KMT Assignment 1

8/7/2019 KMT Assignment 1

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Rudrajeet Pal

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Skills scenarios for the European textiles, clothing and leather industries adouble helix approach to anticipate 2020 plausibility

Abstract

The analysis is based on the working paper Skills scenarios for the textiles, wearing apparel and leather products sector in the European Union anticipating the most probable scenario as an outcome of the interactingmarket drivers, in 2020 timeframe, by investigating the three documented plausible scenarios for the Europeantextile, clothing, and leather industries. The analysis uses the double helix approach to sequence all the scenariosevolving out of the interaction of the market drivers ultimately validating the probability of Scenario 1:Globalization Limited to be maximum for 2020. The purview conclu des with a brief of the adjustmentstrategies to be followed in such a scenario heeding the core competences given distinctive priorities.

1. Introduction the three plausible scenariosThe three scenarios depicted in the report Skills scenarios for the textiles, wearing appareland leather products sector in the European Union (Ludwig et al. , 2009) describe alternativeworlds for Textile, Clothing, & Leather (TCL) industries in the European Union (EU) whichimply different market perspectives, policies and competences, & adjustment strategies of companies, sector organizations, training institutions and policy makers. These scenarios are aresult of the combination of the three drivers pivotal for the future of the European TCLindustries. These major drivers are globalization , environmental concerns , and restructuringpolicies as shown in Figure 1. The forces of globalization refers to the new liberalizedeconomic order characterized by increasing relocation of production to low-cost countries andthe competitive position of emerging countries in the TCL industries covering the majordeterminants like heavy price competition, increased product quality, expected

standardization of global products though recently it is accrued upon increasing inter-dependency between markets rather than standardization.Environmental concerns are predominantly related to the rising energy prices and the damageto the climate not only giving rise to higher environmental costs but also leading to strongervalues among the consumers, policy makers and enterprises to save the environment.Restructuring the policies are mostly related to the policy responses to the changing worldeconomy with sufficient European restructuring policies either liberal enough with trust onthe efficiency of markets or defensive with a strong commitment for the manufacturing sectorin Europe. This signifies the development of strong knowledge base in Europe and the New

Member States with support from the government, development of industrial basis fordomestic productivity increase and protection of intellectual property. Moreover, there arestrong restructuring policies by the emerging countries triggered by rising wages andenvironmental costs requiring re-orientation of investment activities. This aims at establishinga strong industrial high-tech basis in these countries to escape from low-cost competition andget access to profitable market segments. In the long-run a more balanced situation isexpected to rise from cost differentials and trade flows.

Interaction between any two of the dominant drivers as mentioned above is expected togenerate the following plausible scenarios:


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Scenario 1: Globalization Limited characterized by weakened forces of globalization but strong environmental concerns. It anticipates the considerable effectsof climatic change, rising environmental costs to change the global trade patternproliferating protectionist ideas and disintegration of the economies into regionalclusters. Relocated production facilities will be shifted back to Europe withdevelopment of competences holistically.

Scenario 2: Asian dominance European excellence characterized by strongforces of globalization and liberalized world economy with liberal policies based ontrusts. It anticipates the development of improved manufacturing specialization in theemerging Asia and strengthening of EU through high value-added products andimproved technological lead.

Scenario 3: Advanced New Member States characterized by defensive

restructuring policies and weak environmental concerns. This scenario attempts todefend the industrial basis of EU with the development of the New Member Statesembracing the negative effects of globalization. It anticipates the relocation of manufacturing and revival of industrial jobs to EU with strong demands forproduction-related skills in low-cost countries and professionals in high-cost countries.

Figure 1. Drivers and scenarios (Source: Economix, 2009)

Objective and Methodology

This analysis is based on the report Skills scenarios for the textiles, wearing apparel and leather products sector in the European Union trying to predict one of the plausiblescenarios to be anticipated by 2020 for the European TCL industry. The research has beenable to develop a relation among the plausible scenarios mentioned in the above report in theform of an industry double-helix representing the scenarios to be inter-related in the form of atime-based sequence (adapted from Fine, 1998). The double-helix illustrates that these


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scenarios arising due to the interaction dynamics of the market drivers viz. globalization,environmental concerns, and restructuring policies influence or are influenced by thefollowing themes viz. (i) supply chain structure the make/buy decision, (ii) consumerinfluence final consumer behaviour, (iii) new products and materials - impact of variousinnovations, & (iv) governmental influence international governmental decisions affectingfree trade. The rate of evolution of an industry structure along the double-helix could betermed as the industrial clockspeed 3.

