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Sven Illeris
The purpose of this paper is to present the dramatic changes in the textile and clothing industry in Denmark, Poland, and other Baltic countries which have occurred since the 1989 political and economic upheavals. The presentation will primarily be an empirical description and an analysis of the courses and consequences of these changes, but I shall also attempt some more theoretical discussion, e.g. of the future perspectives of these processes. Of course, the number of persons involved in this restructuring is only a tiny fraction of the total employment in the Baltic countries. Nevertheless, the changes in the textile and clothing industry may be seen as a case study of more general changes in these countries. Not a typical case - for several reasons, the changes have been more rapid here than in most sectors. But they may indicate trajectories which will be followed by other sectors. The paper is based on my earlier studies of the textile and clothing industry in Denmark and Poland (Illeris 1992, 1994), on other studies and press cuttings, on a series of interviews with key persons in the Danish textile and clothing industry, as well as on recent statistical data. Unfortunately, I have had no opportunity to investigate recent developments from the point of view of the transition countries. Historical background In Denmark, various types of textile and clothing industry were created during the early phases of industrialisation in the 19th century. In the 20th century and especially after World War II, this industry has - as in most of Western Europe - gradually decreased, due to competition frm low wage countries. Only in the industrial district of Herning-Ikast, in Western Jutland, the sector remained successful and even started exports to other North European countries. This fact is due to several unique factors which I shall briefly recall. The Herning-Ikast textile and clothing industry has its origin in the 18th century, when the poor farmers of this sandy, heath-covered region started knitting stockings from the wool of their sheep (Hansen 1983). In the 19th and 20th centuries, some local people created manufacturing firms which put out much of the production (especially of under-garments) to farmers who had knitting machines on their farms. Thus a tradition of local entrepreneurship and close networks between local partners emerged. The industry increased in the 1930s and 40s, based on the protected Danish market, where everything that was produced could be sold. When trade was liberalized after World War II, many experts said that the Herning-Ikast industry had no chance of surviving. The firms survived, however, through Taylorist rationalisation as well as through specialisation (e.g. in sewing operations) combined with flexibility based on network cooperation and awareness of the rapidly changing fashions: The firms were able very quickly to launch and expand the production of clothes now in demand, by creating a production network of firms specialized in the components necessary just for that product. Thus, a so-called "industrial district" came into existence, based on the same factors as the well-known Italian ones (Piore & Sabel 1984): Economies of agglomeration ("everybody knows what everybody else is specialized in"); but also non-economic factors such as a tradition of entrepreneurship and simultaneous competition and cooperation. And behind this, a community culture of shared norms and mutual trust. The association "Danish Textile and Clothing Industry" had been instrumental in setting up a number of exhibition facilities as well as R&D and especially vocational training institutions. Incidentally, this association and the national Union of Clothing and Textile Workers were the only ones with offices outside Copenhagen, namely in Herning. Other services had cropped up spontaneously, in particular trucking. It is interesting to notice that while other SME-areas are known to offer only minimum wages and "sweatshop" conditions of labour, this is not the case in the Herning-Ikast area, where unionisation is high. But even unions tend to be part of the local cooperation culture. Poland saw the emergence of a textile and clothing industry in the 19th century, too. A major concentration of this industry took place in L—dz, but the locational pattern included a number of minor textile towns. It was largely based on the domestic market of Tsarist Russia before 1917, and - after a difficult time between the World Wars - again on the provision of textiles and clothes to the COMECON countries after World War II. In the latter period, it followed the general Soviet model of organisation: A concentration into gigantic state-owned units, well suited for instance to textile weaving. As this sector did not receive high investments, the machinery gradually became worn down, and productivity was low. It should be noted, however, that in Poland this model of organisation did not remain the only one. Especially in the 1980s, small private enterprises were allowed. A number of such firms were created in the textile and clothing industry, where requirements on machinery and skills were low. Of course, textile and clothing industry was also found in the Soviet part of the Baltic area. Here, however, there were only gigantic state-owned factories. Conditions after 1989 The political and economic transformation of the former CONECOM countries since 1989 has dramatically changed the conditions for the textile and clothing industry on both sides of