1. 1 Assessment of the International Competitiveness of the Textile and Clothing Sectors of the New EU Member Countries Tallin, 19 January 2005 by Francesco Pellizzari This document has been produced with the financial support of the European Community’s BSP2 programme. The views expressed herein are those of of CAST and can therefore in no way be taken to reflect the official opinion of the European Commission

2. 2 Background and objectives The complete liberalisation of the international trade of textile and clothing (T/C) products will continue and increase the recent trends in international competition. Unfortunately, these trends represent serious threats that must be addressed by the European T/C industry in order to maintain and reinforce its position. The emerging scenario may be even more difficult for the new EU members that have just completed the transition phase. This assessment is aimed at understanding the current situation and at providing some inputs to CEEC T/C companies for developing their competitive strategy.

3. 3 Structure and methodology This assessment consists of four parts: 1.Assessment of the foreign competition in Europe. 2.Key competitive factors in the T/C industry and strategic tools for enhancing competitiveness of CEEC enterprises. 3.Analysis of the Added Value Chain in selected countries. 4.Considerations and inputs for the strategy of CEEC T/C companies.

4. 4 A note on sources of data and approach used by this assessment It was not possible to base this assessment on a homogeneous set of data sources. Each part of this assessment was elaborated starting from a different set of data (sometimes for different periods and for different selection of countries). This prevents a direct, mathematical comparison of different analysis. Despite non-homogeneity of data, we believe that the results of this assessment allows significant considerations and remarks on the current state of the T/C sector.

5. 5 Part One Assessment of the competition in Europe

6. 6 Assessment of the competition in Europe: scope of the analysis 1.This first part is an assessment of the competition in the EU by considering five large Eu importers (Germany, France, Italy, UK and Spain) and 22 exporters to the EU: the 10 countries of the project: Estonia, Latvia, Lithuania, Poland, Czech Republic, Slovakia, Hungary, Slovenia, Romania and Bulgaria. 4 South Mediterranean countries associated with the EU: Turkey, Egypt, Tunisia and Morocco. 3 South East Asia newly industrialized countries: Hong Kong, South Korea and Taiwan. 5 Asian emerging countries: China, Bangladesh, India, Indonesia and Pakistan.

7. 7 Assessment of the competition in Europe: data analysed and sources This analysis is focused on the two most recent years available: 2002 and 2003. Data considered are IMPORTS in the EU and specifically in the five big EU countries from the selected 22 exporters, of: 1.Textile products (yarns and fabrics) 2.Clothing products (garments and accessories) Both Value and Quantities are considered. Average prices were calculated. Source of data is Eurostat.

8. 8 Assessment of the competition in Europe: objectives of the analysis The objective of the analysis is to identify winners and losers in the EU market, main trends and the role/weight of price in the competition. Additionally, the analysis intends to point out differences in the international strategy of the purchasing countries in order to understand if there are specific “supply chain” for each large market.

9. 9 Assessment of the competition in Europe: analysis of yarns and fabrics 2002 -2003 Increase of quantities imported but decrease of total value due to a significant decrease of the average price mainly for imports from Asian countries (international quotation in “devaluated” USD). Increase of concentration: the first five countries make- up about 50% of total imports. China, Turkey and India are the leading countries. India is a cost leader. Very good position of the Czech Rep. (fifth) and good position of Poland who are both large suppliers to Germany.

10. 10 EU Importers and International Exporters 2002 – yarns/fabrics – 000€

11. 11 EU Importers and International Exporters 2003 – yarns/fabrics – 000€

12. 12 EU Importers and International Exporters 2002 – yarns/fabrics – tons.

13. 13 EU Importers and International Exporters 2003 – yarns/fabrics – tons.

14. 14 EU Importers and International Exporters 2002 – yarns/fabrics – prices

15. 15 EU Importers and International Exporters 2003 – yarns/fabrics – prices

16. 16 EU Importers and International Exporters: analysis of garments and accessories 2002 -2003 The garments and accessories import market is very large totalling about 54 billion € or almost 4 million tons (three times the textile sector). Increase of imported quantities and concurrent decrease of values due to a decrease in the average price in Euro. The first five exporting countries make-up 50% of total imports. China is the leading country (28,9% of all imports in terms of quantity) followed by Turkey in a strong second position. Romania, Bangladesh, Tunisia and India hold the following positions.

