Assessment of the International Competitiveness of the Textile and Clothing Sectors of the New EU Me

1
Assessment of the International Competitiveness
of the Textile and Clothing Sectors of the New
EU Member Countries
by Francesco Pellizzari
Tallin, 19 January 2005
This document has been produced with the
financial support of the European Communitys
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
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
Structure and methodology

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

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
Part One Assessment of the competition in
Europe
6
Assessment of the competition in Europescope of
the analysis

• 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
Assessment of the competition in Europedata
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
• Textile products (yarns and fabrics)
• Clothing products (garments and accessories)
• Both Value and Quantities are considered.
• Average prices were calculated.
• Source of data is Eurostat.

8
Assessment of the competition in
Europeobjectives 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
Assessment of the competition in Europeanalysis
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
EU Importers and International Exporters2002
yarns/fabrics 000
11
EU Importers and International Exporters2003
yarns/fabrics 000
12
EU Importers and International Exporters2002
yarns/fabrics tons.
13
EU Importers and International Exporters2003
yarns/fabrics tons.
14
EU Importers and International Exporters2002
yarns/fabrics prices
15
EU Importers and International Exporters2003
yarns/fabrics prices
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
EU Importers and International Exporters
supplying partnerships
Cooperation or special relationships between
countries are evident. Germany Turkey (1st
supplier) good positions of Romania (3rd),
Poland (5th or 50 of total Polish exports to EU)
and Czech Rep. (6th or 70 of total Czech exports
to EU). France very good position of French
speaking countries Tunisia (2nd , comparable to
China) and Morocco (3rd). 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
(3rd). Spain strong position of Morocco (2nd
with 20 of imports)
18
EU Importers and International Exporters2002
garments and accessories 000
19
EU Importers and International Exporters2003
garments and accessories 000
20
EU Importers and International Exporters2002
garments and accessories tons
21
EU Importers and International Exporters2003
garments and accessories tons
22
EU Importers and International Exporters2002
garments and accessories prices
23
EU Importers and International Exporters2003
garments and accessories prices
24
Assessment of the competition in EuropePosition
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
30Value - 36 Quantity) and Italy is the
largest importer for garments (CEEC penetration
33Value 18-20 Quantity).
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
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
Assessment of the competition in Europe Open
questions about China
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.
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
Assessment of the competition in EuropePossible
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
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.
• Todays European consumer
• The Retail System
• The T/C Manufacturers

31
Assessment of the competition in Europe China
and the European consumer
Todays 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
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, HM, Benetton
import heavily from China.
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 Brands
international positioning. A serious threat will
arise, if and when, Chinese brands will appear
in the market.
34
Assessment of the competition in Europe OECD -
RCA Index
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.
j
j
j
j
j
RCA
ln (x
/ m

S
x
/
S
m
) 100
i
i
i
i
i
xexports
mimports
iindustries
jcountries
China and Turkey keep the lead.
35
Assessment of the competition in EuropeSome
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
Part TwoKey competitive factors in the T/C
industry and strategic tools for enhancing
competitiveness of CEEC enterprises.
37
Competitive Generic Strategies

• Cost Leadership
• Structural Cost Advantages (raw materials)
• Contingent social/economic/political conditions
• Differentiation
• Segmentation (selected market groups)
• Positioning (specific values)

Cost Leadership based on tangible
assets Differentiation based mainly on
intangible assets (brand)
38
Cost Leadership Strategy
COSTS Relative Possible Weight
Differences Raw Materials Uti
lities/Other inputs
Labour cost Technology
Finance
39
Labour Cost in the Textile and Clothing Industry
- Selected Countries
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
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
The Added Value Structure
43
Added Value structure, price level and demand
demand curve
PRICE
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.
high differentiation low
QUANTITY
fashion brand
middle
basic
44
Four different sectors situations
number of possible differentiations
45
The Value Chain in the T/C sector
fabric
fibre
yarn
garment
retail
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
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
Part ThreeAnalysis of the Added Value Chain in
selected countries.
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
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
Analysis of the Value Chain in the Textile
sectorPercentage composition
Cast Elaboration on OECD data
51
Value Chain in the Textile sectorEstimation of
a measure of income per unit
ADDED VALUE IN USD FOR SELECTED COUNTRIES
Textile
Costs of input
Wages and
Sector
material and
Value Added
salaries per
Operating
Income/Empl.
1998/99
utilities
per employee
employee
surplus
Current USD
Czech Rep.
13,74
7,64
6,10
3,10
3,00
France
112,39
73,39
39,00
21,90
17,10
Germany
122,90
80,50
42,40
26,80
15,60
Italy
130,43
85,43
45,00
18,00
27,00
Korea
124,49
81,79
42,70
11,00
31,70
Slovakia
12,61
8,41
4,20
2,40
1,80
Spain
88,45
59,35
29,10
14,70
14,40
Turkey
60,63
41,53
19,10
5,40
13,70
Bangladesh
3,51
2,41
1,10
0,50
0,60
Egypt
8,31
5,81
2,50
1,50
1,00
Hong Kong
112,37
79,67
32,70
18,00
14,70
India
6,92
4,92
2,00
1,30
0,70
Indonesia
15,38
11,18
4,20
0,70
3,50
Morocco
24,43
18,03
6,40
3,00
3,40
Cast Elaboration on OECD data
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
Assessment of the best selling
countriesTextile Sector
Cast Elaboration on OECD data
54
Assessment of the best surplus-making
countriesTextile Sector
Cast Elaboration on OECD data
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
Analysis of the Value Chain in the Clothing
industry selected countries
Source OECD
57
Value Chain in the Clothing Sector Estimates of
a measure of income/unit
58
Assessment of the best selling
countriesClothing Sector
Costs of
input
Value Added
Wages and
"Price"
Income/Empl
material and
per
salaries per
Operating
Country
Index
utilities
employee
employee
surplus
Rank
Current USD
1
Germany
149,43
109,83
39,6
25,3
14,3
40,85
2
France
115,86
82,26
33,6
20,2
13,4
31,67
3
Italy
113,29
80,89
32,4
14
18,4
30,97
4
Hong Kong
95,50
67,90
27,6
14,8
12,8
26,10
5
Spain
62,85
42,55
20,3
11,5
8,8
17,18
6
Korea
48,37
24,57
23,8
9,1
14,7
13,22
7
Turkey
47,71
32,11
15,6
4,1
11,5
13,04
8
India
11,71
9,11
2,6
0,7
1,9
3,20
9
Czech Rep.
11,17
6,67
4,5
2,6
1,9
3,05
10
Egypt
9,20
6,10
3,1
1,2
1,9
2,51
11
Morocco
9,07
5,07
4
2,5
1,5
2,48
12
Slovakia
8,78
4,88
3,9
2,3
1,6
2,40
13
Indonesia
6,83
4,33
2,5
0,6
1,9
1,87
14
Bangladesh
3,66
2,76
0,9
0,4
0,5
1,00
Cast Elaboration on OECD data
59
Assessment of the best surplus making
countriesClothing Sector
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 prices 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
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
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
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.