Globalization of Production in the Textile and Clothing Industries Essay

East European full reintegration into the world economy had already started during the eighties, but the end of the decade and the beginning of the nineties saw a sudden spurt in that direction. This has taken the form not only of a swift trade reorientation towards the West, especially the EU, but also of new forms of inward foreign direct investment (FDI), subcontracting and cooperation agreements with Western enterprises. As a consequence, Eastern Europe has become deeply involved in the larger process of globalisation of production characterizing the international economy, where firms’ operations are becoming much more complex and pervasive than traditional arms-length trade and traditional international investment, including both international production and sourcing. Therewith the process of transition to the market appears to be more and more intertwined with Western firms’ strategies. It is then of some interest to analyse the extent of such relocation, its various forms and the possible impact on both the relocating and the host countries. International relocation can be analysed from different points of view. The perspective of the present paper is to concentrate on one of the most important trade partners of Eastern Europe – Italy – and on two industrial sectors in which the latter is specialised in production and exports – textiles and clothing, which are also of paramount importance in Eastern Europe’s exports. A few data on production, employment, investment and foreign trade may suffice to show the enormous importance of these industries for Italy. In 1993 this country produced almost 40% of the entire EU production of textiles, including knitwear. The other major EU countries followed rather distanced: France (17% – including household textiles), Germany (16%) and the UK (11%). The correspondig employment for Italy was 30% of the EU total, taking into account also the firms with less than 20 employees. The second most important country – Germany – employed just half of that amount. Finally investment, both total and per head employed, reveals a similar pattern, these two countries being followed by France and the UK. The ranking is similar in the clothing industry. In 1993 Italy represented 41% of total EU production, 24% of total employment (including firms with less than 20 employees) and headed the investment ranking, both in absolute terms and on a per capita employed basis. It should be added, in this respect, the particular consumption habits of Italians, who devote to clothing a much higher share of their total consumer spending than the other European nationals. The importance of the internal market is only paralleled by the place of the two sectors in Italian foreign trade. During the last few years Italy has been the second or third world exporter both of textiles and of clothing products, if one excludes Hong Kong due to the paramount importance of its reexports. She is the first Western supplier of the G7 markets for clothing and first on a par with Germany for textiles. The industry presents the second, and growing, largest positive trade balance in Italian foreign trade. The two sectors together represent 11% of her total exports, but a much lesser share of her imports (5%). However imports tend to grow faster than exports. A growing number of competitors is gaining market shares in the EU, at the expense of the traditional leaders like Italy and Germany. Import penetration, which has roughly doubled in the last ten years, is but one of the factors that, starting from the late eighties, is exerting growing pressure on the whole industry at a EU level. Production is falling and labour productivity rising much faster than in average manufacturing. The result for the EU has been 639,000 jobs lost in 1988-94, equal to almost 30% of all job losses in the manufacturing industry. Italy was also hit, although less than other European countries for the reasons indicated later. What is the particular place of Eastern Europe in this process? The CEECs represent only roughly 3% of Italian total trade in textiles, but a much larger share in Italian imports of clothing – 15% -, their importance in Italian exports of the same being minor (2%) (table 1). Almost half of the Italian imports of clothing from Eastern Europe come from Romania and more than one fifth from Hungary, the rest being spread among the Czech and Slovak Republics, Bulgaria and Poland, in the order. Together with an increasing deficit for Italy, the share of clothing in total Italian imports from each CEEC has been increasing recently in all cases, and particularly so from Romania and Bulgaria, where it now stands at 41% and 27%, respectively, and from Hungary (12%). The two sectors behave asymmetrically: clothing looms from two to eight times larger in Italian imports than exports, while textiles are far more important in Italian exports, at the exception of exports to former Czechoslovakia. This was also the only country with which Italy ran a deficit in textiles (today with the Czech Republic). Previous studies conducted by the author (Graziani 1993, 1994a, 1994b, 1995) show a generalized relative specialization of the CEECs in most clothing products