17. 17 EU Importers and International Exporters: supplying partnerships Cooperation or “special relationships” between countries are evident. Germany: Turkey (1 st supplier); good positions of Romania (3rd), Poland (5 th or 50% of total Polish exports to EU) and Czech Rep. (6 th or 70% of total Czech exports to EU). France: very good position of French speaking countries Tunisia (2 nd, comparable to China) and Morocco (3 rd ). Italy: Romania in the same position of China (20% of import share) and Tunisia. UK: still strong relative positions of English speaking countries such as Hong Kong (3 rd ). Spain: strong position of Morocco (2 nd with 20% of imports)

18. 18 EU Importers and International Exporters 2002 – garments and accessories – 000€

19. 19 EU Importers and International Exporters 2003 – garments and accessories – 000€

20. 20 EU Importers and International Exporters 2002 – garments and accessories – tons

21. 21 EU Importers and International Exporters 2003 – garments and accessories – tons

22. 22 EU Importers and International Exporters 2002 – garments and accessories – prices

23. 23 EU Importers and International Exporters 2003 – garments and accessories – prices

24. 24 Assessment of the competition in Europe: Position of the 10 CEEC countries Textiles Clothing %Quantity%Value %Quantity %Value 2002 17,7 18,3 18,3 12,4 2003 18,9 17,7 17,9 11,1 Their general position is significant. Czech Rep. and Poland (for yarns and fabrics) and Romania and Poland (for garments and accessories) are the leading exporters. Germany is the largest importers for yarns and fabrics (CEEC penetration 30%Value - 36% Quantity) and Italy is the largest importer for garments (CEEC penetration 33%Value 18-20% Quantity).

25. 25 Assessment of the competition in Europe: China China is “the phenomenon” that has to be monitored. China is the leading exporter to EU with an impressive record: In 2003 China is always in the first position as exporter to the EU: both for Textile and Garments as well as value and quantity. In the garment sector China is by far the strongest country with almost 30% of total exports in quantity. Remarkable its position in Italy: China covers almost 50% of imports in quantity. The penetration trend is still strong and it does not appear that it has reached its ceiling.

26. 26 Assessment of the competition in Europe: Success factors of China The key of success is a very low average price for a “good” (well manufactured) product. The Chinese product is not limited to “simple” items (such as T shirts or underwear like Bangladesh, Pakistan and India). China is already producing rather “complex” and “quality” items (tailored dresses, suits,..). This manufacturing ability is also directed to copy more sophisticated products. Counterfeiting has become a significant part of the business.

27. 27 There are increasing questions about the “excessively low” price levels of Chinese T/C items. Such large differences are hardly explained by mere economic conditions. Some argue that the Chinese industry (still mainly controlled by the state) is resorting to dumping in order to enlarge and consolidate its position. Reactions to what can be called “unfair competition” were reported to the highest European institutional level. Assessment of the competition in Europe Open questions about China

28. 28 Assessment of the competition in Europe: The China case The accession of China to the WTO should bring some advantages to the establishment of a fair competition. However, it is difficult to think that these advantages can be exploited without a full and correct information about the production and business conditions in China. Intelligence work is necessary to provide support to the European manufacturers and therefore facilitate the implementation of WTO rules. Through Cast branch in China (Cast operates in China since 1994) we collected some circumstantial evidence.

29. 29 Assessment of the competition in Europe: Possible levers of unfair competition in China Considering that: China is still a centrally planned economy the main share of the GDP is produced by public enterprises the public sector is generating huge losses, common sense says that inputs for the manufacturing “private” sector are sold below their costs. Additionally, other forms of “unclear” advantages arise from: low workers welfare (social charges, safety,..) lax environment protection legislation hidden tax vacancies hidden incentives an unreliable accounting system

30. 30 Assessment of the competition in Europe: China and the European market China has a number of allies in Europe that cooperate to boost its penetration. Today’s European consumer The Retail System The T/C Manufacturers

31. 31 Assessment of the competition in Europe: China and the European consumer Today’s European consumer demonstrates an increasing propensity to low price products as a consequence of a stable or declining (Italy and Germany in particular) purchasing power. “Price” is gaining rank in the priority list of the consumer behaviour.

32. 32 Assessment of the competition in Europe: China and the European Retail System The Retail System is made-up of large retailers who are constantly developing their own “private labels” in order to compete with the fashion brands. French and German retailers are at the forefront of this strategy. Also the large clothing retailers such as Zara, H&M, Benetton import heavily from China.

33. 33 Assessment of the competition in Europe: China and the European T/C Brands The T/C Manufacturers out-source or de-localise production taking advantages of extremely low costs combined with good manufacturing capabilities. A large Chinese production out-sourced by European brands is a major tool for sustaining the T/C manufacturers’ international competitiveness since the strength of the brand in the market can overcome the weakness of a “made in China” label. In the short term this weakens the European T/C industry (production) but not necessarily a Brand’s international positioning. A serious threat will arise, if and when, “Chinese brands” will appear in the market.

34. 34 Assessment of the competition in Europe: OECD - RCA Index RCA j i = ln (x j i / m j i :  x j i /  m j i ) *100 x=exportsm=imports i=industriesj=countries Italy is the only EU large country with a positive comparative advantage. All the other four large EU countries are losing competitiveness. The three CEEC countries are in the middle. China and Turkey keep the lead.

