European Clothing Industry : meeting the competitive challenge 9781845443757, 9780861769933

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Volume 8 Number 3 2004

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Fashion Marketing and Management An International Journal The European clothing industry: meeting the competitive challenge Guest Editors: Ian M. Taplin and Jonathan Winterton

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Journal of Fashion Marketing and Management

ISSN 1361-2026 Volume 8 Number 3 2004

The European clothing industry: meeting the competitive challenge Guest Editors Ian M. Taplin and Jonathan Winterton

Access this journal online __________________________ 251 Editorial advisory board ___________________________ 252 Abstracts and keywords ___________________________ 253 INTRODUCTION The European clothing industry: meeting the competitive challenge Ian M. Taplin and Jonathan Winterton______________________________

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ACADEMIC PAPERS The UK clothing industry: extinction or evolution? R.M. Jones and S.G. Hayes________________________________________

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Organizational foundations of export performance: the case of the Turkish apparel industry Binnur Neidik __________________________________________________

279

Structural change: the dominant feature in the economic development of the German textile and clothing industries Ulrich Adler____________________________________________________

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CONTENTS

CONTENTS continued

International competitive change and strategic behaviour of Italian textile-apparel firms Simone Guercini ________________________________________________

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Final demise or regeneration? The Dutch case Michiel Scheffer and Marieke Duineveld _____________________________

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Book review _______________________________________________ 350

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EDITORIAL ADVISORY BOARD Professor Margaret Bruce Manchester Business School, Manchester, UK Contantine Campaniaris Ontario, Canada

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Professor Nancy Cassill Department of Textiles and Apparel, North Carolina State University, USA Professor Peter Chisnall Altrincham, Cheshire, UK Professor Mario de Araujo Department of Textile Engineering, Universidade de Minho, Portugal Professor Kitty G. Dickerson Department of Textile and Apparel Management, University of Missouri-Columbia, USA M. Easey Newcastle Business School, University of Northumbria at Newcastle, UK Dr Andrew Godley School of Business, University of Reading, UK Professor Simone Guercini Department of Business Sciences, University of Florence, Italy Cathy Hart Loughborough University, UK

Professor Dale Littler Manchester School of Management, UMIST, UK Professor Mary Littrell College of Family and Consumer Sciences, Department of Textiles and Clothing, Iowa State University, USA Professor Christopher Moore Glasgow Caledonian University, Caledonian Business School, UK Belinda T. Orzada Associate Professor, Department of Consumer Studies, University of Delaware, Newark, USA Lynn Oxborrow Nottingham European Textiles and Clothing Observatory, Nottingham Trent University, UK Dr Ji-young Ruckman Department of Clothing Design and Technology, The Manchester Metropolitan University, UK Dr Michiel Scheffer Director, Noe´ton Knowledge Management BV, Amsterdam

Professor Patrick Hetzel Universite´ Panthe´on-Assas, Paris, France

Professor Gail Taylor Institute of Textiles & Clothing, The Hong Kong Polytechnic University, Hong Kong

Professor Dr Ingo Hirsch Diplom-Kaufmann, Fachhochschule AlbstadtSigmaringen, Germany

Dr Peter Totterdill Nottingham European Textile and Clothing Observatory, Nottingham Trent University, UK

Leslie Holden Visiting Professor, The Arnhem Institute for the Arts, The Netherlands

Professor Diann Valentini Fashion Institute of Technology, New York City, USA

Professor A.R. Horrocks Centre for Materials Research and Innovation, Bolton Institute, UK Tim Jackson Department of Fashion Promotion, London College of Fashion, UK

Maureen Whitehead Department of Retail and Marketing, The Manchester Metropolitan University, UK

Dr Hye-Shin Kim Associate Professor, Department of Consumer Studies, University of Delaware, Newark, USA Dr Grace Kunz Associate Professor, Department of Textiles and Clothing, Iowa State University, Ames, USA Professor Sharron J. Lennon Consumer and Textiles Sciences Department, Ohio State University, Columbus, USA Journal of Fashion Marketing and Management Vol. 8 No. 3, 2004 p. 252 # Emerald Group Publishing Limited 1361-2026

Professor Trevor J. Little Textile and Apparel Management, College of Textiles, North Carolina State University, Raleigh, USA

Professor Melvin Wiener Director MS Fashion Apparel Programme, Philadelphia College of Textiles and Science, Pennsylvania, USA Professor Jonathon Winterton Directeur du Recherche, Groupe ESC Toulouse, Toulouse, France Professor Gillian Wright Chair in Strategic Management, Liverpool Business School, UK

The European clothing industry: meeting the competitive challenge Ian M. Taplin and Jonathan Winterton Keywords Garment industry, European Union, Organizational restructuring, Competitive strategy, Trade, Imports This paper examines earlier and more recent patterns of restructuring that have occurred as a consequence of import penetration. It focuses upon work reorganization, job losses and changes in the retail-manufacturer relationships and how these trends differ in key European countries. Finally, it asks questions about future trends, both in employment (and the changing nature of jobs) as well as government policies towards the politics of trade.

The UK clothing industry: extinction or evolution? R.M. Jones and S.G. Hayes Keywords United Kingdom, Garment industry To provide an opinion as to the demise or metamorphosis of the UK clothing industry within the wider European context. Recently conducted research, along with a range of pertinent published (1978-2004) statistical data are used to inform the authors’ viewpoint on the development of the UK clothing industry. The statistical evidence describing the change in import penetration, employment levels and the impact of the national minimum wage support the view that a new typology of the clothing industry is emerging from the ashes of a rapidly declined manufacturing base. Some of the detail of garment types is hidden by the SIC system. Conversely, at times, the very categories used appear to have little contemporary relevance. Three areas of concern would remain: first, that over time the cluster itself would lose its critical mass; that the cluster might collapse if the central core of manufacturing is hollowed out; and thirdly, that over time some of the “knowledge based” tasks such as design and product development might themselves

be subject to migration to lower-cost locations. This paper contributes a carefully considered, and compiled, viewpoint from experienced observers of the UK clothing industry that augments the debate centred on the development of the EU clothing industry.

Organizational foundations of export performance: the case of the Turkish apparel industry Binnur Neidik Keywords Turkey, Garment industry, Exports, National economy, International investments To provide an overview of the organizational changes Turkish apparel firms have undertaken in the 1990s and early 2000s and to show how these changes affect sector’s export performance. Designed as a case study that uses interview and archival data. Interviews with company representatives, conducted in Turkey and Germany during 1996-2001, are primary sources of information. As in all case study research, the interviews are supplemented by archival data, including statistical reports published by host country governments, annual company reports, company Web sites, industry magazines, research reports prepared by the local industry associations, articles appearing in the mass media including the Internet. While Turkey has historically been dependent on the EU market and this dependence has helped Turkish manufacturers develop new capabilities, recent organizational trends in the industry point to a struggle by manufacturers to break out of this dependence and expand in new markets. Three overarching organizational trends stand out: the increasing creation of backward and forward linkages, both domestic and foreign, the relocation of production to cheaper sites, both inland and overseas, and the increase in the scale and scope of partnerships formed with US companies. These partnerships not only create a new set of relationships, but also transform the existing ones. Relies on the respondents’ knowledge of past and present

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events and documentary data to make inferences about process and change in the industry. Not based on a random sample and oversamples large firms. A useful overview of organizational changes that presents firm-level data. May provide insight into how export growth in apparel may be sustained beyond 2004.

Structural change: the dominant feature in the economic development of the German textile and clothing industries Ulrich Adler Keywords Germany, Textile industry, Garment industry, Economic trends, Globalization The textile and clothing industries are good examples to analyse emerging industrial trends in international co-operation and to map the globalisation effects on outward processing, jobs and technology. The research focuses on the development of economic indicators and is based on the results from consulting and research projects, as well from enquiries in the German textile and clothing industries, which are exposed to intensive cost competition and trying to find a new position within the process of globalisation. A reduction of demand, a change in consumption patterns, the modification in the retailing system, the development of personal income and a global shift of production have triggered the decline of the domestic production of textiles and clothing. Emerging producers from eastern, developing and newly industrialising countries are now the main suppliers for the German textiles and clothing market. The German clothing companies defend a rest market and use intensively the outward processing in low-wage countries. As a result of the tremendous differences in production costs, the demand for clothing textiles shifted globally towards low-cost places of clothing production. The outward processing from industrialised countries established a very efficient, well-organised global production network in low-wage countries, enabling new potential for economic development. This research focuses

on the view of producers in industrialised countries. The analysis shows that the future of textiles and clothing companies is not in producing but in the management of markets, organising a global supply chain of subcontractors and in retailing. The experiences within the global outward processing network shows very high innovation and learning rates in low-wage countries, enabling a serious potential towards a self-contained economic development. The economic and social liberalisation within the EU region and the out-phasing of the WTO in 2005 will give new power to the globalisation process and will influence the structural change of industry. This paper is written as a rational position sensing of the German textile and clothing industries prior to the out phasing of the WTO regulations and the 2005 liberalisation of the EU textile and clothing sector.

International competitive change and strategic behaviour of Italian textile-apparel firms Simone Guercini Keywords Italy, Textile industry, Garment industry, Marketing strategy, Corporate strategy In the 1990s the trend of textile and apparel manufacturing in Italy differed considerably from other European countries with high labour costs. The examination of the peculiar factors generating the Italian specificity represents the first aims of this paper, and will be discussed employing statistical sources concerning market performance, industrial organization and retail structure. A second aim, of no less central importance, is the evaluation of the strategic behaviour adopted by Italian textile and apparel firms in front of competitive change on international market. Results emerging from a secondary research are presented. The analysis proposed focuses mainly on strategic market positioning and integration between manufacturing firms of the textile-apparel pipeline and clothing retail.

Final demise or regeneration? The Dutch case Michiel Scheffer and Marieke Duineveld Keywords The Netherlands, Garment industry, Globalization, Competitive strategy, Design management, Distribution channels and markets This paper examines the impact of the increasing global competition on the Dutch apparel industry and the changes in the whole apparel supply chain. The restructuring of the Dutch industry happened at a relatively early stage in Europe. Main trend was the delocalisation of production while the design and distribution function has survived.

Specific attention is given to the statistical limitations to analyze the changes in the supply chain of the apparel sector. The liberalisation process seems to have little quantitative impact on levels of employment taken in consideration that the supply chain consists of a broad scale of companies from industry to design and retail. The Dutch apparel sector is not heading to a final demise so long as the sector utilize the specific domestic features and succeed in retaining the value adding activities. The Dutch case provides a more in-depth analysis of the strategies taken by the industry that faces a growing global competition.

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INTRODUCTION

The European clothing industry Meeting the competitive challenge

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Ian M. Taplin Wake Forest University, Winston-Salem, North Carolina, USA and Bordeaux Business School, France

Jonathan Winterton ESC Toulouse, France Keywords Garment industry, European Union, Organizational restructuring, Competitive strategy, Trade, Imports Abstract This paper examines earlier and more recent patterns of restructuring that have occurred as a consequence of import penetration. It focuses upon work reorganization, job losses and changes in the retail-manufacturer relationships and how these trends differ in key European countries. Finally, it asks questions about future trends, both in employment (and the changing nature of jobs) as well as government policies towards the politics of trade.

Even non-students of economics understand the basic precepts of comparative advantage, principally that industries which are low skilled and labour intensive will migrate to those countries that have labour markets which feature a plentiful supply of precisely such a commodity. Clothing production is a quintessential example of such an industry. Using low-priced labour to manufacture and assemble garments has been an omnipresent feature of the textile and clothing industries, making them simultaneously mobile and global in scope. Historically, firms have sought manufacturing sites that offered cheap, often docile labour, and built their competitive position upon cost compression through low wages. In recent decades, newly industrializing countries have typically selected textiles and clothing as industries which provide them with a foothold on the industrialization ladder, allowing them to gain valuable industrial work skills whilst generating foreign exchange earnings through export led growth policies (Dicken, 2003). Often through direct or indirect subsidies to firms, the state in such countries has stimulated the growth of this industrial sector. However, when wages rise and corresponding operational costs increase, as they inevitably do, the jobs move to lower cost sites elsewhere. This historical pattern has resulted in mixed outcomes in the countries that lose jobs. Consumers often benefit from lower cost apparel products, and certainly more variety, without necessarily sacrificing quality. However, workers with few transferable skills suffer job loss and often periods of long unemployment as factories close and work is moved overseas. Communities where factories are shuttered Journal of Fashion Marketing and Management Vol. 8 No. 3, 2004 pp. 256-261 q Emerald Group Publishing Limited 1361-2026 DOI 10.1108/13612020410547789

This paper and the ones that follow are the result of a workshop held at ESC Toulouse, in February 2004 and sponsored by CREER (Centre for European Research in Employment and Human Resources) and the Journal of Fashion Marketing and Management. The authors wish to thank Richard Jones for his detailed comments on EU trade policy, as well as members of the workshop whose stimulating discussion helped them better frame the ideas in this paper.

see their tax base diminish and witness the negative economic effect as lay-offs in one sector ripple through the local economy. This pattern of worker dislocation and industrial decline in one country corresponds to new job growth and industrial development in another. As long as clothing manufacture continues to be an industry with a low level of technical innovation and minimal capital requirements, the barriers to entry will remain low, and the jobs will migrate to low cost labour sites. For this reason, the clothing industry is seen as a “sunset industry” for high wage economies as jobs will inexorably and eventually disappear following intensified competition from enterprises in low-wage economies (Bonacich et al., 1994; Taplin and Winterton, 1997; Jones, 2002). Although indisputably in decline, the clothing industry nonetheless remains an important sector in high wage economies. The employment figures reveal a long term secular decline in most of these societies as the number of enterprises shrink. But the insatiable appetite for clothes by modern consumers ensures that aspects of the industry, particular in the areas of design and high fashion, high cost garments will remain. Restructuring and reconfiguration: the early 1990s Earlier research has shown how the clothing industry in high wage economies underwent profound and rapid restructuring in the early 1990s as firms attempted to cope with a massive increase in import penetration from low wage countries, changes in local labour and product market conditions, and alterations in the broader regulatory environment that governs trade in apparel and textiles (Taplin and Winterton, 1997; Rosen, 2003). Relaxation of the Mulit-Fiber Agreement (MFA) during the early 1990s resulted in an increase in clothing imports from low-wage economies which in turn pressured high-wage European manufacturers to search for improved efficiency. They did this frequently through an increased use of outsourcing, in which low value-added tasks such as garment assembly was sub-contracted to low wage countries, typically in eastern Europe and/or North Africa with whom the EU had preferential trade agreements (Scheffer, 1994). Not only did this lower manufacturing costs, it also facilitated shorter lead times and increased flexibility that were being demanded by powerful retailer groups. Goods could be quickly delivered, in smaller batches, from these regions to the markets in Western Europe. For firms that maintained domestic production, organizational restructuring that included re-engineering and changes in work organization often occurred. Increasing use of just-in-time (JIT) and quick response (QR) techniques to meet shorter lead times, together with a systematic use of teamwork and multi-skilling amongst operatives, to improve both productivity and quality, were features adopted by many, particular larger companies (Bruscas et al., 1998; Sels and Huys, 1999). Many firms also sought technological solutions to cost issues. This occurred principally in the design and marking/cutting stages with the introduction of computer controlled cutters (CCC) and computer assisted design (CAD) systems that reduced material wastage and the need for some skilled operatives (Taplin and Winterton, 1995). However, given the difficulty of automating actual garment assembly meant that that part of the production process remained labour intensive, hence the shift towards sub-contracting by many firms. While increased imports have intensified competition on costs and delivery times, plus contributed to product market fragmentation, the results have not been identical

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in each country. Italy’s concentration on focused differentiation and niche marketing (particularly aimed at high value-added products), plus the extensive use of domestic sub-contracting as a form of flexible specialization (Belussi, 1992; Bolisani and Scarso, 1995), are different from the UK where a mass production model was more likely to prevail (Winterton and Winterton, 1997). In Germany, a highly regulated labour market and a skilled workforce resulted in a low domestic innovation potential and led to increased overseas outsourcing. Geographically proximate low-wage labour markets in central Europe, particularly Hungary, became centres for outward processing trade. In such a situation, materials were exported for processing to firm in such a country then the finished product re-imported to Germany. This arrangement minimized tariffs (it was only on the value-added or foreign labour costs) and limited the financial risks of German firms, plus it was quick and inexpensive to ship goods such short distances (Adler and Breitenacher, 1997). The two features that additionally stand out for this period are an employment decline in the clothing and textile sectors plus the growth of industry concentration. The loss of jobs in high wage economies is unsurprising given the trends documented above. However, one of the responses to increased import penetration has been a wave of mergers and acquisitions within the industry that has led to consolidation and increased power by key firms. This has been especially the case in Italy as textile-clothing giants have come together, whereas in the UK and France the concentration has been greatest at the retail level. Often this has led to greater use of overseas outsourcing as larger firms leverage their organizational and financial resources to secure favourable and efficient production terms. Recent changes In the late 1990s and after the turn of the century, most of the earlier trends have continued if not intensified. Dramatic changes in the regulatory environment when the World Trade Organization agreement on Textiles and Clothing (ATC) replaced the MFA in 1995, has resulted in further import penetration of western markets. The opening of EU markets to imports and the removal of trade barriers against imports, part of the ongoing globalization and liberalization trends, have further exposed European manufacturers to ever more competition from low labour cost countries. In addition to the elimination of quotas implied in the ATC, the EU is also obliged to apply the same liberalization to China under the EU-China agreements upon China’s entry into the WTO. In addition, a number of other specific arrangements that are part of the broader trade liberalization trend that began in the early 1990s have been put in place. These include a further reduction of trade barriers with Central and Eastern European countries since 1 January 1998; liberalized trade with Sri Lanka since 2001; and a customs union with Turkey. The EU has also entered into a number of free trade areas covering textiles and clothing with countries such as Egypt, Tunisia, Morocco, Mexico, and South Africa. The EU also allows free access from the candidate countries, the non EU members of the European Economic Area and the 69 members of the Lome´ convention. As a result of these significant liberalization trends, in 1999, 50 percent of all EU textile and clothing imports were duty free compared with 28 percent in 1994; and 70 percent of all imports of textiles and clothing (in value terms) are free of any quantitative restrictions, despite the fact that the EU still applies quotas to imports from 20 countries under the ATC until 2005. Given these trends, it is not surprising that the EU

Commission’s views on the clothing and textile industry do not include subsidies, protection or any privileged status (www.europa.eu.int/comm/enterprise/ mail-box.htm). Instead, the full onus of responsibility appears to have been placed on the industry itself to meet the competitive challenges of the future. The outcome of such policies is inescapably more job losses and a further decline of these sectors in the EU. This brings us to the question of how firms in different countries have responded to such imperatives and whether there are similar restructuring patterns in each of the countries. In the remaining papers in this special issue we look specifically at what has happened in certain countries following the increased liberalization of trade. We chose the UK and Italy because historically they have had until recent years a large domestic industry, both in employment and value terms. Germany’s industry began a secular decline in the 1980s following outsourcing but retained higher value-added jobs domestically. What has happened in Germany might tell us whether such a strategy might have continued utility for a high wage economy. We also examine changes in a smaller EU country, the Netherlands, inasmuch as it provides a glimpse at retailer-manufacturer integration innovations plus whether or not being the centre of trans-shipment trade (via the port of Rotterdam) might confer some advantages. Finally, we consider changes in Turkey, an “almost” EU country but nonetheless one which has many of the low cost advantages associated with the growth of imports. This not only provides us with an opportunity to assess how one country has benefited from the recent liberalization of trade, but also how firms in that country have attempted to move into higher value-added activities as their wage rates grew. This confers upon Turkey something of a transitional status but it also demonstrates the trend whereby formerly low cost producers are moving up the value chain and attempting to compete across a wide range of price, quality, speed dimensions that could further threaten high wage economies. In the papers that follow, certain themes will be repeated. Imports continue to displace domestic production in all the countries except Turkey, although rising wage rates there make manufacturers uncertain about the continued viability of domestic production. Employment, especially in the UK and Germany where the industry is rapidly shrinking, continues to decline. Government, particularly EU policies, far from being protectionist are being developed to encourage people to leave the industry and indirectly subsidize (through trade agreements) production in countries such as Morocco. Consequently, one can fully expect even further declines in employment. Productivity amongst existing workers remains stable or in some cases even declined. However, Italy continues to invest more heavily in employees than say the UK but does so in the context of an industrial organization model where small firms and industrial districts are privileged and proliferate. Because of the relative success of Italian firms as high-value added producers, many suggest this as a possible model for other high-wage economies. But the atypical nature of Italian industrial development (Taplin, 1989) and the historical legitimacy – and success – of its high fashion branding, make replication rather difficult. Italian firms have nonetheless been forced to rationalize production and have done this through increased overseas outsourcing (principally to central and eastern Europe) and improvements in distribution channels. The latter has been achieved as a consequence of cooperative relations between manufacturers and retailers that have a long history, plus continued local government support for the industry.

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In all but Italy and Turkey, increasingly the jobs that remain are more likely to be in high value-added, design categories. In the UK, there is evidence of clustering amongst high technology, sophisticated design companies that work closely with retailers to deliver more unique products. Similarly, the Netherlands has seen a change from production-led to design-led firms, in this instance partly a response to a highly structured retail environment. Even Turkey has seen a growth of domestic outsourcing as firms in higher wage regions have shifted garment assembly to lower wage regions within the country. Presumably this might foreshadow a restructuring of production in that country, as key firms go from being production sites for EU/US firms to developing an international brand position in their own right. Conclusions and questions The sorts of changes that are discussed in this special issue enable one both to assess the current state of the industry in select EU countries and ponder its future. In doing the latter a number of interesting questions emerge. As firms shift to high-value added tasks, will one see a re-invention of the industry? Traditional job classifications that are used by government statistics might not capture the new activities that are nonetheless directly related to clothing production. Will this result in a reclassification of the industry that reflects such changes, and enable us to better conceptualize occupational changes that mirror new work activities? Relatedly, what jobs can countries keep (presumably the high value-added ones) yet might these too be destined to disappear with technological innovation waves of the future? Might hitherto low cost producers attempt to move into higher value-added production and become direct competitors to the existing, but reinvented, EU manufacturers? How might retailer power change in the future and what might the effects of this be? As retailers have consolidated, become more powerful in buyer-led value chains, and entered production (through private label) in their own right, (see Gereffi, 1996, for a fuller discussion of the phenomenon), does this further increase their asymmetrical relationship with manufacturers? How might even consumers also affect the overall picture? Retail prices have declined in most countries in recent years precisely because of increased imports and this has encouraged an increase in sales despite lower purchasing power for many consumers. Will this trend continue and will consumers continue to expect the high degree of product diversity at a low price to which they have become accustomed? Finally what happens in 2005 when tariffs are further reduced and China assumes even greater significance as a textile/clothing exporter? Presumably the politics of trade will continue to produce nuanced responses that are both strategic and domestically defensive. And one can assume that Turkey and Italy will continue with subsidies to domestic producers that afford a degree of protection against imports. But will EU commissioners retain their current stance of considering textiles and clothing a sunset industry? If this is the case, then presumably further loss of jobs and industrial decline will be the norm. References Adler, U. and Breitenacher, M. (1997), “Production, organization and technological change: the German clothing industry in international competition”, in Taplin, I.M. and Winterton, J. (Eds), Rethinking Global Production, Ashgate, Aldershot, pp. 131-55.

Belussi, F. (1992), “Benetton Italy: beyond Fordism and flexible specialization”, in Mitter, S. (Ed.), Computer-aided Manufacturing and Women’s Employment: The Clothing Industry in Four European Countries, Springer-Verlag, London, pp. 73-91. Bolisani, E. and Scarso, E. (1995), “The international decentralization of production activities: the case of the Italian apparel industry”, paper presented at the 2nd EuroOMA Conference, Twente, 28-31 May. Bonacich, E., Cheng, L., Chinchilla, N., Hamilton, N. and Ong, P. (1994), Global Production, Temple University Press, Philadelphia, PA. Bruscas, G., Groves, G. and Kay, J. (1998), “Drivers of change in UK clothing manufacturing”, Journal of Fashion Marketing and Management, Vol. 2 No. 3, pp. 230-9. Dicken, P. (2003), Global Shift, 4th ed., Guilford Press, New York, NY. Gereffi, G. (1996), “Global commodity chains: new forms of coordination and control among nations and firms in international industries”, Competition and Change, Vol. 1 No. 4, pp. 427-39. Jones, R. (2002), The Apparel Industry, Blackwell, Oxford. Rosen, E. (2003), Making Sweatshops, University of California Press, Berkeley, CA. Scheffer, M. (1994), “Internationalisation of production by EC textile and clothing manufacturers”, Textile Outlook International, January, pp. 101-23. Sels, L. and Huys, R. (1999), “Towards a flexible future? The nature of organizational response in the clothing industry”, New Technology, Work and Employment, Vol. 14 No. 2, pp. 113-28. Taplin, I.M. (1989), “Segmentation and the organization of work in the Italian apparel industry”, Social Science Quarterly, Vol. 70 No. 2, pp. 408-24. Taplin, I.M. and Winterton, J. (1995), “New clothes from old techniques: restructuring and flexibility in the US and UK clothing industries”, Industrial and Corporate Change, Vol. 4 No. 3, pp. 615-38. Taplin, I.M. and Winterton, J. (Eds) (1997), Rethinking Global Production, Ashgate, Aldershot. Winterton, J. and Winterton, R. (1997), “De-regulation, division and decline: the UK clothing industry in transition”, in Taplin, I.M. and Winterton, J. (Eds), Rethinking Global Production, Ashgate, Aldershot, pp. 18-40.

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ACADEMIC PAPER

The UK clothing industry Extinction or evolution?

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R.M. Jones and S.G. Hayes Manchester Metropolitan University, Manchester, UK Keywords United Kingdom, Garment industry Abstract To provide an opinion as to the demise or metamorphosis of the UK clothing industry within the wider European context. Recently conducted research, along with a range of pertinent published (1978-2004) statistical data are used to inform the authors’ viewpoint on the development of the UK clothing industry. The statistical evidence describing the change in import penetration, employment levels and the impact of the national minimum wage support the view that a new typology of the clothing industry is emerging from the ashes of a rapidly declined manufacturing base. Some of the detail of garment types is hidden by the SIC system. Conversely, at times, the very categories used appear to have little contemporary relevance. Three areas of concern would remain: first, that over time the cluster itself would lose its critical mass; second, that the cluster might collapse if the central core of manufacturing is hollowed out; and third, that over time some of the “knowledge based” tasks such as design and product development might themselves be subject to migration to lower-cost locations. This paper contributes a carefully considered, and compiled, viewpoint from experienced observers of the UK clothing industry that augments the debate centred on the development of the EU clothing industry.