The first approach of this paper would be to inter-relate the scenarios depicted, in the report,to generate the structure of the industry double-helix. The second approach involvesunderstanding the current position of the industry based on the helix by matching the currentindustry trends, dynamics and attributes to those expected according to the model. This isessential to provide an argument to the predicted scenario anticipated for 2020. The overallstructure of the work is based on deductive approach.

Scenario 1: Globalization Limited

Scenario 1 (shown as A in Figure 2 ) is a combination of strong environmental concern andweakened globalization. The rising energy prices, risks of climatic change and increasingneeds for protectionism ensuing higher employment creation in EU are expected to drive theplausible scenario by 2020. The present format of world trade, whereglobalization/internationalization is rampant with long distance transportation and logistics, isexpected to fade out due to the environmental and energy risks which tend to weigh much

more than the cost-advantages due to relocated production in low-cost regions. Views onglobalization will apparently change and alter the individual consumption behaviourfavouring eco-perspectives in buying behaviour and fashion. Considerable changes areexpected to be in the fields of new technologies and specialty textiles signifying innovationand ecological processes. It is expected to develop strong feelings against environmentallydubious products with increasing implementation of regulatory policies on social and labourstandards by the European Commission (EC), considerably putting pressure on the Asianproducers to increase cost. This inevitably would lead to shifting of parts of productionfacilities back to Europe thus limiting exports.

However, the New Member States will start rising in dominance as the traditional TCLindustries in the high-cost areas of Europe (EU-15) will shrink to past trends of reduction inproduction activities, due to continuous ageing population 4, incremental wage trend andreversal of anti-globalization trends. The production and manufacturing activities which re-located to Western Europe, earlier, will start to shift back to the low-cost areas (emergingNew Member States) with sufficient support from the Western European economies.However, the niche segment in the high-cost areas of Europe will also start deteriorating asthe dominant sales chains will be increasingly attacked by the growing competitors (brandsand innovators) from New Member States and developing Asia (China, India). As a result the

high-tech Western European sector will be less and less able to compete to the skilldevelopment of the rising New Member States anticipated by B of Figure 2 in the industry


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double-helix, progressively leading to their dominance. Enterprises in the New Member Stateswill also start to create their own brands, design worldwide marketing strategies, and developnew product and production technologies. The key to their economic success would be basedon profits from the independently financed retail trade & production facilities and thedevelopment of creative capacities through innovation and research. The strong existence of the New Member States is depicted by C in Figure 2 of the industry double-helix.

Scenario 2: Asian dominance European excellence

This scenario is being depicted as an outcome of liberal restructuring policies and strongforces of globalization. It is expected that the consumers would continue to be price-selectivewith rapid changes in fashion and its proliferation, considering participation by the Asiancountries in efforts to reduce world energy and climate risks significantly (according to the450 stabilization case, IEA 2007). Substantial cost burden due to measures for environmentalprotection will, however, not reduce the opportunity to continue being identified as a low-costarea for majority of the bulk production due to formidable rise in technology andcompetitiveness. Distinctive priorities based on cost advantages will remain unchanged withthe chain dominators reaping full profits of outsourcing. Major parts of the low-costproduction is initially expected to be concentrated in the hands of the emerging nations, Chinaand India, but in the long-run they are anticipated to upgrade themselves through value-addition and strategies to establish some trends in Asian fashion and living styles as the low-cost segments will move further to other Asian countries (Vietnam, Bangladesh etc.). Asiancountries will expand their training activities and will build up new training centres. This is

supplemented by the excellence of the European enterprises concentrating on development of the value chain through retailing, marketing and innovation. European domination of thevalue chain in terms of profitability will continue in two niches; specialty textiles and topquality consumer products. The scenario is being shown as E in Figure 2 .

