Past, Present and Future The Case of the Hungarian Textile and Clothing (TC) Sector By Judit Hamar Competitiveness of „New Europe” Second Lancut Economic Forum 28-29, April 2006
Scope • Economic role of the TC sector • Competitiveness: trends and factors • Export performance and OPT • Home market conditions • Adjustment ability and productivity • FDI and expansion abroad • Changing trends after 2000? • Global competitiveness (NMSs, WTO, EU) • Conclusions
METHODS: Measurable Effects 1 • Trends and shares in Hungary • Past (1992-2002+) • Recent (2000-2004+) • Company performance (2000-2003) • By sub sectors and company groups • Regional distribution • International competitiveness • Effects of recession and the enlargement • Output, exports, home demand, wages and productivity in the NMS-s • Global competitiveness • market shares (WTO, EU) • RCA and GL indices
METHODS: Non-Measurable Factors • Level of integration vs. autonomy of FIE-s in business functions: Results of the TC sector of an international survey (Hamar-Stephan, 2006) • Links between competences and: • Market structure • Magnitude of changes • Financial sources • Future upgrading
RESULTS 1Economic Role, Transitional Crises Clothing industry • came out first from the transitional crises • had a leading role in market-reorientation and restructuring • attracted first the FDI • Its profitability was the highest in 1993
RESULTS 2Economic Role, Recent Changes • TC output decreased, clothing stagnated, • while manufacturing dynamically grew. • Employment fall everywhere, but • the most in clothing industry.
FACTORS in the 2nd Part of 90s • Decline was rather statistical than real: • dynamic growth, but fall in export-shares and production, due to: • the newly emerging export-oriented industries (electronics, transport equipment). • Export growth rate has declined since • 1998, due to • the quota elimination on OPT in Pan-Europe, • restructuring of main partner firms, and • new-comers (Italy, Greece) in Romania, Bulgaria • and income fall on OPT exports
Changing trends after 2000? • The question is, whether the recent changes are temporary • mainly due to recession and to domestic demand slowdown? • or signals for a permanent trend-change? • Productivity • in the clothing industry raised the most, • but the gapis still the largest • 38% of the manufacturing level.
What’s New in Recent Decline? No new phenomena: • recession, outsourcing, growing competition of neighbouringand fast emerging Far East, • high sensitivity of the Hungarian exports (especially the OPT) on external demand, • better adjustment ability of clothing over textile production, and • the relatively low level of FDI and declining FDI attractiveness of the sector.
New phenomenon the Magnitude of Changes • Clothing producers • despite the recovery of external markets,face with deteriorating home market conditionsand struggle with new dimension of problems. • Reasons: • radical fall in FDI (disinvestments, firm closures), • wage-level increase (minimal wages) • exchange rate (sudden, now volatile) • Results: • Clothing industryis no longer an employment-absorbing industry: lay-off in 2004 was 81% of the total in manufacturing
Textile industry: clear new trend FDI fall in all respect: in home market to 44% of 2000 value in exports to 71% and almost in all performance indicator Clothing industry: similar trend: withdraw of capital, falling investment and share of foreign firms But performance improved: due exclusively to FC, even in the ROI. indigenous firms’ indicators deteriorated due to the exports COMPANY PERFORMANCE Source: Tax Office, Double accounting companies, 2000-2003
Textile FC in 2003 Produced 46% of sector output 66% of exports 34% of the operating surplus 10% of profit and 7% after taxation But paid 86% of dividend Clothing FC 25% of no of firms 25% of employees produced 82% of exports and 60% of sector output Had 92% of the operating surplus and profit bf tax and 95% after it GAP Between Foreign and Home Companies: Still High
INTERNATIONAL COMPARISONForecasts • Effects of the new challenges • of recession, • enlargement of the EU, and • liberalisation of global TC markets in 2005 • on the Hungarian economy were estimated the smallest among NMS-s • as the sector economic role was already the lowest here.
INTERNATIONAL COMPARISON Results 1 • New challenges have affected most the Hungarian TC sector • its scope was already the smallest, but output decreased (after Slovenia) most. • Hungarian TC export share was the smallest, but declined most. • It concentrated more on the EU and US markets than in the other NMS-s, • and similarities with the Chinese export-structure were almost the highest.
