Past, Present and Future

1. 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

2. 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

3. 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

4. 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

5. 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

6. RESULTS 2Economic Role, Recent Changes • TC output decreased, clothing stagnated, • while manufacturing dynamically grew. • Employment fall everywhere, but • the most in clothing industry.

7. TRENDSStagnation, Dynamic Growth, and Decline

8. FACTORS 1Exports and ProductionStrong Correlation

9. FACTORS 2Domestic DemandDecrease, Growth and Slow Down

10. 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

11. Recent FallAbsolute Decline

12. Adjustment Ability and Productivity

13. 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.

14. 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.

15. 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

16. 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

17. 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

18. 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.

19. 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.

20. 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)

21. 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.

22. 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.

23. 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

24. 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?

25. 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).

26. 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.

27. 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.

28. 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.

29. 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

30. 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

31. 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.

32. 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)