Scenario 2 is a resultant of the long-term decision by the governments of the EU countries andthe European Commission (EC) in mitigating the risks of a competitive struggle with theAsian countries rather than develop potential synergies necessary for competition. This ismore concentrated on utilizing the available resources and work force of the Asian countries

mainly for production advantages (shown as D in Figure 2 ).However, it is anticipated that companies will, once again, start relocating their production toEuropean low-cost areas (New Member States) with increasing shift from the Asianproduction facilities to avail the European Union (EU) support for improved infrastructureand services and escape the impending difficulties. The common initiative by the EC and theNew Member States to defend the European TCL industries from Asian challenge wouldinclude the following measures under the Advanced New Member States Programme 1: (i)strong investments in training and Research & Development (R&D), (ii) establishingcompetitive production networks, (iii) technology-orientation and R&D-intensity, (iv)

branding and designing, (v) efficient use of European Structural Funds. This is highlighted by


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F in Figure 2 . This is a consequence of increasing protectionism to insulate the domesticEuropean TCL industry from rising Asian dominance and export-led growth.

Scenario 3: Advanced New Member States

With the turn of the helix, this phenomenon becomes intense with the New Member Statesproviding all competences required to run independent businesses in all aspects. Stronginvestments in training facilities with initial support from the national government and the EUis profitable to develop expertise in the fields of engineering, business and management,marketing, design and innovation resulting in the decline in its dependency on EU-15. Thissignifies the formation of an independent TCL industry in the New Member States with thestart of creation of own brands, marketing, and developing new products and productiontechnologies again (Scenario 3, shown as G in Figure 2 , repetition of scenario depicted byC).

However, the advantages of the low-cost areas of Europe (the New Member States) will startto fade out having to bear the costs of environmental protection and higher wage pressure.Considering a less stronger economy of these states compared to the EU-15, still strongerbrands in EU-15 and considerable equalization of the cost structures throughout Europe, thetraditional centres of TCL industries will revive slowly configuring itself to gain back its lostproductions, reaping advantages of protectionist and disintegrated market economy (shown asH in Figure 2 ). The rise of this scenario is expected to occur as the workers tend to migrate tothe high-wage countries from the New Member States for improved income position.

Figure 2. Industry double-helix structure (adapted from Fine, 1998)

The above mentioned double-helical sequence of events is expected to represent the scenariosfor the European TCL industry decoupled with the Asian TCL industry. The trends so farobserved in reality were consolidating enough to validate the progression along the model, butthe rate of turn from one scenario to another is dependent not only the rate of interaction of the three major drivers of scenarios mentioned earlier but also on the sudden market shocksand turbulences like the recent global economic downturn.


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Current Situation

Analysis of the current situation of the European TCL industry is based on the identificationof the interactions among the major drivers. The development of the scenarios is based on thestatus of the drivers: competitiveness, environmental costs, markets, and knowledge base,supply chain structure, policies & regulations and foreign trade (Ludwig et al. , 2009). Thereport summarizes the main characteristics of the scenarios in terms of the main drivers(Table 1) and anticipates that the currently prevalent scenario is Scenario 2 (Asiandominance European excellence) .

A review of the forecasts and projections along with the current situation is expected to bebeneficial in assessing the scenario outcomes for identifying the potential future trends. Thecurrent situation signifies the start of the following aspects:

a. Developing knowledge base Considering the erosion of the training system by thelast decade due to declining number of jobs and in training participation it isconsidered effective in developing close cooperation among training facilities, firmsand research organizations to develop centres of education and knowledge in the nearfuture by raising investments. Such programmes have started in EU since couple of years and statistical evidence suggests upgrading strategies for educational attainmentand expanding the excellence of knowledge base. There has been increasing supportfrom the national and local governments also, particularly stipulated to the fields of specialty textiles, top quality production and its ecological aspects, process and

product innovation, interdisciplinary approaches, and creation of critical competencesin many functions like network-based value chain management, internationalmarketing and branding etc.

b.