Journal of Fashion Marketing and Management Vol. 8 No. 3, 2004 pp. 262-278 q Emerald Group Publishing Limited 1361-2026 DOI 10.1108/13612020410547798

The clothing industry in the UK The production of clothing and the associated level of employment in the UK have been in long-term decline for many years – see Table I and Figure 1. In the context of this paper, the industry is recognised as that part of the textile-fashion supply chain encompassed by Standard Industrial Classification 18 (SIC 18) in UK official statistics[1]. It can be seen from Figure 1 that the period since the mid-1990s has been remarkable in that, in contrast with the earlier periods, both employment and output declined together. Jones (2002a, p. 27) argued that this marked “a second watershed “ in the decline of the sector following the first period of rapid decline identified by Winterton and Barlow (1996) as taking place between 1978 and 1983. The decline is both dramatic and confirmed by many data series, e.g. between 1993 and 2002, employment fell by 48 per cent; in the period of 1995 to 2002 output (physically made in the UK) fell by 44 per cent; between 1995 and 2001 the number of companies in the sector fell by 35 per cent (ONS, 2002). The rapid collapse of employment which has taken place since the mid-1990s has continued apace, with the latest figure for June 2003 plummeting to 68,300, i.e. between June 2001 and June 2003 over 22,000 jobs (or 25 per cent of the stock) were lost. Therefore, while there can be no questioning the decline, the reasons for the decline are more controversial, as will be seen in the next section. However, these trends have to be seen in the context of overall structural trends in the UK economy. In particular, it has to be recognised that the entire manufacturing sector now represents (Jones, 2002a) less than 20 per cent of overall economic activity in the UK and that the market sector (i.e. jobs not supported out of the public purse) has also been in sharp

Year

Output

Employment

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

108.8 110.9 99.9 92.6 93.4 96.5 102.3 109.4 109.7 110.7 109.0 105.3 106.2 95.9 98.5 98.2 102.7 100.0 98.1 91.6 84.7 74.3 72.5 62.6 56.0 NA

202.8 202.2 178.1 157.7 149.7 147.2 147.9 151.9 148.5 149.6 149.4 142.8 129.2 108.2 101.5 106.8 102.8 100.0 97.1 92.5 85.5 81.8 72.0 65.6 55.5 NA

Source: ONS, National Statistics Online (www.statistics.gov.uk) and private correspondence

decline relative to the public sector. Therefore, even if the clothing industry was not disadvantaged relative to overseas production by relatively high labour cost, it would not be surprising if a decline was recorded. The role of imports The general trend Tables II and III (Jones, 2003a) show the trend in domestic production, exports and imports between 1993 and 2001 in current and real price terms. The data source and the costing conventions are fully described in Jones (2002b). The tables confirm the decline of domestic production and highlight the rapid rise in import penetration which took place over the reference period. The role of imports in causing job loss in the textile and clothing industries has long been a controversial one and there is an extensive – though flawed – research base covering many countries and time periods. This is summarised in Jones (2002a, pp. 86-92). Job losses could be attributed to three forces: a lack of demand; a rise in productivity or a rise in imports. The majority of research utilised a technique known as “the accounting technique” to isolate the individual impact of the three forces. Most studies conclude that the major cause of job loss in the developed countries was productivity growth and not imports from low cost countries, although as Jones (2002a, p. 90) pointed out, that in “relation to the apparel sector the picture is far from less clear

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263

Table I. Output and employment in the UK clothing industry: index numbers (1995 ¼ 100)

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264

Figure 1. Trends in output and employment in the clothing industry in the UK (SIC Division 18) 1978-2003

cut than it appears to be in the primary textile sector”. Unfortunately the technique used to generate these results is considered by many authors such as Martin and Evans (1981) and Wragg and Roberts (1978) to be seriously, if not fatally, flawed in that it requires belief that the three forces are entirely unconnected. As Jones (2002a, p. 91) commented this “seems barely credible; it is difficult to believe that the impetus to the increase in productivity recorded in the UK apparel industry in the 1980s was not driven by the perceived need to compete with overseas competition. In addition, to the extent that import competition promotes low prices, this in turn could be expected to increase domestic demand” Jones (1988a) studied the relationship between apparel imports, production and consumption in the UK 1975 to 1985 and found virtually no evidence of a inverse relationship between levels of production and imports. However, a later study (Jones, 1988b) into MFA imports 1984 to 1987 using lagged relationships did find that in 52 per cent of the garment categories a negative relationship was starting to appear. In Table III it can be seen that between 1993 and 2001, UK domestic production fell in real terms by 36.6 per cent while imports rose by 104.5 per cent. The average level of

UK manufacturer sales Total exports Total imports Trade balancea UK net supplyb Import penetration (%)c Export ratio (%)d

1993

2001

(A)

(B)

4,065,717 1,492,254 3,437,850 2 1,945,596 6,011,313 57.2 36.7

2,337,879 1,777,698 6,376,289 24,598,591 6,936,470 91.9 76.0

1,795,491 1,365,272 4,896,990 23,531,717 5,327,209 91.9 76.0

2,577,979 1,960,267 7,031,133 25,070,866 7,648,845 91.9 76.0

Notes: adefined as the difference between exports and imports. If imports exceed exports the balance is negative; bdefined as UK manufacturer sales minus exports plus imports; cdefined as imports as % of UK net supply; ddefined as exports as % of UK manufacturer sales Sources: 1993 – CSO and Taylor Nelson AGB Productions, UK Markets (1994 ed.); 2001 – ONS, Production, Sales and Trade (2002 ed.)

UK manufacturer sales Total exports Total imports Trade balance UK net supply Import penetrationc Export ratiod

Current prices

RPI index

Clothing price index

242.5 +19.3 +85.5 +136.4b +15.4 +60.7 +107.1

2 55.8 +8.5 +42.4 +81.5b 2 11.4 +60.7 +107.1

236.6 +31.4 +104.5 +160.6b +27.2 60.7 +107.1

Notes: aTable II in the text; bthis means the negative balance has become bigger; cnote that this does not mean that the import penetration ratio was 60.7. This is the % change between the ratios at the two dates; dthe import penetration ratio in 2001 was (see Table VIII) 91.9% Source: 1993 – CSO and Taylor Nelson AGB Productions, UK Markets (1994 ed.); 2001 – ONS, Production, Sales and Trade (2002 ed.)

The UK clothing industry

265 Table II. Changes in the UK clothing sector 1993-2001 in value terms (£000)

Table III. % changes in UK clothing sector 1993-2001 in value termsa

import penetration rose by 60.7 per cent, i.e. from 57.2 per cent to 91.9 per cent. This does not, of course, prove that the rise in one caused the fall in the other. However, it is possible – for the time period in question – to rule out both the other two potential causes of job loss because between 1993 and 2001 there was (see Table IV) a fall in productivity rather than a rise and there is no evidence of a lack of spending on apparel 1993 1994 1995 1996 1997 1998 1999 2000 2001

94.1 98.5 100.0 100.7 102.0 102.8 103.1 105.2 102.8

Source: ONS, Labour Market Trends, August, 2003

101.1 103.0 100.0 98.2 96.8 89.0 82.5 78.4 68.7

Table IV. Changes in productivity 1993-2001 (1995 ¼ 100)

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in the UK market place which had grown in size continuously since the mid-1950s (Jones, 2002a, p. 234) and which in the recent past has both shown rates of growth per annum far in excess of those exhibited by the trend in total expenditure and risen as a proportion of total expenditure – see Tables V and VI. Therefore, by a process of elimination it can be suggested that the rise in imports 1993 to 2001 was a major contributory factor in the fall in domestic production. The rest of this section will, accordingly, focus on various dimensions of import performance. Import penetration rates by garment type 1993 and 2001 Import penetration is defined as the percentage of the domestic market taken by imports – in this case it is imports as percentage of UK manufacturers sales – exports + imports. This is defined as UK net supply. The percentages by garment type have been calculated and are shown in Figure 2[2]. The variation in penetration rates is extremely wide and is represented in Figure 2. It can be seen that, in 2001, most garments fall into the range 50 per cent to 100 per cent. This can be regarded as the modal or most typical range. It can also be seen that 2001 figures normally exceeded 1993 figures. The degree of correlation between the two sets of figures is +0.49 (significant at the 1 per cent level) and the Spearman’s rank correlation is 0.55 (significant at the 1 per cent level). This suggests that having a high degree of import penetration at the start of the study period explained only a small proportion of the level of import penetration at the end of the period. It is difficult to know what – if anything – this indicates in terms of the evolution of the industry but it could be argued that it suggests that inherent garment characteristics or qualities of individual garments do not explain much of the change in import penetration observed over the period. In this case it might then be argued that more general factors must be responsible. It could be argued that testing for a difference between the two distributions is more meaningful. The t-test (t statistic= 24.66, t critical value (2-tailed) ¼ 1.98) shows significant differences between the 1993 and 2001 figures (at 1 per cent level) and it can

Table V. Clothing consumption in the UK, £million at 1995 prices

Table VI. Changes in consumption year on year (%)

1998 1999 2000 2001 2002

Total consumption

Clothing and footwear

% of total

496,231 519,222 545,751 567,903 589,017

32,276 34,265 37,584 41,909 47,094

6.5 6.6 6.9 7.4 8.0

Source: ONS, Consumer Trends, Quarter 1, 2003

1998 1999 2000 2001 2002

3.7 4.6 5.1 4.1 3.7

Source: ONS, National Statistics Online (www.statistics.gov.uk) and private correspondence

4.5 6.2 9.7 11.5 12.4

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267

Figure 2. Import penetration (%) 1993 and 2001

be concluded that the mean increase of 23.08 is significant and meaningful. This supports the view that the difference between the two distributions is not due to chance. Import penetration ratios and the ratio of domestic production to imports, 2001 It would be expected that those garment types with very high import penetration ratios would normally have little domestic production remaining, other things being equal. The penetration ratios previously calculated have been complemented by a calculation, for each category, of the ratio of imports to domestic production (I to DP) which is calculated by dividing imports by domestic production. If the ratio is less than 1 it indicates that domestic production exceeds imports. High figures indicate imports in excess of domestic production[3]. The degree of correlation between the two ratios is only 0.2 per cent (significant at the 5 per cent level). This result is counter intuitive and again difficult to evaluate. It can be seen that those sectors with very low ratios of imports: domestic production (i.e. where domestic production exceed imports) do tend to have very low import penetration ratios. However, removing the “outriders”, i.e. those garment categories with I:DP ratios of over 100 produces a Pearson’s correlation of +0.594 which can be described as a moderate correlation. However, it is clearly not the case that there is any close progressive relationship between the two ratios once a certain level of imports domestic production has been reached. Identification of sectors least affected by imports It is clear that the degree import penetration (in 2001) varies enormously from garment to garment, i.e. some sectors have resisted imports more successfully that others. A list of sectors with import penetration ratios below 60 per cent is given below, together

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with their I to DP ratios (those garments marked a have both a ratio of imports to domestic production of less than one and an imports pentration ratio of less than 60 per cent. The figures in brackets are the I:DP and IP ratios respectively): .

268

.

.

.

.

.

.

. .

. . . . .

. . . . . .

. . . . . .

men’s and boys’ ensembles of cotton for industrial and occupational weara (0.8, 53.6); men’s and boys’ ensembles of man-made fibres for industrial and occupational weara (0.1, 14.7); men’s and boys’ jackets and blazers of cotton for industrial and occupational weara (0.6, 40.4); men’s and boys’ jackets and blazers of man-made fibres for industrial and occupational weara (0.3, 26.7); men’s and boys’ trousers of man-made fibres for industrial and occupational weara (0.5, 36.6); men’s and boys’ overalls of man-made fibres for industrial and occupational weara (0.3, 23.5); women’s and girls’ jackets and blazers of man-made fibres for industrial and occupational weara (0.3, 22.1); men’s and boys’ other garments for industrial and occupational weara (0.2, 18.3); men’s and boys’ overcoats, raincoats, car coats etc. of cotton or man-made fibres weighing over 1kg per garmenta (0.4, 34.4); men’s and boys’ singlets, vests etc. of textiles (1.0, 68.3); women’s and girls’ jackets and blazers of wool or fine animal haira (0.9, 58.0); women’s and girls’ skirts and divided skirts of wool or fine animal haira (0.6, 48.5); women’s and girls’ trousers of wool or fine animal haira (0.6, 42.3); women’s and girls’ neglige´es, bathrobes, vests, briefs etc. of man-made fibres (1.0, 60.1); felt hatsa (1.0, 12.1); hats made by assembling strips of materiala (0.6, 45.2); silk ties (1.0, 67.5); leather belts (1.0, 66.1); garments of non-woven fabricsa (0.7, 52.1); men’s and boys’ overcoats, raincoats, etc. of impregnated or rubberised fabricsa (0.2, 34.1); track suits of knitted or crocheted textilesa (0.7, 50.6); women’s and girls’ specialist sports wear of man-made fibresa (0.8, 49.6); women’s and girls’ swimwear, not knitted of crocheteda (0.5, 37.5); shawls, scarves, etc. of wool or fine animal haira (0.9, 58.0); ties of man-made fibresa (0.2, 15.4); men’s and boys’ singlets, vests etc. of cottona (0.4, 31.7).

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269

Figure 3. Changes (1993-2001) in UK production (A), imports (B) and net supply to the UK market (C)

There may, of course, be many reasons for the low level of imports in these sectors, e.g. chance; the small size of the markets; the importance of quick response; the influence of design; the importance of a “made in Britain” label or relatively low labour import. It would be an interesting piece of research for the future to see if these sectors do have any shared characteristics. Import penetration and the decline of UK production It has been possible to assemble data on changes (1993-2001) in UK production (A), imports (B) and net supply (to the UK market (C)) for 104 garments. All three variables can go up top (+) or down (2 ). This means that there are theoretically eight possible combinations. In practice only seven combinations occurred and only four combinations were observed frequently, as is shown in Table VII. Cases I and III show imports (B) rising and UK production (A) falling. The 104 garment types are plotted on a three dimensional diagram (Figure 3). Garments fitting pattern III where UK production fell even though net supply was rising would appear on the

I II III IV

A

B

C

% of cases

2 + 2 2

+ + + 2

2 + + 2

31.7 21.2 33.7 9.6

Table VII. Combinations of outcomes 1993-2001

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270

right, at the back and at the bottom of the cube; garments falling into pattern I would be on the left, at the bottom and at the back. Therefore, it could be argued that if imports are “destroying” UK production we should observe most garments in those two segments of the cube – particularly at the back and at the bottom. “Good” sectors of the industry might be represented by case II where everything is rising together – these will appear at the top, to the back and on the right. These represented 21.2 per cent of the garment categories. It should be noted that there was no consistent tendency for these garments to exhibit low import penetration ratios in that within this group the ratio ranged from a low of 18.3 to a high of 120.1. In summary, this analysis suggests that in some 65.4 per cent of the individual garment sectors examined imports rose while domestic production fell.

Impact of the national minimum wage The national minimum wage (NMW) was introduced in 1999 at a level of £3.60 and has since risen to £4.50 as of October 2003, with a further increase to £4.85 scheduled in 2004 widely discussed. Fears about the impact of the NMW on the textile and clothing industry have, whilst being widely discussed, been found to be unsubstantiated. Whilst the levels of pay have had a discernable influence on externally contracted operations (such as catering and cleaning) and under-performing staff – the product of operating piece rate systems – the direct impact on textile and clothing manufacture has been swamped by much greater external factors; principally, off-shore manufacturing (Low Pay Commission, 2003). However, it is of course possible that the rise of offshore manufacturing is itself linked to the labour cost gap between the UK and other locations. Job losses have traditionally been attributed (Jones, 2002a) to one of these factors, viz. productivity increases; lack of demand and imports. As has been indicated above in the section entitled “Role of imports”, UK productivity has fallen not risen in the recent past and there is no sign of lack of demand in the market place. As part of a longitudinal survey of the impact of the NMW on clothing manufacturers (conducted by Manchester Metropolitan University) a telephone questionnaire has been conducted five times – in 1997, 1998, 2000, 2001 and 2002. The original sample size was 20, drawn as an opportunistic sample from the UK’s Electronic Yellow Pages. However, the survey saw a decline in numbers of participating companies during 2001 and 2002 from the original 20 to 16 and then to 14 respectively. The analysis of the data is qualitative and falls within the methodology normally described (Teser, 1990) as “content analysis”, in which categories relevant to the research are designed to enable the responses to be classified and the frequency of occurrence calculated. Clearly there is a limit to the reliance which can be placed upon a sample of this size but the study did cover a range of company sizes and a good spread of activities within the sector (Jones and Hayes, 2002). In addition, there was a degree of continuity in the sample. Presented below (Table VIII) are the 2002 responses compared directly to the perceived impact on the main themes (identified through the “content analysis”) of 2001’s questionnaires. It can be seen that in many areas there is an even split between yes and no answers (questions A and F) and that the perceived impact on working hours and pay structures was not realised, these findings concur with those of The Low Pay Commission (2003).

The majority of respondents feel that the NMW was set too high at £4.10 (Table IX) with, rather surprisingly, one respondent suggesting it was too low. However, the simple percentages do not always necessarily indicate “zero impact”, e.g. the responses to question B have to be seen in the context that most respondents’ perception was extremely negative in the first place. Over the course of the longitudinal study there has been expressed, strongly and consistently, a view that a rate of £5.00 would be extremely damaging – that rate is now being approached in the UK. The single most significant feature of the responses from continuous members of the sample is the total collapse of confidence in the future expressed in the first survey, when most felt they could still compete with imports. The view expressed in the final two surveys was uniformly pessimistic. Therefore, while it cannot be stated that the NMW has had a direct and identifiable impact upon employment, it can be argued that (Jones and Hayes, 2002) “There is sufficient evidence to justify a conclusion that increasingly the NMW is seen as one of the more significant threats to the continuing viability of the industry in the UK”.

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271

EU policy towards the clothing sector UK policy is, of course, subsumed in EU policy which covers a wide range of areas such as trade policy; innovation; competition policy; regional policy; assistance and employment policy. In the present context, trade policy is clearly the most important. EU policy has been described in the Introduction to this edition. It is worth repeating that the key word in trade policy is liberalisation, i.e. the progressive opening up of the EU market in clothing to imports and the removal of trade barriers against imports. As can be seen from Table X, the percentage of UK clothing imports coming from what can be described as low-cost regions had reached 73 per cent in 2001. As is implied in Figure 2, the rate of increase in import penetration between 1993 and 2001 varied greatly as between garment categories. The MFA phase-out dates within this period were 1995 and 1888. The categories of garments covered by those two phase-out cycles are shown in Table XI together with the percentage increase in import 2001 Question

% No

% Yes

% No

35

65

50

50

50 20 15 50 40

50 80 85 60 60

43 29 21 57 50

57 71 79 43 50

(A) Is/did the minimum wage reaching/reach a critical level? (B) Has it changed your perception of the viability of the industry? (C) Will/did the increase (to £4.10) cause job losses? (D) Will/did it reduce working hours? (E) Will/did it alter pay structures? (F) Will/did it reduce profits or the services offered?

Do you regard this figure as . . . Respondents 2001 Respondents 2002

The NMW at £4.10 Too high 40 64

2002

% Yes

Too low

About right?

0 7

60 29

Table VIII. Main themes: national minimum wage

Table IX. The national minimum wage at £4.10

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Sources of UK imports

% of total 1995

% of total 2001

29.7 4.9 3.5 2.0 0.4 6.6 2.7 50.3

24.3 9.0 6.4 1.5 0.3 7.1 2.1 49.4

272

EU Rest of W. Europe E. Europe N. America Other Americas Middle East and N. Africa Sub-Saharan Africa Asia and Oceania

Table X. Low cost suppliers 1995 and 2001

Note: low cost suppliers are defined as E. Europe, Middle East and N. Africa, Sub-Saharan Africa plus Asia and Oceania. Turkey is classified into the Rest of W. Europe but has been added into the low cost total to give the % quoted in the text

penetration over the reference period. The value of this data is seriously limited by the fact that in 1995 and 1998 the garment categories involved were relatively unimportant categories (i.e. non-sensitive items). In addition, the data for a number of the categories were suppressed while, as has been noted, workwear as a sector remains relatively untouched by imports. Therefore, while it can be seen that a number of the categories affected by the early phase-out of quotas did experience substantial increases in penetration, this has to be seen in the context of a very rapid rise in average penetration over the period in the sector as a whole (see Table III). Therefore, it is not possible to use – at least for the UK – data on individual products to throw much light on the impact of the removal of the MFA on domestic production. However, at a more general level and given that, as was pointed out above, there is no possibility that either rising productivity or a lack of demand can have caused job loss, it is reasonable to argue that the massive rise in imports and in import penetration recorded in Table III and Figure 2 Garment type

Change in import penetration 1993-2001

Knitted ties Knitted suits Other ties 3 categories

Data suppressed Data suppressed

Woven handkerchiefs 2 categories Swimwear 3 categories (plus one suppressed) Woven scarves 2 categories Table XI. Change in import penetration 1993-2001

Corsets Woven gloves

12.6-15.4 57.3-67.5 115.3-86.2 82.3-119.5 142.9-164.5 74.7-148.6 15.4-37.5 96.8- 96.8 20.8-181.2 219.4-391.0 33.4-71.7 95.5-118.6

were facilitated by the progressive liberalisation of trade since 1991 and must be identified as the main contributory factor in the collapse of domestic employment and production in the UK. It is not credible to argue that the massive increases in imports from such countries as Turkey, Sri Lanka and Romania were not related to the liberalisation initiatives taken in respect of those sources over the last decade. If a protected sector is defined as one in which when domestic demand rises and cannot be met by domestic sources imports are prevented from filling the gap so that prices rise it is clear that the UK clothing market was not protected to any meaningful degree by the MFA – there were simply too many preferential suppliers not covered by the quotas. Table XII demonstrates that since 1974 the trend in clothing prices in the UK has consistently lagged behind the movement in the RPI.

The UK clothing industry

273

Evolution or extinction? There seems to be little doubt that large scale domestic manufacture of garments will never return to the UK unless there is a catastrophic break down in the world trade system which renders offshore sourcing impossible, or a miraculous breakthrough in technology renders garment assembly a capital intensive process – or both. There appear to be, on the basis of the evidence above, sectors – or niches – in which domestic production can survive, such as workwear; in addition quick response garments and technical textiles also appear, on a priori grounds, to have a relatively brighter future. Therefore, to this extent it can be argued that a traditional sector is becoming extinct other than in these special areas. However, this is not necessarily the end of the story. Research at MMU suggests that there is another way of looking at the transformation of the industry which is being largely driven by the huge variation in labour costs globally (Tyler, 2003). The assembly of the garment is the stubbornly labour intensive part of the operation but is only a small portion of the textile-fashion supply chain. There seems little chance that this will change (Jones, 2002a, p. 155) It is probably not insignificant that as the number of people employed in the industry in the UK has collapsed, the proportion of male to female workers has become virtually 50:50, whereas in the past the industry was dominated by machinists who were inevitably (in the UK) female. Therefore, as the sewing jobs either disappear or move offshore, the more traditionally male-oriented jobs are left. The making up of the garment is one part of a long process which converts fibre into a garment – normally known as the textile-fashion supply chain (Jones, 2002a, p. 2). If “the clothing industry” is seen as one level in the chain, then at that one level a significant number of processes and operations have to be carried out apart from sewing. The list would include the following: . Product development. . Market research. Year

Index of average prices

Ratio of clothing prices

1980 1985 1990

205 223 266

79 60 53

Notes: The index of average prices is measured by the RPI; the ratio is found by dividing the clothing price index by the RPI and multiplying by 100 Source: Jones (1994) reproduced in Jones (2002a, p. 240)

Table XII. Clothing price movements in the UK 1974-1990 (January 1974 ¼ 100)

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. . . . .

274

. . . . .

Design. Fabric testing. Quality control. Cutting and marker making. Sample making. Advertising and promotion. Brand building. Buying. Importing. Sourcing agencies.

In addition it could be argued that hosiery and knitwear form part of the clothing industry but in the UK they are classified into textiles. Finally, as Tyler (2003, p. 231) points out, the way in which many UK retailers have chosen to manage their product development and procurement strategies has meant that often “these activities of retail organisations look very similar to those of manufacturers that now source in low labour cost countries”. The division between manufacture and retail becomes increasingly blurred. Unfortunately the official data collection systems often lag behind these commercial developments. The Annual Business Inquiry (previously the old Census of Production) covers only manufacturing activity in the traditional sense. In principle, if a company previously making up in the UK closes the UK plants and sources offshore instead it would most probably be re-classified out of SIC 18 (clothing manufacture) and recorded as “a converter” unless the company retained title to the goods and took all the financial risks at all times. An attempt can be made to get around this issue by using the concept of a “cluster” of activities – a textile cluster. A cluster would consist of a group of companies which carry out the functions related to the creation of value in the supply chain, which ends with the production of a garment. These companies could, in principle, be allocated in the official statistics to many different industrial headings, e.g. there is a textile design sub-section in the design industry. This is a useful idea but care has to be taken (Jones, 2001) not to confuse this idea with the popular cluster concept developed by Porter (1998) which relates to the clustering in small geographical area of the head offices of world class companies – which is not necessarily the same region where they employ the most people. In terms of the textile apparel cluster it was concluded by Porter (1998, p. 494) that “Britain lacks comparative advantage . . . in most areas of textiles/apparel”. This confusion of concepts does not necessarily mean local agencies have no role in promoting employment. In particular, the so-called up-grading strategy (Cooke, 1999) may be beneficial – in which an attempt is made to facilitate and support the enhancement of existing firms’ capabilities via such initiatives as assistance with marketing or forging links between companies and with local educational establishments. The big issue, according to Cooke (1999), is that some industries appear to be “sticky”, in the sense that they stay in the same place and weather “the levelling effect of accelerated world market integration and the global search for profitability” while others do not. In view of the potential confusion it might be useful,

therefore, to call the clusters we are concerned with in the present context something like locally integrated supply chain clusters (LISCC). Two recent studies at MMU have highlighted these issues. First, a study was carried out in 2001 and 2002 to identify (Tyler, 2003) a typology of successful clothing companies (identified from secondary financial data) and based on company interviews. The basic approach to the survey was to ask the question “What drives the successful companies?” The core business was (Tyler, 2003, p. 232) “ the supply of product to satisfy customer requirements. The dominant service issues are design and product development, sourcing and supply chain business relationships”. Features of successful companies were identified but of more significance in the present context was the fact that distinctions between “clothing manufacturers” and “clothing suppliers” were far from clear cut. In particular (Tyler, 2003, p. 233) many “clothing companies that used to be well known as manufacturers are now in the ‘supplier’ category. Furthermore, the operations arm of many retailers could easily be regarded as ‘clothing suppliers’. We concluded that the supplier/manufacturer distinction is arbitrary and both categories represent the ‘clothing industry’ of today”. The main point is that many companies who are non-manufacturers in the traditional sense still generate a lot of wealth within the LISCC. Following from this, a second study (MMU, 2004) was initiated to test the hypothesis that simply looking at the official statistics for the size of “the clothing industry” (defined in the UK as SIC Order 18) would significantly understate the contribution to the economy made by the LISCC. The north-west region was used to test this hypothesis. In 2001 the total number of enterprises classified to SIC Order 18 in the whole of the UK was 5,831 (down from 8,672 in 1995) (see Annual Business Inquiry, 2002, National Statistics online, available at: www.statistics.gov.uk/abi/). There are no regional figures but traditionally the north-west had about 16 per cent to 20 per cent of the UK total, this would give around 1,000 companies. The study – based on a number of secondary sources – unearthed a total of 2,083 companies in the cluster. The resulting typology identified four categories of companies (excluding those who could not be classified): traditional manufacturers (21 per cent); 100 per cent overseas suppliers (14.4 per cent); balanced sourcing suppliers (10.8 per cent) and niche manufacturers (2.4 per cent) who were mainly in performance related markets. The study of these companies found a total employment of 44,452 – when according to the official statistics of employment in the entire UK clothing industry, the figure for the UK was 63,000! Table XIII and Figure 4 summarise the early results of the study. Therefore, it could be argued that while the traditionally defined industry has been severely eroded there has also been an evolution within the wider cluster, e.g. in the latest study some 73 per cent of companies in the cluster were not manufacturers. This cluster will probably never provide the volume of jobs the traditional clothing industry did because removing the making-up process takes away a very high proportion of total jobs because the industry was characterised by a very high ratio of operative to total jobs Number of companies covered Number of traditional manufacturers Number of employees Source: MMU (2004)

2,083 372 44,452

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Table XIII. The Manchester cluster

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Figure 4. The emerging typology

(Jones, 2002a, p. 41). Nevertheless, on the basis of the Manchester study, it could be argued that the textile-fashion cluster can still provide a substantial number of jobs and make a larger contribution to the regional and, by implication, the national economy than would be anticipated from the official statistics – particularly if a regional multiplier is applied. Conclusions There is no doubt that the period from the mid-1990s to the present has seen a catastrophic collapse in both the output (volume) of garments actually made up in the UK and the number of people employed making those garments. It is not possible to estimate what proportion of those losses was attributable either to the progressive liberalisation of trade or to the introduction of the NMW and it is possibly not that important – other than as an interesting academic exercise – that this is ever achieved, given that there is virtually no possibility of any reversal of policy. What is clear is that over the period the combined pressures of the progressive removal of trade barriers and the upward pressure on the wage differential between the UK and low-cost suppliers from a variety of sources (but mainly from aspects of EU social policy) combined to reduce the attractiveness of domestic production relative to offshore production beyond the point of no return for most of the UK-based companies which remained in existence. These pressures were not, of course, continuous. Jones (2003b) has shown how the relative competitiveness of the UK in terms of wages costs was eroded between 1990 and 1997, for example, in relation to Turkey and China the two major suppliers. This does not mean the absolute extinction of all the industry, as niches remain where domestic production remains attractive and, in addition, as has been seen, there is also an element of evolution into a different sort of industry as characterised by the cluster identified in the MMU research, although much of that activity is itself linked to making up offshore. Three areas of concern would remain: first, that over time the cluster itself would lose the critical mass necessary to maintain the required skills base and range of

component suppliers vital to the cluster’s health (Roberts and Marsh, 2002) under the continued pressure of global shift; second, that the cluster might collapse if the central core of manufacturing is hollowed out by the same force; and third, that over time some of the other tasks (the so-called “cleverer” tasks) such as design and product development might themselves be subject to migration to lower-cost locations, in the same way as we are now seeing some service sector jobs move to India, for instance. Notes 1. A full list of SIC 18 categories can be obtained from the authors. 2. The full table showing import penetration percentagess by individual category for 1993 and 2001 together with the description of SIC 18 can be obtained upon request from the authors. 3. The full table by category can be obtained on request from the authors. References Cooke, P. (1999), “The competitive advantage of regions”, in Barnes, T. and Gertler, M.S. (Eds), The New Industrial Geography, Routledge, London. Jones, R.M. (1988a), “The relationship between clothing production, consumption and imports in the UK”, Hollings Apparel Industry Review, Vol. 5 No. 2, pp. 21-53. Jones, R.M. (1988b), “The relationship between trade and production in the UK clothing industry”, Hollings Apparel Industry Review, Vol. 5 No. 3, pp. 3-12. Jones, R.M. (1994), “The demand for clothing in the UK 1974-1991”, The Journal of Clothing Management and Technology, Vol. 11, pp. 85-114. Jones, R.M. (2001), “Porter’s clusters, industrial districts and local economic development”, Journal of Fashion Marketing and Management, Vol. 5 No. 3, pp. 181-9. Jones, R.M. (2002a), The Apparel Industry, Blackwell Science, Oxford. Jones, R.M. (2002b), “The women’s wear industry in the UK 1993-2001: a statistical review”, Journal of Fashion Marketing and Management, Vol. 7 No. 2, pp. 207-24. Jones, R.M. (2003a), “The UK clothing sector 1993-2001: hats, workwear and other wearing apparel – and the final analysis”, Journal of Fashion Marketing and Management, Vol. 7 No. 4, pp. 428-40. Jones, R.M. (2003b), “Hidden costs: only surface deep?”, Journal of Fashion Marketing and Management, Vol. 7 No. 1, pp. 7-12. Jones, R.M. and Hayes, S.G. (2002), “Minimum wage legislation and the UK clothing industry”, Performance and Reward Conference Proceedings, MMU Business School, MMU, Manchester. Low Pay Commission (2003), The National Minimum Wage: 4th Report of the Low Pay Commission, TSO, Norwich. Martin, P. and Evans, J.M. (1981), “Notes on measuring the employment-displacing effect of trade by the accounting method”, Oxford Economic Papers, Vol. 33, pp. 154-64. MMU (2004), Re-mapping of the North West Clothing Industry, International Fashion Business and Technology Centre, Manchester. ONS (2002), Annual Business Inquiry, HMSO, London. Porter, M.E. (1998), The Competitive Advantage of Nations, Free Press, New York, NY.

