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The third annual Pasold lecture, delivered at the London School of Economics on December 11, 2001, by Sir Geoffrey

Owen, Senior Fellow, Institute of Management, London School of Economics Globalisation in textiles: corporate strategy and competitive advantage
Twenty five years ago the UK had an unusual distinction it was the home base for the largest textile company in the world. In 1978, according to figures produced by a German trade magazine, Courtaulds was far out in front of its nearest competitor, which was Burlington Industries in the US. The same ranking list showed that three other British companies Coats Patons, Tootal and Carrington Viyella were also in the top 25. The rest of the list was largely populated by firms from the US and Japan (Table 1). Now for those who do not know the industry, these rankings might be seen as a sign of Britains competitive strength in textiles and perhaps some people in the industry did think in those terms during the 1960s and 1970s. After all, dont we feel a glow of pride when Vodafone is named as the worlds largest mobile telephone operator, and arent we a little sad when ICI slips down the list of the worlds leading chemical companies? But in textiles, as we now know all too well, there is not much correlation between size and commercial success. In the twenty years following the publication of that list, the four British companies performed rather poorly, as did the British textile industry as a whole. When the 1999 ranking list was published (Table 2), Courtaulds now known as Courtaulds Textiles, demerged from its original parent was down at number 24. The other three had been absorbed, through merger and take-over, into Coats Viyella, which was ranked at number 11. By this time both companies were in a weak state, and could by no stretch of the imagination be regarded as world leaders. Courtaulds Textiles was subsequently acquired by Sara Lee of the US, and most of its textile, as opposed to its garment-making, interests were sold off. Coats Viyella, too, has largely withdrawn from making textiles in Britain. In a European context what is striking is that over this period the most successful of the major European textile industries have been those of Italy and Germany, and in both countries production has been, and still is, largely in the hands of small and medium-sized enterprises (Table 3). The best performer has been Italy, exporting about the same amount as Germany, but retaining a larger share of its home market hence a trade surplus of nearly $6bn, compared with about $1.7bn in Germany, and a deficit of nearly $3bn in Britain (Table 4). What lies behind this divergence in performance? Why did Courtaulds, Coats Patons and the other British firms play their cards less well than their counterparts in Germany and Italy? More generally, which firms in which countries have done best in an industry which over the past thirty years has been subject to intense competitive pressure? To the extent that one firm did better than another, was this due to better management, or does the explanation lie in country-specific factors the size and character of domestic demand, whether government policy was helpful or unhelpful, or the impact of national institutions such as the training and education system?i Perhaps Courtaulds and Coats Patons did as well as could reasonably be expected, given the constraints under which they were operating within the UK.

In addressing these questions I shall be talking about that part of the textile industry value chain which goes from the manufacture of yarn to the production of apparel and other finished products - though I will also be saying a little about retailing (Table 5). I will be dealing mainly with events since about 1970, with some reference to earlier history. Before looking at companies and nations, I want to say a few things about the industry. Three forces have been at work over the past thirty years which have altered the nature of competition in textiles and clothing. The first is internationalisation; the second is technology; and the third is fashion. Since 1970 there has been a continuing shift in the production and export of textiles and clothing from the developed to the developing countries (Table 6). The shift had begun in the early post-war years. Three of the leading exporters at that time were Hong Kong, India and Pakistan, which, because of their membership of the Commonwealth, had duty-free access to the British market. Other Asian countries, notably Taiwan and Korea, soon joined in the game, targeting the US as their main export outlet. For these countries the production of cotton textiles was an obvious choice as the first step towards industrialisation because it did not require large investment in machinery and the raw material was easily available. Many of them subsequently diversified into other types of fabric, and into the manufacture of garments. In the case of Taiwan and Korea, there has also been a big investment in fibre production these two countries combined now produce more man-made fibres than the whole of Europe. The least developed countries have generally entered the market at the garmentmaking stage. This is the most labour-intensive part of the value chain, and countries such as Bangladesh and Indonesia have used their comparative advantage ample supplies of low-cost labour to build up a sizeable export business as sub-contractors to clothing manufacturers and retailers in the industrialised countries. There are now more than 150 developing countries supplying garments to the industrialised world, although the 25 largest suppliers account for nearly 90 per cent of the trade.ii The expansion of exports was controlled and distorted by trade restrictions imposed by the industrial countries, starting at the end of the 1950s and later consolidated into the Multi-Fibre Arrangement, or MFA. The MFA was renewed and modified on several occasions, but in 1995, as part of the Uruguay Round of trade negotiations, developed and developing countries agreed on a phased programme of liberalisation. If the timetable is adhered to, all MFA quotas will be removed by 2005, although there is still uncertainty about tariffs, which in some countries, notably the US, remain much higher on textiles than on other industrial products. Despite the MFA, world trade in textiles and clothing has continued to grow, with a few countries emerging as dominant suppliers. In textiles, the big winners have been the Asian countries, led by China, Korea and Taiwan, although Turkey has been coming up fast (Table 7). Among European countries, only Italy has held its ground, while Germany, France and the UK have all fallen back. In clothing the league table looks rather different (Table 8). The most obvious change is the rise of China as by far the largest exporter, but two other developments are also significant. One is the decline in exports from the three Asian tigers, Hong Kong, Taiwan and Korea. Companies in these three countries, faced with rising wage costs at home, have been obliged to transfer some of their clothing production to cheaper locations, principally in mainland China and other Asian countries.

