Myths and facts on ‘relocation’ Béla Galgoczi European Trade Union Institute for Research, Education and Health and Safety ETUC Employment and Economic Committe Summer School Krakow, Poland 7-10 July 2005

Background  Fall of Iron Curtain, opening up of China:  Huge part of world population got integrated into the world economy within a short time period:  Not just new markets,  Also huge labour force with different factor conditions  The labour supply of (especially) CEE, unlike at previous market entry of ‘peripheral countries’, has medium to high skills  Challenge: skilled labour at much lower costs in vicinity  Impact of enlargement: NMS-s having adopted the ‘acquis’ (labour, industrial, environmental, investment standards) >  > ‘unfair competition’ partially brought under control, but risk level for investment decreased > CEE locations more attractive  New division of labour in Europe – new industrial landscape

Background  Challenge for EU15: integration of CEE parallel with the emergence of China at a negative economic cycle  Pressure on enterprises by globalised product and capital markets grows > employers exploit the situation  Balance of capital & labour shifted  Employees at different locations played out against each other  Downward spiral or mutual gains?  Fears in EU15: jobs in massive numbers would move from EU15 to NMS-s?

Terminology  When talking about ‘relocation’ (or ‘delocalisation’), a great variety of terms are used, often in a confusing way.  There are two starting points:  foreign direct investment (FDI) – /not just fresh capital../  and international trade:  Within international trade, the rapid growth in the intra-industry trade of intermediaries is due to the emergence of (international) outsoucing or offshoring.  (International) Outsourcing means that domestic firms give up parts of their intermediate production chains and buy instead parts from foreign suppliers. As such, this can be seen, as a form of ‘international production share’

Terminology  Offshoring on the other hand means that domestic firms set up new factories abroad to produce the intermediary products themselves. This is an intra—firm relationship, where the mother company keeps ownership control over its supplier  A concept of ‘relocation’ can be formulated, as: ‘the process of shifting economic activities towards foreign sites, including the closing of domestic sites or scaling down their activities’  In principle three ways: (the key is ‘substitution’ and ‘transfer’)  any expansion abroad that does not result in expansion at home,  when a subsidiary company in abroad is established to target new markets instead of exporting from the domestic location.  when a substitution of factors takes place in respect to the domestic market also: when imports from the offshored production site supply the domestic market, as well.

Relocation - /substitution/  The term ‘relocation’ is used thus, when the ‘substitution character’ appears explicitly and directly – production locations are being closed or scaled down parallel with operations established abroad.  In reality, it is hard to draw the balance of operations, as explicit and implicit forms of factor substitution get mixed and processes of specialisation and structural change play a great role.

Concerns  As companies seek to take advantage of newly emerged opportunities to exploit large differentials in wages and working conditions,  Workers and unions fear that this will lead to a massive exodus of well-paid jobs in high-wage countries,  to a weakening of labour’s bargaining position and  thus to a downward spiral of wages and conditions.

Facts  Up till now, a massive exodus of jobs to low wage countries did not happen  The overall balance is still positive (but local tensions grow)  According to Eurostat: FDI to NMS is marginal  the share of the NMS in the total FDI inflow to Europe, and their share in the FDI flow within the EU 25 remains rather marginal.  Of the €77.2 bn inward FDI to EU 25 in 2003:  €74.9 bn went to EU15 and just €2.3 bn to EU10.  FDI from the EU15 to EU10 amounted to €6.9 bn in 2003, between the EU15 it was €183.7 bn.

Inflow of FDI into the 5 accession countries between 1993 and 2004 (in € millions)

FDI as a % of GDP

Dramatic difference in wages and labour costs  Wage difference between OMS and NMS at exchange rate, on average 4.5 times (at PPP cca 1:2), e.g. wages in Germany are six times higher than in Estonia..  But the wage gap is getting smaller due to high wage growth in NMS and also to the appreciation of CEE currencies vs the Euro  E.g. the 32% wage increase in HU between appeared as over 50% increase in Euro  Still, low wages remain a factor advantage for the next decade  Investment motivation is however: 1. Market exploration, expansion, 2. Cost advantage, 3. Skilled labour 4. Lower tax levels, but certain level of infrastucture, political stability being a precondition

Figure 2: Average monthly wages in industry and services, in Euro and PPP, 2003 /NMS/, 2002 /OMS/ Note: Wages were calculated based on data providing labour costs in Euro and the wage component in labour costs. For further details, see source. PPP calculated with OECD30 PPP.