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Roberts, D. and Marsh, P. (2002), “A failure in the making”, Financial Times, Vol. 20, January, p. 11. Teser, D. (1990), Qualitative Research, Falmer Press, Basingstoke. Tyler, D. (2003), “Will the real clothing industry stand up?”, Journal of Fashion Marketing and Management, Vol. 7 No. 3, pp. 231-4. Winterton, R. and Barlow, A. (1996), “Economic restructuring of UK clothing”, in Taplin, I. and Winterton, J. (Eds), Restructuring within a Labour-Intensive Industry, Avebury, Aldershot. Wragg, R. and Roberts, J. (1978), Post-War Trends in Employment, Production and Output, Department of Employment, London.

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ACADEMIC PAPER

Organizational foundations of export performance The case of the Turkish apparel industry

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Binnur Neidik Duke University, Durham, North Carolina, USA Keywords Turkey, Garment industry, Exports, National economy, International investments Abstract To provide an overview of the organizational changes Turkish apparel firms have undertaken in the 1990s and early 2000s and to show how these changes affect sector’s export performance. Designed as a case study that uses interview and archival data. Interviews with company representatives, conducted in Turkey and Germany during 1996-2001, are primary sources of information. As in all case study research, the interviews are supplemented by archival data, including statistical reports published by host country governments, annual company reports, company Web sites, industry magazines, research reports prepared by the local industry associations, articles appearing in the mass media including the Internet. While Turkey has historically been dependent on the EU market and this dependence has helped Turkish manufacturers develop new capabilities, recent organizational trends in the industry point to a struggle by manufacturers to break out of this dependence and expand in new markets. Three overarching organizational trends stand out: the increasing creation of backward and forward linkages, both domestic and foreign, the relocation of production to cheaper sites, both inland and overseas, and the increase in the scale and scope of partnerships formed with US companies. These partnerships not only create a new set of relationships, but also transform the existing ones. Relies on the respondents’ knowledge of past and present events and documentary data to make inferences about process and change in the industry. Not based on a random sample and oversamples large firms. A useful overview of organizational changes that presents firm-level data. May provide insight into how export growth in apparel may be sustained beyond 2004.

As of 2001, Turkey was the seventh-largest apparel-exporting nation in the world, in addition to being one of the top suppliers of apparel to the European Union (EU)[1]. Notwithstanding this status, Turkey became an apparel exporter only in the mid-1980s, to which it entered facing dire economic conditions. These conditions included accelarating inflation, rising unemployment, common shortages, labor unrest, and last but not least, rampant political violence. Towards the end of the 1970s, Turkey’s growth process had become extremely unstable and its debt problems worsened, due to external shocks, a mismanaged economy, and severe political instability (Baysan and Blitzer, 1990, p. 9). Yet, Turkey rapidly began to increase its apparel exports in the 1980s. The apparel exports went up from an insignificant US$0.1 billion in 1980 to US$3.4 billion in 1990. This upward trend continued throughout the 1990s. By 2002, the value of Turkey’s apparel exports had reached about US$9 billion (Turkish State Institute of Statistics, 2003). This export performance made Turkey not only one of the largest apparel-exporting nations in the world, but also the only developing country to remain a top-supplier to the European Union for over 15 years.

Journal of Fashion Marketing and Management Vol. 8 No. 3, 2004 pp. 279-299 q Emerald Group Publishing Limited 1361-2026 DOI 10.1108/13612020410547806

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How did Turkey’s apparel sector succeed in increasing its exports, and rather rapidly at that, amidst such unfavorable economic conditions? More importantly, how was Turkey able to sustain this export performance through the 1990s, despite increasing competition from other developing countries, especially China? In this paper, I provide an overview of the organizational changes that took place in the Turkish apparel industry in the past decade to account for Turkey’s sustained export performance in the apparel sector. In contrast to existing literature, which emphasizes the role of macroeconomic management and international regulatory frameworks, I emphasize the role of organizational restructuring the industry has gone through in the 1990s. In this respect, I show the different ways in which Turkish manufacturers have reorganized their supply chains so as to remain competitive. I argue that while Turkey has historically been dependent on the EU market and this dependence has helped Turkish manufacturers develop new capabilities, recent organizational trends in the industry point to a struggle by manufacturers to break out of this dependence and expand in new markets. The paper is based on field research conducted in Turkey in 1996, 1997, and 2001 as well as field research conducted in Germany, Turkey’s largest export market, during 2000. The primary method of data collection was interviews with company representatives. The total number of companies interviewed was 15 in Turkey and in Germany. Additionally, the study used archival data, gathered from both government and non-government sources of information. These included statistical reports published by host country governments, annual company reports, company Web sites, industry magazines, research reports prepared by the local industry associations, news clippings and other articles appearing in the mass media including the internet. Most recent information about the previously interviewed 15 Turkish firms was gathered from company Web sites and/or articles about the companies that have appeared in the mass media. Web sites of additional companies were also reviewed for the paper. The number of Web sites reviewed thus amounted to 124[2]. In what follows, I first provide an overview of Turkey’s export performance in the apparel sector, highlighting the variables emphasized in recent debates to explain its upward trend. I then provide an overview of changes the industry has gone through in the 1990s, focusing on organizational variables. This is followed by a conclusion, which reflects upon the future of the industry. Explaining the upward trend in Turkish apparel exports Following the liberalization of the Turkish economy in the early 1980s, Turkey’s apparel and textiles exports began to rise rapidly (Duruiz and Yentu¨rk, 1992; Yasar, 1996). This upward trend, however, was not limited to the 1980s. As highlighted in Table I, Turkey’s apparel and textiles exports continued to rise through the early 2000s. Accordingly, Turkey was able to maintain a significant trade surplus in apparel since the 1980s. Although she has also maintained a trade surplus in textiles, the value of this surplus fluctuated over time. Debates on Turkey’s export performance, led mainly by economists, have centered on two major variables to explain this upward trend. The first one emphasizes the role of government policies and macroeconomic variables (Arıcanlı and Rodrik, 1990; Yasar, 1996). Indeed, state interventions have played a substantial role throughout

1980

1983

1986

1989

1992

1995

1998

2002

Apparel Exports Imports Surplus

131 0.02 131

648 0.13 648

1,245 2.5 1,243

2,719 7.3 2,712

4,139 31 4,108

6,121 49 6,072

7,073 243 6,830

8,897 263 8,634

Textiles Exports Imports Surplus

343 79 264

841 98 743

1,347 294 1,053

1,652 712 940

2,532 1,813 719

3,557 2,317 1,240

4,244 3,819 425

936 159 777

Source: T.C. Basbakanlık Devlet ˙Istatistik Enstitu¨su¨ (Turkish State Institute of Statistics)

Turkey’s economic history. Of particular significance, however, is the export-led industrialization strategy adopted during the early 1980s. It is generally accepted that the reforms introduced in this period were the most radical in terms of the extent of structural change they sought to achieve (Kıray, 1990). These reforms have opened up the Turkish economy to world markets, liberalized its trade regime, and initiated the process of Turkey’s integration into the world economy (O¨z, 1999). A second variable of interest has been the multi-layered international regulatory framework that has historically governed apparel trade. One of the most important layers of this framework is the EU, with which Turkey has been associated since 1959. The EU’s trade regime had far-reaching consequences for not only its member states, but also its trading partners. It followed that Turkey benefited from its association with the EU for at least a couple of reasons. First, because of her status as a preferential trade partner, Turkey avoided the quantitative restrictions she continues to face in the US market (Yasar, 1996; Tu¨cking, 1999; PRUS Notes, 2002). As highlighted in Table II, it is not surprising in this regard that the EU emerged as Turkey’s largest export market. Second, Turkey established a Customs Union with the EU in 1996, which triggered some substantial changes in Turkey’s trade regime. First and foremost, the Customs Union removed the restrictions on most Turkish exports to the EU. Second, Turkey eliminated tariffs on manufactured imports originating in the EU and adopted the EU common external tariff for manufactures. Third, she aligned itself to the preferential trade regime of the EU. At the beginning of 1998, for instance, quantitative restrictions on textile products originating in Central and Eastern European and some Mediterranean countries were abolished, in parallel to the EU’s implementation. Last but not least, Turkey eliminated many of its existing direct export incentive programs. Instead, she began to rely on a wide range of indirect measures, including duty concessions and preferential credit allocation to exporters (World Trade Organization, 1998). None of these variables, however, fully explains the continued growth of apparel exports for a number of reasons. First of all, some economists have shown that the export expansion of the early 1980s took place, in large part, by drawing on existing capacity, rather than by new capacity creation through a greater allocation of investment to export industries (Akyu¨z, 1990, p. 115). Thanks to the abundance of direct export subsidies, existing capacity was diverted into exports in order to

The Turkish apparel industry

281 Table I. Turkey’s apparel and textiles exports: 1980-2002 (US$ million)

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Table II. Turkey’s major trading partners in apparel and textiles trade: 1986-2001 (US$ million)

1986

Value

Apparel exports Germany USA France

693 143 92

The Netherlands

65

UK

55

Switzerland Italy Iraq BelgiumLuxembourg Austria EU total in top-10 Total share of top-10 Textiles exports Germany Italy Iraq UK Iran USA

35 33 24 21 18

%

1994

55 Germany 11 USA 7.3 France The 5.2 Netherlands 4.4 UK 2.8 Austria 2.6 Italy 1.9 Poland Belgium1.7 Luxembourg 1.4 Switzerland 76

Value 2,421 599 348 301 278 132 88 78 66 64

93 201 141 71 63 61 60

21 15 7.5 6.7 6.4 6.3

France BelgiumLuxembourg

48

5.1

48

5.1

Algeria

41

4.3

Saudi Arabia EU total in top-10 Total Share of Top-10

29

3.1 53 81

%

2001

49 Germany 12 USA 7.1 UK 6.1 France The 5.6 Netherlands Belgium2.7 Luxembourg 1.8 Italy 1.6 Denmark 1.3 Spain 1.3 Austria 71

Value 2,514 1,112 1,006

333 276 251 209 208 166 96

14 12 11 8.9 8.8 7.2

7.6

393

5.5

233 164 142

3.3 2.3 2.0

112 111

1.6 1.6 74 90

Germany USA Italy UK France Romania

87

4.1 Spain Belgium3.8 Luxembourg

78

3.4 Poland

56

2.4 Areas Nes 48 76

36 16 14

537

89 Germany Italy Areas Nes UK USA France Syrn Arab Republic BelgiumLuxembourg Saudi Arabia The Netherlands

%

574 457 422 377 259 116

14 11 10 9.0 6.2 2.8

110

2.6

107

2.5

94

2.3

93

2.2 44 63

Source: World Trade Analyzer

compensate for depressed domestic demand and income (Baysan and Blitzer, 1990, p. 25). It should be noted, however, that the upward trend continued despite a considerable reduction in export subsidies towards the end of the 1980s. The upward trend also continued through the 1990s, well into the early 2000s, despite the discontinuation of direct export incentives just before the realization of the Customs Union in 1996. Second, although the Customs Union removed all trade barriers between the EU and Turkey, this did not have any immediate impact on exports of the apparel sector. The nominal tariff rates on imports of most industrial goods from Turkey had already been abolished by the EU in the early 1970s. While not all products fell under this category, a phased reduction of duties on these particular products had been under way ever

since. Accordingly, with the realization of the Customs Union, only the few remaining restrictions were removed (Togan, 2001). It follows that although government policies and the EU’s trade regime have affected the Turkish economy by providing a basis for a stable macroeconomic environment, they cannot fully account for the upward trend in apparel exports. In this connection, more attention should be given to recent research by sociologists who emphasize a different set of variables that are likely to obstruct and/or facilitate the efforts of national industries in international markets. Among these sociologists, one group of scholars draws our attention to the different types of interfirm networks that connect local suppliers with foreign buyers (Gereffi, 1999; Bair and Gereffi, 2001; Bair, 2002). According to the central argument of these scholars, the different types of cross-border networks, or “global commodity chains” (Gereffi, 1994), which the suppliers become part of, help them develop unique sets of capabilities. It is expected that this process will eventually lead to industrial upgrading and transform the suppliers’ export role in the global economy. The most typical path of industrial upgrading involves a transition from assembly to full-package exports. The former involves the labor-intensive assembly and re-export of simple manufactured goods from imported inputs, whereas the latter involves the making of finished consumer goods by contract manufacturers in locally owned factories. Also possible is the transition to a third type of export role, namely, “branded manufacturing,” where the suppliers make, market, and export their own branded products. This approach suggests that export performance can best be understood through an analysis of the organization of global commodity chains. While it does not disregard the importance of the previously discussed variables, it shows how the impact of these variables is mediated by meso-level, organizational phenomena. Accordingly, in the remainder of this paper, I provide an overview of the different ways in which the Turkish manufacturers have reorganized the Turkish apparel commodity chain in the 1990s in order to sustain their competitiveness. The re-organization of the Turkish apparel commodity chain in the 1990s Figure 1 summarizes the main set of relationships that characterize the Turkish apparel commodity chain of the 2000s. It should be noted that, notwithstanding the increase in textiles imports in the late 1990s, Turkey can be distinguished from some of its neighbors by its stong textiles sector, the foundations of which date back to the 1960s. Indeed, Turkey became a major producer of cotton yarn in the 1960s and an exporter of it in the early 1970s. By 1972, about 69 percent of all textiles exports were in the form of cotton yarn and fabrics (Yasar, 1996, p. 59). In 2000, it had become the seventh largest producer in the world (Yo¨ntem, 2000). It had also become the sixth largest producer of yarns, or, the third biggest outside Asia, behind the USA and Brazil. In 2000, Turkey’s spinning mills produced about 1.3 million tons of spun yarns, accounting for 4.5 percent of the world total (Textiles Intelligence, 2001). The growth in Turkey’s textiles sector, however, did not remain limited to cotton products. Turkey also became one of the leading producers of wool. Currently, it is the third largest mohair producer in the world (Textile, Knitting, and Clothing Workers Union of Turkey, n.d.). In addition, advances were made in the man-made fibers sector.

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Figure 1. Turkish apparel commodity chain as of 2003

The Turkish man-made fibers industry started in the late 1930s with the production of regenerated cellulose. Already in the 1960s and 1970s, Turkey was able to produce polyamide, polyester, polypropylene, and acrylic. With the exception of acrylic, most of the raw materials for synthetic fibers and yarns could be produced locally. As of 2002,

Turkey was reported to have the sixth largest synthetic textiles capacity in the world (C¸atalbas et al., 2002). Thanks to the availability of textiles, Turkey began to be inserted into the world economy as a full-package supplier in the late 1980s. A decade later, she also began to develop some branded-manufacturing capabilities. Towards the end of the decade, a small subset of branded manufacturers even ventured into retailing, both at home and overseas – a process, which began to increase their brand visibility. The evolution of these capabilities went hand in hand with three overarching organizational trends. The first one was the increasing creation of backward and forward linkages, both domestic and foreign, by the apparel and textiles firms. The second one was the relocation of production to cheaper sites, both inland and overseas. Last but not least, there was an increase in the number of partnerships formed with US companies, which began to transform the existing set of relationships while creating new ones. In what follows, I outline each of these trends. .

The creation of backward and forward linkages Table III highlights the main characteristics of selected textiles and apparel firms that were included in the study. As summarized in the table, most of the apparel manufacturers date back to the 1980s. Moreover, all firms are export-oriented notwithstanding their differences in size and capacity. As highlighted in Table IV, both the textiles and apparel firms have created several important linkages in the 1990s. In this connection, two particular trends can be noted. The first one is the investments undertaken by the textiles firms to extend their production chain into apparel manufacturing. One example in this regard is Gu¨neydog˘u, one of the largest suppliers of denim in Turkey. Starting in the mid 1990s, Gu¨neydog˘u’s parent company made several investments both in Turkey and abroad to manufacture jeans and other apparel. Another example is Kipas, which became one of the largest producers of yarn and fabrics since its establishment in the mid-1980s. In 1998, Kipas acquired Bozkurt Mensucat, a well-known full-package supplier that dated back to the 1950s. Similarly, apparel firms have made a series of investments in the 1990s, creating both backward and forward linkages. In this respect, one of the most important developments have been the investments made in integrated factories. During the 1990s, even the relatively smaller firms, such as Go¨ru¨m and Suverenler, were in the process of pooling production in integrated plants. In addition to cutting, sewing, and finishing capabilities, these plants were to include a knitting department that could provide a portion of the firm’s monthly fabric requirement. Two reasons were cited for this development. First, the manufacturers wanted to increase their capacity and produce in larger quantities. Second, they wanted to exercise more control over quality. Go¨ru¨m, for instance, reported that it worked with so many different workshops in Istanbul that it became impossible to achieve even quality in a given order. Its new integrated plant, however, would enable the firm to achieve “standardization,” in addition to allowing the firm to handle larger-volume orders. This latter advantage was particularly important to the firm because its buyers from Europe preferred to place larger orders (Interview with Aylin Yazici, marketing manager of Go¨ru¨m, Istanbul, Turkey, 20 June, 1996). Suverenler reported similar reasons for their investment in an integrated plant. Additionally, it was noted that the establishing of a knitting department, would secure

The Turkish apparel industry

285

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Rank in Turkish 500 Year est. Product focus and 1,000 Textiles Isko

286

Bilkonta

Gu¨neydog˘u Gu¨ney-Polgatb

1989 Denim

Table III. Profile of textiles and apparel manufacturers

Home market and exports Over 90 percent for exporter firms or direct exports Mostly exports Mostly exports

Capacity (mn meters/year)

35

246

37

235

146 153

90 86

NA

NA

Mostly exports

Jeans Men’s suits Jeans Sportswear Men’s suits

96 228 268 544 597

125 61 53 26 23

68/32 70/30 70/30 Mostly exports 80/20

917,000d 260,000e 720,000f 500,000 108,000e

Casualwear Casualwear Casualwear

153 528 532

87 27 21

Mostly exports Mostly exports 90/10

400,000 440,000e 167,000d

Casualwear Casualwear Casualwear

733 NA NA

18 20 3

Mostly exports 85/15 90/10

300,000 NA NA

1985 Variety of fabrics and accessories 1987 Denim 2001 Synthetic and woollen 1972c Cotton

Tayteksc Apparel Branded Erak 1984 Sarar 1944 Erog˘lu 1983 Sun 1987 Gu¨rmen 1985 Full-package g Gu¨ney-Polgat 2001 Tayeksc/g 1989 Arat 1984 Bozkurt Konfeksiyonh 1998 Go¨ru¨mi 1981 Suverenleri 1950s

Sales Exports vs home (US$ market (% when mn) available)

120 2

40 40 7.2 (pieces/month)

Source: Sales and rank figures from the “Turkish 500” and “Turkish 1000” listings of the Istanbul Chamber of Industry. Other figures compiled from company Web sites, newspaper articles, and/or interviews. Information for Isko, Gu¨neydog˘u, Gu¨ney-Polgat, Erak, Sarar, Erog˘lu, and Sun compiled exclusively from company Web sites and newspaper articles Notes: Conversion rate used: US$1 ¼ 1,455,000TL (period average reported by Reuters); NA: not available; Mostly exports: refers to an export share over 90 percent or more. This figure may include indirect exports via sales to export-oriented domestic manufacturers; a subsidiary of the Sahinler Group that functions as a trading company for woven and knitted fabrics; Some manufacturing with a focus on dyeing and finishing; b Turkish/Israeli merger; c Tayeks and Tayteks are subsidiaries of Taypa. 1972 is the year of establishment for Taypa; d estimated from annual capacity. The calculation assumes a 12-month work-year; e Estimated from daily capacity. The calculation assumes 20 work-days/month; f Total capacity for Erog˘lu includes Erog˘lu (wovens) and Ers (knits) divisions of the company; g focus on woven casualwear; h former “Bozkurt Mensucat,” which was interviewed by the author before its acquisition in 1998 by KI˙PAS, a major Turkish textiles company; i the current figures for these companies are not available because they have not survived. Figures reported are as of 1996 (the year of the interview)

a continuous supply of good-quality fabrics and shorten delivery times. As noted in the general manager’s own words: Although we are able to return most faulty fabrics to the textile firms, this adversely affects our delivery times. Our customers, on the other hand, are rather concerned about this. Turkey is competing with other countries not only on the basis of price, but quality and delivery

Textiles Bilkont (Sahinler Group – 1985)a

Year

Description of investment

Location

1994

Integrated plant for yarn and fabric (knitted) production Establish Bilkont Jeans Establish a manufacturing plant for Bilkont Jeans, “The Sun Jordan Textile” Integrated plant to manufacture jeans Integrated plant to manufacture apparel and home textiles Acquisition of “Bozkurt Mensucat,” an integrated apparel manufacturer, est. in 1954

Turkey

1994 2003 Gu¨neydog˘u (1987)

1996 2001

Kipasb (1986)

1998

Apparel Branded Sarar (1944) Erog˘lu (1983)

1996 1992

2003

Fabric processing plant for home textiles First integrated plant for manufacturing including finance, exports, and marketing departments Launching of the “Colins” brand First overseas marketing branch for “Colins” Acquisition of the “Loft” brand for the home market Second and larger integrated plant for manufacturing Second overseas marketing branch Addition of a knitting department Addition of a printing department Launch the “Jimmy Key” brand Acquisition of the fabric manufacturer “Ekoten” Establish “Vega” for the production of textiles machinery First overseas marketing branch

1996 1996 1996

First integrated plant for manufacturing First integrated plant for manufacturing First integrated plant for manufacturing

1992 1995 1997 1999 Sun Tekstil (1987)

Full-package Arat (1984) Go¨ru¨m (1981) Suverenler (1950s)c

1999 1992 1995 1997 2000 2000

Turkey Jordan

The Turkish apparel industry

287

Turkmenistan Turkmenistan Turkey

Turkey Turkey Russia Turkey Turkey Poland Turkey Turkey Turkey Turkey Turkey Germany Turkey Turkey Turkey

Source: interviews and company Web sites. The table highlights key investments of the 1990s only. Notes: a the information in parentheses refers to the founding year of the company; b parent company of Bozkurt Konfeksiyon, specializing in yarn and fabric production; c the exact date of establishment could not be recalled by the informant

times. Price competition is no longer possible anyway as labor costs in Turkey are already relatively high (interview with Omer Suveren, assistant general manager of Suverenler, Istanbul, Turkey, 12 June, 1996).