INTERNATIONAL COMPARISON Results 2 • Home market conditions deteriorated most in Hungary: • Relative household spending on clothing decreased similar to the Slovakian, Estonian and Czech trends, • while consumer prices increased mostly (after Romania) in Hungary • in other countries decreased (mainly in the Czech Republic and Lithuania)
Results 3 • Wage- and salary grew everywhere, • But not the Hungarian increase was the most dynamic (17%, Czech 25%) • and the 301€ (gross monthly) wage level was not the highest • compared to the Slovenian 650, Croatian 410, and the Czech level of 375 € per head • only 15% of the German level. • Productivity level (GVA to employees) • was the highest in Hungary, mainly in clothing 12,2 thousand € per head, while in Poland 9 th., and in Estonia 5,8 thousand per head.
GLOBAL COMPETITIVENESSLoosing export positions • RCA indices proved • comparative disadvantages in all textile items, • while clothing exports had comparative advantages, but decreasing • Grubel-Lloyd indices • revealed fast increase and relatively high share of intra-industry trade • mainly in the first part of 90s, • but decreased after 2000.
GLOBAL MARKET SHARES strong correlation with EU-15 export-trends • Hungarian export shares increased • only in 1st of 90s, • a little in 2nd of 90s, when EU15 exports stagnated • Its rank in 2004 • the 16th in the EU, with 2,4% share of clothing exports • and 2,5% of textile imports from EU25
NON-MEASURABLE FACTORSQuestion of the survey • Theaim of the survey was to analyse, • how much the subsidiaries (FIE-s) of MNC-s depend on parent firms, how much they can decide,and in what business functions? • Are there any links • between competence of FIEs management on decision-making and firm development, • and if there are, to which extent depends its competitive position on where and who made the decisions?
SURVEY RESULTS 1Relative high autonomy in business functions • in operational management, in process- engineering, and some role in strategic decision-making • Market functions (even accounting in some cases) belonged rather to the competence of the parent firm. • Hungarian TC firms had a better position on the “learning curve”,but • this was below the Hungarian average, (despite long life of a decade).
SURVEY RESULTS 2Source of competitions • FIEs are rather production units than real firms: • Extra importance of quality control • R+D considered hardly or not important, • the lack of links to indigenous institutions, such as Universities, or research institute, • their isolated positions raise barrier to technology transfer through spill-over effects.
SURVEY RESULTS 3Strong correlation in market structure and level of autonomy • Parent firm has determining role • through market links, and humandevelopment, (less in investment); • even if parent firm does not interfere directly the business decisions, or • even in the very few home-market oriented firms, too at least by the fact, • that parent firm in deteriorating market conditions could withdraw its capital, or finally close up the firm.
SURVEY RESULTS 4Development and autonomy • In spite of significant development at most factors of competitiveness • and the relative autonomy • we can conclude that the future of these firms is almost exclusively in the hand of the foreign partner.
CONCLUSIONSAt the firm level • It is still valid (as ten years ago): • that with badly paid workers TC firms cannot upgrade on the value-chain • The main reason for productivity gap is still the lack of necessary knowledge to upgrade from OPT to OBM (market and strategic business function) • Strategy to keep the wage-level low and to improve productivity by lay-off (and tax-evasion) is not enough to keep global competitiveness even at the home market
POLICY CONCLUSIONSWay of thinking be changed Industrial policy has • to avoid focusing only on some high-tech industries, instead • to improve investment-worthiness, to develop and adjust the education system • Horizontal industrial policy tools however could and should help the sector to improve competitiveness and the regions hindered most by restructuring
Conclusions • Horizontal industrial policy has to follow • special needs of the sectors, by knowing, that spectacle technological development has happened in low-tech (food, agriculture or in the TC) sectors. • These industries became users of new innovations and technologies developed in other sectors (such as in chemistry, nano-, bio-technology, ICT). • They even generated those innovations, created new markets and new area of use, • and by this way, increased value added and produced competitiveadvantages.
References • Hitchens et al: Competitiveness of Industry in the Czech Republic and Hungary (Avebury, 1995) • Lutz Walter: European Technology Platform for the future of textiles and clothing.www.euratex.org • Luis Navarro: Recent theoretical developments and implications for EU policy (Enterprise Papers, No 12) • Stephan-Hamar: EU Integration and the Prospects for Catch-Up Development in CEECs,The Determinants of the Productivity Gap, no. HPSE-CT-2001-00065 • Hamar–Stephan (2006): Results of a Fieldwork Project (in: Stephan (ed.) Technology Transfer via Foreign Direct Investment in Central and Eastern Europe (Theory, Method of Research and Empirical Evidence (Plagrave, Macmillan)