the former Iron Curtain. The conclusion of the Uruguay Round of GATT negociations, with its global liberalisation of textile and clothes trade, has pulled in the same direction. In particular, trade became much easier between Eastern and Western Europe. Negociations between the EU and the transition countries resulted in low customs tariffs for EU import of clothes, and from 1998 there are no tariffs at all. In the labour-intensive textile and clothing industry, wages constitute most of the production costs (though the share is different in different operations, sewing being the most labour-intensive operation). Wages are much higher in Western Europe than in the transition countries and Third World countries. Thus according to the calculations of "Danish Textile and Clothing", in 1997 Polish hourly wages are about 1/8 of Danish wages in this sector, Lithuanian wages about 1/30, and Chinese wages about 1/50. (Of course, the purchasing power does not vary in the same proportion, since prices are also lower in the low-wage countries). The total calculation of costs must take into consideration that the productivity of Danish workers is higher and the number of production errors lower. When Danish firms wish to outsource sewing work to Poland (I shall return to this phenomenon), they also have to pay transport costs and, in some cases, tariffs. But altogether, they calculate that the costs of sewing work made in Poland are about 1/3 of the costs in Denmark, and the costs of work made in Lithuania or China about 1/5. As regards Poland, this proportion has not changed much since 1989 - as wages increased in Poland, the zloty has repeatedly been devalued. It is an obvious advantage for Poland that there is an old tradition and expertise in the textile and clothing industry. Seamstresses are estimated soon to reach 80 % of the productivity of their Danish colleagues. It is a drawback that quality requirements were low in the former COMECON market, but according to unanimous Danish manager opinions, after some time Polish seamstresses reach the Danish quality level. It is more difficult in Lithuania - where organized crime is felt as a problem, too - and in China. It has been difficult for Polish managers to learn how to operate in a highly competitive market, and in early stages Danes have been involved in management work. However, management salaries are also much lower than in Denmark, so Danish firms are anxious to educate Polish managers and transfer know-how to them. The Danish government has subsidized courses for them, and the Herning vocational school is extending its activities to Poland. Transport costs only play a minor role for textiles and clothes. For fashion goods, the time costs are more important. Due to the special character of this sector, it is often of decisive importance to be able to deliver the goods a few weeks after the signing of an order. Hence for a Danish firm, it is crucial that the goods can reach - and be shipped back from - northern or western Poland in 1 day and Lithuania in 2 days. The Far East countries are not relevant partners in this connection, but are competitive in less fashion-dependent products. What happened in the textile and clothing industry of the Baltic area? Very soon after 1989, the prices of textiles and clothes in Western Europe started to fall; they have now dropped by approximately a third. In Denmark, it became obvious that the industry would simply not be viable if it did not restructure radically. In the transition countries, a deep economic crisis reduced demand. For industries which had exported their products to other COMECON countries, such as the Polish textile and clothing industry, this market vanished almost overnight. Some of the large state-owned factories were soon closed, and in the remaining ones major staff reductions took place. On the other hand, many new entrepreneurs started private firms. This was more often the case in Poland, where entrepreneurship was already a known phenomenon, than in the former Soviet areas. In this situation, West European textile and clothing firms soon found out that it might be a solution to outsource their sewing operations to the transition countries. Firms from many countries have participated in this process. I shall only focus on outsourcing of work from the Danish textile and clothing industry, which in this way has been dramatically transformed. It is primarily the sewing work which has been outsourced. This means that the Danish firm typically still buys woven cloth or carries out the knitting work, organizes the dying and cutting operations in Denmark, ships the pieces to Poland or another transition country where they are sewn (but remain the property of the Danish firm), and has the clothes transported back to Denmark where they are quality controlled, finished, and marketed. The organisation of the outsourcing may take different forms. Most contracts concern a single order, and are contracts between a Danish and a Polish firm, in some cases assisted by a contact broker. Since the Danish firms typically are small, these contracts are better suited to the new, private Polish firms than to the old large, state-owned factories. In particular, Danish firms cooperate with firms in northwestern Poland to whom the distances are shortest. The managers of the small Danish firms are accustomed to keep close control of all processes, which means that distances matter. But there are also contracts with firms in L—dz or other parts of Poland or Lithuania. This type of contract is dominant in the knitware industry.