This is not to suggest, however, subcontractors are no longer important nodes in the commodity chain. The full-package supplier Taypa, for instance, remains partially dependent on subcontractors for the assembly stage. Despite having three factories located in different parts of Turkey, Taypa still subcontracts 30-40 percent of its sewing. It should be emphasized, however, that the degree of dependence has changed over the years, as investments were made in integrated plants that would enable a substantial portion of cutting and assembly to be carried out overseas. This is a

Table IV. Establishment of backward and forward linkages by textiles and apparel manufacturers

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contrast to the late 1980s and early 1990s, where apparel firms used to outsource cutting, assembly, and/or fabrics to small, independent workshops, usually located in Istanbul (Neidik, 1995). It should be noted that these accounts were consistent with the reasons cited by German firms in interviews for why they opted for Turkish suppliers. In this respect, delivery times, in addition to flexibility, were the most commonly cited reasons. Delivery times emerged as the most important reason for especially the mail-order companies, one of Turkey’s main customer niches. For mail-order companies, delivery times were especially important because they usually placed last-minute repeat orders with Turkish suppliers. The 1990s were also when some of the full-package suppliers attempted to launch their own brands and develop marketing and, in a limited number of cases, retailing capabilities. In terms of brand development, the most successful firms have been manufacturers of jeans and men’s outerwear[3]. One of the most prominent examples is the jeans manufacturer ERAK, a company that has served as a full-package supplier to the German manufacturer Mustang for more than a decade. Since the mid-1980s, ERAK has developed from being a full-package supplier to the German jeans manufacturer Mustang and similar companies to being an international marketer of the brand, “Mavi” (Interview with Ju¨rgen Zapp, production sourcing manager of Mustang, Ku¨nzelsau, Germany, March, 2000). Another notable example is Sarar, which has served as one of the biggest suppliers of Hugo Boss in Turkey for 13 years until the termination of the relationship around 1998. Since the termination of the relationship, Sarar has focused on marketing and promoting its brand overseas (C¸erc¸i, 1998). Some of the branded manufacturers have also made significant inroads into retailing, both in the domestic market and abroad. As further noted in Figure 2, which compares the development of the forward linkages of Erak and Mustang, the typical path in the early 1990s has been to open stores in Turkey and then to expand overseas. Newcomers, such as Sun, however, have followed a more aggressive strategy and started to expand in Europe, without first becoming established in the domestic market (Patentofisim.com, 2003). Notwithstanding the differences in their expansion strategies, however, all branded manufacturers rely on overseas divisions in order to support their expansion efforts. Erak, for instance, has divisions in the USA, Canada, the UK, Germany, Belgium, Denmark, and Australia., whereas Sarar has divisions in the USA, Germany, Russia and China. This is not to suggest, however, that branded manufacturers were the only firms to invest in brands, marketing, and retailing. In the mid-1990s, most full-package suppliers attempted to develop private collections that could eventually be sold under the company’s brand. Go¨ru¨m, for instance, was a typical example of these firms. Company representatives frequently made trips to Germany to market the company’s private collections, mainly to mail-order companies. Just like the branded manufacturers, Go¨ru¨m also kept a marketing office in Germany, run by the owner’s next of kin residing there. The purpose of this office was not only to help Go¨ru¨m market its collections, but also to improve communication between the headquarters in Turkey and the firm’s German clientele. Other firms have also made inroads into distribution by becoming licensees of foreign brands. Arat, for instance, had obtained in 1996 the license for the Dutch apparel company Scotch & Soda, which is distributed in Europe by retailers like

The Turkish apparel industry

289

Figure 2. The forward linkages of Mustang and Erak

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Peek & Cloppenburg. Since 1996, however, Arat has also been able to develop its own brand, although this brand is better known locally. Some other full-package suppliers also have brands, although most of these brands have not yet been registered. This is in contrast to the branded manufacturer Sarar, for instance, which has been in the process of registering its brand internationally since the early 1990s, an effort that otherwise did not become widespread in Turkey until the mid-1990s (tekstilci.org, 2003). The registration of brands was given fresh impetus only with the realization of the Customs Union, under which Turkish firms have been expected to comply with the EU’s competition laws and regulations. Table V summarizes the capabilities of Turkish apparel manufacturers as of 2003. As highlighted in the table, some full-package suppliers have become branded manufacturers and developed retailing capabilities. The core capability of many full-package suppliers, however, remains manufacturing. Although some suppliers have been able to create brands, these are either still in the process of being registered and/or do not yet enjoy brand visibility. The relocation of production Although Istanbul was the production and export hub of the apparel industry in the 1980s, this began to change in the 1990s. With the coming of the new decade, more apparel firms began to shift production to Anatolia, the large peninsular part of modern day Turkey that lies in Asia. It was maintained by all informants in interviews that, compared to Istanbul, Anatolia was not only a relatively low-cost site, but also home to skilled labor. A major problem with Istanbul as a production site was fast turnover. Turnover was fast because the subcontractors frequently lost employees to those competitors that were willing to pay slightly higher wages. The average Anatolian worker, however, was seen as being more loyal to his job because of the lack of industrial jobs in the region. Moreover, it was maintained that there was a high-skilled labor force in the relatively backward parts of Anatolia than would be found in Istanbul. This, in turn, was attributed by the informants to the government’s occasional implementation of formal training programs as well as its investments in organized industrial districts in Anatolia, set up to attract both capital and labor. An example of a manufacturer who shifted production to Anatolia was Arat. As of 1996, Arat was investing in an integrated plant in Adana, located in the southern part of the peninsula (Interview with Mahir Kadayıfc¸ı, general manager of Arat, Istanbul, Turkey, 12 June, 1996). Today, most of the company’s production takes place in this plant. Towards the end of the decade, however, a new relocation pattern began to emerge. Apparel manufacturers increasingly began to invest in production sites in Eastern Europe and the Turkic Republics. The reasons behind this shift were two-fold. First, following the Customs Union, Turkey signed free trade agreements with many of the countries, located in these regions. In addition to being cheaper labor sites with abundant skilled labor, these countries offered liberalized access to Turkish manufacturers, beginning in the early 2000s. Second and more importantly, however, was the issue of quota restrictions. As outlined earlier, the 1990s were characterized by the creation of important backward linkages that enabled the Turkish manufacturers to increase their capacity, improve

+ + + + + + + + +

2 + (Fabric processing) 2 + (Fabric production) 2

+ (Fabric production) + 2 + (Yarn and fabric production)

Pattern and/or design

+ + + +

+ + + + + + + + +

+ + + + + + + + +

+ NA + + NA + + + +

+ + + + +

Cutting Sewing Washing Finishing

+ + + +

+ + + + +

Quality control and packaging

+ 2 + 2

+ + + + +

+(5) +(24) +(36) +(7) + 2 2 2 2

+ +(38) +(58) +(16) + 2 2 2 2

Brands Turkey Overseas

Source: Author’s own elaboration based on interviews and company Web sites Notes: Retailing figures are as of 2003. The figures in parentheses exclusively indicate the company’s own stores. Merchandise of companies such as Erak are further distributed throughout the world in major retail outlets, such as department and specialty stores

Branded Erak Sarar Erog˘lu Sun Gu¨rmen Full-package Gu¨ney-Polgat Tayeks Arat Bozkurt

Textiles

Retail (number of stores)

The Turkish apparel industry

291

Table V. Capabilities of Turkish apparel manufacturers (2003)

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quality, and shorten delivery times. As outlined above, a small subset of the population also developed significant marketing and retailing capabilities. These organizational developments put the Turkish manufacturers in a better position to export to the US market, typically dominated by large corporations that placed significantly larger orders, compared with those of their European counterparts. Thus, in an effort to reduce their dependency on the European market in general, and the German market in particular, Turkish firms increasingly began to turn to the US buyers in the 1990s. As previously mentioned, however, just like many other countries in the world, Turkey’s apparel exports to the USA were subject to quota restrictions. In order to increase their exports to the US market, the Turkish manufacturers began to take advantage of unused quotas in their new production sites and export directly from there. Accordingly, in addition to providing low-cost labor, these production sites became a means to further increase exports to one of the largest apparel markets in the world. Figure 3 provides examples of overseas relocation by Turkish manufacturers. One of the first firms to relocate was the previously mentioned Gu¨neydog˘u. Gu¨neydog˘u formed joint ventures with the Turkmenistan government and the European Bank for Reconstruction and Development as early as the mid-1990s. It invested in a large integrated facility for the manufacturing of jeans, and subsequently, in a facility for other types of apparel. Most of the apparel produced in these facilities are being exported to the USA, where the main buyers are large corporations, such as Sara Lee, Wal-Mart, and VF, among others (Web site of the parent company C¸alık Holding, 2003; available at: www.calik.com/en). The Germany-based Sahinler Group, whose core production had typically been carried out in Turkey in the 1990s, has also relocated production, investing in plants in both Bulgaria and Romania. Similarly, most of the production carried out in these plants is for US companies, such as Aeropostale, Jacques Moret, and VF’s Nautica. Most recently, there has also been some relocation to production sites in the Middle East. Sahinler Group’s Bilkont Jeans, for instance, has very recently invested in a plant in Jordan (Web site of the Sahinler Group, 2003, available at: www.sahinler.com). Once again, the main motivation behind this investment can be traced back to improved access to the US market. Jordan offered this access because of its Qualified Industrial Zones (QIZ) Agreement with the USA. Signed in October 2000, the agreement granted Jordan’s US exports duty-free treatment if the exported products were manufactured in the designated zones (Web site of the Jordan Embassy in the USA (n.d.)). A similar investment was made by Gu¨ney Sanayi, a large textiles firm that owns the apparel manufacturer Gu¨ney Giyim. Gu¨ney merged in 2001 with Polgat, one of the few vertically integrated textiles companies in Israel. Gu¨ney Giyim, the apparel division of Gu¨ney Sanayi, had traditionally been a full-package supplier to German companies, such as Brax and Peek & Cloppenburg (Reinhold, 2002). The merger, however, was expected to improve Gu¨ney’s access to the US market and diversify its clientele because of Israel’s long-standing free trade agreement with the USA (Turkish Press Review, 2000). The expansion of US networks in Turkey A final trend that characterizes the Turkish apparel industry of the late 1990s is the increasing number and variety of networks set up by US companies. Table VI lists the

The Turkish apparel industry

293

Figure 3. Relocation of production by Turkish manufacturers

Hugo Boss (Germany) Du Pont (USA)

Polgat (Israel)

Cone Mills (USA) Hugo Boss (Germany) VF (US)

1999

2001

2002

Expansion (details not announced)

Expansion (invest US $15mn in current Apparel plant)

2 2

Apparel

Merger (55 percent Turkish ownership) Apparel & textiles Joint venture (51/49) Textiles

Gu¨ney Sanayi (“Gu¨neyPolgat”) Isko (“IsKone”)

2 Sabanci Holding (“Du PontSA”)

Apparel

Apparel

Greenfield (DM 25mn; company’s third Apparel factory in the world) Joint venture (50/50) Synthetic fibers

Acquisition (of former licensee; VF’s third factory in Europe)

Strategic partnership (US $20mn)

Sector

Supply denim for 501 jeans of Levi Strauss Europe Production of women’s apparel and sportswear Launch the “VF Ege” brand; produce H.I.S. and The North Face brands

Exclusive production of 501 jeans for Levi Strauss Europe Production of Lee and Wrangler brands for local market, Eastern Europe and the Middle East Production of men’s clothing for Europe with imported input Development, production, and sales of polyester filament, resins, fibers and related materials Gain access to the US market

Goal

Sources: Radikal-Online, 3 October 1998; Turkish Daily News, (1999a,b); Turkish Press Review, 22 September, 2000; Charlotte Business Journal, 15 May, 2002; Fashion Business International, July, 2003; Hu¨rriyet, 14 July, 2003; Fiber2fashion.com (2003)

June 2003 July 2003

2000

1998

Levi Strauss (US) VF (USA)

1997

Type/amount of investment

294

Karamanci Holding (“Denimko”) Mavi Ege (“VF Ege”)

Foreign investor Turkish partner

Table VI. Foreign direct investment in textiles and apparel after the Customs Union

Year

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295

Figure 4. Examples of US foreign direct investment in Turkey

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major investments foreign companies have made in Turkey following the Customs Union. As summarized in this table, there has been an increase in the scale and scope of investments from US firms. A significant example, in this regard, has been the partnership Levi Strauss has formed with Karamancı Holding, namely “Denimko” (Turkish Daily News, 1999a). The purpose of the partnership was to produce Levi Strauss’ 501 jeans for the European market. What was more significant than this partnership itself, however, was the formation of additional US-Turkish partnerships it facilitated. Cone Mills, the long-standing supplier of 501 fabrics for Levi Strauss, also formed a partnership in Turkey, several years after the establishment of Denimko. The partnership, formed in 2002, was a joint venture between Cone Mills and Isko, one of the largest textiles manufacturers in Turkey. The joint venture, “IsKone,” made Isko the largest manufacturer of denim in Europe. According to the agreement between the two companies, IsKone would be the sole supplier of fabrics in Europe for 501 jeans (Charlotte Business Journal, 2002). Additional investments have included DuPont’s partnership with Sabancı Holding in 2000 (Fashion Business International, 2003) and the VF Corporation’s acquisition of its former licensee, Mavi Ege, in 1998 (Radikal-Online, 1998). VF, which continues to manage a substantial number of full-package suppliers in Turkey, has also recently announced that it would make additional investments in “VF Ege” to produce its The North Face and the formerly German-owned H.I.S. brands in Turkey (Karatas, 2003). Figure 4 highlights how Levi Strauss has reorganized its supply chain in recent years. It should be noted that while having invested in subsidiaries, Levi Strauss still works with full-package suppliers in Turkey. It should also be noted that some of these former full-package suppliers are currently branded manufacturers with retailing capabilities, competing internationally. The Levi Strauss supplier Erog˘lu, for instance, presents a case similar to that of the previously mentioned ERAK. As summarized in Table VI, Erog˘lu has developed extensive branding, marketing, and retailing capabilities since its establishment in 1983. Erog˘lu is reportedly the market leader in Russia with its “Colins” and “Loft” brands (Cengiz, 2003; C¸elebi, 2003). The future of Turkey’s apparel exports These findings suggest that there have been significant changes in the Turkish apparel commodity chain in the 1990s. Turkish manufacturers have been reorganizing the chain in order to sustain their export performance in the increasingly competitive apparel sector. It can be concluded that export performance cannot be fully understood by examining the impact of government policies and international regulations on business interests. While these variables contribute to the stability (or lack thereof) of the macroeconomic environment, they do not capture the ways in which firms acquire capabilities that further affect their strategic choices with respect to supply chain organization. Therefore, a more fruitful approach should show how organizational level variables interact with government policies, international regulations, and market conditions to determine export growth. Although Turkey has enjoyed export growth in its apparel sector, the question remains as to whether she will be able to sustain this export performance beyond 2004 – at the end of which the Agreement on Textiles and Clothing is expected to expire. As outlined above, as a result of long-term cooperation with foreign buyers

and a series of investments, some manufacturers in Turkey have been able to develop significant branded manufacturing capabilities in the 1990s. Despite the apparent success of these branded manufacturers, however, it would be premature to talk about a shift in Turkey’s export role from full-package supplier to branded manufacturer. The reasons for this are two-fold. First, the number of branded manufacturers with registered trademarks and extensive marketing capabilities remain limited. Second, not all Turkish manufacturers have been equally eager to invest in brands and related capabilities. As outlined above, instead, the main business strategy of the 1990s has centered around gaining improved access to the US market. In this connection, a major trend has manifested itself, in which an increasing number of Turkish firms relocate production overseas. As a short-term business strategy, the relocation is viable, in that it helps Turkish firms lower costs and bypass quotas they otherwise face in certain markets. Its long-term welfare implications for Turkey, however, are unclear and could be bleak. Given her status as a lower-middle-income developing country with high rates of unemployment, can Turkey afford any job losses in the very industry that led to its partial recovery from the dire economic conditions of the 1970s? This is a key question that needs to be addressed in further research. It should also be noted, however, that, ironically, as more Turkish manufacturers continue to relocate production for improved access to the US market, US foreign direct investment in Turkey has increased in the late 1990s. Thanks to the partnerships formed with some of these US companies, Turkey is increasingly becoming an export-hub through which many transactions in the ever-growing free-trade area in and around Europe are being coordinated. It could be argued that, in the short run, these investments have put Turkey in a favorable position vis-a`-vis its major competitors. The long-term implications of these developments on Turkey’s export performance and export role, however, are open to discussion. Notes 1. Figure based on data from World Trade Analyzer. World Trade Analyzer offers a trade database that allows access to data for 600 commodity groups and 192 countries. It is created from data reported by member countries to the United Nations Statistical Office, later compiled by Statistics Canada. World Trade Analyzer uses the Standard International Trade Classification System. 2. Information on Isko, Gu¨neydog˘u, Sarar, Erak, Sun, Erog˘lu and Gu¨ney-Polgat are based on archival data only. Information on the rest of the companies used as examples in the paper are based on both interview and archival data. 3. The total value of Turkey’s jeans exports was expected to reach $US750 million by the end of 2003 (Cengiz, 2003). References Akyu¨z, Y. (1990), “Financial systems and policies in Turkey in the 1980s”, in Arıcanlı, T. and Rodrik, D. (Eds), The Political Economy of Turkey: Debt, Adjustment, and Sustainability, St Martin’s Press, New York, NY, pp. 98-131. Arıcanlı, T. and Rodrik, D. (Eds) (1990), The Political Economy of Turkey: Debt, Adjustment, and Sustainability, St Martin’s Press, New York, NY.

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Bair, J. (2002), “Beyond the maquila model? NAFTA and the Mexican apparel industry”, Industry and Innovation, Vol. 9 No. 3, pp. 203-25. Bair, J. and Gereffi, G. (2001), “Local clusters in global chains: the causes and consequences of export dynamism in Torreon’s blue jeans industry”, World Development, Vol. 29 No. 11, pp. 1885-903. Baysan, T. and Blitzer, C. (1990), “Turkey’s trade liberalization in the 1980s and prospects for its sustainability”, in Arıcanlı, T. and Rodrik, D. (Eds), The Political Economy of Turkey: Debt, Adjustment, and Sustainability, St Martin’s Press, New York, NY, pp. 9-36. C¸atalbas, O¨., Sevim, U¨. and Emek, A. (2002), Clothing Accessories Industry in Turkey, Export Promotion Center of Turkey, Ankara. C¸elebi, E. (2003), “Mercan’ı Tırmandı Taklit Edilen Colins’i Yarattı”, Hu¨rriyet, 23 September, available at: www.hurriyetim.com.tr/haber/0,sid , 4@nvid , 315568,00.asp (accessed 18 November). Cengiz, D. (2003), “Jean’de Sessiz Lider Oldular, 750 Milyon Dolara Dayandlar”, Hu¨rriyet, 25 October, available at: www.hurriyetim.com.tr/haber/0,nvid , 327760,00.asp (accessed 12 December). C¸erc¸i, T. (1998), “Sarar’la Hugo Boss’u enflasyon Ayirdi”, Hu¨rriyet, 13 September, available at: http://arsiv.hurriyetim.com.tr/hur/turk/98/09/13/ekonomi/05eko.htm (accessed 17 December). Charlotte Business Journal (2003), “Cone Mills completes formation of joint venture”, 14 November, available at: http://triad.bizjournals.com/triad/stories/2002/11/11/daily33.html (accessed 12 December). Duruiz, L. and Yentu¨rk, N. (1992), Facing the Challenge: Turkish Automobile, Steel and Clothing Industries’ Response to the Post-Fordist Restructuring, ˙Iletisim Yayınları, Istanbul. Fashion Business International (2003), “A marriage of equals”, online, available at: www.inteletex.com/ FrontPageFeatures.asp?PubId ¼ &NewsId ¼ 2051 (accessed 25 November). Fibre2fashion.com (2003), “Hugo Boss to produce apparel in Turkey”, 28 June, online, available at: www.fibre2fashion.com/news/NewsDetails.asp?News_id ¼ 3671 (accessed 3 December). Gereffi, G. (1994), “The organization of buyer-driven global commodity chains: how US retailers shape overseas production networks”, in Gereffi, G. and Korzeniewicz, M. (Eds), Commodity Chains and Global Capitalism, Praeger, Westport, CT, pp. 95-122. Gereffi, G. (1999), “International trade and industrial upgrading in the apparel commodity chain”, Journal of International Economics, Vol. 48 No. 1, pp. 37-70. Jordan Embassy in the USA (n.d.), “Qualified industrial zones”, available at: www.jordanembassyus. org/new/commercial/qiz.shtml (accessed 30 December). Karatas, N. (2003), “Lee’den 15 Milyon Dolarlık Yatırım ve ˙Iki Kardes Marka”, Hu¨rriyet, available at: www.hurriyetim.com.tr/haber/0,sid , 111@tarih , 2003-07-14 m@nvid , 290480,00.asp (accessed 11 December). Kıray, E. (1990), “Turkish debt and conditionality in historical perspective: a comparison of the 1980s with the 1860s”, in Arıcanlı, T. and Rodrik, D. (Eds), The Political Economy of Turkey: Debt, Adjustment, and Sustainability, St Martin’s Press, New York, NY, pp. 254-68. Neidik, B. (1995), "Small business and social networking: the case of Istanbul’s jeans industry", Master’s thesis, Bogazio´ University, Istanbul. O¨z, O¨. (1999), The Competitive Advantage of Nations: The Case of Turkey, Ashgate, Aldershot. Patentofisim.com (2003), “Sun tekstil mu¨sterinin ayag˘ına gidiyor”, 8 May, available at: www.patentofisim.com/haber_detay.asp?i ¼ 1424 (accessed 12 December).

PRU (2002), “The EU clothing sector: trade policy and value chain restructuring”, PRUS Notes, Vol. 7, July, Poverty Research Unit, University of Sussex, Brighton. Radikal-Online (1998), “Mavi Ege Amerikalılar’a Satıldı”, 3 October, available at: www.radikal.com.tr/1998/10/03/ekonomi/mav.html (accessed 11 December). Reinhold, K. (2002), “Schnelle Quelle am Bosperus”, Textilwirtschaft, No. 50, pp. 66-7. tekstilci.org (2003), “Sarar’ın Hedefi Du¨nya Pazarı”, 17 September, available at: www.tekstilci. org/2002.1/metinler.php?metin ¼ 498&PHPSESSID ¼ c817c309586ce65 (accessed 17 December). Textile, Knitting and Clothing Workers Union of Turkey (n.d.), “Textile and garment sector in Turkey”, online, available at: www.teksif.org.tr/textile_in_turkey.html (accessed 18 November). Textiles Intelligence (2001), “Turkey’s spun yarn output set to climb as Western Europe suffers further setbacks”, 31 July, available at: www.textiles.intelligence.com/til/pres.cfm?prid ¼ 289 (accessed 18 November). Togan, S. (2001), “The Turkish economy and the European economies in transition”, in Togan, S. and Balasubramanyam, V.N. (Eds), Turkey and Central and Eastern European Countries in Transition, Palgrave, New York, NY, pp. 7-50. Tu¨cking, E. (1999), Die Deutsche Bekleidungsindustrie im Zeitalter der Globalisierung: Eine Marktanalyse unter besonderer Beru¨cksichtigung außenwirtschaftlicher Rahmenbedingungen, FATM, Mu¨nster. Turkish Daily News (1999a), “501s exported from Turkey”, 5 June, available at: www.turkishdailynews.com/old_editions/06_05_99/econ.htm#e4 (accessed 3 December). Turkish Daily News (1999b), “Hugo Boss opens factory in Izmir”, 1 October, available at: www.turksihdailynews.com/old_editions/10_01_99/econ.htm#e (accessed 3 December). Turkish Press Review (2000), “Turkey’s and Israel’s biggest fabric companies merge”, 22 October, available at: www.byegm.gov.tr/YAYINLARIMIZ/CHR/ING2000/09/00X09X22.HTM (accessed 30 December). Turkish State Institute of Statistics (2003), Foreign Trade Statistics, DIE, Ankara. World Trade Organization (1998), “Trade policy review: Turkey”, 7 October, first press release, available at: www.wto.org/english/tratop_e/tpr_e/tp83_e.htm (accessed 25 November). Yasar, E. (1996), Tu¨rk Tekstil ve Konfeksiyon Sekto¨ru¨, ITKI˙B, Istanbul. Yo¨ntem, Z. (2000), “Textile industry sectoral study: Turkey”, unpublished document, UNEP Blue Plan for Mediterranean Regional Activity Center, Ankara. Further reading Erak (n.d.), Corporate Web site, available at: www.mavi.com (accessed 12 December). Erog˘lu (n.d.), Corporate Web site, available at: www.eroglu.com/eroglu.htm (accessed 10 December). Gu¨ney-Polgat (n.d.), Corporate Web site, available at: www.guney-giyim.com.tr, accessed 30 December 2003. Isko (n.d.), Corporate Web site, available at: www.isko.com.tr (accessed 22 December). Sarar (n.d.), Corporate Web site, available at: www.sarar.com.tr (accessed 14 December). Sun Tekstil (n.d.), Corporate Web site, available at: www.suntekstil.com.tr (accessed 12 December).

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ACADEMIC PAPER

Structural change The dominant feature in the economic development of the German textile and clothing industries Ulrich Adler IFO Institute for Economic Research, Mu¨nchen, Germany Keywords Germany, Textile industry, Garment industry, Economic trends, Globalization Abstract The textile and clothing industries are good examples to analyse emerging industrial trends in international co-operation and to map the globalisation effects on outward processing, jobs and technology. The research focuses on the development of economic indicators and is based on the results from consulting and research projects, as well from enquiries in the German textile and clothing industries, which are exposed to intensive cost competition and trying to find a new position within the process of globalisation. A reduction of demand, a change in consumption patterns, the modification in the retailing system, the development of personal income and a global shift of production have triggered the decline of the domestic production of textiles and clothing. Emerging producers from eastern, developing and newly industrialising countries are now the main suppliers for the German textiles and clothing market. The German clothing companies defend a rest market and use intensively the outward processing in low-wage countries. As a result of the tremendous differences in production costs, the demand for clothing textiles shifted globally towards low-cost places of clothing production. The outward processing from industrialised countries established a very efficient, well-organised global production network in low-wage countries, enabling new potential for economic development. This research focuses on the view of producers in industrialised countries. The analysis shows that the future of textiles and clothing companies is not in producing but in the management of markets, organising a global supply chain of subcontractors and in retailing. The experiences within the global outward processing network shows very high innovation and learning rates in low-wage countries, enabling a serious potential towards a self-contained economic development. The economic and social liberalisation within the EU region and the out-phasing of the WTO in 2005 will give new power to the globalisation process and will influence the structural change of industry. This paper is written as a rational position sensing of the German textile and clothing industries prior to the out phasing of the WTO regulations and the 2005 liberalisation of the EU textile and clothing sector.

Journal of Fashion Marketing and Management Vol. 8 No. 3, 2004 pp. 300-319 q Emerald Group Publishing Limited 1361-2026 DOI 10.1108/13612020410547815

This paper has been presented at the workshop “The European Clothing Industry: Meeting the Competitive Challenge,” CREER Centre for European Research in Employment and Human Resources with the Journal of Fashion Marketing and Management, 26-27 February 2004, E´cole Supe´rieure de Commerce, Toulouse, France. The author is grateful to Klaus Trompetter from Gesamttextil, the association of the German textile and fashion employers, for supplying him with literature and for helpful references. Karlo Satter from the IG Metall (German Metal Workers Union) gave him useful comments. Thanks to Paul Kremmel PhD, who translated this paper despite a lot of activities for other publication projects. Thanks are expressed to the publishing team from Emerald, Paul Wood, Richard Jones and Steve Hayes, as well to Professor Ian Taplin from Wake Forest University, Salem and Professor Jonathan Winterton from ESC, Toulouse and the participants of the meeting on the EU textile and clothing industry in Toulouse, February 26/27 2004. The author takes full responsibility for the views and the opinions expressed in this paper. The result does not necessarily reflect the views of the publishing institution.

Once more, the case of the German textile and clothing industry[1]. The German textile and clothing industry has been mired in cost competition in the international division of labour for more than 15 years. The production costs, which are high in an international comparison, led to declines in both industries. New products and the change in the functions of the enterprises, including a new constellation of companies, are a result of adjustments to a new stage of competition within a new global social and economic framework. The assimilation process had different aspects in the industries in Germany. The textile industry carries out a know-how-based, marked-oriented globalisation; the clothing industry has focused on a cost management strategy. Thus, in the textile industry a process towards technical high-tech products and foreign investments can be observed. The clothing industry developed a new type of the service enterprise, to meet the competitive needs of globalisation. Those types of enterprise combine customer requirements with know-how, as well as creative and production potential on the international labour market. Within the framework of globalisation, in the clothing industry, local manufacturing in Germany itself has become unimportant. Shifting production, like outward processing, now stands in the foreground. Different innovation potentials in the textile and clothing sector The innovation potential is quite different in the two industries. Within the production chain, more technological improvements can be recognised in the textile sector than in the clothing sector. The impact of mechanical engineering, of computer technology and recently, nano-technology, considerably changed the production methods and the scope of companies’ activities and product innovation in the textile sector. The technological framework touched the modernisation process of equipment in the clothing industry only slightly. In the textile industry, the emphasis on modernisation aims at steady technological improvements at the level of the manufacturing industry. In the clothing industry, the implementation of information and communication technology has an emphasis on organisational optimisation and improvements of business administration, with few opportunities for technical modernisation in the assembling. Theoretically the technological innovation enables a sustainable substitution of labour by capital. Therefore, the textile industry should be able to compensate higher wages by capital accumulation. But, different reasons lead to a similar result. Both industries suffer from an economic decline within the international price competition. As an effect of the international division of labour and advancements in global co-operation, global standards of production methods emerged, mostly to assure comparable quality standards and technical productivity levels. Thus, the textile producers in developing countries are partly overcapitalised in respect to local wages if they participate in global co-operation networks or supply chains. Global co-operation established production forms at a traditional technological level in the clothing industries world-wide. Hence, local producers in Germany, as an example of industrialised countries, cannot succeed in price competition by enhancing technological developments. Both industries make an active use of the international division of labour, but by different means, to respond to international price competition. The German textile industry follows a market-oriented deployment of production and uses foreign investments in countries with growing markets. The German clothing producers use the international division of labour to profit from lower wages by means of outward processing. The economic development of the clothing industry is symptomatic of the situation for mature industries that are exposed to a stagnation of demand and insufficient opportunities

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for technical modernisation. Since the 1980s there has been a trend to eliminate traditional production forms, outdated compensation, organisation, training and management procedures through flexible production methods and an efficient mechanisation of working processes. The workflow in the assembly process of sewing changed from piecework, with a high load of stress, to handicraft-like organisation teamwork, as is common in design and development companies. With the increase in outward processing, the clothing industry moved away from competition in the improvement of production techniques and exposed itself to more market competition. Because clothing manufacturing is difficult to automate, a capital-intensive manufacturing cannot be realised. Wages in manufacturing remain the decisive cost factor and at the same time the only changeable cost element that significantly determines competitive capacity. Labour cost competition is mainly achieved by outward processing of assembly work[2]. As in the clothing industry, in the textile industry the significance of the local market is fading. In the 1980s, for example some 12 per cent of private consumption was accounted by textiles and clothing demand. Today, it is about 5 per cent (see Groemling and Matthes 2003, p. 23). Second, the shifting of the global centres of production, together with the intensive price competition of established low cost producers, absorb the local demand for yarn, textiles and cloth. These are incentives for shifting production abroad towards the regions of major demand. The clothing industry has an advantage in the strategy of adopting to international competition. First the production process enables the progressive outward processing to low-wage countries, which is secondly subsidised by tax exemption. Textile production follows the outsourcing strategy with a time lag of some seven to ten years. The impact of the international competition is absorbed by the higher rates of process and product innovation. The textile producers upgrade the products and implement investments in foreign countries. Uniform reaction to challenging conditions In clothing production, low-wage providers have an absolute advantage. Foreign competitors in so-called “low-wage countries” have lower labour costs with a similar supply of service and quality. They have a command on comparable production methods and in this respect, they have both absolute and relative economic advantages. In the countries with which the German clothing industry competes, clothing production has a high value. In Germany, the industry is neglected, both in terms of payment for labour and in terms of support by society to increase the standing of the industry. At a time when change was conceivable, pay was relatively poor. The workers were traditionally recruited from the market of the unskilled and semi-skilled, which in turn had a negative effect on productivity, learning competence, job identification and corporate identity which hindered innovation activity. Within this time-span, some 15 years ago, technological and organisational innovations might have a considerable impact on the economic standing of the clothing industry. This chance for restructuring the technological position had been possible for a short window of opportunity in the 1980s when the international division of labour was reshaped. Politics, trade unions and industry associations underestimated the challenge of the international competition and preferred the protection from the Multi Fibre Arrangement (MFA) rather than an active innovation strategy for labour intensive industries. The protection of local producers in industrialised countries through the MFA impeded strategic decisions to save the industry by opportune measures of technical and organisational modernisation. A thorough automation in industrialised countries was additionally prevented by

numerous effective technological innovation barriers. Information technology, the most important innovation, was introduced to a similar extent as in the German manufacturing industry in the field of planning of operations, in the preparation of the workflow, ordering and billing. Foreign producers have been successful in expanding their price-based market position in Germany. They now account for the largest part of the domestic supply. The importance of domestic manufacturers has decreased continuously, with the exception of supplying special markets. They were only able to safeguard their position through the use of foreign-country production in the form of outward processing, production in own companies and merchandise procurement. Since the fall of the Iron Curtain 15 years ago, it has been basically decided that Germany is indefensible as a production location (not only for apparel, but for most traditional, labour-intensive and less-innovative products). In recent years a new type of clothing enterprise has arisen. The majority of clothing enterprises now see themselves less as producers than as agents between customer needs, know-how possessors including creative designers and the potential of the global production network[3]. As a rule, a residual manufacturing capacity remains at home for the handling of last-minute and special tasks, stock keeping and logistics as well as core manufacturing for the preparation and support of foreign production and for sales (0 series, presentation collections). This development is tantamount to clothing producers acting as dealers and as such they are exposed to the competition from trading companies, which is even harder. However, this change in competition strategy cannot stop the diminishing importance in the consumption of clothing. As mentioned, the share of expenses for clothing in total private consumption[4] amounted to 7.6 per cent in 1980, in 1990 it had fallen to 7 per cent and today is only 5.4 per cent. The traditional need for simple clothing, such as undergarments, shirts, t-shirts, sportswear, clothing accessories, etc. is now met by import products. The market share of individual and high-quality products, such as designer fashions, casual wear, brand products, functional apparel or leisure time clothing, is the market segment served by German manufacturers. The framework for adjustment is similar for the textile. The demand for home textiles declined. Currently, the share of technological textiles dominates the output of the textile industry. The producers in industrialised countries can only survive in high level and high technology markets, with an emphasis on know how, specialisation and innovation. The tendency towards high level production may be observed in the textile and clothing industry as well. In the textile industry, as a result of the shrinking of the local production, the domestic demand for apparel textiles (cloth, knitwear and soft goods) receded. Ten years ago, apparel textiles comprised about one half of the production value and currently comprises not even one third of the market volume of textile producers. The falling of the private consumption pinches at the demand for home textiles (e.g. curtains, bed-linen and furniture textiles). Nevertheless, home textiles have stood their ground with stable 30 per cent market share. In recent years, technical textiles gained about two-fifths of the production value in the textile sector. Germany is now a place for the production of so-called technical and “intelligent textiles”. The development of the German textile and clothing branch is similar to that of other developed countries. Jones and Hayes (2004, p. 3) proved for the UK and Hetzel (2004) demonstrated for France identical experiences. Despite a better development of demand in the UK, for example, and very innovative, but diverging corporate market strategies in the case of France, the adoption process seems to be quite identical to the German case. Jones and Hayes (2004, p. 7), for example, stated for the UK:

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Job losses could be attributed to three forces viz a lack of demand; a rise in productivity or a rise in imports . . . (The) 2001 UK domestic production fell in real terms by 36.6 per cent while imports rose by 104.5 per cent. The average level of import penetration rose by 60.7 per cent i.e. from 57.2 per cent to 91.9 per cent.

