A Service of

Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics

Schwarting, Uwe

Article — Digitized Version Strategies for survival: The example of the

Intereconomics

Suggested Citation: Schwarting, Uwe (1979) : Strategies for survival: The example of the clothing industry, Intereconomics, ISSN 0020-5346, Verlag Weltarchiv, Hamburg, Vol. 14, Iss. 1, pp. 15-19, http://dx.doi.org/10.1007/BF02924501

This Version is available at: http://hdl.handle.net/10419/139585

Standard-Nutzungsbedingungen: Terms of use:

Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes.

Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu INTERNATIONAL DIVISION OF LABOUR Strategies for Survival The Example of the Clothing Industry

by Uwe Schwarting, Bonn *

In the debate about relocation to the developing countries of "structurally weak" industries the cloth- ing industry has attracted the special interest of academic and political economists in the Federal Republic of Germany. The following article constitutes a summary of the most important findings of a study of the conditions under which this industry wi|l be able to ensure its continuing existence in the Federal Republic in the future 1.

ew measures are needed in changed situ- ation for the production factor labour in the Fed- N ations. This truism applies in an especially eral Republic of Germany is - apart from a few great measure to the clothing industry of the Fed- exceptions - far above the international level. eral Republic of Germany which has had to sub- mit to an exceptionally extensive process of ad- It has to be pointed out that the Table - which justment in the last few years. As a result of the relates to 1974 because more recent figures are change to flexible exchange rates this labour- not available for all the countries concerned - intensive industry has been exposed to compe- is of limited value as evidence because tition by imports from a large number of foreign [] The wages have been converted into Deut- suppliers who are deriving marked advantages schemark and therefore do not fully reflect the from their relatively low producing costs. The as- internal developments in other countries; cendancy of the foreign competitors was at first contained by intensified rationalization and [] The incidental labour costs - which vary wide- through removal of activities to the ly from country to country - have not been taken peripheral and structurally weak areas of the Fed- into account; eral Republic, but measures of this kind were only temporarily successful because the remuner- [] There is no indication of labour productivity rates which affect the comparison in practice as Table many a hoped-for labour cost advantage is coun- terbalanced by low productivity. The Competitive Position of the German Clothing Industry (in regard to Labour Costs) compared Even so many of the competing supplier coun- with Other Countries, 1974 tries are enjoying price advantages which are (German Gross Hourly Wages = 100 %) attributable to their low wage levels. The location- <1o% t lO<0% i0<50% j j,0<10000I 100<140% al handicap of the German clothing manufac- turers has become greater rather than smaller as South Singapore Argentine France Belgium Denmark Korea time passed. This is probably part of the expla- Colombia Syria Spain Italy Nether- USA nation for the wide range of protection given to lands Ecuador United the German clothing industry by quantitative im- Kingdom port restrictions and self-restraint agreements in Hungary Austria addition to higher import tariffs. The importation Yugoslavia Bulgaria of certain originating from a number of Greece third countries for instance is at present subject Hongkong to common licensing requirements as well as a Cyprus limit on maximum imports under the agreement S o u r c e s : Bundeskammer der Gewerblichen Wirtschaft: Sek- tion Industrie, Vienna. Census & Statistics Department, Labour Department, Annual Report, Hongk.ong. international Labour Of- * Institut fur Mittelstandsforschung. rice; Year Book of Labour Statistics, Geneva. Statistical Office of I Uwe S c h w a r t i n g, Direktinvestiti.onen, passive Lohnver- the European Communities: Social Statistics - Labour Costs in edlung und Zuk&ufe als Unternehmensstrategien der deutschen Industry, Luxembourg. Statistisches Bundesamt, Fac,hserie M, Bekleidungsindustrie - Eine unternehmensgr58enspezifischeUn- Reihe 12: Verdienste und LOhne im Ausland, I. Arbeitnehmer- terauchung (Direct investments, passive job processing and buy- verdienste und Arbeitszeiten, Streiks und Aussperrungen (Earnings ing-in of goods as business strategies of the German clothing and wages abroad. I. Employed persons' earning and working- industry - An investigation into specific enterprise sizes), Bei- tLmes, strikes and lockouts), Wiesbaden. tr~ge zur Mittelstandsforschung, No. 42, G6ttingen 1978.