Other types of organisation are long-term contracts of cooperation, joint ventures, or purchases of Polish/Lithuanian firms by Danish companies or individual persons. In these cases, it is more usual that all physical operations are outsourced, including dying and cutting, as well as quality control. If the Danish firm originally was a trading firm, it may even leave the purchase of cloth and other raw materials to the Polish/Lithuanian partner and only keep a few functions which I shall discuss later. Under these organisational forms, the Danish partner has less flexibility to make changes from month to month, but the investment (which may partly be in kind - their old machines) ensures that they have a production capacity which suits their needs.
Figure 1 shows the development of Danish outsourcing of sewing work to Poland. Danish Textile and Clothing estimates that the outsourcing has created about 10,000 jobs in Poland and 1000 jobs in Lithuania. In the partner firms, the productivity and wages as well as the working environment is often higher than in other Polish/Lithuanian firms. Consequences of the outsourcing of operations
In Denmark, and in particular in the Herning-Ikast area, the restructuring process so far has not only saved a good deal of the textile and clothing industry, but on the whole left the survivors in a better economic shape than they were 10 years ago (figure 2).
The specialized sewing firms in Denmark have almost been wiped out, and the total number of textile and clothing manufacturing firms has been reduced from 700 in 1987 to 400 in 1997. But the surviving firms have increased their turnover and profits considerably. The export of clothes has increased, too, and while in 1987 only 30 % of the exports went outside the Nordic countries, this happened to 60 % of the 1996 exports (Nielsen & Pedersen).
The other side of the coin is that the sector has shed labour in Denmark, as shown in figure 3 (which includes the leather industry, but this is very small).
Figure 3 shows that until around 1990, the total Danish employment in the textile and clothing sector diminished, but in the County of Ringk¿bing, including the Herning-Ikast area, it was stable. Since the, employment has been reduced by some 13,000 jobs or about 40 %, and the reduction was more or less parallel in the County of Ringk¿bing and the country as a whole. The reduction has almost exclusively hit the unskilled workers, mainly the seamstresses who have all but disappeared in Denmark, except for a few working on test-models and other special tasks. On the other hand, employment of white collar persons working in design, management, and marketing has fallen much less, and recently even increased a little. As a result, the above-mentioned Danish Union of Clothing & Textile Workers was left with so few members that it had to let itself be absorbed by the general union of unskilled workers.
In other words, the typical Danish textile and clothing firm has been transformed from a manufacturing firm to a firm whose economic values are created in knowledge-intensive service functions: The firms still conceive themselves as manufacturing firms, and are classified as such in the official statistics, but in reality are service firms. Their organisation, however, has dropped the word "industry" from its designation and is now just "Danish Textile and Clothing". The manufacturing sector thus merges with the wholesaling sector, which also increasingly designs and manages the manufacturing of clothes, on the basis of their intimate market knowledge. There are clear tendencies of integration with the retailing of clothes, too, by way of franchised shops. Whether vertically integrated or disintegrated, a new pattern of specialisation emerges, not based of types of clothes - such as sportswear - but on market segments, for instance clothes for middle-class teenager girls. Most Danish clothing firms aim at the broad medium market - "reasonable quality at a reasonable price" - but there are also up-market and low-price firms. These developments have been under way for some time, but the outsourcing of the manufacturing operations to foreign countries has radically changed the character of the firms: The operations are technically and geographically more and more complicated, involve many specialists, and hence require an increased turnover volume. A concentration into fewer, bigger firms takes place, though the firms are still in the small-medium range. It is hardly possible for an entrepreneur any longer to start his own firm by buying a secondhand knitting machine and putting it up in his garage. Entry barriers have increased. Traditionally, the sector scorned theoretical knowledge, and around 1970 Herning refrained from begging a university from the Government - which everybody else did at that time. But now, the sector employs an increasing number of university-educated persons and is interested in financing research institutions. In the country as a whole, the textile and clothing sector was responsible for 1 % of all jobs in 1990, and the reduction has not created serious problems. In the 4 