both on the EU and on the Italian market. Moreover, in both markets import penetration ratios for the same are on the increase. Does this mean that Italian textile and clothing industry is losing ground vis a vis East European producers? The question is whether international trade data – like surpluses and deficits, market shares, specialization indices and import penetration ratios – by themselves are to be considered reliable competitiveness indicators, if a substantial part of trade flows is in some way or other tied to the importing country. From this perspective, imports into the relocating country could ideally be divided into three distinct flows: a) ‘untied’ imports from foreign firms; b) imports derived from non-equity cooperation agreements (in particular from subcontracting) ; and c) FDI-related imports. International relocation of production – taken here to mean not only the physical delocalisation of production abroad, but also the organized sourcing from other countries – affects directly the two latter flows and is then crucial for interpreting the meaning of trade indicators and trends. 2) The Italian model until the mid-1980s International relocation has been almost completely absent in the Italian experience of textile and clothing production until at least the mid1980s. Contrary to the growing international redeployment of its main EU competitor – Germany -, Italian relations with foreign markets were mostly centered on arms-length exports. The few affiliates abroad of Italian bigger firms had just the task to support the sales network in the recipient country. This explains also why Italy did not incur into the same dramatic employment reduction suffered by Germany, wich lost half of it in the last twenty years. Besides limited FDI, Italian manufacturers did also avoid subcontracting abroad by obtaining its advantages on a purely domestic level. The logics of subcontracting are well known, all the more so in the textile and clothing industry. Through it, producers look for: 1) lower costs, since the subcontractors do not invoice for indirect costs; 2) more flexible and reactive supply, that can be disposed of in case of ceased necessity; and 3) eventually some expertise and know-how not available in-house. Subcontracting has always been important within Western Europe. According to a recent survey, in 1992 the clothing subcontracting sector employed in the EU 800,000 workers, including 200,000 artisans and 150,000 illicit workers (Mercer 1994). This is equal to roughly 26% of total EU employment in the textile and clothing industry. Nearly 30% were in Italy and 17% in the UK, the others following suit. Up to the mid1980s Italian producers could limit subcontracting almost exclusively within the national boundaries. The following features allowed its coming to life and its efficiency: a) the main and most original factor was represented by the so-called â€Å"industrial districts† (Becattini 1987 ).  Production was concentrating in a small area, with a myriad of interdependent small enterprises, horizontally and vertically specialized in each of the subsectors of the industry. Production of wool in Prato and Biella, silk in Como and knitting in Carpi are but a few examples of such districts. We are here in a typical Marshallian world of economies external to the enterprise, but internal to the industry, where all the firms, independently from their size, may reap the benefits from a certain clustering of activities. A traditional culture of industrial work, specialized skills both of workers and services, the possibility of rapid exchange of inventions and improvements, coupled with the widespread use of subcontracting, often to the lower paid workers of the so-called informal economy, were enhancing the locational advantages and decreasing the transaction costs, compensating in this way the higher official labour costs vis a vis lower-wage countries (Forti 1994a); b) most firms were family-run and rather small, a limited number of medium size, as compared to the average West European, while the few larger ones had not yet reached the minimum critical threshold below which a clothing manufacturer is not able to finance the very high costs of internationalization, some of which are typically ‘sunk’ costs ; c) the main outlet was represented by the national market, where a very fragmented retail network (in clothing) acted as a relative shelter from foreign competition, limiting the import penetration ratio to a level well under the EU average; d) progressively, Italian producers had chosen the product differentiation path (especially in clothing), by positioning themselves in the up-market segments, characterized by non price competition and a high fashion-, quality- and value-added content. As one knows, internationalisation of production is all the more convenient the larger the amounts to be produced and the more standardized the productive processes. ) finally, especially in the textile sector, Italian producers had continually fostered technological innovation, obtaining the highest productivity levels in the world, which allowed them to compete worldwide. 