INTERECONOMICS, Jan./Feb. 1979 15 INTERNATIONAL DIVISION OF LABOUR on the international in textiles and bilateral pense. At the present time the Swedish Govern- arrangements with the third countries concerned. ment is trying to re-establish an indigenous Compliance with the fixed export ceilings under and clothing industry with state support. the mentioned agreements is ensured by a jointly agreed bilateral control system. What has been said indicates a need to diverge from the thesis that the clothing industry, being Following demands for dismantlement of these a disadvantaged industry, should be relocated protectionist measures it has been recommended and to choose a more differentiative approach. in a number of studies that the clothing industry The clothing industry will certainly undergo fur- should be relocated from the highly industrialized ther adjustment processes but it will nevertheless countries into the developing countries 2. These retain its legitimate place in the highly industri- suggestions are based above all on the compara- alized countries in the coming years. This as- tive labour cost advantages of the developing sumption is borne out by the findings of an analyt- countries in conjunction with the low capital re- ical study undertaken by the Ifo-lnstitut fer Wirt- quirements for equipment and training in the schaftsforschung (Munich) conjointly with the clothing industry. Rheinisch-Westf&lisches Institut fSr Wirtschafts- These proposals build on the "factor proportions forschung (Essen) on behalf of the Federal Min- theorem" which however is not accepted by all istry of Economic Affairs. economists as a theoretically valid , even It was found that the German clothing industry is in its modified form which allows for the human conducting 62% of its foreign trade with coun- skill content of the production factor labour. The tries whose exports to the Federal Republic bear cost relations and factor proportions deducible an "exceptionably close" resemblance to their from the available statistics are in the view of imports from the Federal Republic. Its high ex- critics 3 inadequate for an even approximately change-intensity with highly developed industri- satisfactory qualitative characterization of the va- alized countries shows that the German clothing riety of articles actually existing in a product industry is well able to play a role in the inter- range, for there is a great deal of evidence to national goods exchanges - on a relatively low suggest that the comsumption of upper-garments level - where differentiated end-consumer wishes will be less price-elastic in the future but all the have to be met. The developing countries are more income-elastic. In consequence the clothing clearly at a disadvantage in this field even though industry will become increasingly market- and the conditions on the supply side favour them product-orientated which is likely to impair the compared with industrialized countries 4. substitution "chances" of the more distant sup- pliers. Alternatives for Survival Critical views have also been heard from political It follows that the clothing industry should find quarters. In the context of the debate on the relo- one alternative for survival in deliberate with- cation of Iocationally disadvantaged industries drawal from the down-market, where prices are the German for the textile and cloth- no longer profitable, and concentration on high- ing industry has pointed to the example of Swe- grade product groups. Such a strategy may be den which has forfeited its textile and clothing described as "sophistication in marketing": the industry almost entirely by pursuing a foreign manufacturers produce and sell "cleverly" devised trade policy of this kind. Once the Swedish in- products for the market opened up by the steady dustry had ceased to be a competitor in its local growth of freely disposable incomes. In doing so, market, foreign suppliers were able to exploit the manufacturers can make good use of their their pricing monopoly at the consumer's ex- very detailed knowledge of the latest materials, 2 Cf. Hugo D i c k e et al., Besch&ftigungswirkungen einer ver- consumer habits, the trade structure and of their st&rkten Arbeitsteilung zwischen der Bundesrepublik Deutschland und den Entwicklungsl&ndern (Employment effects of increased personal contacts. Attention to and emphasis division of labour between the Federal Republic of Germany and on the quality image of the German product is the developing countries), Kieler Studien No. 136, T~bingen 1976; Gerhard F els, Speziaiisierungsmuster in der Arbeitsteil.ung one particular variant of this "sophistication" zwischen Industrie- und Entwickiungsl&ndern (Patterns of specia- lization in the division of labour between industrialized and de- approach. However, even if this alternative offers veloping countries), in: Die Weltwirtschaft, 1971, No. 1, p. 19ff.; an escape route from a difficult economic situa- Eva-Maria S c h a r r e r, Die Chancen der Textil- und Beklei- dungslndustrie in hochentwickelten L~.ndern - ein empirischer tion to creative and flexible firms capable of sup- Beitrag zu kontroversen Fragen der Standortwahl beider Industrie- zweige (The chances of the textile and clothing industries in plying the market with the which it highly developed countries -- an empirical contribution to the wants, it must be realized that discussion on controversial issues concerning the choice of plant locations in both these industries), Kieler Diskussionsbeitr~.ge 4 Hans B a u m a n n et al., AuBenhandel, Direktinvestitionen und No, 26, Kiel 1972. Industriestruktur der deutschen Wirtschaft. Eine Untersuchung ihrer 3 Cf., e.g., Jens Jeesen, Die Bedeutung der Importkonkurrenz Entwicklung unter BerScksichtigung der Wechselkursver&nderungen fL~r ausgew&hlte Erzeugnisse der Textil- und Bekleidungsindustrie (Foreign trade, direct investments and industrial structure of the (The importance .of import competition for selected products of German economy. An investigation of their development with spe- the textile and clothing industry), Forschungsbedchte des Landes cial consideration of the exchange rate movements), Volkswirt- Nordrhein-Westfalen, No. 2730, Opladen 1973, p. 4. schaftliche Schriften, No. 226, Berlin 1977, p. 122.