The change in the importance of the textile and clothing industry The activities of traditional industries with high labour costs which are exposed to international cost competition – such as shipbuilding, steel construction, the toy industry or the producers of watches and optical devices are the same in the strategic dimension. The tactical activities may differ from industry to industry depending on technology, the vocational needs, technical norms and legislative frames. In the clothing industry the shifting manufacturing by outward processing is easy. The aim of the industry is to hold the high end of value added domestic. Just that part of manufacturing will have a sustainable development, which corresponds to the average industrial levels of equipment standards, compensation and qualification. The part of labour that lies beneath this wage and know-how threshold can only be used if one shifts these tasks to lower labour-cost areas and if companies assure the access to the outward processing part of production by means of entrepreneurial activities. The core functions remain at home, such as organisation of operations, engineering, know-how, the creative potentials, marketing, and residual or core manufacturing. The declining importance of the clothing industry as an example for that process is shown in Table I with the numbers for employees, sales and enterprises. In 1990, the 2,074 enterprises of the clothing industry recorded sales of approximately e14.0 billion and were still an internationally important part of the clothing industry[5]. In the last 12 years some 350,000 industrial jobs have disappeared in east and west Germany. The textile and clothing industry in east Germany[6] (340,000 employees in the textile and clothing industry in 1990) has virtually disappeared despite competitive production techniques, manufacturing know-how and qualified working staff. In 2000 the 6,425 enterprises in clothing manufacturing achieved sales of e14.5 billion (see Table II). In early 2002 the clothing industry still had 56,583 employees in 574 firms with sales of e10.5 billion. In 2000, some 6,801 textiles manufacturers achieved sales of about e20.8 billion. Most of the companies of the textile and clothing sector are small and medium sized. The small manufactures, mostly sewing shops, tailors, dressmakers or handicraft businesses with an turnover up to e0.5 million account for roughly 74 per cent of companies but attain only 3 per cent of turnover. The large firms with more than e10 million annual turnover have a proportion of 5 per cent of the number companies and 77 per cent of turnover. These figures are indicators for a process of concentration and merging of firms as a precondition for international competitiveness. But German textile companies do not have a high score among the major players in the international business. The most important German textile company ranks 19th in the world list of global players. In the textile industry, the scale of a company is defined by the product technology. Relatively large companies are specialised in the production of non-woven fabric and thread or textrusion of fabric. The development and the relation of exports to imports is shown in Table III[7]. The figures represent the total exports and imports from and to Germany from all dealers and customers (industry, dealers and trade agents, including outward processing trade and intra company trade). Most of the exports go to the countries of the European Union. Most of the imports come from low price importers. The import penetration

Year

No. of employees

No. of companies

Sales (billion e)

1980a 1985 1990b 1995 2000 2001

248,776 118,132 164,023 105,872 66,199 60,889

3,210 2,456 2,074 1,252 695 613

10.60 11.30 13.70 12.04 10.74 10.51

Exportsc (billion e) 1.55 2.30 3.11 2.70 3.11 3.12

Notes: athe numbers for 1980 and 1985 refer only to the former federal territory of west Germany; bthe values for 1990 and later are for East and West Germany; cdelimitation according to WZ 93-statistical frame. These are enterprises with more than 20 employees. Source: Statistisches Bundesamt (n.d.); und Zeitreihen des Statistisches Bundesamts, 5400077, Produzierendes Gewerbe, Betriebsergebnisse insgesamt, nach Hauptgruppen, Abschnitten, Unterabschnitten, Abteilungen, Gruppen und Klassen der WZ93, Bekleidungsgewerbe (18), www-zr.destatis 2002 (German Federal Statistical Office, National Accounts, Manufacturing Industry, Wiesbaden)

Textile manufacturing Number of Turnovera in manufactures million e

Size of company (e turnover) 16,600-250,000 0.25-2 million 2-10 million 10-250 million 250 million and above Total

3,878 1,839 715 394 5 6,831

336 1,359 3,324 13,415 2,420 20,854

1995 1996 1997 1998 1999 2000 2001 2002 2003

Textiles Exports billion e Imports billion e 9.9 10.0 11.0 11.6 11.0 12.0 12.1 12.0 11.3

Source: Statistisches Bundesamt (2004)

11.6 12.0 12.6 13.2 12.7 14.0 13.6 12.7 12.2

305

Table I. Companies, employees, sales and exports in the German clothing industry

Clothing manufacturing Number of Turnovera in manufactures million e 4,592 1,158 426 242 7 6,425

325 745 1,909 8,792 2,677 14,488

Note: awithout value added tax (VAT) Source: German Federal Statistical Office, Wiesbaden (2002)

Year

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Table II. Number and size of German textile and clothing manufactures (2000) (values according to the German value added tax statistics)

Clothing Exports billion e Imports billion e 5.0 5.3 6.0 6.5 6.5 6.9 7.1 7.5 7.3

14.6 15.5 16.5 17.1 16.4 17.8 17.6 16.9 16.1

Table III. German foreign sales of textiles and clothing

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increased. The supply ratio from domestic production is only residual. The declining trend in domestic sales was not compensated by exports. German suppliers were very successful in the exports, particularly of high-quality products to the EU. German manufacturers had to withdraw to the remaining markets in which the additional outlays in production for technological improvements (textile industry) or quality and fashion (clothing industry) were still rewarded. Based on the study of Stengg (2001, p. 46) we can assume that the manufacturers in China, Africa, Turkey and the Central and East European (CEE) countries supply more than 70 per cent of simple and medium-level clothing. The industrialised countries of North America and Europe account for more than 50 per cent in the high-quality sector (brand sector, land of origin image, casual wear). Here is also the greatest potential for export success. According to expert estimates, the supplier share with products from domestic production is now below a 10 per cent proportion of the entire market[8]. The change in competition in the international division of labour The old lectures of David Ricardo are basically confirmed, up to now, that countries in international competition should rely on competencies in which they have comparative advantages. In this sense it is necessary to identify the important core competencies of Germany as an industrial location. Competition for mature industries can no longer be defined by technical modernisation of production facilities. In the foreground now stand competition of ideas, marketing and entrepreneurial decisions, which presupposes the employment of well-paid specialists. The consequences are similar for the strategy of textiles and clothing manufacturers; the detailed activities to achieve this strategy differ. Clothing industry activities The extent of foreign production by German clothing enterprises depends on an optimisation process. This process balances the extent of service for the (mostly high quality) demand for domestic production at high labour costs and the demand for the service for foreign production (in the low price segment) that will be produced at low labour costs. Production alternatives in the international division of labour are: own foreign manufacturing, partial subcontracting, outward processing, full-stage foreign manufacturing and merchandise procurement. The comparative calculation of the production costs in site selection, apart from pure wage costs, is based on haulage, import duties, local taxes and social charges, differences in technical productivity and product quality, differences in administrative costs and for experts, and the expenditures for the support of outward processing. The results of appropriate calculations from Kurt Salmon Associates (KSA, 1980; 1999) have remained stable to a large extent for several years. At the end of the 1980s, production costs per manufacturing minute[9] in Germany amounted to about e0.30, while the average for comparable work in low-wage countries was about e0.10. Currently for about e0.40 per production minute in Germany, costs are about e0.25 on average for the industrialised countries in Europe and America, about e0.15 for production in newly industrialised countries and about e0.10 in low wage countries. Accordingly, a stable level for production costs in low-wage countries has been achieved. This is a kind of “commodity price” which is to be applied for comparable services of production of internationally traded goods shifted to low-wage countries in the outward processing[10]. This “international equilibrium price” has stabilised since the fall of the Iron Curtain. Since then, an increasing world demand for clothing can be observed. In the context of the international division of labour in Central and Eastern Europe (but also

in the Mediterranean area, in the Near East, in Latin and Central America, as well as in Asia), new production centres for clothing and textile manufacturing have appeared. Thus the ability to activate low wage labour jobs for the co-operation in the outward processing business is strongly cross-linked with the emerging of new production sites in newly industrialising countries, which are partly subsidised with tax privileges and investment funding in special economic zones[11]. Calculations of Stengg (2001, p. 17) confirm that a high cost-benefit ratio can be achieved with the use of classical equipment and conservative organisation in most of the low wage countries. Classical organisation concepts and medium technology equipment define the international level of standard production methods. According to Stengg (2001, p. 16) in Turkey, India or Egypt the ratio of wages to value-added is three to seven times that of Germany. This difference is partly a result of equipment. The state of the art in production technology in outward processing and in the production for the world market has converged world-wide as an effect of the unification of technical quality standards and leads to a similar technical productivity. Internationally a certain “over-capitalisation for quality management” is to be found in the factories of the partners in outward processing and producers for the world market. Currently the outward processing is simply limited by the imposition of tax free quotas from the regulations within the World Trade Organisation (WTO), which will be terminated at the end of the year 2004. A precise history of regulations within the WTO is elaborated in this journal by Scheffer and Duineveld (2004, p. 2) and is thoroughly assessed in the report from IFM & Partners (2004). After the reunification of Germany, the shift of production to CEE countries instead of the use of the production potential in east Germany proved to be the more lucrative decision[12]. Production in CEE countries contains price advantages with comparable quality and/or productivity and only insignificantly higher transport costs. Furthermore the CEE countries have a considerable potential of qualified female labour that has not been exhausted. Table IV shows the importance and development of the production alternatives in the international division of labour for sales of the clothing industry based on periodic surveys of the industry by the Ifo Institute. The most important partners for foreign clothing production are enterprises in Poland, Romania and Tunisia. With these countries, approximately 40 per cent of subcontracting and outward processing is executed. In-house Survey year 1983 1987 1993 1997 2002

Domestic

Foreign

62.8 44.9 25.6 28.2 17.0

3.1 7.9 6.3 6.3 14.2

Outward processing Full-staged job Domestic Foreign contracting abroad 14.1 13.5 5.9 5.6 2

9.5 16.9 34.5 46.9 49.6

– a –a 12.2 –a –a

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Procurement Domestic

Foreign

2.9 6.4 – 1.4 0.1

7.6 10.4 15.5 11.6 17.1

Notes: adata not collected; the surveys of 1983 and 1987 represent the answers of approx. 200 enterprises, that of 1993 approx. 100 enterprises. The surveys of 1997 and 2002 are partial results of surveys on the state of the production shift in all of manufacturing and represent model calculations and extrapolations on the basis of the answers from 48 and 38 enterprises in each case and on the basis of relevant economic sector indicators Source: Surveys and calculations of IFO Institute, Munich, several years

Table IV. Importance and development of the production and procurement alternatives in the production of clothing (in % of sales)

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A further 20 per cent of the outward processing is with the Czech Republic, Slovakia, Croatia and Hungary (Table V). The tactical adjustments to the international competition in production costs have changed. In the 1980s, clothing producers had considerable own production facilities and used local subcontractors[13]. Since the 1980s up and into the 1990s, outward processing increased. From the early 1990s, foreign procurement was intensified in order to adjust the scope of company delivery. Up to the middle of the 1990s the activities focussed on lowering production costs. Since then, a growing proportion of turnover is achieved by the production in own companies in foreign countries. Whether these marked-oriented investments, close to new foreign emerging markets in in-house production sites will dominate, is a matter of future observation. Textiles industry activities In the textile sector, outward processing is partly limited because of technological restrictions. Nevertheless, textile firms can use four activities to adjust prices and labour costs: (1) Upgrading of technology and products using higher levels of capital intensity in order to enforce productivity and quality efficiency; investments in new products, consumer needs and markets. (2) Specialisation for markets and for technological functions within the textile process (production of yarn, thread, textrusion, as well as production of woven cloth, fabric and non-woven fabric and finishing). (3) Outward processing and investments in foreign countries for consumer oriented placement of productions, procurement of foreign textiles. (4) Foreign investments. Point 1. The textile industry is capital intensive, thus textile firms have been more successful in enhancing effectiveness and productivity to lower unit costs. In terms of labour costs the economic framework for automation activities is similar to those of the Outward processinga Country Import

Table V. Main partner countries for outward processing, clothing imports and exports (according to regions) 2001 (billion e)

Poland Romania Tunisia Czech Rep. Ukraine Slovakia Slovenia Hungary Bulgaria Croatia Turkey Others (25 countries) Total

0.80 0.78 0.31 0.28 0.20 0.19 0.19 0.19 0.19 0.18 0.15 1.03 4.49

Imports Country China Turkey Poland Romania Italy Hong Kong Tunisia Bangladesh India Others (108 countries) Total

Exports Import 1.42 1.28 0.97 0.91 0.80 0.48 0.46 0.45 0.36 5.34 12.53

Area

Export

EU countries CEE countries Misc. Europe Africa America Asia Australia/Oceania Remaining countries

3.48 0.56 0.69 0.02 0.22 0.22 0.01 0.01

Total

5.21

Note: aoutward processing is contained in the imports and exports Source: BBI (2002); Statistisches Bundesamt Wiesbaden, Tab. 031,211, Bundesamt fu¨r Wirtschaft und Ausfuhrkontrolle (Federal administration for economy and export control), calculations of the Ifo Institute, Munich, 2002

clothing industry (Table VI). Germany is one of the top ranking countries with respect to the labour costs in the textile industry. But the substitution of labour by capital is not a smooth way to compensate these costs. Despite higher innovation potentials, there is only a temporary benefit from the adjustment of the equipment. The global innovation race between the textile producers quickly counter-balances a local technical innovation progress. As in the clothing industry, the learning effects of all rivals in business are high. Thus, technological progress is rapidly absorbed by competitors and leads to a similar technological standard within the global production networks, challenging the theoretical benefits of high-tech equipment. As the best competitive strategy in practical terms, product innovation together with appropriate upgrading of equipment seems to have been successful. The traditional product innovation, the production of expensive and high quality cloth for local apparel producers seems to be a second best strategy. The German textile manufacturers are, in fact, busy increasing the share of high quality cloth. But especially the Italian competitors have had a kind of monopoly position in this market for decades as a result of close co-operation with local high level fashion clothing firms and famous brands (Guercini, 2004). The competitiveness of German textile companies is definitely in the sector of high technology fibres and innovative textiles. The monopoly position of the German textile industry depends on the interdependence with German industry. German industry, especially the automotive, construction and mechanical engineering industries, producers of health care and environmental technology, wrapping and packaging have a need for these technical textiles. Even the clothing industry is examining applications of so called “innovative textiles” in order to reach out for new markets and customers. This product segment Country Denmark Western Germany The Netherlands Belgium Sweden Japan Finland USA Austria France UK Italy Ireland Spain Eastern Germany Greece Portugal Poland Czech Rep. Hungary Slovakia

Labour costs (e/hour)

Total labour costsa (e/hour)

18.8 11.6 11.0 10.4 10.7 11.2 9.8 12.7 8.7 8.1 10.6 7.1 10.1 6.5 7.1 5.0 3.3 2.0 1.6 1.6 1.4

23.14 20.01 19.52 18.78 18.15 18.06 17.21 16.75 16.10 14.86 14.31 13.98 13.54 11.59 11.12 8.35 5.66 3.13 2.73 2.57 2.21

Note: aIncluding additional costs for social security Source: Gesamttextil (2003)

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Table VI. Labour costs in the textile industry of selected countries (in e/hour, direct labour costs and total labour costs, 2001)

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permits prices that match the local level of labour costs. The production of “intelligent textiles” is hard to imitate and saves a technical head position, rather than the production of high quality fashion cloth. The proportion of technical textiles currently amounts, as mentioned, to 40 per cent of turnover. This close co-operation between industry and textile companies as an innovation partnership has been successful with almost all innovative industrial companies, that use technical textiles in all important industrial countries of Europe and North America. Point 2. The framework of international competition defines new dimensions for the global producers. In the textile industry a tendency towards huge factories and to the merging of firms can be observed in order to achieve economies of scale and reach minimum standards of market shares. The specialisation of functions within the textile supply and production chains is a result of these external effects in Germany. Point 3. Experts estimate, as mentioned, for the textile industry some 20 per cent of turnover is achieved by outward processing and own production abroad. The textile industry follows the outsourcing situation of the clothing industry with a lag of estimated seven to ten years. The time difference in the adjustment to the globalisation may be attributed to the better innovation potential, which absorbs the impact on jobs and production methods. The co operation with international partners will be similar in the textile industry and in the clothing industry. First, the activities are now market oriented. Second, the partners in the international supply chain are capable of assuring not only cost competitiveness, but also delivering textiles on an acceptable quality level in order to substitute own delivery or to enable the procurement of foreign clothing textiles with the purpose of supplementing the own scope of products. Point 4. The textile industry follows a close market orientation by means of foreign investments. Recently many emerging markets can be observed, mostly in the CEE countries, Russia, China and the Pacific Region. It is important to participate as a supplier to these markets. Groemling and Matthes (2003, p. 78) assessed that the investments of the clothing and textile industry in foreign countries accumulated assets of about e4 billion. Most of them were done in the EU. The figures include expenses for market preparation, production, and retailing. Especially in the eastern neighbour countries of Poland, the Czech or the Slovak Republic and in Hungary, future investments in new production facilities are supported by qualified workers and by local back-up of regional industrial development and settlement activities. The production of “technical textiles” needs a close link to the industrial consumers in order to establish an efficient innovation partnership. This effect triggers foreign investments. The impact on companies’ concepts and the development of the factors of production in clothing companies[14] For the domestic production of clothing, the ability to use traditional production know-how has faded into the background. In the foreground are abilities in service, marketing and distribution. Important for competition is a strong profile with regard to recognition of value, fashion, design, price-performance ratio and awareness for target groups. Special importance is assigned to market strategy because the enterprises increasingly behave like retailers because of the growing proportion of procurement of clothing. Competition has changed accordingly. In the retail business in Germany for garments, clothing manufacturers are confronted with a strong concentration of oligopoly providers. Retailing in Germany is dominated by large chains, mail-order

firms, discounters and department stores accounting for 68 per cent of clothing sales. The big commercial houses have expertise in marketing and distribution and also use world-wide outward processing for the production of their own brands. The outward processing now can be identified as a world-wide, well-organised network of productive facilities which can be used from all kind of business. In particular, internationally active providers of luxury brands, as well as “system suppliers” with a “young” image, have been the winners in national and international clothing markets. The production methods of clothing manufacturing are mature to a large extent. Technical innovations are faced with effective innovation barriers and are aimed at the application of precision mechanics for the refinement of workplaces and the work flows in the machines as well as the use of information technology for the programming of machines and the improvement of the planning, surveillance and administration of manufacturing. Information technology is particularly suitable for advancing administration, billing, design, distribution and marketing in the industry. In the textile industry, similar developments may be observed for companies that produce ready-made articles for the home textile sector or for the producers of knit-ware. Competition, innovation, price development and fashion aspects are the same as those of clothing producers. The organisation of companies and the co-operation with other firms, subcontractors, consultants, designers and last not least with the consumers show a similar development. Traditional textile producers react on the continuos decline in demand to cloth from the local apparel producers. Especially the producers of technical textiles are important agents in the innovation process of their customers. Therefore they need to establish factories close to them. Despite those intensive entrepreneurial activities, the economic importance of the textile and clothing firms is declining. The developments of labour productivity, capital productivity and the total productivity[15] are shown in Figure 1 for the textile and clothing industry in relation to the German manufacturing industry. The development of labour productivity is shown in Figure 1(a). Labour productivity of all industries has been growing since 1980. The textile industry had been able to follow the paths of the average of the manufacturing industry. The labour productivity in the clothing industry shows lower growth rates than the manufacturing industry. The manufacturing industry gained 175 per cent of labour income in the time span from 2000 basic to the year 1980. The clothing industry reached even 120 per cent in this time. The development of capital productivity is shown in Figure 1(b). The development of capital productivity of the clothing industry seems to be poor in relation to the labour productivity of the textile and manufacturing industries in Germany. The manufacturing industry managed to stabilise its capital productivity over the past 20 years. In the clothing industry, capital investment and capital use is no major topic. The steady decline of capital productivity may be evident. There seems to be a close relation between outward processing and the decline of capital productivity. The textile industry was able to establish a more efficient capital use than the manufacturing industry until the beginning of the 1990s, the time of the German reunification. Since the early 1990s the development of the capital productivity in the clothing industry has a similar shape as the capital productivity of the clothing industry in the 1980s, the time of the beginning intensive outward processing[16]. The development of the total productivity is shown in Figure 1(c). Total productivity is an indicator for the efficiency of the combination of product factors. The

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Figure 1. Development of economic indicators in the textile and clothing industry

textile and the manufacturing industry achieved more benefits than the clothing industry. The use of labour and capital in the German manufacturing industry was about 50 per cent more efficient in 2000 than in 1980. The efficiency of labour and capital in the German textile industry improved by 25 per cent from 1980 to 2000. The use of labour and capital in the German clothing industry was about 25 per cent less effective in 2000 than in 1980. This result may be surprising. But it must be recognised that the production methods have changed tremendously in the clothing industry. No conventional industrial organisation may be found in a clothing firm today. Additionally, the total productivity index measures the industrial potential in relation to an average industrial company. Thus it seems to be an indicator for the relation to the average use of labour and capital in the industry.

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313

The change in structures of production, organisation and qualifications The gradual impact of globalisation on production methods can be observed in all manufacturing industries. Principles of shareholder value, common commitments of accounting (GAP) and uniform management principles like “lean organisation” lead to globally comparable enterprise concepts. Generally speaking, there is a tendency towards service intensive production forms with a growing share of planning, management, administration and control jobs. Therefore, a decline of blue collar workers can be seen. In terms of payment, this downward movement of blue collar work is noticeable in the manufacturing and in the textile industry as well, but it is crucial in the clothing industry (Table VII). The proportion of wages from the sum of wages and salaries was reduced in the manufacturing enterprises from 61 per cent in 1980 to 51 per cent in 2000. The textile industry had a higher labour intensity (25 per cent) in 1980 than an average enterprise in the manufacturing industry and a higher proportion of blue collar workers (67 per cent). The clothing industry was the most labour intensive with 24 per cent of wages from turnover. For the last 20 years both indicators declined in all industries: the share of wages from turnover and the share of wages from the sum of wages and salaries. But, the clothing industry performed best from 1980 to 2000. Now it has one of the lowest shares of wages from turnover. In the clothing industry the new form of the “service-oriented clothing enterprise” has led to new emphasis in work, organisation, qualifications, co-operation and communication. In this respect the share of creative tasks, marketing functions, Index Share of wages from the expenses investments for wages and salaries (%) Share of wagesb from turnover (%) clothing industry Textile Clothing Manufacturing Textile Clothing Manufacturing Year (million e) (nominal) industry industry industry industry industry industry 1980 1985 1990 1995 2000

185a 170a 240a 190 150

66.9 64.0 62.1 58.0 56.9

71.3 67.6 61.8 52.8 41.7

60.8 57.7 56.5 53.3 51.4

23.7 20.2 20.2 21.4 19.9

24.6 21.6 18.8 16.9 14.4

21.3 19.1 20.3 19.9 16.8

Notes: auntil 1990 west Germany only; 1995 to 2002 East and West Germany; bwages and salaries Source: Calculations of the IFO Institute on the basis of data of the Federal Statistical Office, Fachserie 16, R. 2.1 and 2.2; Goerzig et al. (2001); IFO Investment Survey 2001

Table VII. Modification of the labour structure in the textile and clothing industry development of investments and the share of industrial labour as well as the ratio of wages from turnover, 1980 to 2002

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management and administration tasks, and logistics in relation to manufacturing functions is decisive. Statistically there has also been a decline in industrial blue collar jobs in relation to white collar jobs. Since the clothing industry now employs 60 per cent white collar employees, these investments are mainly in the financial area, administration, management and creative sectors, support for partial subcontracting and logistics, in other words for modern jobs. The type of remaining blue collar jobs in the industry has changed. The share of warehouse and transport labour has expanded at the expense of pure sewing labour in the assembly. In addition, professional demands have also increased for sewing. Changes in the general conditions have forced companies, for financial reasons, to replace the traditional assembly manufacturing, with its high division of labour, by a flexible administration of production, reducing flexibility costs and expenses for high quality at a reasonable productivity rate. Firms that are successful in international competition no longer employ unskilled or semiskilled labour but require professional craft skills, as are found in studio companies, for example. The professional level of industrial labour and payment resemble, in this respect, those of crafts in production, those of commerce in the administration and those of the services in the creative sectors. In the clothing industry, over the course of time, an unexpected reduction of the wage ratio has been achieved, which has currently sunk to below 15 per cent of turnover (Table VII). As a result of an indirect rationalisation through the outward processing and other outsourcing measures, the amount of domestic wages is no longer the determining factor in costs. In the meantime, the clothing industry is regarded as a pioneer in the globalisation of production. In the future, decision makers must realise the changing framework within the international division of labour after the enlargement of the EU and the out-phasing of the restrictions/subventions for/to trade with textiles and clothing within the WTO regulations at 1st January, 2005. An executive from a famous German clothing producer, in an expert interview with this author, was asked the question: “What are your actual activities in outsourcing?”. He replied, “We wait for January 1st 2005 and we are now preparing business relations in order to focus on full job contracting with China”. Learning from other experiences Despite the drastic obstacles for the economic future of the German textile and clothing producers, Germany remained one of the major suppliers for the world market of textiles and clothing (see Guercini, 2004, pp. 7-14). The German industry is effective in using know-how from the co-operation with foreign partners and profits from incorporating related benefits. The co-operation is focussed now on cost management and outsourcing of the assembly within the outward processing. The outsourcing process affects theoretically the pattern of benefits and activities, which are listed in Table VIII. Table VIII represents the results of an enquiry from the Outsourcing Institute in the US economy. The answers show that outsourcing of assembly is not the only activity and cost reduction not the only benefit. Important benefits or reasons besides cost reduction are: enlargement of the scope of company, relieving of company resources and the use of capacities on an international level. The outsourcing of production seems to be of minor importance in an holistic view of areas and reasons of outsourcing activity.