Environmental concerns Governments play an important role through actionstaken to address social and environmental concerns, particularly in integrating theseinto all aspects of decision making. EU High-Level Group for the Future of Textilesand Clothing 5 lists the series of mega-trends anticipated to be affecting the future of EU TCL industries as rising energy & raw material prices, scarce water resources,changing environmental awareness of consumers, assessment of proper use of chemicals etc. ( Ludwig et al. , 2009 ).

c.

Reduced employment shrinkage CEDEFOP projections by Institute forEmployment Research (IER) 6 suggests that the rate of decline of employment in EU27would shrink, considerably, until 2015 compared to the past ten years consideringchange in market conditions possibly due to rapid productivity increase, limitedimport substitution due to growth of brands and fashion close to national and localconsumer tastes, consumers eco -perspectives and deteriorating competitive prioritiesof Asian producers due to rapid wage increases and energy prices. Occupational

change will continue to be the major trends in the coming years considerablyexpanding the employment in management and professional activities and a minor


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increase in service and sales-oriented and clerical jobs while elementary jobs areexpected to grow slightly.

d.

Regional policies and regulations The more open and partnership-basedapproaches result in higher levels of cooperation and compliance, stemming from theincreased relevance and legitimacy of government actions. The stage is set fordifferent actors to more easily play their appropriate roles in addressing issues of common concern, drawing on the strengths and minimizing the weaknesses of each.

e.

Innovation EUROSTAT, Community Innovation Survey (CIS) 7 andCEDEFOP/IER 6 analyses summarize the recent European TCL enterprises to beinnovative and R&D -engaged. The analyses show that the transition of theEuropean TCL industries towards a knowledge-based industry is already on the wayeither through product, process or organizational innovations characterizing variouspatterns of innovation broadly. EURATEX (2006) & Ludwig (2009) have listed thebroad areas identified over the last few years as areas of innovation based on broadresearch activities from firms and universities viz. (i) new textile materials &structures, (ii) health care & smart textiles, (iii) textiles to support other industries, (iv)new textiles for environmental objectives, and (v) mass customized clothes. This hasbeen related to product and process innovation leading to quality improvements,product and market diversification, and production flexibility and capacity, and costsreduction.

f. Outsourcing Outsourcing has been predominantly a trend in the recent times and aneffect of globalization though the recent financial crisis has seriously affected theWestern European financial market to reduce the cash liquidity leading to tradedeficits and non-fulfilment of credit cycles related to EXIM policies. These haveconsiderably reduced the rate of outsourcing activities and also import substitutions.

g.

Protectionism Econometric estimates show that outward investments have a strongnegative impact on domestic employment. With more FDI and subcontracting of work, the Western Europe was increasingly hit by negative balance of trade (tradedeficit) shrouded by import substitution. This has considerably reduced the currencyliquidity, domestic production network and its productivity and also workforceemployment. The recent credit crunch triggered a phenomenon of increasinglyinsulating the national economies from the external turbulence by followingprotectionist idea and policies. Moreover, the environmental concerns arising due toincreasing energy crisis and the population due to outsourcing possibilities have led tostrengthening of the anti-globalization movement.


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Table 1. Main characteristics of scenarios (adapted from Economix, 2009)

DriverScenario 1

Globalisationlimited

Scenario 2Asian dominance

European excellence

Scenario 3Advanced

New Member StatesCurrent Scenario 2020 expected trend

Environmentalcosts

Rising significantly,high climate risks

Rising, effectiveenvironmental policies& manageable climaterisks



Markets Strong concern aboutclimate risks,disintegrated global

economy, slow macro-growth

Rise in environmentalpolitics, global marketfor top qualities, global

labour division, strongmacro-growth

Consumers prefer jobcreation and remainprice sensitive, medium

macro-growth

environmentalfvfvfvfv politicsglobal market for top

qualities, global labourdivision, strong macro-growth

Rise in discontentagainst globalization,strong concern of

climate risks,disintegrated globaleconomy

Knowledge base Based on innovation &eco-perspectives,efficient resourceutilization,craftsmanship

Innovation of specialtytextiles, design, sales &marketing, value chainmanagement

process innovation &organisational changes,increase of labourproductivity

Based on innovation of specialty textiles, brands,value chain management

eco-perspectives, brands,craftsmanship, resourceutilization

Competitiveness Decliningcompetitiveness of emerging countries dueto high environmentalcosts, critical impact of ecological and socialconcerns