16 INTERECONOMICS, Jam/Feb. 1979 INTERNATIONAL DIVISION OF LABOUR

[] the need for continual to keep German clothing industry - compared with the abreast of the makes rationalization more average of other industries - must be regarded difficult and as small. In 1977 developing countries accounted [] there is a risk of an eventual production switch for about 15% of the direct investment under- by the majority of firms to a volatile high-fashion taken by the clothing industry while the corre- field which will in consequence suffer strong sponding rate for all industries was about 30%. price competition and dwindling profit margins. These figures suggest that the very low wage costs in the developing countries have not proved A second alternative for survival has therefore to as great an incentive as had been expected, be considered - usually in conjunction with the which is most surprising seeing how great the first alternative- namely, cooperation with a man- possible savings were in fact. Costing of the man- ufacturer in a low-wage country. This cooper- ufacture of in Nigeria produced the follow- ation variant has become especially important in ing comparative figures: the fashion trade where it has given a new lease [] A multistage production unit operated at a of life to quite a few old-established firms. This cost advantage of DM 29.60 per kilogram com- "supplementary" alternative for the survival of an pared with a similar one in the Federal Republic enterprise takes the form of what is known as of Germany when. working the same number of "passive job processing": fabrics and unfinished shifts. clothes are sent abroad, finished - i.e. in the main, made up - there for the account of the [] The cost advantage rose to DM 40.60 per kilo- German principal and then re-imported into the gram when the Nigerian unit worked an extra Federal Republic. A third alternative to be men- shift. tioned is the establishment of a foreign produc- In spite of governmental efforts to make direct tion unit by the German manufacturer (direct in- investment in developing countries more attrac- ). Here again it is not a question of tive (investment promotion treaties, development "either/or" but of filling out the firm's basic strat- countries taxation law, etc.') it is to be noted that egy. The fourth alternative, finally, consists of buy- the incentives for capital investments in develop- ing-in garments which have been made abroad; ing countries have in the past proved insufficient the "production" element of the German clothing to bring about an increase of the investments in manufacturer takes here second place. the clothing industry. The fact that the industri- An opinion poll about these various alternative alized countries enjoy greater favour reflects the strategies with a foreign element in the summer higher rating by German direct investors in the of 1977 elicited results which shall be summariz- clothing industry of the advantages of market ed here briefly: proximity and well-developed infrastructure in the industrial countries of which for the most part also offer labour cost advantages. Besides, The Direct Investment Strategy the provisions of the International Textile Agree- [] From the German clothing manufacturer's ment carry some weight in the choice of location point of view direct investment is to be classified as this creates a hazard for possibly intended re- as definitely supply-orientated; the advantages imports. It is thus seen that clothing manufac- of low production costs combined with the pos- turers choosing a site for their operations do not sibilities of re-importation were given the highest confine their calculations to a purely monetary preference rating (48% of all mentions). Besides, computation of relative labour costs; these by mention was made of: market development themselves work out clearly in favour of siting (22.6%), spreading the risk (22.6%) and fiscal manufacturing activities in developing countries. and financial incentives (6.5%). Direct invest- [] It is generally assumed that big enterprises ments by clothing manufacturers are thus moti- find it relatively easier to plan and carry out di- vated "one-sidedly" by the criterion of low wages. rect investments - at least in the preparatory This contrasts with the main motives of other phase of scrutinizing and plotting a project - industrialists who, as shown by a number of stu- than do medium-sized and small firms which have dies, put sales considerations above cost and no staff sections of their own and therefore de- profit motives s. pend upon the assistance and interm,ediation of [] Against the background of this vote for low- outsiders. This is true as far as the clothing indus- cost production abroad the actual extent of the try is concerned. The "threshold level" for man- direct investment in developing countries by the ufacturing operations abroad was found to be in the group of firms with 100-199 employees; 5 Cf., e.g., Heinrich J e t t n e r, FSrderung und Schutz deutscher Direktinvestiti.onen in Entwicklungsl~.ndern (Promotion and pro- most direct investments however were concen- tecti,on of German direct investments in developing countries), Aachener Studien zur internationalen technisch-wirtschaftlichen trated in the hands of the (few) large-scale Zusammenarbeit No. 15, Baden-Baden 1978, p. 99. operators.