The eight main reasons for outsourcing Enlargement of scope of the company Cost reduction Relieves company resources Use of capacities on the international level Enhancement of the modernisation process Enhancement of market development Risk management Use of advantages of foreign locations

Incidence of answers % 55 55 38 36 20 18 12

The nine main areas for outsourcing

Incidence of answers %

Information technology

55

Administration Logistics/transport Finance

47 22 20

Personal management Production Contact – call centres Sales, marketing

19 18 15 13

Facilities management

11

12

Source: Casale (2003)

The main areas of outsourcing are those with high innovation rates, a commitment to establish work flows at an international level and to assure considerable potentials for specialisation and benefits trough economies of scale. These activities reduce the transaction cost. These are the business sub-systems information technology, administration, logistics and finance. These reasons had been obviously the basic kick off for merging various companies in the industry, in the service sector and in the information/media sector, to dimensions of global concern: the automotive and aerospace industry, nutrition and energy companies, banking/finance, or the major consultants, telephone, broadcasting companies and publishers. A small-scale dominated industry has not the standing to accomplish international and economically-sufficient standards which are equivalent to the stage of large companies. It stands to reason that even small-scaled textile and clothing companies will find ways for co operation in the areas of information, administration, logistics or finance, in order to benefit from the variety of advantages of outsourcing. Is seems to be a fact that the co operation within the global outsourcing network will reach out for a new stage of activities using additional areas for outsourcing and producing supplementary benefits. We have to understand that outward processing will come in a new phase, if the liberalisation of textile and clothing trade within the WTO will be accomplished in 2005. And it will change completely if the tax exemptions of outward processing vanish. The benefit of the tax exemptions within the outward processing trade with the CEE countries become obsolete with the joining of these countries to the European Union. The newly published IFM Study on the implications of the 2005 trade liberalisation in the textile and clothing sector (IFM & Partners, 2004) sees a severe impact on the industrialised countries in almost every product sector. To stabilise this new shock of adjustment, the outsourcing process cannot be limited to the traditional activities of outward processing. It is likely that the whole pattern of demonstrated outsourcing features will be optimised in order to stabilise the market performance of companies. Besides these aspects, German producers can learn a lot from other countries: . The emphasis of German business management is in the sector of competition. The case of Italy illustrates the so called “synergy of local co-operation in the

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315

Table VIII. Reasons and areas of outsourcing (answers from managers of US companies) (%)

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production chain” in order to enhance the potentials, capabilities and innovative processes. (see Guercini, 2004, p. 14). The partners in the outsourcing have very good, partly better conditions of innovation, learning and market penetration. The case of Turkey points up the chances of successful textile and clothing producers and stands for the opportunities of all new climbers from central-east and south-east European countries into the league of developed industrialised societies (see Binnur, 2004). Turkish companies have learned the textile and clothing business within the outsourcing network together with the EU producers, among others, with Germany, getting acquainted with the needs of this market. Indeed, Turkey is now, after China, the main supplier of textiles and clothing for the German consumer. Recently Turkey is underway to reach out into high level markets and aims to the US-American market with own brands. A similar development or success can be certainly observed in Poland, Rumania or in the Czech Republic and will be watched in China in some five to ten years.

German producers must recognise the function and the change in the mode of operation with their co-operation partners. In the future, business will become more effective, if the textile and clothing producers in Germany incorporate the new capabilities of these partners into their production strategy. The phenomenon of structural change that once proceeded as a step-by-step process, presents daily challenges today. This “permanent structural change” could prove to be a model for other industries. Perhaps, we may learn from this example, how to rethink future production in industrialised countries. Notes 1. The European currency “e” is used to measure the economic power of the clothing industry. The exchange rate between European currency e and the US$ was in 2002: 1e ¼ 1US$ (at beginning of 2004 about 0.8e/1US$). 2. The structural change in the clothing industry was analysed by the Ifo Institute with a view to the technological and organisation changes and their impact on organisation, qualification and management. Adler, (1988, 1990, 1997). The results had been based on empirical findings from modernisation projects in clothing firms, funded by the German Federal Ministry for Education, Science and Research. 3. A good explanation of the cross-linked connections and flows of delivery within this global network of outward processing is shown by Guercini (2004, p. 29). 4. Measured as a share of consumption costs for clothing from the spending of private households according to expenditure purpose in respective prices (Statistisches Bundesamt (n.d.), Wiesbaden, Volkswirtschaftliche Gesamtrechnungen, Fachserie 18/Reihe 1.2., national accounts, various years). At constant prices higher shares are attained because price developments of clothing products were below the other expenditure categories of private consumption. In 1970 the share was still a nominal 8.7 per cent. In real terms – 1980: 7.7 per cent; 1990: 6.1 per cent and 2001: 5.6 per cent. 5. These data are based on sales tax statistics. German statistics distinguish between the clothing industry (industrially organised enterprises with more than 20 employees) and clothing manufacturing (which also includes crafts, tailor shops and small enterprises). The majority of the enterprises of the clothing industry (80 per cent) are small and mini businesses with less than e0.5 billion sales, in particular in the crafts. They represent only 4 per cent of industry

6. 7. 8.

9.

10.

11.

12.

13.

14. 15.

sales. At the beginning of 2002 the craft statistics included 5,245 tailors and dressmakers. The ca. 16,000 alteration tailors are not included in the statistics. The concentration of the industry has increased as a result of globalisation. Only 3.1 per cent of the enterprises account for 76 per cent of industry sales. Accordingly, large enterprises are better prepared for global competition. The IFO Institute conducted a study on the state of the textile, clothing and leather industries in east Germany in the 1990s (Breitenacher et al., 1997). The exports and imports in Table III comprise all activities of German companies: industry, crafts, tailors, retailers and other business. The value of 10 per cent is based on estimates from experts (Groemling and Matthes, 2003, p. 23) calculate the import penetration of the clothing and textile sectors at 80 per cent. They proved that the import penetration changed from about 20 per cent in 1970 to 80 per cent in 2000. These calculations for the years 1980 and 1999 are done by the consulting firm Kurt Salmon Associates (KSA) in the framework of production cost comparisons for the clothing sector. The calculations for the 1980s included haulage and insurance (CIF: cost insurance freight). The current values were determined without transport and insurance costs (FOB: free on board). These are average estimates on the basis of a mathematical model that calculates the full costs for subcontracting as standard costs, i.e. the value added per production minute of a standard piece. This involves the calculation of the costs of industrial and/or industry-like production forms. Not considered are the production costs of local “sweatshops”, i.e., companies in which labour is compensated with extremely low wages amidst unacceptable working conditions and with clear exploitation of social fringe groups, even child labour. These sweatshops have clearly lower production costs. Cf.: www.sweatshopwatch.org See Groemling and Matthes (2003). The Ifo Institute investigated the importance of outward processing in: Adler and Breitenacher (1995). Also: Aberdeen Group (2003) and Casale (2003) from the Outsourcing Institute. The Soziologische Forschungsinstitut at the University of Go¨ttingen is currently preparing a study on location choice in the German industry. The effective labour cost level in east Germany is clearly under that of west Germany. Nevertheless, in an international comparison, east Germany does not compare well to the CEE countries from the standpoint of wage amounts, productivity and transaction costs. So called “Zwischenmeister” were specialised in subcontracting for distinctive products. These enterprises and traditional home workers had been local sewing shops without brands and distribution-facilities. As a result of the intensive outward processing, those local sweatshops with low paid labour vanished within the last ten years. The employment of ethnic minorities in sweatshops, like Indian and Pakistan people in UK, people from Algeria or Senegal in France or Chinese people in the Prato District in Italy, is not discussed in Germany. There is a considerable employment of alien employees in the clothing industry. A huge proportion of the 16,000 alternation shops is operated by people of Turkish origin, mostly in the large cities, with an estimated employment of some 50,000. The following section focuses on the German clothing industry. Detailed analysis could not be executed for textile firms. The total productivity used here is not the same indicator as it is familiar in the Cobb Douglas function. The indicator represents a combination of capital productivity (gross value added in relation to 1000 e of capital assets) and labour productivity (gross value added in 1,000 e per employee) by means of the ratio of wages and salaries from the gross value added. It is an indicator for the efficiency of factor allocation with respect to the income of labour and capital, without the state income (taxes). The factor indicates the application of production factors in relation to a basic year. All prices are those of 1995. Values over 100

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317

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indicate an improvement of factor input in relation to the economic progress. Those below 100 indicate a deterioration of the combination of labour and capital. 16. The future development of capital productivity in the textile industry must be observed. There may be, in the near future, a similar adoption process in the use of capital in the textile industry, as there has been in the clothing industry in the years after 1990.

318 References Aberdeen Group (2003), The Global Sourcing Benchmark Report, Balancing Supply Cost, Performance, and Risks in an Uncertain Economy, Aberdeen Group, Boston, MA. Adler, U. (1988), “Wettbewerb, Technik und Arbeitsgestaltung: neue Tendenzen im Bekleidungsgewerbe?” (“Competition, technology and workplaces, new tendencies in the clothing industry?”), IFO Studien zur Industriewirtschaft No. 35, Munich, IFO. Adler, U. (1990), “Arbeit und Technik in der Bekleidungsindustrie” (“Labour and Technology in the Clothing Industry”), HdA – Schriftenreihe, No. 98, Campus, New York/Berlin. Adler, U. (1997), “Sozioo¨konomische Aspekte der Gruppenarbeit (“Socio-economic aspects of group organisation”), Bekleidungstechnische Schriftenreihe, Vol. 122. Adler, U. and Breitenacher, M. (1995), “Bedeutung, Probleme und Zukunft des passiven Lohnveredlungsverkehrs fu¨r die Textil- und Bekleidungsindustrie (“Significance, Problems and future of outward processing for the textile and clothing industry”), ifo Studien zur Industriewirtschaft, No. 51, Ifo, Mu¨nchen. BBI (2002), Bundesverband Bekleidungsindustrie, Die deutschen Bekleidungsindustrie, Jahresbericht, 2001/2002 (The German Clothing Industry, Annual Report, Cologne). Breitenacher, M., Adler, U. and Voegtle, C. (1997), “Das Textil-, Bekleidungs- und Ledergewerbe im Freistaat Sachsen” (“The textile, apparel and leather manufacturing in the state of Saxonia”), IFO Dresden Studien No. 18, Ifo, Munich. Casale, F. (2003), Outsourcing Essentials, Buyers Guide – Mastering the Outsourcing Process, The Outsourcing Institute, Jericho, NY. Gesamttextil (2003), Annual Report, Jahresbericht 2002, Association of German Textile and Fashion Industries, Eschborn. Goerzig, B. et al. (2001), Produktion und Faktoreinsatz nach Branchen des verarbeitenden Gewerbes Westdeutschlands (Production and Factor Input in the west German Manufacturing Industry), Berlin. Groemling, M. and Matthes, J. (2003), Globalisierung und Strukturwandel der deutschen Textilund Bekleidungsindustrie (Globalisation and Structural Change in the German Textile and Clothing Industry, Colone), Cologne, p. 23. Guercini, S. (2004), “Strategic behaviour of Italian textile-apparel firms: national specific and international competitive change”, paper presented at The European Clothing Industry: Meeting the Competitive Challenge, ESC Toulouse, 26-27 February. Hetzel, P. (2004), “Meeting the Competitive Challenge of Europe via Marketing: The Evolution of Fashion Marketing in France”. IFM & Partners (2004), “2005 T/C Liberalisation”, Consolidated Report, Study on the Implications of the 2005 Trade Liberalisation in the Textile and Clothing Sector, Institut Franais de la (Mode IFM), Centre d’E´tudes Prospectives et d’Informations Internationales (Paris), European Public Advisers (Brussels), MAIA (Brussels), Pole Europe Conseil (Brussels). IFO (2001), IFO Investment Survey, IFO, Munich.

Jones, R. and Hayes, S. (2004), The UK Clothing Industry – Extinction or Evolution?, ESC Toulouse/Manchester. KSA (1980), Cost Comparison Study 1980, Kurt Salmon Associates, Du¨sseldorf. KSA (1999), Comparison Study 1999, Kurt Salmon Associates, Du¨sseldorf. Neidik, B. (2004), Organizational Determinants of Export Performance: The Case of the Turkish Apparel Industry, ESC Toulouse/Manchester. Scheffer, M. and Duineveld, M. (2004), Final Demise or Regeneration: The Dutch Case?, ESC Toulouse/Manchester. Statistisches Bundesamt (n.d.), Volkswirtschaftliche Gesamtrechnungen, Fachserie 18/Reihe 1.2./Fachserie 16, R. 2.1 and 2.2, German Federal Statistical Office, Wiesbaden, National Accounts, various years. Statistisches Bundesamt (2004), National Accounts, Fachserie 7, Reihe 1, German Federal Statistical Office, Wiesbaden. Stengg, W. (2001), The Textile and Clothing Industry in the EU: A Survey, EU Enterprise Papers No. 2-2001, 2-2001, EU, Brussels. Further reading Bundesamt fu¨r Wirtschaft und Ausfuhrkontrolle (2001), Eschborn. DIHK (2003), “Deutscher Industrie und Handelskammertag, Produktionsverlagerung als Element der Globalisierungsstrategie von Unternehmen: Ergebnisse einer Unternehmensumfrage, Berlin (Outward Processing as an Element of Globalisation, Enquiry, Mai”. Gesamttextil (2001), “Market opening, trade and development", 3rd International Congress on Trade Politics, Deutschen Industrie und Handelskammertag, Berlin, 25 September.

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The Emerald Research Register for this journal is available at www.emeraldinsight.com/researchregister

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ACADEMIC PAPER

International competitive change and strategic behaviour of Italian textile-apparel firms Simone Guercini University of Florence, Florence, Italy Keywords Italy, Textile industry, Garment industry, Marketing strategy, Corporate strategy Abstract In the 1990s the trend of textile and apparel manufacturing in Italy differed considerably from other European countries with high labour costs. The examination of the peculiar factors generating the Italian specificity represents the first aims of this paper, and will be discussed employing statistical sources concerning market performance, industrial organization and retail structure. A second aim, of no less central importance, is the evaluation of the strategic behaviour adopted by Italian textile and apparel firms in front of competitive change on international market. Results emerging from a secondary research are presented. The analysis proposed focuses mainly on strategic market positioning and integration between manufacturing firms of the textile-apparel pipeline and clothing retail.

1. Introduction The size of textile and apparel manufacturing industries in Italy shows certain particular characteristics that involve the textile-apparel pipeline in its four levels (fibers, textiles, apparel, retail). These characteristics result in a rather complex overall situation, which can be simplified and summarised as follows. First, Italy is poor both in natural fibers and also in raw materials for the production of man-made fibers; despite this, the contribution of this sector to the positive Italian trade balance is particularly significant. Consequently, textile and apparel manufacturing activities are particularly sensitive to the trends of international markets. Second, the structure of this industry in Italy shows an elevated number of firms, concentrated and rooted in local systems that are of noteworthy economic and social impact (industrial districts). Furthermore, although the textile and apparel sector is highly fragmented, it is recomposed within the industrial districts. There are local systems that are specialized in textile manufacturing, others in apparel, and yet others specialized in both. Third, the retail distribution of apparel in Italy also has certain unique features, in particular the persistence of the strategic group of independent retailers. Although the market share of independent retailers is declining, it still occupies a majority position within the total market of apparel consumption. Journal of Fashion Marketing and Management Vol. 8 No. 3, 2004 pp. 320-339 q Emerald Group Publishing Limited 1361-2026 DOI 10.1108/13612020410547824

The author thanks Silvia Ranfagni and Andrea Runfola for help in collecting data. The research on which the present study is based was supported by the Laboratory of Marketing and Internationalisation (LabMI) of PIN-University of Florence at Prato. The author bears sole responsibility for the contents of this paper.

The illustration and in-depth examination of the above mentioned peculiar factors represents a first aim of this paper. A second aim, of no less central importance, is the evaluation of the strategic behaviour adopted by Italian textile and apparel firms in front of the increasing power of the retail level of the pipeline. With regard to this second aim, we will focus mainly on strategic positioning and integration between manufacturing firms and clothing retail. The evolution of firms’ positioning will be evaluated both with respect to their market segments and also in the framework of buyer-seller relationships.

Italian textile-apparel firms 321

2. The Italian textile and clothing pipeline in the national and international landscape The Italian textile and clothing industry has a leading position in the European framework. Italy has over 50,000 firms operating in the sector of textiles and apparel, employing little short of 690,000 workers at the end of 2002. The overall turnover of these firms decreased by almost four percentage points during 2002, but it was still 3 percent higher than in 1999 (Table I). In recent years, the Italian textiles and apparel industry and market have been caught up in an intensification of the globalization process. Italian textiles and clothing firms have engaged in pronounced market-seeking internationalization, as testified by the roughly 60 percent incidence of exports out of turnover. Since 1999, this percentage has risen by more than 7 percentage points. The surplus created in the commercial balance derives both from the textiles and the apparel sector (Table II). In this sense, the Italian situation differs from the general European pattern, in that the European

Turnovera Export a Importa Export-import a National availabilitya Jobs b Export/turnover Import/national availability a

1999

2000

2001

2002

2002/ 2001 %

2002/ 1999 %

44,570 23,556 11,063 12,493 32,077 690,200 52.9%

47,101 27,047 13,173 13,874 33,227 698,600 57.4%

47,789 28,941 14,148 14,793 32,996 694,700 60.6%

45,911 27,667 14,261 13,406 32,505 687,100 60.3%

23.9 24.4 +0.8 29.4 21.5 21.1 20.3

+3.0 +17.5 +28.9 +7.3 +1.3 20.4 +7.4

34.5%

39.6%

42.9%

43.9%

+1.0

+9.4

b

Notes: million euro; units Source: Sistema Moda Italia (SMI) and Associazione Tessile Italiana (ATI) on ISTAT data

Import Million euro Change (%) Total textile-apparel Textiles Apparel

14,315 6,311 8,003

+0.8 25.4 +6.3

Source: Sistema Moda Italia (SMI) – ISTAT

Export Million euro Change (%) 27,989 12,080 15,909

24.4 25.7 23.4

Table I. The Italian textile-apparel pipeline performance

Balance Million euro +13,674 +5,769 +7,906

Table II. Foreign trade of the Italian textile-clothing industry (2002)

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Union taken as a whole presents an international trade surplus in textile products but a noticeably greater trade deficit as regards clothing. Despite the decline in exports during 2001-2003, over the last ten years Italian firms have achieved a more positive trend on the international market than on the domestic market. The Italian textiles and apparel market is roughly one-third smaller than the output of the entire domestic industry in this sector. Domestic market is rapidly undergoing internationalization as compared to the past, with the incidence of imports over total sales rising from 34.5 in 1999 to 43.9 percent in 2002. The textile and apparel sector represents a substantial portion of Italian manufacturing industry. It is responsible for over 10 percent of turnover and of persons occupied in this sector and exports, and for no less than one-third of the commercial trade surplus (Table III). These figures are considerably higher than in other industrialized European countries[1]. The year 2003 was a difficult year for Italian firms, whose exports declined considerably (26 percent in the period from January to July), especially in the field of knitwear (212.2 percent) and semifinished textile products (yarn 27.4 percent, fabric 28.3 percent); the drop was only slightly less severe in clothing (23.9 percent). During the same period imports also showed a negative trend, although the decline was less marked (21.5 percent) and was concentrated in the field of semi-finished textile products (yarn 25.6 percent, fabrics 26.9 percent). Overall, 2003 showed a decrease in foreign trade compared to the previous year, with an over 10 percent reduction in the commercial trade surplus. However, this surplus still stands at fairly elevated levels (Table IV). Italian exports of textile products and apparel showed a positive trend during the period of time extending over the second half of the 1990s. If one considers this time horizon, the reduction in exports observed from 2002 to 2003 has not yet completely absorbed the strong increase recorded during the earlier period of 1999-2001 (Table IV). %

Table III. Textile-apparel share in the Italian manufacturing sector (2002)

Table IV. Italian textile-apparel foreign trade from 1995 to 2003

Turnover Added value Export Trade balance

10.2 10.8 10.6 33.0

Source: Sistema Moda Italia (SMI) – ISTAT

Export a Change (%) Import a Change (%) Balancea Change (%)

1995

1996

1997

1998

1999

2000

2001

2002

2003

22,280 +16.5 9,121 +13.6 13,159 +18.6

22,813 +2.4 8,536 26.4 14,277 +8.5

24,039 +5.4 10,018 +17.4 14,021 21.8

24,515 +2.0 10,685 +6.7 13,830 21.4

23,456 24.3 10,732 +0.4 12,725 28.0

26,733 +14.0 12,770 +19.0 13,963 +9.7

28,737 +7.5 13,737 +7.6 15,000 +7.4

16,137b na 8,434b na 7,703a na

15,172b 26.0 8,312b 21.5 6,860b 210.9

Notes: amillion euro; bdata January-July; na: no data available in the ranking to make this calculation Source: ICE (Italian Trade Commission) on ISTAT data

Both in textiles and in clothing, Italian manufacturing firms are among the major European competitors in this sector. In the field of textile products, Italy represents over 27 percent of turnover and 24 percent of the investments made in the 15 countries of the EU, with a position that appears to have remained basically stable between 1996 and 2002. In the field of apparel, in 2002 the Italian position appears to have been even stronger, in that it represents over 37 percent of turnover and no less than 48 percent of investments, with a rise even in comparison to the already high level recorded in 1996 (Table V). In the textile sector, investments per employee are lower in Italy compared to the European average. In contrast, in the apparel sector, investments per employee are considerably higher in Italian firms compared to the European average, and more than twice the level recorded in the industry of certain countries, such as the UK. The number of persons occupied in the textile firms decreased, but to a lesser extent compared to the situation in France, Germany or, even more so, the UK. In the apparel sector there is even evidence of a tendency running contrary to the prevailing trend, so that while the major European countries showed a roughly 40 percent decrease in the number of persons occupied in this sector, in Italy there was actually a 1 percent increase between 1996 and 2002 (Table VI). In short, the overall trend of the Italian textiles and apparel industry appears to be strikingly different from the general pattern observed in the rest of the European Union. This is illustrated by the graphs representing the production trends in the textile (Figure 1 versus Figure 2) and in the apparel (Figure 3 versus Figure 4) industry.

Textiles

Share in turnover (%) 1996 2002

Share in turnover (%) 1996 2002

Share in investment (%) 1996 2002 Clothing

Italy 27.5 27.5 24.3 24.0 Germany 18.9 16.4 18.7 17.4 France 15.5 16.2 14.7 12.7 UK 10.6 10.5 7.2 7.6 European Union – 15 100.0 100.0 100.0 100.0

Source: Euratex-Bulletin 2003-2

323

Share in investment (%) 1996 2002

Italy 34.2 37.2 47.0 48.3 France 13.7 15.0 9.9 10.2 Germany 17.1 13.8 11.3 8.6 United Kingdom 13.2 10.9 8.0 7.7 European Union – 15 100.0 100.0 100.0 100.0

Source: Euratex-Bulletin 2003-2

Investment/employee in the textile industry Index 1996 ¼ 100 Investment/employee in the clothing industry Index 1996 ¼ 100 Employment in textiles in 2002 (1996 ¼ 100) Employment in clothing in 2002 (1996 ¼ 100)

Italian textile-apparel firms

European Union – 15

Italy

France

UK

Germany

3,291 109 1,678 109 84 79

2,171 97 2,463 88 94 101

4,195 102 1,834 144 78 62

2,728 152 928 144 64 58

5,243 111 1,918 115 77 58

Table V. Shares in turnover and investment in 1996 and 2002 in the European Union

Table VI. Investment and turnover by employee (2002 – euro/employee)

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Figure 1. The European Union textile industry

3. Specificities of the Italian textile and clothing pipeline The notable and continuing size of the textile and apparel manufacturing industry in Italy is still an element that distinguishes Italy from other European countries with elevated labour costs. This dimensional difference persists alongside qualitative differences. Such differences concern the industrial organization of manufacturing in textiles and the clothing industry, and also the structure of the apparel distribution channels. With regard to industrial organization, a striking feature is the considerable number of Italian textile and apparel firms, most of which are fairly small and locally aggregated in industrial district (Table VII). And as regards the structure of distribution, independent and traditional retailing maintains the largest market share, in contrast to the typical model in the other European countries, where one finds an increasing predominance of large distribution chains and specialised chains. For example, new outlet centre formulas developed much later in Italy than in other European countries like France and the UK (Burresi and Guercini, 2003). The relation between these two factors has been investigated in the literature. Porter (1990) considers the characteristics of Italian distribution as a factor that can account for the competitive position Italian manufacturers have long enjoyed in this sector. Other authors, in more recent debate on this issue, have underlined that “expert demand” can contribute to heightening the innovation potential of firms in local district systems[2]. Yet, today domestic customers represent a minority share of the

Italian textile-apparel firms 325

Figure 2. The Italian textile industry

Italian textile and clothing manufacturers’ turnover (39.7 percent in 2002) and international demand plays a key role in the market policies of the firms. Because of the special features of the entrepreneurial approach in the industrial district, firms active in the district may be driven by a rationale different from short-term motivations (Becattini, 2003). Mechanisms of exchange, generation and reproduction of intangible resources (knowledge, trust) operate within these local systems. One problematic aspect of knowledge generation and diffusion in industrial districts is found in the innovator’s appropriation of the advantages of the innovation: this is a “classic” theme that has also been discussed in not too distant times (Teece, 1987). The same question is also raised in the reflections put forward by some entrepreneurial circles within the district context, exploring the problem of unfair competition[3]. The results of Italian industry has been associated with the adoption of “cooperative network strategies” (Jones, 2002) and with the orientation towards a range of fragmented markets in which the impact of economies of scale for the individual firm is limited, whereas focalization strategies prove to be effective and successful. This has prompted Italian firms to reduce product standardization and to place greater emphasis on small market niches. Achievement of large size occurs at the level of local systems in geographically defined context and interacts with certain policies of local development (technical education and training of skilled employees, comarketing and management of the trade fair system, etc.). This is true in particular in certain industrial districts where the overwhelming Italian production capacity in the textile and apparel sectors is concentrated and in which vertically integrated firms have been

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Figure 3. The European Union clothing industry

substituted by units that enter into cooperative relations with one another (Johnston and Lawrence, 1988). As a result of this structure of textile and apparel manufacturing, large size firms – of which there are certainly some examples in Italy – do not have such a pronounced weight as in other countries. It can be noted that the percentage share achieved in terms of the turnover of the major firms in this sector is relatively low in Italy if compared to other countries (Table VIII). As regards the level of apparel retailing in the textile-apparel pipeline, the Italian situation reveals that the strategic group of independent stores still occupies a substantial position. In 2002 it still accounted for over half of the apparel sales for consumption on the Italian market (Table IX). This is a noticeably higher figure than in the rest of the European Union, where as early as 1997 retail sales by independent points of sale already represented little more than 30 percent of the total (Figure 5). The continuing strength of independent retail in apparel distribution in Italy is unrivalled in other European countries (Figure 6). During the 1990s, in the European Union the weight of independent retail points of sale lost percentage shares out of the total of apparel sales in favour of specialised chains, department stores, hypermarkets and supermarkets. In the four-year period from 1993 to 1997 alone, independent retail lost over 10 percent in terms of share of the apparel market (Figure 5). In Italy, independent points of retail progressively declined over the years, but much slower than in other European countries (Table IX). Despite the “sunk costs” represented by the relational heritage, a process of offshore investment and production decentralisation is now under way. This process was begun