Strong position of emerging countries inlow and mediumquality segments,European producers onhigh value markets &specialty textiles

Strong position of low-cost areas in Europe inmedium qualitysegments, high-costareas on high valuemarkets & specialtytextiles

Rapid outsourcing withrecent trends to followprotectionist policies tosafeguard indigenousindustries and reviveproduction

Decliningcompetitiveness of emerging countries dueto high environmentalcosts, critical impact of ecological and socialconcerns, China, India tohigh-quality segment

Branchstructures

Locally concentratedvalue chains & regionalclusters, small-sizedproduction networks,craft business

Mass production in Asia,small-sized innovativecompanies in EU, globalnetworks of producers

Mass production in EUlow-cost areas, rely onEU independentsuppliers, top qualityinternational brands inhigh-cost areas

Mass production in Asia,small-sized innovativecompanies in EU, globalnetworks of producers

protectionism

Locally concentratedvalue chains & regionalclusters, small-sizedproduction networks,craft business

Foreign trade Low growth of worldtrade

Strong growth of worldtrade

Medium growth of world trade

Disintegrated economywith low growth


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Argument

According to the deductive analysis carried out in Table 1, it is anticipated that the criticalposition of the European TCL industry by 2020 would be somewhere around H in theindustry double-helix model i.e. it is likely to take the turn of the helix from Scenario 2(position E) via Scenario 3 (position G).

The current economic crisis has also proved that the world is increasingly becoming aregionalized platform to hedge against the risks of bearing the brunt of downturn and creditcrunch. Analysis suggests that not only Western Europe has been increasingly followingprotectionist ideas due to trade, environmental & social concerns and safeguards its own TCLindustry, Asian emerging powers are also insulating themselves from the overheated Westernfinancial market concentrating on trade growth based on domestic specialization and intra-regional growth and increase in productivity. This also helps them to shield from turbulence

in the capital market and cushion its reserves. Considering the poor performance of the NewMember States in the current credit crunch due to excessive borrowing of funds from theWestern Europe without considering consequences of liquidity dry up (Global Finance, 2009)it is expected to have a fast turnaround of the helix from the current scenario somewherebeyond E, Figure 2 (Asian dominance European excellence) over the Scenario 3 (Rise of New Member States); due to their poor performance in the recent crisis; towards a muchinsulated and protectionist scenario of limited globalization (Scenario 1: GlobalizationLimited), possibly around H. The New Member States (Central and Eastern Europe) were thehardest hit by the global economic and financial downturn because of their tightened creditliquidity and constrained monetary policies due to low interest rate thus devaluing thecurrency and increasing the cost of foreign-currency debts (Global Finance, 2009). Its once-closed economy was worlds most open having the highest trade -to-GDP ratios. This resultedin high dependence in foreign capital flows and sufficient support from EU, IMF and othermultilateral bodies, till it came to a shuddering halt by end of 2008. This has shackled thefloating economy of the New Member States the most largely adding to financial instability,denting of investors confidence, reduced support from the governme ntal and world bodiesand plunge into debt. This strongly reasons why the turn of the helix (Figure 1) is supposed tobe very fast to settle to something that is very rigid in clusters with reduced export-growth.But despite the gloom, the Western Europe will partly rely on this region undergoing

integration; with the EU stressing the low-cost, upgrading of infrastructure, and its proximityto key markets.

Recommendations

To support the plausible Globalization limited scenario for the European TCL industry by2020 it is necessary for the sector to achieve self-sustenance which is less dependent oninternational trade and comply with rising environmental standards. The core competencerequirements ask for strong change management towards efficient and highly specializedcompany networks. Establishment of marketing channels must be effective, apart from theexisting retail business, with creation of new brands. Thus marketing and sales is needed to be


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strongly consumer-oriented with social and environmental responsibility. In parallel,administrative departments are intended to imply the new environmental standards efficientlywith R&D expertise developed about sustainable products and technologies with goodknowledge of traditional production technologies. It is also needed to focus on processengineering to increase energy efficiency and emission, and quality control to concentrate onenvironmental standards. This will also include logistics, which will have to improve energyefficiency rather than shorten delivery times. Production also needs to be small-scale andspecialized and with reuse of traditional crafts to support the growth of domestic productionspecialization and employment reducing import substitution and hence reducing trade deficit.This is essential to develop industrial stability, hedge risks, and build sufficient credit reserveagainst unexpected credit crunches. The report summarizes that it is absolute essential toundertake apposite adjustment strategies viz. (i) networking strategy, and (ii) subcontractingstrategy.