INTERECONOMICS, Jan./Feb. 1979 17 INTERNATIONAL DIVISION OF LABOUR

[] NO reliable data have so far been available foreign companies. These different degrees of about the quantities of clothing re-imported from participation have however one thing in common the - primarily supply-orientated - foreign fac- within the scope of passive job processing: un- tories, but a consideration of the difference be- made-up merchandise is exported, processed and tween the sales total and domestic production of then re-imported. the German clothing industry - of which only part can be attributed to markups - or of the dif- Countries with an active job processing business ference between the imports of the textile with the Federal Republic have a contingency trade and the corresponding imports shown by quota in addition to their ordinary German import the foreign trade statistics can only lead to the quota. A weighting system is used for sharing conclusion that a high percentage of the clothing out the quotas among applicants so as to ensure imports consists of "intra-company imports" by that their individual quotas correspond to the the clothing industry itself. market position and prevent a monopoly or oligo- poly of big importers who possess better sources The evaluation of the answers showed that the of information or react more quickly. The allo- questioned firms tend to import 50% of their cation procedure devised to avoid such an - on foreign production or more. Estimates led to the structural grounds undesirable - development is conclusion that such intra-company imports from as follows: The entire quota is divided into three foreign factories accounted in 1970 for about equal parts so that newcomers can get an appro- 16% of all clothing imports. This figure under- priate share of the market for themselves. One- lines the importance of direct investment for the third of the quota (known as the basic or per- clothing industry. The products from the foreign capita quota) is shared out among all applicants, factories can make a decisive contribution to the another third part is divided in proportion to the survival of an enterprise through overhead cost sales turnover of the applicants, and the imports spreading and filling-out of product ranges. It is in the preceding years are referred to for the to be assumed however that the concentration allotment of the remaining third part of the quota. process, which is taking place in the clothing in- This method of quota allocation a middle- dustry as elsewhere, stems largely from the cost class industry like the clothing trade. Job-proc- advantages accruing to the firms in question from essed garments are, moreover, partially exempt- the lower cost of their foreign production. Bear- ed from, import duty insofar as the amount of duty ing in mind that according to the inquiry nearly charged is reduced by the (notional) dutiable half the firms with foreign factories belong to the value of imported unprocessed goods of the same group of large-scale operators, it must be antic- kind (differential charging). ipated that the - as yet dominating - medium- sized and small firms will suffer further setbacks A criticism which has to be made is that passive if they do not adopt different business strategies. job processing is governed by a narrow framework This being so, the reluctance of the medium-sized of regulations which do not always facilitate the firms in the clothing industry to engage in direct execution of this kind of transaction. The regula- investment must cause misgivings. tions governing the foreign trade, tariffs and pay- ments are very diverse; in some countries cus- This reluctance suggests management short- toms clearance is hampered by petty-minded- comings among intermediate clothing manufac- ness; clothing manufacturers may not be suffi- turers as - according to another inquiry 6 - prob- ciently flexible, knowledgeable or venturesome. lems of finance are not the main obstacle to It is probably in some measure due to all these direct investment in the clothing industry. factors that medium-sized clothing firms have not made as good use of job processing arrange- The Strategy of Passive Job Processing ments as was feasible. The following figures give an idea of the actual extent and importance of Passive job processing which involves making-up passive job processing: or repair of garments - i.e. a processing opera- tion - in a foreign factory has attracted espe- [] About 90% of the clothing imports into the cially great interest in the Federal Republic of Federal Republic from Yugoslavia result from this Germany. This form of extraterritorial engagement kind of processing business. extends all the way from ordinary outwork [] 17% of all clothing imports into the Federal through cooperation in,cluding the use of German Republic fall under the heading of passive job know-how and machinery to the setting-up of processing. Institut f[ir Mittelstandsforschung, Forschungsgruppe K61n (Authors: Ralf-Peter Th{Jrbach, Josef Geiser), Export- These figures indicate the scope for this "survival probleme mittelst&ndischer Betriebe. - Eine empirische Analyse in ausgew&hlten Industriebereichen (Export problems of middle strategy" even though access to the European class enterprises - An empirical analysis in selected industrial areas), Beitr&ge zur Mittelstandsforschung, No. 23, G6ttingen 1977, Community market has lately been denied to TabTe 25, p. 10g. many job-processed products by protectionist

