Can France's 'so-called workers' still compete on the world stage?

After Maurice M. Taylor Jr. of tire manufacturer Titan International gave up on trying to buy a Goodyear factory in northern France, he wrote a letter to France’s industrial renewal minister that painted the French labor force in no uncertain terms.

“The French workforce gets paid high wages but works only three hours,” the Titan chairman and CEO wrote in the letter, which was printed in the French media last week. “They get one hour for breaks and lunch, talk for three and work for three.”

“You can can keep the so-called workers,” he finished. "Titan has no interest in the Amien[s] North factory."

Unsurprisingly, Mr. Taylor's blunt words drew a heated response from Industrial Renewal Minister Arnaud Montebourg, who said they "denote a perfect ignorance of what our country is, France, of its strong assets, as well as of its globally-acclaimed attractiveness and bonds with the United States of America.”

But while the highly publicized, vitriolic exchange made for good fodder for press on both sides of the Atlantic, it also shined a light on the repeated criticism by businesses in France and abroad of the shrinking competitiveness of the French economy compared with its European neighbors.

Can the French economy still compete on the world stage?

Declining competitiveness

Though France remains one of the most attractive European countries to foreign companies, the size and power of its industry has been dwindling for over a decade as plants have closed down and tens of thousands of jobs have been cut every year.

Nicolas Bouzou, the founder and director of economic analysis company Asterès, says lack of competitiveness is the French economy’s “No. 1 problem.” Such a problem won’t be fixed unless the government takes an entirely new approach to help businesses strive by cutting public spending and labor costs and making labor rules less strict, according to Mr. Bouzou.

“The government is starting to become aware [of the lack of competitiveness of the French economy], but if it wanted to act radically it would enact a massive plan of reduction of public spending and of reduction of labor costs and taxes on businesses, for example,” Bouzou says. “And it’s not at all what it is doing.”

The Goodyear factory in northern city of Amiens is the latest of countless cases of industrial failures that make the headlines virtually every week in France. Last summer, Doux poultry group came close to bankruptcy and slashed nearly 1,000 jobs. Carmaker PSA Peugeot Citroën plans to shut down a plant in Aulnay-sous-Bois near Paris next year – which would result in about 3,000 job losses – and cut 1,400 jobs at another factory in Rennes.

An average of 65,000 industrial jobs were lost every year in France from 2000 to 2007, according to a September 2010 report by the General Directory of the Treasury, part of the French economy and finance ministry. Competition from foreign countries accounted for about a third of these job losses, the report found. 

France’s international trade deficit decreased to 67 billion euros in 2012, a slight improvement from the 74 billion euros in 2011, the foreign trade ministry announced on Feb. 7.

And as France’s industrial capacities diminish, so does its ability to attract companies from abroad.

According to a November 2012 report by consulting firm Ernst & Young, Germany edged out France as the second-most attractive European country for foreign investments in 2011. The United Kingdom was in first place. (A French government body, however, found France was ahead of Germany as a destination for foreign investments in 2011.)

Marc Lhermitte, a partner at Ernst & Young and the report's author, says Germany is now increasingly attracting foreign businesses as a result of reforms enacted over the past decade that made its economy more competitive and open to investments while France’s attractiveness stagnated.

“In the meantime, France has become a cause of more and more interrogations and skepticism from foreign investors,” Mr. Lhermitte says, adding that France is nonetheless one of the European countries with the most foreign companies on its soil.

France received 540 projects of investment from foreign companies in 2011, down from 562 in 2010, Ernst & Young found. Meanwhile, Germany’s attractiveness increased over that period of time as it received 597 foreign investment projects in 2011, up from 560 in 2010.

Still attractive to investors

Nonetheless, France was the most attractive European destination specifically for industrial investment in 2011, according to Ernst & Young.

Marina Niforos, the managing director of the American Chamber of Commerce in France, says what makes France an attractive country for US companies is its central location within the European market, the affordable prices of energy, the quality of the workforce, and a tax break on research and development.

Yet, the frequent changes in business regulations made by French governments can make the life of the more than 4,000 US businesses in France difficult, Ms. Niforos says. US companies present on French soil “would like to see more stability in the regulatory framework,” she adds.

In a survey of foreign companies published with its report, Ernst & Young found 70 percent of foreign investors to France said the country remained an attractive destination but 53 percent had also been unhappy over the past decade about the level of taxes, the rigidity of the labor market, and high labor costs.

“In France, it’s not that it is impossible to lay off people – it is expensive to lay off people, that’s mostly it.” says Olivier Passet, the director of economic syntheses at Xerfi, an economic studies firm. “It means that between the time you have to wait before actually laying off someone – depending on how long the employee has worked for the company – and the layoff stipend you have to pay, you have an extremely high cost.”

Mr. Passet says such costs prevent innovative middle-sized and small companies from settling in France, leaving mostly giant foreign groups that can afford layoffs to invest on the French market. This could hamper an already slow economic growth in the long run, as innovations that generate wealth will no longer be made in France unless the country manages to attract new firms, according to Passet.

“What France risks is being an economy based on giant companies relying on consumers and paying stable incomes, but little by little falling behind in terms of innovation,” Passet says.

A Socialist solution?

Since the Socialists won the presidential election last year, the French government, through its industrial renewal minister, Mr. Montebourg, has vowed to slow down layoffs at big factories by trying to find new investors when possible – and sometimes suggesting nationalization as a way of saving jobs. Montebourg appointed 22 commissioners for industrial renewal in each French region – the French equivalent of a US state – last summer and tasked them with identifying companies threatened by bankruptcy.

Montebourg, who belongs to the left wing of the Socialist Party, advocated for a form of protectionism that he called “deglobalization” when he ran, but lost in the left wing’s primary election ahead of the 2012 presidential campaign. Vowing to promote goods produced in France since he became minister, he posed on the front page of a magazine in October wearing a French sailor blue-striped shirt and a watch while holding a blender – all items made in France.

Bouzou says that by trying to prevent layoffs at faltering factories at all costs, the government is wasting public funds that could be used instead to help smaller businesses hire workers and grow.

“It is normal that there be layoffs,” says Bouzou, the author of “You Hear the Tree Fall but not the Forest Grow,” an essay on global economic changes. “That big companies lay off employees isn’t what bothers me the most. What bothers me the most is that the others don’t hire.”

After a report on France’s competitiveness commissioned last summer by French Prime Minister Jean-Marc Ayrault painted a bleak picture of the French economy, the government vowed to address the problem and make the country more attractive to foreign investments.

“All indicators show it: The competitiveness of the French industry has been decreasing for 10 years and the movement seems to be accelerating,” the report, which was published on Nov. 5, said in its first sentence.

The French economy faces harsh competition from both Germany, which exports goods of higher quality than France, and from developing countries, as well as Eastern and Southern Europe countries where labor costs are cheaper, the report said. On the day he handed his report to Ayrault, Louis Gallois, the general commissioner to investment of the government and author of the report, said what France needed was a “competitiveness shock.”

Following the report, the government laid out 35 measures for boosting competitiveness by reducing labor costs, cutting red tape, and making access to credit easier for small- and mid-sized businesses. The main measure, which went into effect on Jan. 1, is a tax credit for the private sector aimed at cutting 20 billion euros in labor costs each year – although the government has said the tax credit will cut only 10 billion euros this year. 

Lhermitte of Ernst & Young says the current sluggish economic growth will make changes harder to enact for the government, adding that it could take a minimum of five years before France’s competitiveness improves.

Paraphrasing the title of a 1970s French movie, Lhermitte asks, “Is the situation serious? Yes, it is serious. Is it desperate? No, it is not desperate.”