Italian textile-apparel firms 327

Figure 4. The Italian clothing industry

,2 2-10 10-50 .50 million euro million euro million euro million euro Firms (number) Jobs (number) Total turnover (millions euro) Turnover per employee (£ 1,000 euro)

55,198 419,701 20,716

1,873 76,538 5,475

49.6

71.5

778 102,627 9,760 95.1

150 79,335 9,959

Total 57,999 678,200 45,911

125.5

67.7

Source: Sistema Moda Italia (SMI) – Prometeia

Country 2001 Italy Germany United Kingdom France Spain

Three main companies (%) 16.6 40.4 25.0 22.4 26.9

Number of companies Five main Ten main companies (%) companies (%) 23.8 55.5 35.6 30.7 36.3

33.2 79.6 54.2 46.7 44.9

Table VII. The Italian textiles and apparel firms per turnover segments (2000)

15 main companies (%) 39.3 93.6 61.7 56.5 50.5

Source: Euratex-Bulletin 2003/1; na: no data available in the ranking to make this calculation

Table VIII. Share of the main companies in the total 2001 turnover of the country’s clothing industry

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Table IX. Share of the main apparel retail strategic groups in Italy

Figure 5. European Union (15): share of the main apparel retail strategic groups

by some of the Italian textile and apparel firms as early as the late 1980s (Scheffer, 1992). This process can be observed in the trend of the Italian international trade of semi-finished textile products. It partly favours countries that are geographically fairly close to Italy, like Romania, but also very distant countries, such as China. However the characteristics of these two countries with respect to the internationalization of resource-seeking by Italian firms are by no means identical, as testified by the statistical data. Romania is not only in a strong position among countries from which imports derive, but it is also one of the main countries to which exports are destined. This European country is the destination of semi-finished products made in Italy, with Retail strategic group

1997

1998

1999

2000

2001

2002

2005a

Independent stores Specialized chains Large retailers (GDO) Itinerants Others Total

57.6 13.3 15.5 9.5 4.1 100

56.5 13.7 14.8 9.7 5.3 100

55.7 14.0 15.0 9.8 5.5 100

55.2 14.0 15.3 10.2 5.3 100

55.2 13.8 15.1 10.6 5.3 100

54.0 14.5 16.0 10.8 4.7 100

52 16 18 10 4 100

Note: aThe 2005 data are estimated Source: Sita Nielsen/Federazione Moda Italia

Italian textile-apparel firms 329

Figure 6. Share of the independent stores on apparel retail sales in Europe

certain particularly labour-intensive phases then being carried out in Romania to manufacture the finished product. The position of Tunisia is not very different. The position of China, on the other hand, is notably different. This Asian nation now clearly ranks first among countries from which textile products and clothing are imported into Italy, but it does not figure among the main destinations of Italian exports. The Italian commercial trade balance with China in the sector of textile products and apparel is particularly negative, much more so than for Romania. Only a very limited quantity of the semi-finished textile products worked in China derive from Italy (Table X). The commitment by Italian entrepreneurial sectors operating in industrial districts to remain within the sectors of textiles and apparel is accompanied by the commitment of entrepreneurial forces operating in apparel retailing, and this has maintained the position of independent stores. This commitment leads to mobilising personal resources, effort and hard work, financial and cognitive resources, which jointly represent an element of resistance to decline of this sector in Italy, at least in the terms that can be observed in other industrialised countries. In particular, the direct knowledge we have acquired of these firms through previous surveys shows that the entrepreneurial resource is an essential production factor in situations where the average size of the firm rarely exceeds ten employees, and where

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Table X. Italian textile-apparel foreign trade per country (January-July 2003)

Rank/country

valuea

1 Germany 2 France 3 USA 4 Spain 5 UK 6 Romania 7 Switzerland 8 Japan 9 Hong Kong 10 Tunisia

2,062 1,669 1,168 950 921 710 660 617 435 403

Export change %

Balance valuea

212.6 23.1 210.5 +2.3 213.4 20.6 +6.9 25.0 28.8 22.4

1,493 1,122 1,106 691 746 2180 544 574 374 286

Rank/country

valuea

1 China 2 Romania 3 Germany 4 France 5 Tunisia 6 Turkey 7 India 8 Belgium 9 Spain 10 Hungary

1,169 890 569 547 488 422 364 272 259 195

Export change % +13.6 +0.8 2 5.1 2 5.9 2 3.1 +12.4 +1.3 2 10.5 2 14.9 2 7.7

Balance valuea 2 1,065 2 180 1,493 1,122 286 2 150 2 328 77 691 49

Note: amillion euro Source: elaboration ICE on data ISTAT

human resources focusing on the entrepreneur and the entrepreneurial family clearly play a pronounced role. The Italian industrial districts, by virtue of the very model of the district, did not arise as a purely economic phenomenon (a cluster of firms) but is at least in part as the more general reflection of social and institutional aspects. 4. Evolution of market positioning and buyer-seller relationship Today Italian textile manufacturing firms are experiencing an economic downturn, which is partly due to the crisis in international consumption, but is partly also a structural problem deriving mainly from a twofold circumstance: the change in customer base and the emergence of new international competitors. These two factors, occurring simultaneously, are closely interconnected. Over the last few years there has, in fact, been a change in purchaser-supplier relations in the textile-apparel pipeline, and this is of relevance since the latter has always exhibited marked specificities in the production cycles and the corresponding business-to-business relations. Thus for a significant portion of firms, this change has also been accompanied by a change in the client profile and sourcing strategies. The observable trend indicates the emergence of features that diverge from the typical characteristics of the client in the past (Mulhern, 1997). What is beginning to emerge is the figure of the retailer who integrates industrial capabilities (sourcing of semi-finished textiles, apparel design, product branding). This affects the market of some textile firms more than others, partly depending on the manufacturer’s typological characterization and localization. The level of retail in the textile-apparel pipeline is becoming more important than it was in the past. The technical competencies typical of the clothing firm are driven towards a role of sub-supplier, and this is accompanied by more pronounced international decentralization, but with design and product image remaining in the hands of the new direct customer. This means that the original situation, whereby proposals for the final customer were formulated on the basis of joint discussions that took into consideration the point of view of the fabric producer, the manufacturer and the retailer, is now giving way to a rather more asymmetric structure with the balance of power tipped towards those who manage the distribution processes (Figure 7).

Italian textile-apparel firms 331 Figure 7. From the central manufacturer to the central retailer in the textile and clothing pipeline

For the textile manufacturing firm, the retail buyer puts forward a different set of demands compared to the more traditional client who is an apparel manufacturer. In the new context, the actual garments can in some sense recede into the background, maintaining or recovering their importance to the branding and retailing processes. The textile manufacturer presides over the R&D activities pertaining to the firm’s product (materials, new fibers, new combinations/blends, the various fabric ennobling and finishing treatments). In this framework, the manufacturer’s position can be important to the extent that the product and its characteristics (comfort, image, history, etc.) become fundamental in stimulating emotions/experience. The increased role of distribution in the textile-apparel pipeline derives not only from its bargaining power (which comes into play in transactions) but above all from its market power (capacity to orient the final consumer’s preferences). The great clothing distribution chains have a fundamental role, albeit considerably differentiated[4], in relations with the consumers, and they also keep abreast of fashion consumption trends, adapting their own operational requirements to these changing trends. This may, for example, affect the choice to turn to new delocalized suppliers, not always offering productions of equal complexity. Against this background, during the 1990s the positioning of Italian textile producers continued to move towards higher segments of the market. An overview of the trend of imports and exports during the 1990s prompts a number of interesting observations that offer insight into the positioning of the Italian firms. For example, in the field of wool yarns for knitwear, imports of woollen yarn (in tons) rose more rapidly in quantitative terms than was the case for exports (+147 percent versus 90 percent), but if one examines their value, it can be seen that the value of Italian exports rose more than that of imports into Italy (+156 percent versus 146 percent). The average price of yarn exported by Italian firms rose significantly (+34.7 percent). The price of imported yarn did not change in absolute terms, but decreased in real terms (Table XI). The strong competitiveness of Italian firms in the highest segments of the yarn market is confirmed by these findings. Italian exports are oriented above all towards the developed countries, which continue to rank foremost among foreign purchasers of Italian exports, despite the rise

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of some Asian, North African and Eastern European Countries. The US market is more important than it may appear to be if one considers only the quantity of export from Italy to the USA. This is because US brands and retailers are the real decision makers in purchases by other firms in the supply chain that translate into Italian exportation towards other countries. In the last decades, Italian manufacturers have increasingly begun to occupy niche markets and fragmented portions basically belonging to the upper band, featuring very elevated qualitative standards but also equally elevated fragmentation, almost non-existent opportunities for planning, and rapid product innovation. These are requirements that compel Italian manufacturers to engage in ceaseless efforts and invest heavily, but they also represent strong points when contending with competition from countries with lower labour costs. In the past, Italian manufacturers focused their work on only two seasons: one concerning production, and the other centring on the pattern book. Now they work simultaneously on three or four different seasons. Some of their customers in various parts of the world exhibit traditional forms of behaviour, while others act as trail-blazers and are considerably in advance of market trends. Emphasis is placed on the need for tomorrow’s enterprises to have two souls: one highly creative, which has always been an important element for Italian manufacturers, and the other highly flexible and capable of rapid delivery to customers. In the present phase, Italian manufacturing firms in the textile-apparel pipeline are facing a markedly heterogeneous customer base, which is strongly diversified in terms of the clients’ role in the textile-apparel pipeline, their competences and the rationale underlying their choices. This is a factor that accentuates the complexity of the market and makes it difficult for the manufacturing firms to assume a correct positioning. During the 1990s, the expansion of the pattern books of many Italian textiles firms was linked to the more diversified range of preferences expressed by the demand. But at the same time, it made management of the collection far more burdensome. Furthermore, seen from the perspective of the customers, the positioning of the supply offered by the firm became far less clearly defined and the greater variety may have made the buyers’ task more problematical, faced as they are with a complex range of articles from which to select. A recent case analysis of 15 Italian fabric manufacturers (Guercini, 2003) highlighted that the large distribution firms had risen to a position of considerable importance among the clients of textile producers (Gereffi, 1999). The large distributors effectively act as players in the globalization process not only on the level of “market seeking” but also on that of “resource seeking”, more specifically in the search for

Years Tons

Table XI. Italian wool yarns – foreign trade 1990-2000

1990 1995 2000

16,007 30,058 39,466

Import Index 1990 Index 1990 ¼ 100 Billion ITL ¼ 100 Tons 100 188 247

243 476 596

100 196 246

46,249 58,205 87,982

Source: elaboration on Sistema Moda Italia – ISTAT – data

Export Index 1990 Index 1990 ¼ 100 Billion ITL ¼ 100 100 126 190

674 1,247 1,728

100 185 256

suppliers (Elson, 1990). They are considerably larger than their suppliers and in direct contact with the final customer. The retail buyer does not merely purchase apparel, but in the role of a simple intermediary the retailer achieves an integration upstream of the functions of design, textiles sourcing and branding which previously were the exclusive preserve of the apparel manufacturer. In fact, the very term “distributor” risks becoming inadequate, as these firms sell something different from the source articles they purchase, thus combining the competences of various different suppliers. In contrast to the traditional independent clothing store, the large specialised retail firms and brand-dominated firms do not restrict their activity to actual retail distribution: rather, they go as far as to conceive the project of the collection and thus bring about a process of integration of the research and development functions for production of collections: that is to say, they take over some of the functions that are typical of the apparel industry. The changing status of relations with distribution is a structural change, and presents significant implications for firms that manufacture textile and apparel products. Overall, then, the distribution functions and management of the processes involved in the network of sales outlets have acquired a more central role in the textile-apparel chain and more relational power (Thorelli, 1986). Accordingly, the acquisition of distributive competences and trade marketing, both of which now have greater centrality in retail distribution, have become of notable importance not only for the apparel manufacturer but also directly for the manufacturer of semi-finished textile products, who enters into relations with those who control the retail sales outlets. In other words, as far as the manufacturers of semi-finished textile products are concerned, this change involves a more direct relationship with retail (Figure 8). Thus when it is a question of formulating marketing policies, greater attention is paid to the needs and suggestions expressed by retailers, whose contribution to product innovation processes is becoming more significant[5]. In the new distribution formulas, the retailer can change the sale outlet window display as frequently as desired (Taplin, 1999). Among the consequences of this potential for rapid change, an interesting feature is the increasing importance of operators who create formulas leading to fast fashion inspirations, flashes and quick fashions (Azuma, 2001; McLaren et al., 2002).

Italian textile-apparel firms 333

Figure 8. Interaction and networking in the textile-apparel pipeline

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Figure 9. Kinds of integration processes between manufacturing and retailing

The brand retailer turns to textiles and apparel suppliers who operate as producers for major firms; these suppliers are more frequently localized in countries distant from the national base of the direct client, and are generally chosen according to criteria that devote considerable attention to costs, although the criteria themselves may vary over time[6]. 5. The vertical integration strategies of Italian clothing firms The pattern of integration processes observable within the distribution industry takes on special features in Italy. Two conceptually distinct types of integration can be observed, both involving apparel distribution, but the “guiding” player may in some cases be an industrial concern (an apparel producer or manufacturer of semi-finished textile products), and in other cases a retail firm. While it can be difficult to make a clear-cut separation between the two categories, it is nevertheless generally possible to determine which is the predominant of the two activities. Alternatively, it is sometimes possible to distinguish the two aspects by the criterion of the origin of the firm’s activities. In the chart shown below (Figure 9), the situation is summarised with the aid of four panels (“A”, “B”, “C”, “D”). Alongside this process, one may also find situations that involve integration from upstream to downstream and/or forms of external rather than internal growth. Those situations are presented by a secondary research that makes use of data (news) taken from the Journal du Textiles on the growth processes of firms that integrate manufacturing functions with those of retailing in the textile-apparel pipeline. Following this analysis, the most relevant emerging result is the diffusion of strategic processes of the kind “B” and “D”, where the manufacturer firm plays the role of focal firm in the vertical integration process. It is perfectly possible for retail not to be limited to integrating the R&D activities of the apparel collection (design) and the outsourcing of textile materials, but also to develop manufacturing capacities of its own. The transition from a traditional apparel distributor to the industrial retailer comes about through a strategic process of vertical integration of the typical functions of clothing manufacturers. This may occur through (internal) organic growth or external growth (by acquisitions or agreements). In the former type of situation one has a transition from downstream to upstream, achieved by internal growth, with the retail operator moving towards the ability to do research

and development and to create apparel collections. We may define this situation as organic growth from retail to industry; it corresponds to panel “A” of the matrix shown in Figure 9. The distribution firm may proceed to integration with industrial activities (research on collections, sourcing of semifinished products, garment manufacturing services) through a number of different external growth processes, by means of acquisitions and agreements. Such a situation is observed, for example, in some predominantly grocery distribution chains (panel “C” in Figure 9). Firms originating from clothing retail can integrate collection research and development as the result of an organic growth process, but they may also achieve this result through external growth (takeovers, agreements). Integration with the semi-finished product supplier can take place over time by transition from a buying orientation to a procurement orientation, and finally to supply chain management orientation. This evolution involves a shift from an earlier perspective where negotiation strategies focused merely on distributive aspects (Thompson et al., 1996), with the major thrust being negotiation of the lowest possible purchase cost, to a perspective based on an integrative negotiation strategy. This new approach involves an evaluation of costs deriving from the choice of procurement, so that emphasis is no longer placed exclusively on the purchase price (Zhao and Jinxing-Zhang, 2002): rather, the implications of product quality and the services offered by the supplier are also taken into account. Integration in the distribution level of the textiles and clothing pipeline can originate from integration downstream of the apparel industry and/or of the semi-finished textile products (panel “B” in Figure 9). Such processes may come about in terms of organic growth of apparel retail, essentially through the establishment of a set of directly owned, or at least directly managed, sales outlets, This is the typology most frequently encountered in the Italian situation, in line with the data obtained by our secondary research. This kind of expansion does not necessarily guarantee an elevated performance, but in some cases it has genuinely led to success. The largest Italian apparel producers also operate on the level of textiles and are involved in distribution as well. This situation looks more frequent in Italy than in other countries of the European Union (Table XII). The opening of directly managed points of sale seems to be a particularly widespread strategy today in textiles and apparel, and is favoured not only by firms whose origins lie in the apparel manufacturing (as in the case of Diesel) but also by operators who entered the market via the route of the production of semi-finished textile products (see the examples of Zegna and Loro Piana, cited in Table XIII). Furthermore, the opening of directly owned points of sale has proven to be a successful development strategy for operators who already have a network, either of their own or affiliated, and this strategy has resulted in massive investments (Inghirami, Diesel, Max Mara, Zegna), which at times have led to greater emphasis on control through ownership rather than affiliation. In this framework, a number of innovative formulas have spring up, whereby sales outlets have begun to integrate commercial functions with services of other types (see Table XIII, the case of Iceberg), in non-traditional contexts (Loro Piana). The apparel manufacturing and semi-finished textile product industry’s thrust towards distribution can also come about via external rather than internal growth (panel “D” in Figure 9). The apparel industry’s external growth into distribution does

Italian textile-apparel firms 335

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Table XII. The top 20 European (and the top seven Italian) clothing groups in 2001: textiles interests and distribution interests

Company

Country

LVMH – Groupe Clothing Zara – ind. dis. text. Adidas Salomon AG Benetton – Clothing Marzotto – Abbigliamento Armani Giorgio Groupe Etam Boss Hugo – World Max Mara Fashion Fila Holding Vivarte-Groupe Andre´ Esprit de Corp. – Europe Escada – Konzern Cortefiel SA Burberrys Group Clothing Punto Fa-Mango Prada Dewhirst Group Soliver-Gruppe Diesel

France Spain Germany Italy Italy Italy France Germany Italy Italy France Germany Germany Spain United Kingdom Spain Italy United Kingdom Germany Italy

2001 turnover (millions Ecu)

2001/2000 (%)

3.610,0 3.249,9 2.200,0 2.097,6 1.410,0 1.271,7 1.099,5 1.095,0 1.087,5 977,2 862,0 862,0 846,2 790,0 778,0 671,6 662,0 654,5 614,0 562,1

+12,8 +24,3 +1,2 +3,9 +15,6 +23,0 +0,0 +18,6 +10,0 22,6 +5,4 +22,3 +3,9 +18,2 +12,9 +47,3 +32,7 20,3 +16,6 +39,3

Note TD TD TD D D D D D D D D D D

Notes: T ¼ company that also has textiles interests; D ¼ company that also has distribution interests Source: Euratex-Bulletin 2003/1

not merely involve the opening of points of sale managed in franchising (Pal Zilieri) but also first, the development of new distribution formulas in agreement with distribution operators, either single-brand (Ermenegildo Zegna) or multibrand; and second, the acquisition of sale outlets or even of entire chains that are already in operation (Marzotto-Valentino, Preca-Brummell, Stefanel).

6. Final remarks The textile-apparel pipeline in Italy has a complex and rather unique profile. But this does not mean that Italy is not subject to the tensions that affect this sector in other advanced industrialized high labour cost countries, and the specificity is not always source of competitive advantage. Rather, it suggests that such tensions may have various different evolutionary paths or outcomes. The textile and clothing supply chain is more and more global and retail-led. In the world-wide market, the industry is not the dominant partner in the pipeline. This is certainly equally true for Italian firms of the textile-apparel chain that have long been operating on the international market, previously in terms of market-seeking and today also of resource-seeking. In particular, firms that operate in the textile manufacturing phase and the apparel manufacturing phase today find themselves facing a change in sourcing strategies by their traditional clients, or possibly even a severe downturn affecting such clients. The clients of Italian textile and apparel producers are more geographically diversified than in the past. They are themselves facing the problem of the growing

B

Italian textile-apparel firms

D

337

Panel in Figure 9

Firm

Date

Description

Armani

04/03/2002

Diesel

14/10/2002

Ermenegildo Zegna

21/04/2003

Fendi

29/10/2001

Gucci

08/04/2002

Iceberg

25/11/2002

Inghirami

09/09/2002

Loro Piana

27/05/2002

Marzotto

02/04/2002

Giorgio Armani launches the new line Armani Collezioni which is followed by the opening of boutiques in Milan, Frankfurt and Paris For 2002, 24 new outlets were planned. Diesel Kid, the children’s clothes label of the group, is going to launch its own direct distribution Ermenegildo Zegna signs a joint venture agreement with Shar Moon for production and distribution in China of Shar Moon garments Restructuring programme of its sales outlets and the opening of new outlets Gucci invested over 200 million Euro in 2001 to open about 70 new boutiques The Italian firm belonging to the Gilmar group is opening its first boutique-art gallery at Riccione. This is a radically new conception of a sales outlet Inghirami has announced its intention to open over 200 sales outlets during the coming three years. In 2002 ten new outlets were opened in Europe, Asia and USA Marzotto becomes the owner of the Valentino boutiques, for a total of 34 sales outlets (19 directly owned, 15 in franchising)

Max Mara

10/02/2003

Max Mara has inaugurated its first boutique in Paris for the young people’s line Max & Co. The aim is to increase to 350 sales outlets by the end of 2003

B

Pal Zilieri

04/02/2003

Forall, owner of the Pal Zilieri brand, is preparing to open the firm’s first single-brand boutique in Paris in 2002, through a franchising agreement

D

Preca Brummel

26/05/2003

D

Sergio Tacchini

19/11/2001

Salvatore Ferragamo

03/12/2001

Preca Brummel undertook the takeover of the children’s clothes chain Bimbus (60 outlets) belonging to the Coin Group T group (200.58 million Euro in 2000, 30% from single-brand outlets) is to open its first megastore in Milan The firm, through the owned French griffe Ungaro, want to inaugurate, by the end of 2003, a number of directly managed boutiques

Stefanel

26/05/2003

Stefanel has taken over 50 percent of the Swiss airport distributor Nuance Group

D

Zegna

17/05/2002

Zegna decided to invest in the opening of new sales outlets. January 2003 saw the inauguration of the largest boutique (700sq.m.) of the group, located in New York

B

Source: elaboration of the database “Journal du Textile”, October 2001-July 2003

D

B-D B B

B-D B D

B-D

B

Table XIII. Cases of vertical integration between apparel manufacturing and retail in Italy

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complexity of supply chain management. The comparison and contrast between overseas and local supply chain can at least partly represent the main trade-offs. In the past, the peculiarity of the Italian manufacturing system and the reasons for its success included the ability to establish cooperative strategies, product quality, and the capacity to make creative proposals. Its production structure typically involved the role of local production systems and also certain specific characteristics of the entrepreneurial approach within these systems. Today, offshore networking and investments are more and more diffused, changing the local system profile. In this context, the vertical integration of operators in the pipeline is making itself felt above all in firms that sprang up in the manufacturing sector and which still today maintain a strong core of apparel manufacturing activity and in some cases even semi-finished textile products. Notes 1. “Apparel manufacture, in 1996, provided 3,8 percent of all jobs in the UK manufacturing sector” (Jones, 2002, p. 39). 2. The reference is to a recent article, in press, by Giacomo Becattini and Gabi Dei Ottati. 3. The problem is even more severe in the case of counterfeit products. 4. Consider, in this regard, the case of the American company GAP, the Swedish company Hannes and Mauritz (H & M), the Spanish company Zara, to cite only a few examples of recent developments exhibiting different size and features. 5. However, this contribution does not always award due consideration to all the aspects taken into account in the past, as the retailer may lack the in-depth knowledge of product technology that forms part of the manufacturer’s expertise. 6. This decision maker who makes the choice concerning the purchase instructs that the fabric should be sent to the chosen apparel firms, which in many cases may be the ones that issue the actual invoice, while once the purchase has been made on the basis of a sample, the fabrics themselves are not physically seen by the retailer until the fully made have been made on the basis of a sample; the fabrics themselves are not physically seen by the retailer until the fully made garments are delivered to the sales outlets.

References Azuma, N. (2001), “Pronto moda Tokyo-style – emergence of collection-free street fashion in Tokyo and the Seoul-Tokyo fashion connection”, International Journal of Retail & Distribution Management, Vol. 30 No. 3, pp. 137-44. Becattini, G. (2003), “Lavoro e impresa nel distretto industriale (Job and firm in the industrial district)”, Il Ponte, No. 12. Burresi, A. and Guercini, S. (2003), “Nuovi attori e integrazione di funzioni nel marketing strategico della distribuzione” (“New players and destination loyalty in retail strategic marketing”), paper presented at the International Conference “Marketing trends in Europe”, Venice, 28-29 November. Elson, D. (1990), “Marketing factors affecting the globalisation of textiles”, Textiles Outlook International, March. Gereffi, G. (1999), “International trade and industrial upgrading in the apparel commodity chain”, Journal of International Economics, Vol. 48 No. 1, pp. 37-70.

Guercini, S. (2003), La conoscenza di mercato del vertice d’impresa. Casi di produttori di tessuti (The market knowledge of top decisions makers. Cases of fabric manufacturers), Franco Angeli, Milano. Johnston, R. and Lawrence, P.R. (1988), “Beyond vertical integration: the rise of the value-adding partnership”, Harvard Business Review, Vol. 66 No. 4, pp. 94-101. Jones, R.M. (2002), The Apparel Industry, Blackwell Publishing, London. McLaren, R., Tyler, D.J. and Jones, R.M. (2002), “Parade: exploiting the strengths of ‘Made in Britain’ supply chain”, Journal of Fashion Marketing and Management, Vol. 6 No. 1, pp. 35-43. Mulhern, F.J. (1997), “Retail marketing: from distribution to integration”, International Journal of Research in Marketing, Vol. 14 No. 2, pp. 103-24. Porter, M.E. (Ed.) (1990), The Competitive Advantage of Nations, Macmillan, London. Scheffer, M. (1992), Trading Places; Fashion, Retailers and the Changing Geography of Clothing Production, University of Utrecht, Utrecht. Taplin, I.M. (1999), “Continuity and change in the US apparel industry: a statistical profile”, Journal of Fashion Marketing and Management, Vol. 3 No. 4. Teece, D.J. (1987), The Competitive Challenge, McGraw-Hill, New York, NY. Thompson, L.L., Peterson, E. and Brodt, S.E. (1996), “Team negotiation: an examination of integrative and distributive bargaining”, Journal of Personality and Social Psychology, Vol. 70 No. 1, pp. 66-78. Thorelli, H.B. (1986), “Networks: between markets and hierarchies”, Strategic Management Journal, Vol. 7 No. 1, pp. 37-51. Zhao, X. and Jinxing-Zhang, W.J. (2002), “The impact of information sharing and ordering co-ordination on supply chain performance”, Supply Chain Management: An International Journal, Vol. 7 No. 1, pp. 24-40. Further reading Richardson, J. (1996), “Vertical integration and rapid response in fashion apparel”, Organization Science, Vol. 7 No. 4, pp. 400-12.

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ACADEMIC PAPER

Final demise or regeneration? The Dutch case

340

Michiel Scheffer University of Ultrecht, Ultrecht, The Netherlands, and

Marieke Duineveld Wageningen University, Leiden, The Netherlands Keywords The Netherlands, Garment industry, Globalization, Competitive strategy, Design management, Distribution channels and markets Abstract This paper examines the impact of the increasing global competition on the Dutch apparel industry and the changes in the whole apparel supply chain. The restructuring of the Dutch industry happened at a relatively early stage in Europe. Main trend was the delocalisation of production while the design and distribution function has survived. Specific attention is given to the statistical limitations to analyze the changes in the supply chain of the apparel sector. The liberalisation process seems to have little quantitative impact on levels of employment taken in consideration that the supply chain consists of a broad scale of companies from industry to design and retail. The Dutch apparel sector is not heading to a final demise so long as the sector utilize the specific domestic features and succeed in retaining the value adding activities. The Dutch case provides a more in-depth analysis of the strategies taken by the industry that faces a growing global competition.

