Pay for No Work

In mid-1973 Sweden's Volvo announced that it would become the first foreign auto manufacturer to build an assembly plant in the U.S.A site had been selected at Chesapeake, Va., to start production in the spring of 1977. But with that deadline at hand, Volvo has postponed start-up indefinitely, leaving Volkswagen as the only foreign carmaker with firm plans to assemble in the U.S., beginning in early 1978.

What went wrong? The quick answer is that Volvo's car sales in the U.S. fell from a peak of 60,338 in 1975 to 43,887 last year, a decline of 27.3%. But that drop is only a symptom of a deeper problem that afflicts not only Volvo but all Swedish industry. Essentially, the welfare-state policies of the Swedish government are pushing labor costs so high as to price Swedish products out of the international market.

Volvo has also been hurt by a drop in its reputation for quality. Though its sales in Sweden last year hit a record 75,000, its exports have slumped so badly that the company's plants are operating at only 70% of capacity--and even so, Volvo is running out of space to store unsold cars.

Thin Profits. Volvo's high prices are largely the result of a 40% raise in Swedish labor costs in the past two years. To contain the damage to sales, Volvo has absorbed some of the cost in export markets, rather than pass on the full rise in prices charged to foreign buyers. Result: Volvo's 1976 profits of $136 million were only 3.7% of sales, v. 10% in 1972 and 1973. Profits on export sales to North America and Western Europe were a paper-thin 1%.

The climb in labor costs is not only the result of pay. An even greater problem is absenteeism, which at Volvo's Torslanda assembly plant just outside the Gothenburg headquarters runs to 20% daily. That means Volvo in effect has to pay five employees to do the work of four. Some workers are absent an average of 65 days a year each.

The reason is a system of sick-pay benefits so generous that it is widely abused. In addition to days when he himself is ill, a father of three children, for example, by law gets 18 paid sick days to allow him to be at home when one or more of his children is bedridden. Says Volvo President Pehr G. Gyllenhammar: "It is no longer a question of whether individual Swedes can afford to be sick and still receive pay, because this is an obvious right. It is a question of the country's ability to pay for the level of absenteeism we have reached."

No Answer. Little relief is in sight.

Like its Socialist predecessor, the new coalition government of Prime Minister Thorbjorn Falldin is fully committed to the welfare state. That means keeping unemployment at its present low rate of 1.5%, even if employers must pay workers who show up only sporadically. Volvo has pioneered new ideas to keep workers interested, including a novel assembly line that allows employees to set their own pace (TIME, Sept. 16, 1974). That has cut absenteeism in a new plant outside Kalmar to 15%--still high by almost any standards outside Sweden. Even shutting down is no answer; on each of the days that its plants will be idle in early 1977, Volvo will have to give workers 85% of their normal pay, and unions are clamoring for 100%.

Ironically, opening the U.S. plant could have helped. American workers presumably would have been absent less often than Swedes, and the labor cost of Volvos sold in the U.S. would have been reduced. "The advantages of manufacturing in the States are still there," says Volvo Senior Vice President Robert Dethorey, "but first it is a matter of utilizing the capacity we have." So long as the government insists that employees be paid for not working, Volvo's prospects are anything but bright.

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