18 INTERECONOMICS, Jam/Feb. 1979 INTERNATIONAL DIVISION OF LABOUR measures against merchandise originating in [] Orders can in principle be placed more certain third countries. quickly; and

Strategy of Complemental Buying-in [] Overhead cost spreading enables the princi- pal to offer better value and a more comprehen- The examined types of intra-company imports sive assortment. focused - to varying degrees - on the "produc- tion element". In the kind of intra-company im- If the sample is representative, complemental ports still to be investigated - the buying-in of buying-in by clothing manufacturers accounts for ready-made garments from outside sources by another 5% (by volume) of all garments imports. clothing manufacturers intent on complementing their assortment it is the ,,merchant" element The importance and dimensions of the three busi- which provides the sole motive. Without produc- ness strategies show clearly in the fact that at tion there is no production risk - what risk there least 40 vol. % of all clothing imports are attrib- is concerns mainly the sales side and can be utable to the activities of German clothing man- countered by correct demand analysis. The "in- ufacturers. To give an example, the total value dustrial character" of the clothing manufacturer of their purchases in 1976 was of the order of recedes into the background. Complemental buy- DM 2.8 bn. It may thus be noted as a fact that ing-in of ready-made garments offers advantages even today firms in industries reputed to be in that structurally weak can still safeguard their survival by setting different priorities. In highly industral- [] The entrepreneurial risk is smaller than in the ized countries well-managed clothing firms tak- other two kinds of intra-company imports; ing heed of all these strategies in their business [] The bought-in garments made at lower cost calculations have still a better "survival chance" in a foreign country benefit from the brand image than badly-managed enterprises in so-called of the German manufacturer; growth industries.

TRADE REGIMES Devaluation and Its Consequences in Developing Countries

by Anne O. Krueger, Minneapolis *

To analyze the role of the trade and payments regime in economic development the National Bureau of Economic Research undertook a major research project on this issue. In this article a brief report on some of the findings pertaining to the effect of exchange rates, i.e. devaluation under exchange control is provided.

ver since conscious efforts to increase growth ing goods from their international prices even in- E rates in developing countries began in the clusive of tariff charges. Some "export pessi- early 1950's, a major source of controversy has mists" believed that this did not matter because been the role of exchange-rate policy in affecting they regarded import substitution as the only the rate of economic growth. Numerous issues feasible means of rapid growth. Others saw the are related to this central question. Many devel- bias against exports as a major impediment to oping countries' exchange rates were maintained rapid development. In addition to these issues, by use of fairly severe quantitative restrictions "stabilization programs" which included currency which restricted purchases from foreigners well devaluation and efforts to curtail the government below desired levels. This, in turn, led to relativ- deficit and the growth of the money supply were ely weak incentives for exports, and a marked highly controversial. Critics alleged that deval- divergence in domestic prices of import-compet- uation resulted in more rapid inflation and reces-

* University of Minnesota, Vice President ~f the American Econo- sion, with little or no improvement in the balance mic Association. of payments, while defenders asserted that over-

INTERECONOMICS, Jan./Feb. 1979 19