The other is the rise of Mexico and Turkey. This reflects the growing trend towards regionalisation a process driven partly by discriminatory trade arrangements (such as the creation of the North American Free Trade Area), partly by changes on the demand side. Retailers of clothing in the US and Western Europe are increasingly looking, not just for low-cost suppliers, but for manufacturers who can can respond quickly to changing consumer demands hence the importance, especially for products which have some fashion content, of proximity, a four-week cycle from order to delivery rather than four months. In North America Mexico is now a more important clothing supplier to the US than Korea and Taiwan, while in Western Europe there has been rapid increase in imports not only from Turkey, but also from Eastern European countries and from North Africa. How far this trend will go, and whether it will extend to textiles as well as clothing, are open questions. There are already signs that, for reasons of cost and convenience, the growing production of clothing in, say, the Czech Republic, is stimulating new investment in fabric in that country. Some observers believe that, although there will continue to be a large number of textile and apparel exporting nations, an increasing share of world trade will be concentrated in the hands of four mega-powers China, India, Mexico and Turkey which will provide a one-stop service covering all stages in the value chain , from fibres through textiles to clothing.iii This shift of production from high-cost to low-cost locations has posed severe adjustment problems for manufacturers in the industrial world. Yet there is another development which should work in the opposite direction. This is the advance in textile-making technology. To take two examples, the shuttleless loom, introduced in the 1970s, produced fabric three times faster than a conventional loom. Open-end spinning increased the rate of yarn production four times over the older ring-spinning techniques, and reduced the number of steps involved in producing some types of yarn from 15 to 4. Big improvements have also been made in the design of knitting machines, and in dyeing and finishing, reducing the labour content of these operations. On the product side, new fabrics have been developed with special properties, both for apparel and for industrial uses. The effect has been to make the textile industry more research-intensive than in the past, and to create new market opportunities for manufacturers in high-cost countries. What are known as technical textiles, for nonapparel applications, now account for nearly 30 per cent of textile production in the European Union, and the proportion is growing. A separate set of technical advances has been the rapid progress in information technology. This has facilitated what has been called lean retailing, whereby retailers use electronic data interchange and related techniques to speed up the flow of information to and from their suppliers, quickly replenishing lines which prove unexpectedly popular, and discontinuing those which are selling poorly. To implement this technology effectively, relations between retailers, apparel manufacturers and textile suppliers have to be managed in a more integrated way; arms length buying and selling gives way to a much greater degree of cooperation. Under these arrangements proximity becomes more important than the lowest possible costs.iv The last of the three forces which have transformed the nature of competition in textiles and clothing is fashion. Rising living standards, changing life styles, more informal approaches to the organisation of work - dressing down on Fridays is one example - have increased the demand for variety. Fashion and branding are playing a larger role, among male as well as female consumers. This in turn has led to a wider