Figure 3: Real wage growth (2000=100)

FDI in 2002 by economic sector

Trends  But the trends may raise concern in the source countries  Western Europe extensively profited from the market opening in the 90-s that contributed to the 7% employment growth of the EU15 ( ) - at the same time 15% employment loss in CEE (6 million jobs!)  Now the bulk of market exploration is over, (markets of CEE-s were exploited in the 90-s, now market dynamism is the source of attraction), relocation for cost cutting and the emergence of regional vertical integrations more characteristic  Shifting patterns: division of labour shows a shift to higher value added products in the NMS-s (an updrading of their activities takes place). Not just labour intensive, low value added activities are performed, but technology and skill intensive activities with higher value added. Activities that were not thought as being subject to relocation, become also affected (as a wide range of business related services and research and development).

Trends  Evidence by trade statistics between EU-15 and CEE NMS-s:  Trade surplus of EU15 with CEE8 decreased from 23bn Eur in 1997 to 13 bn Eur in 2003; German trade surplus down from 5 bn Eur to zero (Trade deficit of NMS appears more with Russia  and China). Shifting trade specialisation of CEE between 1993 and 2003: clothing fell dramatically, automobile and parts increased to the same extent as clothing fell; high increase in telecommunication and data processing, substantial decrease in wood manufacture and furnitures

Concerns to EU15  Decreasing value added in manufacturing (future?)  Structural challenge due to offshoring and new division of labour: increased specialisation, upgrading of activities > labour demand for high skill labour increases, demand for low skilled work decreases > segregation of labour markets, unemployment due to lack of adaptability, less social cohesion  But also net job loss – European Restructuring Monitor:  In EU15 between Jan 2002 and June thousand jobs were lost due to restructuring, out of which 76% was due to internal restructuring, 4.9% – to relocation and 2.5% to outsourcing..  Major problem: ‘concession barganing’

Branch examples, company cases  As patterns of investment, trade and division of labour have a great complexity, examples help in orientation  Win-win situation can be clearly seen in two major sectors: automobile and ICT: vertical and horizontal integration of production chains had a stabilising and positive employment effect on source countries also, in case of ICT sector it contributed to world market expansion of Europe  ‘pure’ relocation is characteristic to sectors with shrinking market in EU15 (e.g. household appliences)  Relocation from CEE countries also started (as part of upgrading and restructuring)

Employment in the German automobile industry (number of employed)

Trade balance of the German automobile sector with the CEE- 4 in 2003 (bn Euro)

Eastern European countries have high level of ICT production ICT production

ICT sector  In production of electronic parts and components the share of CEE-8 in total EU /EU15+CEE8/ production grew from 11% in 1993 to 32% in 2003 (output value of EU15 grew to its three fold, output value of CEE-8 grew to its more than ten fold)  At the same time the share of European (EU15+CEE8) ICT exports in total ICT world exports grew from 31% in 1992 to 41% in 2002.

9% 23% 32% 11% 12% 15% 19%

Branch examples, company cases  ‘pure’ relocation - manufacturing of household appliences:  Electrolux plans to close down half of its production sites in Western Europe and transfer these capacities to CEE locations  French household equipment manufactures plan to move their production to CEE countries and close down their French locations (row material priced doubled in 2004 /China/, French and German markets shrink, while CEE markets grow dynamically: cut costs and move to growing markets..  IBM plans to close its smaller EU15 services centres and merge them in CZ and HU (2500 German jobs at stake)  Siemens Austria moves labour intensive production from Hungary to Romania  Leoni winds up 300 jobs (in automobile cable man.) in Hungary to move them to Romania

Challenges for trade unions  Permanent structural change at each location:  How to manage structural change in the enlarged Europe under global conditions?  Aim: adaptation through the high road (innovation, training, investments) instead of adaptation through the low road of pure cost cutting (either through relocation or through wage cuts and longer working hours)  This requires active management of structural change in a forward-looking way with the involvement of social partners and with strengthened workers participation

Challenges for trade unions  Increasing co-operation between TU organisations of the East and West is needed with European level co-ordination to prevent that workers at different locations are being played out against each other  To prevent a downward spiral:  Promote convergence processes  Capacity building of TU-s in the East  Strengthening social dialogue especially on branch level in CEE  Transfer of good practices through EWC-s  Apply European norms for minimum standards