References1.

Ludwig, K.V. & Valente, A.C. (2009), Skills scenarios for the textiles, wearing appareland leather products sector in the European Union , Comprehensive Analysis of EmergingCompetencies and Economic Activities in the European Union, European Community forEmployment and Social Solidarity, Munich

2.

International Energy Agency - IEA (2007): World Energy Outlook 2007(http://www.iea.org/textbase/npsum/WEO2007SUM.pdf )

3. Fine, C. H. (1998), Clockspeed: Winning Industry Control in the Age of TemporaryAdvantage , Perseus Books, New York

4.

Eurostat (1995), (http://epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-SF-08-072/EN/KS-SF-08-072-EN.PDF )

5.

High-Level Group for the Future of Textiles and Clothing (2006): European Textiles andClothing in a Quote-Free Environment. Brussels

6.

CEDEFOP (2008): Future skill needs in Europe. Medium-term forecast Synthesisreport. Luxembourg(http://www.trainingvillage.gr/etv/Upload/Information_resources/Bookshop/485/4078_en.pdf )

7.

Eurostat (2002), Statistical Classification of Economic Activities in the EuropeanCommunity, (http://ec.europa.eu/eurostat/ramon/index.cfm?TargetUrl=DSP_PUB_WELC )

8.

EURATEXT (2006), The future is Textiles! Strategic Research Agenda of the EuropeanTechnology Platform for the future of textiles and clothing , Brussels

9.

Global Finance (2009), Survival of the Fittest: How The Emerging Markets Fought Off

The Global Downturn , Neville, L., Pp 16-19, September.
http://www.iea.org/textbase/npsum/WEO2007SUM.pdfhttp://www.iea.org/textbase/npsum/WEO2007SUM.pdfhttp://www.iea.org/textbase/npsum/WEO2007SUM.pdfhttp://epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-SF-08-072/EN/KS-SF-08-072-EN.PDFhttp://epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-SF-08-072/EN/KS-SF-08-072-EN.PDFhttp://epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-SF-08-072/EN/KS-SF-08-072-EN.PDFhttp://epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-SF-08-072/EN/KS-SF-08-072-EN.PDFhttp://www.trainingvillage.gr/etv/Upload/Information_resources/Bookshop/485/4078_en.pdfhttp://www.trainingvillage.gr/etv/Upload/Information_resources/Bookshop/485/4078_en.pdfhttp://www.trainingvillage.gr/etv/Upload/Information_resources/Bookshop/485/4078_en.pdfhttp://www.trainingvillage.gr/etv/Upload/Information_resources/Bookshop/485/4078_en.pdfhttp://ec.europa.eu/eurostat/ramon/index.cfm?TargetUrl=DSP_PUB_WELChttp://ec.europa.eu/eurostat/ramon/index.cfm?TargetUrl=DSP_PUB_WELChttp://ec.europa.eu/eurostat/ramon/index.cfm?TargetUrl=DSP_PUB_WELChttp://ec.europa.eu/eurostat/ramon/index.cfm?TargetUrl=DSP_PUB_WELChttp://www.trainingvillage.gr/etv/Upload/Information_resources/Bookshop/485/4078_en.pdfhttp://www.trainingvillage.gr/etv/Upload/Information_resources/Bookshop/485/4078_en.pdfhttp://epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-SF-08-072/EN/KS-SF-08-072-EN.PDFhttp://epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-SF-08-072/EN/KS-SF-08-072-EN.PDFhttp://www.iea.org/textbase/npsum/WEO2007SUM.pdf

KMT Assignment 1

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