range of retail outlets, each catering for a different segment of the market. The US, for example, where the clothing market used to be dominated by department stores like J.C.Penney and mass merchandisers like Sears Roebuck, has seen the rise of discounters such as Wal-Mart and speciality stores such as The Limited and The Gap. To these should be added the entry of foreign companies such as Benetton from Italy. The mass market has become more customised and more personalised. It is a similar story in Britain. Some commentators believe that the recent problems of Marks and Spencer are due in part to the erosion of what had been its core midmarket clientele, looking for reasonable quality at affordable prices. Many M & S customers, according to this view, are looking for something more stylish hence the success of new entrants from overseas such as Zara from Spain and Hennes and Mauritz from Sweden, as well as British competitors such as Next. The market appears to be fragmenting, with M & S being attacked from below by the discounters and from above by the specialist stores. There are still some basic products which do not change much from year to year and which can be produced in large volume for a predictable demand, but even items like jeans are being given a fashion element, and this part of the market fashionbasic goods - appears to be growing. The result is to make planning ahead far more difficult. As a recent US study put it, product proliferation and shorter product cycles, reflected in ever-changing styles and product differentiation, contribute to general demand uncertainty for both retailers and manufacturers, thereby making demand forecasting and product planning harder every day. In a world where manufacturers must supply an increasing number of products with fashion elements, speed and flexibility are crucial capabilities for firms wrestling with product proliferation.v These three forces globalisation, technology and fashion have altered the environment in which manufacturers of textiles and clothing are operating. How have they responded, and why have some done better than others? I will talk first about the UK, make some comparisons with Germany, Italy and the US, and then touch briefly on the East Asian countries. Management gurus often emphasise that companies, in making strategic decisions, are constrained by their earlier history. In the British case, history weighed heavily on the textile industry in the years after 1945. Of the three main branches of the industry cotton, wool, and hosiery and knitwear - the first was by far the largest, and the most fragile. Built up in the nineteenth century to supply the world with low-cost yarn and cloth, the Lancashire cotton industry had suffered grievously in the inter-war years as world trade collapsed and new competitors emerged, principally from Japan. The sellers market that followed the second world war provided a brief respite, but by the mid-1950s competition was again increasing, and further contraction was unavoidable. Lancashire had the special problem, not shared by its Continental or North American counterparts, of being open to attack in its home market from low-cost producers principally India, Pakistan and Hong Kong whose status as members of the Commonwealth entitled them to duty-free access to the UK. Continental and American producers were more heavily protected against low-cost imports during this period, and remained so even after the British government imposed curbs on Commonwealth imports at the end of the 1950s. How was Lancashire to break out of the spiral of decline? Reluctant intervention by the government, with a scheme designed to encourage scrapping and re-equipment, brought little improvement, and by the early 1960s the industry seemed doomed to

wither away. Then came a hugely ambitious and at the time widely applauded private-sector rescue attempt. Courtaulds, the countrys principal rayon producer, set out to modernise and re-equip the Lancashire industry in a way which would allow it to compete profitably against imports. Part of the companys motivation was to secure outlets for the companys fibres which by then included acrylic and other synthetics as well as rayon - but the architects of the plan also believed that the British textile industry could be made profitable in its own right. Their model was the US, where a combination of modern equipment and long production runs enabled textile mills to achieve levels of productivity far in excess of the more fragmented British industry.vi Courtauldss grand design involved a programme of acquisitions which took in, not only some of the largest Lancashire companies, but also knitwear and hosiery companies in the East Midlands; there were also big investments in new weaving mills on greenfield sites. The outcome was a huge, vertically integrated enterprise, making fibres at one end and clothing at the other. At the same time, and partly in response to Courtaulds activities, other companies were caught up in the merger mania. One of the most active acquirers was Coats Patons, a Scottish-based company whose core business was the manufacture of thread. Looking to diversify into new fields a fashionable strategy at the time - Coats bought a number of knitwear and hosiery firms, including the company whose name is associated with this lecture. Eric Pasold, founder and chairman of what was then a leading supplier of childrens wear under the Ladybird brand, has described in his autobiography how he chose to be bought by Coats rather than Courtaulds partly because he thought that Coats retail chain, Scotch Wool Shops, could be converted to sell his childrens wear.vii Regrettably the association with Coats did not work out well; Pasolds was later sold and the factory near Slough closed down, although the Ladybird brand, now owned by Woolworths, is still going strong. The subsequent history of the industry, from the mid-1970s onwards, can be seen in part as a series of attempts by the big groups some of which became even bigger through further acquisitions to find a viable place in the world market. To describe these attempts in detail is beyond the scope of this lecture, but it is worth pursuing the Courtaulds story because it illustrates some wider issues. With hindsight, it can be seen that the strategy of scale, standardisation and vertical integration was flawed. First, it proved impossible for a UK-based manufacturer, even with modern equipment, to compete on price in commodity yarns and fabrics with low-cost foreign suppliers. Second, Courtaulds aim to become the Hong Kong of Europe, supplying standard fabrics throughout the Continent, was based on the assumption that Western Europe would become an integrated, homogeneous market, similar to that of the US. As it turned out, the European market remained more diverse and more fashion-orientated than the US, and less conducive to standardisation. Third, Courtaulds underestimated the difficulties involved in managing a vertically integrated group; the policy of forcing all group companies to buy fibres and yarns from in-house suppliers led to poor quality and loss of market share. With the partial exception of some large Japanese manufacturers, no other textile company in the world has followed a similar strategy; in the US, for example, as in most of Continental Europe, the manufacture of fibres and fabrics is the hands of separate companies, and that structure remains. A fourth mistake was to choose the wrong machinery, especially for the new weaving mills. One experienced observer, after examining the equipment that had been installed at the Skelmersdale mill, could see no possibility of manufacturing profitably on those machines in current or probable future trading conditions.viii