35. 35 Assessment of the competition in Europe: Some final considerations The best equipped competitors facing the Chinese invasion are those that provide “good quality” combined with affordable prices. Turkey is a good example of this. Logistics and cultural proximities (languages, social values,…) are still important. This analysis confirms that even if price is an important factor, actual choices take into consideration: brand (intangible and psychological values), quality (materials and crafting) and service (delivery, customization). The problem is that the newcomers are quickly learning quality, service and may develop new “brands” if they are able to accumulate large financial resources.

36. 36 Part Two Key competitive factors in the T/C industry and strategic tools for enhancing competitiveness of CEEC enterprises.

37. 37 Competitive Generic Strategies 1.Cost Leadership 1.Structural Cost Advantages (raw materials) 2.Contingent social/economic/political conditions 2.Differentiation 1.Segmentation (selected market groups) 2.Positioning (specific values) Cost Leadership based on “tangible” assets Differentiation based mainly on “intangible” assets (brand)

38. 38 Cost Leadership Strategy COSTSRelativePossible Weight Differences Raw Materials****** Utilities/Other inputs* *** Labour cost******** Technology**** Finance****

39. 39 Labour Cost in the Textile and Clothing Industry - Selected Countries

40. 40 Labour Cost - Productivity and Competitiveness The relative “Productivity Index” is calculated by dividing the unit labour cost of each country by the lowest unit labour cost (Bangladesh, Pakistan). Apparently, a German worker should be 70 times more efficient than a Pakistani worker to have the same cost per unit sold. An American, French or Italian worker about 50 times! Productivity is not only linked to production efficiency (quantity) but also to the “value” sold. Value is embodied in the “materials” and particularly for “advanced” products in the “intangible” features of the product (perceived quality, design/styling and brand).

41. 41 Labour cost – Productivity – Added Value Intangible features contribute substantially to fill the “cost” gap; this is the reason of a still strong competitive position of rather expensive countries such as Italy and South Korea. The competitive potential of a business stems from the structure of its value chain. In particular, the important features are those providing Differentiation: product and manufacturing quality, advanced services, and the so called “intangible features” of the product such as design, style and brand.

42. 42 The Added Value Structure Manufacturing (Quantitative) Brand Product Intangible features (design-styling) Attached Services (customization) Extra Quality of Manufacturing

43. 43 Added Value structure, price level and demand PRICE QUANTITY demand curve Value is mainly added by “psychological features”. The product is a symbol. Value is added by “qualitative features”.Technical performances of the product. Value is added by “quantitative features”.The product is affordable. fashion brandmiddlebasic high differentiation low

44. 44 Four different sector’s situations number of possible differentiations defensibility of differentiation H H L L BLOCKED FRAGMENTEDSPECIALIZED OLIGOPOLY

45. 45 The Value Chain in the T/C sector fibreyarnfabric garmentretail The largest part of profit margin goes to the distribution. Strategies of downstream integration. Pass from a Fragmented to a Specialized or even an Oligopoly situation.

46. 46 Globalisation and Strategies In a liberalized and globalized world, a separation between “cost leadership” and “differentiation” is not clear-cut. Globalization makes it possible to the largest or most advanced companies to “cross the borders” of countries and strategies. Differentiation in the markets can go hand-in-hand with leadership of costs in the supply chain. Integration between retail and production makes possible a comprehensive supply chain management encompassing the largest sections of the profit margin. Furthermore it enhances brand affirmation combining product brand and store brand.

47. 47 Part Three Analysis of the Added Value Chain in selected countries.

48. 48 Analysis of the Added Value Chain in selected countries: methodology The source of data is an OECD study that considers a number of countries, 14 of which are relevant for this analysis: Czech Republic, Slovakia (2 new EU members) Italy, France, Germany, Spain (4 EU) Turkey, Egypt, Morocco (3 Mediterranean Countries) Korea, Hong Kong (2 Newly Industrialised Countries) India, Indonesia, Bangladesh (3 ASIA) Years 1998 or 1999 The OECD study considers the textile sector separated from the clothing sector.

49. 49 Analysis of the Value Chain in the Textile sector: General Remarks The % Added Value is generally between 27% and 34%. Extremes are: Korea 44% and India 15% Korea, Turkey, Indonesia show the lowest share of labour cost. In actual terms ($) however the highest added values/employee are produced by: Italy, Korea, Germany Hong Kong and France (approximately between 40 and 45 USD). The Income/Employee figure is calculated by dividing the Value Added/Employee by the % Value Added. This provides a “rough” measure of the “average market price level” for each country.