Journal of Fashion Marketing and Management Vol. 8 No. 3, 2004 pp. 340-349 q Emerald Group Publishing Limited 1361-2026 DOI 10.1108/13612020410547833

With the year 2005 looming, the big question mark is what the consequences are for the remaining textiles and clothing industry in Europe. This topic is the very subject of a large study commissioned by the European Commission to a consortium of consultants in which the author of this article has played a major role (IFM et al., 2004). We will however deal with the conclusions by using the Netherlands as a proxy of the adjustment process that has been experienced or possibly will occur in the EU. The Dutch case has been recently much researched (Scheffer, 1992; 1994; 2003; Raes, 2000) in academic studies. The planning cycle of the trade association has also led to regular studies on the state of the Dutch Fashion sector (FENECON, 1990; 1994; 1998; Modint, 2003). At first sight the Dutch experience is one of massive restructuring. Between 1958, the starting year of the European Community and 2004 the industry lost 90 per cent of its employment in clothing and some 85 per cent in textiles. The restructuring occurred mainly in four waves, each linked to major changes in international trade. The creation of the European Community dealt a first blow to an industry that was already exporting to open markets but was protected in its own market (Scheffer, 1958). The real completion of the custom union in 1969 started a massive downsizing and first experiences of shifts in production to regions with lower labour costs: first Belgium then Tunisia and the former Yugoslavia. A third restructuring wave occurred between 1979 and 1984 and led to a further delocalisation of production. The remaining production was closed down in the years 1991-1994 as a result of production shifts to the fmr. COMECON countries. Over the whole period, tools of protection, such as the

MFA, merely slowed down the process or did favour trade diversion. Liberalisations, as a consequence of EU enlargement or the establishment of preferential regimes did merely accelerate downsizing and oriented trade diversion patterns. The impact of liberalisation can be segmented in four periods. In the first period, 1965-1980, trade liberalisation albeit under the MFA managed trade regime – was mainly a process of de-industrialisation coupled with important import growth from Asia, with some limited trade diversion to the EU countries. In the period 1980, the growth of Asian imports was less dominant and the share of nearby countries within the EU grew, be it mainly at the expense of domestic production. The Netherlands gained in trade with other EU countries. In the 1990s there was an important trade diversion from Asia to sources located nearby the EU with an expansion of the trade surplus with the EU. Recent liberalisation (since 2001) shows mainly a trade diversion pattern within Asia, to the benefit of China and at the expense of other Asian suppliers (especially the ASEAN countries). The surplus with the EU is unaffected. A good proxy of the impact of recent liberalisation is provided by MFA Category 21. This category 21 (parkas, etc.) is one of the few sensitive product categories that was part of the third stage implementation of the ATC. The impact of the removal of quotas on the products of category 21 is significant. The extra-EU trade of The Netherlands (2001/2002) increased in quantity by 209 per cent to 34.000 tons in 2002, while the import in value (euros) only shows an increase of 6 per cent (see Table I). This enormous increase in amount of imports and the decline in price are for the greater part caused by China. The Netherlands is known for its transit trade. The high increase of imports in 2002 has a lower impact for the Dutch clothing sector if the export of category 21 is also taken in consideration. The quantity of export of the Netherlands to the member countries shows an increase of 350 per cent to 27.000 tons (2001/2002). The largest share of growth in imports was therefore taken up by re-exports. A side effect is dramatic decline in prices which both brought parkas into new markets (e.g. promotional articles) but did also made the item less interesting as margin maker. The article became more a volume item than a differentiation item. A consequence of this trend is a general decline in import and wholesale prices and difficulties for producers to justify a higher price for differentiated items. The effect was a loss in profitability of the leading producers. Behind the severe restructuring of the industry emerged two patterns. In textiles, the industry specialized heavily in technical textiles in order to leave the more exposed apparel sector (Scheffer, 2004). Restructuring of the textile industry occurred in the 1970s much as a side effect of collapsing clothing production that led to dwindling markets for apparel textiles. Interior textiles maintained fairly China Value (e mln) NL EU 2001 2002

43 117

356 1,066

Source: Eurostat (2003)

Quantity (ton) NL EU 2,000 26,000

15,000 101,000

Value (e mln) NL EU 2,282 2,409

2,046 2,335

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Extra EU Quantity (ton) NL EU 11,000 34,000

91,000 162,000

Table I. Import product of category 21 into the EU in value and quantity

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Table II. Employment 1995-2002: clothing and related sectors

well (especially in a cluster around Eindhoven) while carpets became a major sector (The Netherlands is the third producer of carpets worldwide after the USA and Belgium). Technical textiles became a major sector of retrenchement and redeployment. Royal Ten Cate, erstwhile a leader in apparel fabrics, has almost entirely shifted to technical textiles (Scheffer, 2003). Therefore the textile industry can be considered as fairly well protected against the impact of liberalisation. In apparel, the company structure transformed itself from being production led to being design led. The number of industrial companies declined since 1970, the average number of employees dropped substantially while turnover by company remained stable. In this period, deindustrialisation meant that most of the companies were reclassified from being part of the clothing industry (NACE 18) to being wholesalers in textiles and apparel (classified as NACE 5141 and 5142). In addition the segment designers (classified as interior and fashion designers under NACE 74845). Taking all categories together, employment has been stable in the Netherlands between 1992 and 2004, with an important increase in self employment. If one adds employment in apparel retailing to wholesale and industrial employment, employment level has been roughly stable since the beginning of the 1970s. One may then assume that if the work content and satisfaction is as rewarding in a store than in a factory, the overall social impact of liberalisation of textile and clothing trade is hardly negative. More than 90 per cent of the firms in all three relevant sectors are small sized companies (, 10 empl.) The average number of people employed in apparel manufacturing, wholesaling or design is around five people per firm. The number of medium and large firms has declined considerably (2 60 per cent). The total number of industrial companies has declined between 1995 and 2002 by 15 per cent to 1,600 companies. The number of companies classified as wholesalers has been stable at around 3,200 companies. The segment, interior and fashion design, with 2,230 companies in 2002, has developed a positive trend since 1995 (+20 per cent) (see Table II). The restructuring is then a side-effect of a major shift in value creation from manufacturing to wholesaling and retailing. The best sign of this shift is the rise in retail margins (currently 50-60 per cent of retail price) and wholesale margins for branded products (currently 45-50 per cent of wholesale price). Altogether the cost of materials and making-up represents between 20 and 25 per cent of the high street price. The increasing share of non-manufacturing in retail price can be seen both as a £ 1,000

1995

1996

1997

1998a

Industry (apparel and fur) Wholesale (apparel and shoes) Interior and fashion designers and other related sectors Subtotal Apparel retailing incl. fashion articles Total

10.2 12.0

9.3 12.1

9.3 12.7

6.6 28.8 59.6 88.4

8.4 29.8 60.8 90.6

10.6 32.6 62.2 94.8

1999

2000

2001

2002

9.5 14.1

6.8 15.3

6.3 15.6

5.4 17.5

4.6 16.3

12.0 35.6 63.7 99.3

16.8 38.9 70.7 109.6

18.2 40.1 72.9 113.0

18.5 41.4 71.5 112.9

17.3 38.2 72.8 111.0

Note: a change in data interpretation from 1999 results in two clusters that are not comparable; 1995 until 1998 and the data from 1999 onwards Source: Centraal Bureau voor de Statistiek – Statistics Netherlands 2003

reflection of increased value added through branding, styling and presentation. It can also be considered as a consequence in increasing costs for managing fashion risks and uncertainty, and possibly of inefficiency in the supply chain. The concept of a stitch in time and quick response is possibly less widespread than some studies suggest (Abernathy et al., 1999). It should be noted that a response to speeding up of fashion trends has been the emergence of a sweat shop cluster around Amsterdam. This cluster and its linkages into retailing has been very well documented by Raes (2000). This emergence is not unique to The Netherlands. Its relative size is however noticeable, as it had, around 1992, more employment than the legal side of the industry. A coordinated action plan of social partners, fiscal and social security organisations and the public prosecutor led to a strong contraction of the sweat shop economy around Amsterdam between 1995 and 1997. Many contractors shifted their orders to Poland and Turkey, and this led many sweat shop owners to re-emigrate to their homeland. Part of orders shifted to the French and English sweat shop districts. So restructuring is more a change in structure than a change in size of the supply chain. This echoes the analysis made by Tyler (2003) about the UK industry (2003). The sector has become a demand-led supply chain, with retailers and brands pulling the reins (Gereffi et al., 2002). The Netherlands has had, since WWII, a highly structured retail industry. A small number of family-owned groups controlled the department stores and multiples (C&A, Vendex, Bijenkorf, P&C, We Group). Independent retailers had joined forces in adhering to retail buying groups (Intres and Euretco being the most significant). Branded suppliers formed countervailing power in setting up a financial services organisation (the former NKC) setting payment conditions and chasing late payers or faulty debtors. The highly structured and governed market enabled a relative good financing of firms and access to trade finance, allowing expansion in export markets. Competition looked like the Japanese car or electronics market: fierce competition on price in the local market combined with a high level of governance enabling a launching pad for exports. A remarkable feature of The Netherlands is that with little domestic production (NL ranks 11th in production of the EU) it plays an import trading role as the 7th exporter and 5th importer of apparel in the EU. Moreover Rotterdam is the main port of entry of textiles/apparel in the EU, with transhipment to Germany, Belgium, Denmark and the UK[1]. The Netherlands can be thus characterized as the (reversed) Hong Kong of Europe. This results from the combination of a massive trade deficit with non-EU countries and a trade surplus with the EU. The Netherlands is – with Italy, Portugal and Denmark – one of the countries in the EU with a positive intra-EU balance (Modint, 2003). This trade balance is mainly the result of increased market share in Germany, Belgium, the UK and France, mainly at the expense of the local industry. This position can not only be attributed to domestic firms. Internationalisation of retailing is another reason, although the main retail groups have stagnated in international expansion during the 1990s, especially in comparison with Spanish and Scandinavian retailers. The attraction of a good logistic base and a good design infrastructure has also attracted foreign investors (e.g. Liz Claiborne acquiring MEXX in 2000) and European headquarters (Nike with 1,200 employees, the largest employer in the sector). These headquarters were initially set up because of fiscal policies and

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logistical advantages. In the second half of the 1990s, a good design infrastructure also attracted the setting up of European design headquarters (e.g. Reebok, Tommy Hilfiger). The restructuring led to the dominance of a type of firm that is neither strictly manufacturing nor wholesaler. The Dutch Industry Association has developed a whole range of terms to characterize the features of the firm. Most used term is “kop-staart bedrijf”which means a head and tail firm: the head being design and the tail the logistics (the rump being delocalized or subcontracted. Somehow a kind of “hollow corporation” (Jones, 1986). The Dutch industry tends also to present itself as suppliers or producers (Modint, 2003). When speaking about wholesalers, a distinction has been made between stock-keeping wholesalers and order-driven wholesalers. Moreover a further distinction between importers and manufacturers had to be drawn up. Thus the redefinition of a sector of activity implies a real identity crisis in how firms are described and recognized. The description of changes in statistical terms relies on production statistics, trade statistics or employment statistics. Production statistics have become highly unreliable because of statistical secret, unrecorded production by smaller firms, the difficulty of distinguishing between real domestic production and OPT production. Trade statistics have become the best indicator of trends as imports cover over 95 per cent of demand in The Netherlands (ING, 2002). However trade statistics are anonymous as they do not distinguish between the beneficiary or the nature of the transaction. Employment figures are even more unreliable for issues of classification and quality of reports amongst smaller firms. In addition the high level of (quasi-) self-employment makes them less reliable. The category NACE 18 properly classifies firms as industrial if the majority of people employed are performing industrial jobs. The category NACE 51 wholesaling applies when the majority of people employed are performing trading activities. Designers are classified as non-industrial workers. This classification means that a company shifting from integrated production to subcontracting is reclassified as wholesaler. A company shifting production outside The Netherlands is also reclassified as a wholesaler. Even if industrial employment becomes a minority in a firm (sampling and quick response manufacturing) the firm is requalified as wholesaler. Taking into account these evolutions, industrial employment has declined between 1995 and 2002 from 10,200 people to 4,600, while wholesaling has increased from 12,000 to 16,300. Even the term “wholesaling” is problematic and it has been problematic in political terms as wholesalers/traders were excluded from OPT quota under EC (Reg) 3036/94 which required an explicit industrial status (FENECON, 1996). This regulation requested that EU firms had a permanent manufacturing activity of commercial series and that industrial employment was maintained. Design activities, as well as sample production and supervision over subcontracted production, did not qualify for industrial status. The term wholesaling underestimates the importance of design, branding, marketing and logistics. The term “design firm” does not exist in statistical terms and would overemphasize the design activity over the marketing and organizational functions. The terms “industry” or “wholesaling” are also important, as each sector has its own collective wage agreement, social levies, pension fund and training body. The clothing industry had more collective arrangements and well developed training activity. The wholesale sector had less comprehensive social arrangements and no

training body. The reclassification from industry to wholesale did then enable lower labour costs and did also weaken the critical mass for keeping in place a comprehensive social coverage. The matter of how to define industry as compared to wholesale is thus an important matter with social, financial and organizational competences. It was especially the industry association Modint that fought for a wider definition of the term “clothing industry”. In the classification for social levies an industrial firm is characterized as a firm that “manufactures or commissions the manufacturing of apparel on its own account and risk based on proprietary designs”. A wholesaler is characterized as a firm buying, stocking and selling existing merchandise (Schootstra, 1991). The complexity in definition goes so far that there are different definitions according to the legal objective. The trade registration, the fiscal registration, the classification for custom purposes (i.e. the OPT regulation), the registration for social funds may differ for one single company. Modint has carried out a survey amongst its 320 members in 1999 which showed that of all clothing producers, only 40 per cent were registered as manufacturers, 35 per cent as wholesalers and 25 per cent as others, ranging from retailers to consultants including architects, textile wholesalers, general trading firms, transport companies and financial holdings (Modint, 1999). Modint has developed a classification of industry and wholesaling activities which takes several dimensions into account. The objective was to redefine the term “industry”. We have looked at intellectual property rights over brands and designs, type of transactions with clients/suppliers, financial ownership over materials, organizational functions and financial business model. In terms of intellectual property rights an industrial firm is owning brands and or models and designs. Transactions with clients are based on own collections. Suppliers are often commissioned on the basis of precise instructions (graded patterns). Fabrics and trimmings are owned by the principal and the subcontractor has a conditioned guaranteed payment. The organization is characterized by a full design department including pattern making, grading, marker making, selection and control of materials. The financial model is characterized by a considerable gross margin reflecting the value added in terms of operations and design/branding. The financial model has led to additional analysis and a further segmentation of the industry. This research is based on a sample of 30 firms with comprehensive financial data over the period 1998-2002. Financial data was completed with interviews. The key figure taken to characterize the business model is gross margin (the difference between the sales and the cost of products). The data showed a wide range of results from a gross margin of 6 per cent to a gross margin of 60 per cent. Most firms could be classified either in a band between 10 per cent and 25 per cent gross margin or a band between 40 per cent and 55 per cent. Another interesting phenomenon was that during the period the share of firms with a gross margin around the average (27 per cent) declined. More interesting, while the average gross margin declined between 1998 and 2002 from 31 per cent to 27 per cent, the standard deviation increased from 7 per cent to 10 per cent, demonstrating both an erosion of margins and a growing dichotomy between business models. The sector became dominated by firms with brands and own designs on one side, often combined with own stores and/or franchisers. In the event that brands did also own stores, gross margins reached 65 per cent. On the other side of the spectrum

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importers and agents performed well as well as companies that could be characterized as co-makers. These start with designs supplied by clients, but organize all preparation and offshore subcontracting of manufacturing as well as logistics and custom clearance. A more precise examination shows that importers do carry out more functions than only buying and selling, as they also design and select merchandise (albeit with limited technical content). In the meanwhile, private label manufacturers lost their importance as the combination of own designs, no-brand and subcontracting of production proved to offer too little value and too much risk. Private label manufacturers either retrenched themselves into co-makership or upgraded through developing real brands. The former strategy was often less riskier than the latter, as the shift to brands requires substantial investment in working capital. Major company failures in the 1990s were due to profit squeeze in the private label segment or failed diversification into brands. An interesting formula is that the design-led manufacturers and the co-makers tend to work together. Design-based firms have increasingly focused on design and marketing and have been subcontracting the preparation, planning and management of production to co-makers. These co-makers operate with a network of subcontractors in a mix of countries (often one or more CEECs, Morocco, Tunisia, Turkey, China, and Bangladesh). This pattern fuels the idea of a trading cluster emerging. This cluster is predominantly located around Amsterdam and its region. The cluster is anchored on one side by the port of Rotterdam, and on the other by Amsterdam Airport. The strong training infrastructure in the west of The Netherlands and a good supply of qualified staff enhances the concept of a design cluster. The traditionally industrial eastern and southern regions have kept a more industrial pattern, with headquarters in The Netherlands (including design) and manufacturing branch plants in developing and transition countries. The changes in locational patterns and interfirm linkages will be the subject of a research project (Atzema and Frenken, 2003) and as yet is not well documented. This is not to say that the further liberalisation is without impact. The impact of various models used in the IFM (2004) study seems to be neutral on The Netherlands, as the category 21 has shown at first. However a further erosion of the dominant producer model is possible as they increase their share of direct sourcing compared to subcontracting. They may also increase the share of merchandise styled and designed by the supplier. This all may be the impact of further decline in prices and downward integration of major suppliers in China. The squeezing out of the middleman is especially feared amongst suppliers to chain stores and department stores. This leaves the branded sector less vulnerable to direct imports, but this has been a segment far more sensitive to the economic cycle. As in none of the European countries, the restructuring process can be seen as unrelated to an institutional environment. This environment is characterized by a mix, over time, of active intervention, benign or malign abandonment, and most of all unintended side effects of policies or arrangements. Within the institutional factors, the Multifibre Agreement is an important feature but has led to much less protection than for other countries. The Dutch government has always supported free trade policies, opposed the MFA and pushed, when possible, for liberalisations and uplifts (Blokker, 1989). The industry advocated until the end of the 1980s the quota regime, but

supported the government stand from the start of the Uruguay Round. Regional quota were already set quite high in the period until the set up of EU-wide quota (Scheffer, 1992). Retailers were also highly creative in importing via other EU countries with underutilised quota. Moreover trade diversion to non-restricted sources (i.e. Portugal but also Northern Africa) but also to other EU countries alleviated partly the impact of restrictions. It was especially the Belgian industry that benefited from restrictions. Last but not least, the Dutch benefited from a liberal interpretation of the OPT regime under Regulation (EC) 636/82. On balance, the MFA and the import regime proved to be hardly effective in terms of protection and led to a gradual delocalisation of production. The lifting of restrictions for imports from CEECs did speed up the delocalisation process after 1992. The Dutch government advocated a policy of restructuring and adjustment, with considerable subsidies for labour costs and for modernisation. Except for some companies, intervention had no impact or adverse impact. Even heavy government intervention and major subsidies could not prevent the industry in Groningen from collapse in the beginning of the 1980s. Industrial policy was reviewed in a parliamentary enquiry in 1986 and sectoral support schemes discontinued. Adjustment since 1986 has thus been very much market led. Export promotion has been a tool to assist adjustment as well as modest technology innovation policies. In recent years the importance of creative industries has been rediscovered. The training infrastructure, mostly independent of the industry, has developed fairly well in the meanwhile and offers a nucleus of revival both around fashion academies (Arnhem, Eindhoven) and Technology Institutes (Twente, Eindhoven). Institutional factors are also important in the denomination and classification of the sector. One of the trends behind the visible restructuring has been a reclassification of industrial firms as wholesalers or as designers. This is not only a functional change, it is mainly a legal change: enabling firms to shift to sectors with lighter or no collective labour agreements. The reclassification of firms shows also that boundaries between manufacturers, wholesalers and designers have become meaningless and that all firms can be coined as being producers. Conclusion The Dutch example is one of the most daunting examples of restructuring, with a virtual melt down of the apparel manufacturing sector between 1967 and 1981, when 85 per cent of manufacturing jobs were lost. Since 1981 restructuring went on at a slower pace and must be seen as a process of transition to a wholesale or design-led sector. We have coined the dominant type firms as being producers: organising the design and distribution process while subcontracting or sourcing manufacturing. The restructuring since 1995 is thus far more qualitative and its net impact on employment has been neutral. The Dutch case is thus an example of a restructuring that happened before the liberalisation of textile quota started. The liberalisation process, engaged since 1994, seems to have little quantitative impact on levels of employment. There looks like being a future after the MFA. The situation of the Netherlands is, however, quite unique as it has been favoured by its location and the dominance of Rotterdam as a point of entry for textile imports into the EU. This location, coupled with a design infrastructure and fiscal and financial climate, seems to have given good conditions for the development of a

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wholesale/design cluster. The loss of market share in the domestic market has thus been compensated by increasing market share through re-exports into other EU countries. This means that the Dutch case is characterized by specific locational conditions and by a political context fostering trading and design activities. The fact that the government favoured liberalisation has left the industry under no illusion where its future would be: in trading activities. The rediscovery of creative industries in combination with major impulses in R&D for new materials may provide the conditions for a renaissance. While the Dutch case is hardly representative for the EU in terms of decline, change and recovery, the sustainability of the current structure remains to be seen. The private label segment is still very dependent on buying decisions made by large retailers and the dominant tendency is to squeeze the middlemen. Subcontracting declines to the benefit of direct sourcing which leads to a further reduction in design and production management functions. This leaves the branded sector less touched but this segment is less stable and more vulnerable to economic downturns. This makes the Dutch case an interesting one to study but probably not a best practice, if such a thing ever exists in fashion. Note 1. Rotterdam is the only Northern European harbour enabling access for larger container ships and having comprehensive facilities for redespatching containers. References Abernathy, F.H., Dunlop, J.T., Hammond, J.H. and Weil, D. (1999), A Stitch in Time: Lean Retailing and the Transformation of Manufacturing: Lessons from the Apparel and Textile Industries, Oxford University Press, New York, NY. Atzema, O. and Frenken, K. (2003), “The dynamics of innovation in the Dutch fashion and interior design industries 1975-2002”, proposal for BSIK/ICES projects, Utrecht. Blokker, N.M. (1989), “International regulation of world trade in textiles: lessons for practice, a contribution to theory”, thesis, Leiden University, Leiden. Eurostat (2003), Intra- and extra-EU trade, The Comext CD-ROM, Luxembourg. FENECON (1990), De ontwikkelingen van de kledingindustrie, FENECON, Amsterdam. FENECON (1994), Meerjarenbeleid: Patronen voor morgen, FENECON, Amsterdam. FENECON (1996), Handleiding Internationale Handel, FENECON, Amsterdam. FENECON (1998), OpMaat . . . Strategische verkenning naar ontwikkelingen in de confectie en tricotagebranche, FENECON, Amsterdam. Gereffi, G., Spener, D. and Bair, J. (Eds) (2002), Free Trade and Uneven Development: The North American Apparel Industry after NAFTA, Temple University Press, Philadelphia, PA. IFM et al. (2005), The Implications of the 2005 Trade Liberalisation in the Textile and Clothing Sector, Institut Franc¸ais de la Mode, Paris. ING (2002), Sectorstudie Mode, ING, Amsterdam. Jones, N. (1986), “The hollow corporation”, Business Week, 3 March, pp. 53-5. Modint (1999), Internal memo, Modint, Amsterdam. Modint (2003), Grensverleggend Ondernemen, Modint, Amsterdam. Raes, S. (2000), Migrating Enterprise and Migrant Entrepreneurship, Het Spinhuis, Amsterdam.

Scheffer, M. (1992), Trading Places: Fashion, Retailers and the Changing Geography of Clothing Production, Faculty of Geography, University of Utrecht, Utrecht. Scheffer, M. (1994), The Changing Map of European Textiles: Production Policies of EC Textiles and Clothing Firms, OETH, Brussels. Scheffer, M. (2003), Innovatieverkenningen: Potenties voor Beschermend Textiel, Ministry of Economic Affairs, Den Haag. Scheffer, M. (2004), “Profile of the Dutch technical textiles industry”, Technical Textiles Markets. Scheffer, R. (1958), “Impact van de Europese eenwording op de Nederlandse textiel industrie”, BSc thesis, HTS Textiel, Enschede. Schootstra (1991), “Indelingsvraagstuk CAO confectieindustrie of groothandel in textile”, internal memo, GAK, Amsterdam. Tyler, D. (2003), “Will the real clothing industry stand up?”, Journal of Fashion Marketing and Management, Vol. 7 No. 3, pp. 231-4.

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Journal of Fashion Marketing and Management Vol. 8 No. 3, 2004 pp. 350-351 q Emerald Group Publishing Limited 1361-2026

Book review Blockbusters: The Five Keys to Developing Great New Products Gary S. Lynn and Richard R. Reilly HarperBusiness New York, NY 2002 xvi+251 pp. ISBN 0 06 008473 1 $24.95 Gary Lynn and Richard Reilly, professors at the Stevens Institute of Technology, spent ten years studying new product development in over 700 companies. This book is the result of their study. Based on corporate documents, interviews with managers and engineers, and statistical analysis of a database, their book provides a set of guidelines for companies seeking to develop breakthrough products that change markets and industries. Lynn and Reilly studied products ranging from packaged goods to high technology systems for NASA, seeking commonalities among the winning companies. As is typical of this type of book, they summarize their findings in the form of critical practices (five of them) that others can adopt to also succeed. Thus, their recommendations are clearly a benchmarking activity where they believe they have identified the most successful benchmarks to use. The authors begin with an overview of the five critical practices they identified leading to blockbuster new product success. Throughout, the authors provide a variety of interesting and enlightening examples to illustrate their key practices. If you ever wondered about the origin of some of the products we use commonly, you will find this a compelling narrative. The authors make good use of the personal accounts they have gathered to show how the new product development process works in many companies. The seminal story is how development of the Zip drive saved the Iomega Company. This account orients the reader to the key issues addressed by the book, illustrating through example the nature and importance of the practices. Subsequent chapters are devoted to each of the authors’ five specific recommendations or critical practices, again using illustrations drawn from a central new product development story. The first principle is that the highest levels of management must be committed to the development of the blockbuster new product. Managers must completely support the project and give the new product development (NPD) team the authority to escape the bureaucratic hindrances of the larger organization. This principle is illustrated through the development by Colgate-Palmolive of Total toothpaste. The second principle is to begin the project with a clear and stable vision of the product (what it will and won’t be) and its consumer benefits. Lynn and Reilly refer to this principle as “project pillars,” arguing that the NPD team must have clearly articulated goals. Their key example of this principle is the development of the first truly usable conference phone, the SoundStation by a startup company, Pollycom. It is

not surprising to learn that successful new products such as this come from a vision emphasizing both the need for the new product and an extensive effort to collect information from both customers and competitors. Getting customer input is a vital element in new-product success, and these stories about how successful managers do this make interesting reading. Principle number three is termed “improvisation.” In the words of Lynn and Reilly, the path to market is described as “Lickety Stick.” By this they mean that the NPD team must be flexible and try a large variety of ideas in rapid succession. Less attention should be paid to perfecting a prototype and more emphasis placed on customer input after exposure to good enough prototype versions. Getting a lot of customer input all along the way is crucial. Blockbuster teams appear to excel in exchanging information. This principle emphasizes sharing knowledge in both formal and informal ways among all participants in the NPD process. Development of the Apple IIe is the key story here. Although this new product was developed by a large team and the process involved a great deal of informal information exchange, careful record keeping also facilitated final success. The final principle is termed “collaboration under pressure.” By describing the development of the Handspring Visor, Lynn and Reilly show how the members of a NPD team do not have to like each other especially, but they do have to cooperate. The significance of a hard deadline is emphasized, as is the concept of “buy-in.” They also make the point that implementing the previous four critical practices enhances teamwork. Lynn and Reilly provide an additional recommendation based on their statistical analysis of their data. This is that all five critical practices must be implemented simultaneously. A company that fails to implement all five stands a much higher chance of failure than a company that does implement all five. There is an additional discussion of “radical innovation,” in which customer input is difficult to collect because customers have no idea of what the new product is. The example here is Corning Fibers’ development of optical fiber technology. The book concludes with specific recommendations to management, guiding them on the implementation of all five practices, and there is an appendix containing a case study to help managers develop measures of team performance. Overall the book is simply and clearly written and is easy to read. The authors make good use of their anecdotes as well as their statistical analysis. This is a very no-nonsense account of a topic that attracts a great deal of interest but for which there are few systematic studies. Blockbusters can be recommended to any reader wishing to learn more about how radical new products are developed. While intended for managers and NPD teams, it could serve as a supplemental text for a course in NPD or even as a stimulus to discussion in MBA classes. Endnotes provide key documentation, and the index is useful. Overall Lynn and Reilly have succeeded in their goal of explaining how radical new products are developed. Researchers in this field should continue to test their hypotheses, thereby deepening our understanding of this vital business practice. Ronald E. Goldsmith Richard M. Baker Professor of Marketing, Florida State University, Tallahassee, Florida, USA

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