core communes of the Herning-Ikast area, however, almost 20 % of the 1990 employment were in this sector, and its reduction means that 7 % of the employment had been lost in 1997. Fortunately, most redundant seamstresses were able to find other work. The county of Ringk¿bing for some time already has had the lowest unemployment rate of any Danish county. In the early 1990s, unemployment increased during the recession, but no more than elsewhere. And from 1994, the unemployment has followed the general Danish downward trend to such a degree that in 1998, the rate of unemployment is about 5 % (depending on the definition of unemployment) in the Herning-Ikast area - which in the present context is more or less equivalent to full employment. The seamstresses have found new jobs, mainly in other manufacturing industries (e.g. furniture) and in public welfare services (which previously were lagging behind in this part of the country). No increase in out-migration can be observed. The buildings can easily be used for other production purposes or warehousing. Perspectives for the future The new type of international division of labour in the Baltic area is hardly a stable one in the long run. For some years, it may be satisfactory for both Western firms - which get cheap labour and substantial profits - and transition countries which get employment and knowledge transfer. But probably, wage levels in Poland will increase, and as Poland gets more and more integrated with the EU, the zloty will be tied to the Euro. From the Western side, the reaction to increasing Polish wages may be a switch of unskilled outsourced work to countries like the Baltic states and Bielorus, where wages may be expected to remain low for a longer period. At the same time, as the purchasing power in Poland increases, Danish firms may have acquired sufficient knowledge about this market to be able to be competitive in the higher quality market segments. Some have already opened shops in Poland. Polish firms, on the other hand, which already have a good level of technical knowledge and to whom market and managerial knowledge is gradually transferred, should have a good chance of taking on not only the simpler low-skill operations, but all functions of textile and clothing firms. As demand from the other transition countries increases, they will be in a good position to export textiles and clothes to these markets, once more. In the very long run, wage levels may hopefully increase all over the Baltic area. The present division of labour - based on differences in wages and skills and on one-way flows of capital and know-how from the West to the East and of goods embodying simple work from the East to the West - may give way to the kind of division of labour which we know today within the EU: A division of labour which implies that by specialisation into different products and operations, there are two-way flows of capital, goods, services and knowledge between all countries, and where there are markets in all countries for all competitive firms - to the benefit of consumers everywhere. It is an open question whether a traditional "industrial district", such as the Herning-Ikast district, will survive. After all, it has until recently been based on networks of concrete technical knowledge and manufacturing production, as well as on a widespread entrepreneurial spirit. As argued above, now there is little room for the traditional entrepreneur, and new types of individuals with more theoretical and abstract qualifications get involved in the textile and clothing sector. On the one hand, it may be asked what will tie the firms to a location in the Herning-Ikast area in the future. Could they not, given their many international connections, better locate in a more easily accessible area like Copenhagen? On the other hand, it may be argued that the new type of workers, too, can best be recruited in the Herning-Ikast area, since the vocational training system here is continually being developed towards the designing and managerial skills now required. And that the Silicon Valley has proved that a concentrated and network-based district may be just as advantageous for sophisticated, abstract work as it has been for low-skill manufacturing. References Hansen, V. (1983) The Danish Hosiery Industry; a Specific Rural Industry in Central Jutland. P. 385-400 in B.K.Roberts & R.E.Glasscock (eds), Villages, Fields and Frontiers: Studies in European Rural Settlement in the Medieval and Early Modern Periods. BAR International Series 185. Oxford: BAR. Illeris, S. (1992), The Herning-Ikast Textile Industry: An Industrial District in West Jutland. Entrepreneurship and Regional Development, 4, 2, 73-84. Illeris, S (1994) L—dz: An East-Central European Textile City. P. 65-76 in S.Illeris, Essays on Regional Development in Europe. Roskilde University: Dept. of Geography and International Development Studies.. Nielsen, G. & Pedersen, S.H. (1998), Dansk tekstil & t¿j 1987-1997 - en branche i bev¾gelse. Herning: Dansk Tekstil og Bekl¾dning. Piore, M.J. & Sabel, C.F. (1984), The Second Industrial Divide. New York: Basic Books. |