50. 50 Analysis of the Value Chain in the Textile sector: Percentage composition Cast Elaboration on OECD data

51. 51 Value Chain in the Textile sector: Estimation of a measure of income per unit Textile Sector 1998/99 Income/Empl. Costs of input material and utilities Value Added per employee Wages and salaries per employee Operating surplus Current USD Czech Rep.13,747,646,103,103,00 France112,3973,3939,0021,9017,10 Germany122,9080,5042,4026,8015,60 Italy130,4385,4345,0018,0027,00 Korea124,4981,7942,7011,0031,70 Slovakia12,618,414,202,401,80 Spain88,4559,3529,1014,7014,40 Turkey60,6341,5319,105,4013,70 Bangladesh3,512,411,100,500,60 Egypt8,315,812,501,501,00 Hong Kong112,3779,6732,7018,0014,70 India6,924,922,001,300,70 Indonesia15,3811,184,200,703,50 Morocco24,4318,036,403,003,40 ADDED VALUE IN USD FOR SELECTED COUNTRIES Cast Elaboration on OECD data

52. 52 Added Value and Competitiveness in the Textile Sector: Considerations This assessment demonstrates that the competitiveness of the advanced, expensive European countries is supported by an average high level of their prices that is: by the value added, by quality and intangible features. Korea is on a top position with the highest capacity to accumulate resources to fuel its development. Turkey is rapidly joining the leading group. The two new EU member countries are among those lagging behind.

53. 53 Assessment of the “best selling countries” Textile Sector Cast Elaboration on OECD data

54. 54 Assessment of the “best surplus-making countries” Textile Sector Cast Elaboration on OECD data

55. 55 Analysis of the Value Chain in the Clothing sector: General Remarks In the Clothing sector, four countries show a Percentage Added Value over 40%. Czech Republic and Slovakia are among them. The most advanced European countries show rather low % added values. However, in money terms Italy, Korea, Germany and France have the highest operating surplus. Hong Kong and Turkey are close to the leading group. Germany, France and Italy have the highest income/employee ratio. In the Clothing industry the gap between the leading countries and the others is even larger.

56. 56 Analysis of the Value Chain in the Clothing industry: selected countries Source OECD

57. 57 Value Chain in the Clothing Sector: Estimates of a measure of income/unit

58. 58 Assessment of the “best selling countries”: Clothing Sector Cast Elaboration on OECD data "Price" Index Income/Empl Costs of input material and utilities Value Added per employee Wages and salaries per employee Operating surplus Rank Current USD 1Germany149,43109,8339,625,314,340,85 2France115,8682,2633,620,213,431,67 3Italy113,2980,8932,41418,430,97 4Hong Kong95,5067,9027,614,812,826,10 5Spain62,8542,5520,311,58,817,18 6Korea48,3724,5723,89,114,713,22 7Turkey47,7132,1115,64,111,513,04 8India11,719,112,60,71,93,20 9Czech Rep.11,176,674,52,61,93,05 10Egypt9,206,103,11,21,92,51 11Morocco9,075,0742,51,52,48 12Slovakia8,784,883,92,31,62,40 13Indonesia6,834,332,50,61,91,87 14Bangladesh3,662,760,90,40,51,00 Country

59. 59 Assessment of the “best surplus making countries”: Clothing Sector

60. 60 Final Considerations on the analysis The 5 big EU countries still maintain a strong international competitiveness based on quality and intangible features. However, it appears that they have reached the price’s market ceiling and they are starting to lose market share (quantity). Production de-localisation and out-sourcing was their response to internal cost pressure. Countries who are gaining positions thank to a good or very good capacity of capital accumulation are Korea, Turkey (and Spain). They are able to add manufacturing “extra” quality, customization and brand (Spain).

61. 61 China and the Europeans China has a particular development path that combines: cost advantages, high accumulation capacity, fast learning capabilities (outsourcing) and a large and fast growing domestic market that can be the training gymnasium for the development of own brands. However, the assets so far built in Europe by European companies vis a vis the final market are very strong (brand and chain integration). They still have competitive strength.

62. 62 The new EU members’ companies This assessment shows that when a country is able to be fully included in an advanced supply chain system, the competitive performances are relevant. Examples are those of the Czech Rep. and Poland with Germany in the textile sector and those of Romania and Poland with Italy and Germany in the clothing sector. The weakest point emerging from this assessment is the low operative surplus of these companies. As a consequence, the T/C in the new EU member countries is not able to invest in the intangible features that generate high added value.

63. 63 Final considerations Manufacturing Extra-Quality and Service (customisation) are likely to be the initial levers on which to build for accumulating a larger surplus. This surplus should be directed to partially free the new EU members from the dependence of strong customers (outsourcing) and start to build their own marketing capabilities, at least in their domestic market. Integration with distribution is one of the key factors; this may be more easily done domestically in larger markets.