3) From domestic to international relocation: the new strategy of Italian firms. Apart from the progressive erosion of industrialized countries’ market shares, by the mid- 1980s new features were emerging in the textile and clothing sector. First of all on the international demand side. Consumption growth started to show the first signs of stagnation, while a general rethinking of the relative value of intrinsic quality as against style was in the making. More in general, a better quality/price relation was sought for. Price elasticity increased also for the high fashion- and quality-content goods. A further factor peculiar to Italy was also at work. Domestic demand started to flatten out at the end of the eighties, bringing it more in line with the demand patterns of the other industrialized countries. On the supply side, at the domestic level the concentration rate in both sectors was rapidly increasing, while large firms reorganized and diversified their production. At the same time, Italy became a very high cost country, moreover characterized by a rather rigid labour market. Abroad, emerging countries were progressively upgrading the quality of their products, through a continuous learning process. On the whole, price competitiveness tended to become more stringent. Increasing competition was stemming as well from the concentration processes affecting the distribution sector. Large distributors tended to place big orders and to intervene in the choice of styles, quality, timing and service standards (OETH 1994). A final contingent factor favourable to the internationalisation of production was due to the real appreciation of the lira between 1987 and 1992, which favoured international operations like FDI and subcontracting. As a consequence, Italian firms started to undergo a rather rapid shift from a purely commercial approach at the international level to a relocation approach. This path was followed not only by large, but also by medium and small enterprises. Relocation expressed itself in two main ways: non-equity cooperation agreements – licensing, management contracts, but above all subcontracting – with some FDI, in lower wage countries; equity agreements – mostly FDI in the form of acquisitions – at first in the most developed markets; These two main ways of redeployment obviously respond to different motivations. At the beginning, relocation in low-wage countries took mainly the form of international subcontracting. The only exception was represented by the textile group Miroglio, which already in 1971 had realized some FDI in Greece, Tunisia and Egypt. In a second phase, the same group has switched to an organization of production based on so called ‘platforms’, that have the task of undertaking some downstream operations in the clothing industry and of optimizing the relations with nearby subcontractors. We have already noted above that the most powerful force behind Italian firms’ subcontracting has certainly been the abatement of production costs (cost saving subcontracting). East Europeans subcontractors have been used only in a very minor way as carrying out special functions (specialty subcontracting) or else as capacity reservoirs in case of occasional demand surges (complementary subcontracting). It can also take various forms. The most widespread is at the start a simple agreement with a local producer in order to buy the final product. At most, the Italian firm bought locally or elsewhere the intermediate products necessary to the productive process. In other cases subcontracting involved the export of semifinished products and the reimport of the finished ones, both without or under the outward processing traffic (OPT) regime. Very similar in nature to the US operations of offshore assembly provisions in other fields of industry as well, OPT takes place when some phases of the textile and clothing production chain – typically: the sewing phase – are carried out by foreign subcontractors. The latter utilise fabrics provided (and owned) by the subcontracting firm, temporarily exported towards the processing country under an EC tariff exemption regime. Up to the entry into force of the Interim Agreements of the EAs customs tariffs were levied only on the value added abroad. Since then, they were abolished altogether. On the other hand, acquisitions in the most sophisticated markets allowed Italian producers to attain several objectives: a) to acquire prestigious brand names; b) to adhere more closely to the host nation’s consumers’ tastes, especially in the medium segments absorbing large amounts of production, and gain market shares from within, keeping a presence in strategic markets; c) possibly, to penetrate third markets and also reimport part of the production; and d) to use the international subcontracting network of the acquired company, especially if it is German. So Marzotto, one of the top textile group in Italy, has acquired the German clothing company Hugo Boss, with a lengthy experience of subcontracting abroad, mainly in Eastern Europe. The aim is to have in a few years half of its production abroad. Another big group, Miroglio, has secured smaller, but more numerous firms: the clothing companies Caroline Rohmer and Sym Claverie in France and Glaeser, Flick, Skarabeus and Gili in Germany, plus the German textile company Steiger&Deschler (Ulmia). Finally GFT acquired the third German clothing producer, Baumler.