5 4 North America 2 Russia 3 Western Europe 1 Japan Middle East and Africa 6 India Rest of Eastern Europe China 7 Brazil 8 Mexico Rest of Latin Am. 9 0 -1 -2 -3 0 31 8. 6. 2015 10 20 30 40 50 60 70 80 90 The width of the bar indicates the share of global GDP in 2014 (adjusted for purchasing power parity), %. Source: IMF (January 2014) 100

Export Demand for Technology Industry in Finland Will Grow by 2. 0 % in 2015 GDP growth in 2015, % 10 6 5 North America 4 India Rest of Eastern Europe China 7 Rest of Asia Average growth: +2. 0% Middle East and Africa 8 Brazil Mexico Rest of Latin Am. 9 2 Western Europe Russia 3 Japan 1 0 -1 -2 -3 0 10 20 30 40 50 60 70 80 The width of the bar indicates the export share of technology industry from Finland in 2013, % 32 8. 6. 2015 Source: IMF (January 2015), Board of Customs 90 100

Exports from EU Countries to Russia is Falling 33 8. 6. 2015 Source: Macrobond

Russia’s Share of Technology Industry Exports Will Decline Again to the Level of Approximately Five Per Cent 34 % 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 e 42 40 38 36 34 32 30 28 26 24 22 20 18 16 14 12 10 8 6 4 2 0 8. 6. 2015 *) Soviet Union up to 1991. Source: Finnish Customs

Breakdown of World Industrial Production % 35 8. 6. 2015 Purchasing power parity adjusted shares. Source: Maddison (Historical Statistics), IMF and ETLA

Industrial Production Development by Year 36 8. 6. 2015 Source: Macrobond

The Big Challenge for Finland after 2008 37 8. 6. 2015

Finnish Exports up to EUR 30 Billion Short of Annual Target Level 38 8. 6. 2015 Source: Macronond, Statistics Finland / National Accounts

Finnish Exports Lagging Behind Competitors 39 8. 6. 2015 Source: Macrobond, Eurostat

The Share of Industry in GDP in Finland 1900 -2013 35% 30% 25% 20% 15% 10% 5% 0% 1900 1905 1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Industry* 40 8. 6. 2015 Industry + service sectors in the technology industry *) During 1900 -1974 industry covers also mines, energy, water and refuse collection sectors. Source: Statistics Finland / National Accounts

Finland’s Industrial Production Will not Regain the Level of 2008 with the Present Production Capacity Finland’s production capasity has decreased over 20 % 125 100 120 95 115 90 110 85 100 80 95 75 -21 % 90 65 80 -22 % 75 41 Industrial production (2008=100), left scale 70 85 70 Industrial production ability (production with capacity in full use), left. Scale 2008 12. 6. 2015 2009 2010 2011 2012 2013 2014 Source: Statistics Finland / National Accounts, Industrial volume index 2015 60 55 Capacity utilization rate, %, right scale

Growth of Public Debt and Tax Rate Out of Control Increased cost burden requires cuts to public sector 42 8. 6. 2015 Source: Macrobond, Statistics Finland

Industrial Investments Should be Increased Industrial fixed and R&D investments in Finland Million euros, at current prices 10, 000 9, 000 8, 000 7, 000 6, 000 5, 000 4, 000 3, 000 2, 000 1, 000 0 2005 2006 2007 2008 2009 Industry 43 8. 6. 2015 Source: Statistics Finland, Confederation of Finnish Industries’ Investment Survey (June 2014) 2010 2011 2012 Technology industry 2013 2014 e

Upswing of Investments Required Finland Index, 2005=100 135 130 125 USA 120 The Netherlands 115 Switzerland 110 105 Sweden 100 Germany 95 Finland 90 85 80 2005 44 8. 6. 2015 2006 2007 2008 2009 Source: OECD, Economic Outlook 2014 2010 2011 2012 2013 2014 e 2015 e

Turning Point of Productivity* Development in Finland After 2008 Finland has lost considerable volume production in electronics, forest and machinery industries** Index, 2000=100 160 155 Manufacturing industry 150 145 140 135 Technology industry 130 125 120 115 110 105 100 95 45 **) The structure of current industry does not enable the similar productivity development as during the years 2000 -2008 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 *) Productivity is measured as real value added per hours worked. When productivity grows (the curve rises) value added grows more than hours worked. Value added = turnover – purchasing of materials and services Value added = labour costs + rents + depreciations + profits 8. 6. 2015 Source: Statistics Finland / National Accounts National economy

Unit Labour Costs at the National Economy Level Unit labour costs = labour costs / productivity, including the influence of effective exchange rates 120 2005, I =100 115 Finland’s cost Competitiveness declines 110 105 Finland’s cost Competitiveness improves 100 95 90 2005 2006 2007 Compared to Belgium Compared to Italy Compared to Finland 46 8. 6. 2015 2008 2009 2010 2011 Compared to Germany Compared to the Netherlands 2012 2013 Compared to Spain Compared to Austria *) In the ECB Harmonised Competitiveness Index, the average effective exchange rate of each country is calculated vis-à-vis 20 to 30 main trade partners, as well as the development of unit labour costs for the total economy. Latest information IV/2014. Source: European Central Bank 2014

What should be done? § Support the renewal of the industry § Taxes should support growth and investment in Finland § Support decision making in companies related to compensation and working time § No new European nor national burdens on companies, which are deteriorating the competitiveness 47 8. 6. 2015

Long-Term Outlook and Challenges § Global Structural Change Set to Continue Apace – Industrial production and services will relocate to rapidly developing economic areas – Strong growth, large markets, cheap labour and increasing expertise will increase the attractiveness of these regions. § Competition over Skills and Raw Materials Set to Increase – Due to an increase in retirement, the sector’s annual recruitment need in Finland will rise considerably in the coming years. – The availability of reasonably-priced energy also threatens to become an investment bottleneck in Finland § Combating Climate Change – A challenge as costs are set to grow faster than in competitor countries – An opportunity for new environmental and energy technologies 48 8. 6. 2015

The Federation of Finnish Technology Industries 49 8. 6. 2015

The Federation’s Member Companies 2013 Number of enteprises / 1 612 80 5% Number of personnel / 186 723 46 23 3% 1% [ARVO ] 31% [ARVO ] 17% [ARVO] 91% 50 8. 6. 2015 1– 249 employees 500– 999 employees 250– 499 employees 1000– employees Source: The Federation of Finnish Technology industries [ARVO ] 38% [ARVO ] 14%

The Federation’s SME Member Companies 2013 Number of enterprises / 1 463 Number of personnel / 70 646 [ARVO] 7% [ARVO] 14% [ARVO] 35% [ARVO] 18% [ARVO] 27% 475 33% 51 8. 6. 2015 [ARVO] 45% [ARVO] 21% 1– 19 employees 50– 99 employees 20– 49 employees 100– 249 employees Source: The Federation of Finnish Technology industries