These weaknesses became more apparent in the difficult economic conditions that followed the oil crisis of 1973-74, and some moves to de-verticalise the company were made. But it was the much deeper UK recession of 1979-81 which forced Courtaulds to undertake a drastic revision of its strategy. It was clear that, despite the partial protection provided by the MFA (which was in any case likely to diminish under pressure from the developing countries), many of the companys spinning and weaving mills were uncompetitive in international terms, and this was also true of some garment-making operations. To survive, the company had to concentrate its UK manufacturing operations on products which, because of their quality, their technical content, or the need to be near the retail customer, were not directly competitive with low-cost imports; this local production would be supplemented by an increasing reliance on overseas sourcing, both for fabrics and for basic garments where long delivery times were acceptable. On the sales side, Courtaulds had a big business in knitwear and hosiery with Marks and Spencer, but it also decided to put more resources into its own brands, such as Gossard, Wolsey, Aristoc and Lyle & Scott, and to promote them internationally. The ultimate aim was to shift a business which derived over 90 per cent of its sales from the UK to one with an overseas content of at least 50 per cent. The link was fibres was no longer relevant, and in 1989 the textile and clothing operations were demerged into a separately quoted company, known as Courtaulds Textiles. Over the next few years most of the spinning and weaving mills were closed down or sold, and the textile side of the business was largely confined to stretch fabric and lace, sectors in which Courtaulds had a technical advantage. On apparel, the Marks & Spencer business was still going strong, but the task of internationalising the Courtaulds brands proved difficult. To make, say, Gossard a world-leading brand called for substantial investment, and Courtaulds was up against big international competitors such as Sara Lee in the US, which owns Playtex and several other wellknown brands. This was one of several problems which depressed profits in the second half of the 1990s. With the share price in the doldrums, Courtaulds Textiles was in no fit state to resist a hostile take-over bid from Sara Lee of the US, which went through in the early months of 2000. The Americans were primarily interested in Courtaulds lingerie, both the Marks & Spencer business and the companys own brands; most of the remaining textile interests were sold soon after the acquisition, as were several garment companies which Sara Lee regarded as peripheral to its main business. What does this story tell us about corporate strategy and competitive advantage? Once Courtaulds recognised that it had no future as a producer of commodity yarns and fabrics, it chose to focus, quite rightly, on areas where it had good technology and a strong market position stretch fabric and lace. These were, indeed, viable, internationally competitive businesses, especially when reinforced by acquisitions in the US and France. But there was not much logic in combining them with garmentmaking; only a small proportion of Courtaulds output of stretch fabric was used internally, and this element of vertical integration gave no advantage to the garment business. On the garment side and here we see the importance of country-specific factors Courtaulds was operating in a domestic market which was not helpful for manufacturer-owned brands, except at the top end of the trade. A Burberry or an Aquascutum could do well, but the mass market was dominated by chain stores selling own-label merchandise, with Marks and Spencer the leader in most sectors. This was a distinctive feature of the British market, quite unlike that of Germany or

Italy, where the retailing industry was far less concentrated. Courtaulds, like other British manufacturers, can be criticised for being too slow to internationalise its brands, but it was at a disadvantage in not having a strong domestic market position on which to build. One way of offsetting this disadvantage was to buy an overseas branded clothing manufacturer, and Courtaulds did indeed buy a French firm for this purpose, but it did not fit easily into the Courtaulds empire and never lived up to expectations. Courtaulds experience, and that of other British companies, shows that it has not been easy both to supply large volumes of merchandise to Marks and Spencer and to promote the manufacturers own brands through other retailers. This is not to say that M & S is unbeatable. A notable British success story was Pretty Polly, a popular brand of womens stockings which sold in large volumes during the 1960s and 1970s although, interestingly, that brand, after various changes of ownership, is now part of the Sara Lee stable.ix But to compete and collaborate with M & S is another matter. One of the most consistently successful British garment makers is Dewhirst, which has chosen to focus almost entirely on Marks and Spencer. Its policy is to provide that company with such good service and such good quality, whether from British or overseas factories, as to make it virtually impossible to switch suppliers; Marks and Spencer absorbs nearly 90 per cent of Dewhirsts production, some of which now comes from factories in Morocco, Malaysia and Indonesia. Specialisation and internationalisation, these British examples suggest, are the keys to survival. Companies have to decide which parts of their business, if any, can be internationally competitive, and do everything possible to reinforce them. Specialisation might mean opting out of apparel-type fabrics to concentrate on highperformance textiles. This is the strategy pursued by Allied Textiles, once one of the leading Yorkshire manufacturers of worsted fabric for clothing; this company, having pulled out of the fashion sector, now makes such products as coated fabrics for airbags, waterproof breathable fabrics, and fabrics for high-visibility clothing.x Another interesting case is Dawson, the Scottish knitwear group, which, after an unhappy experience with diversification, has converted itself from a miniconglomerate into a cashmere-based business, with the Ballantyne brand as its flagship. A more extreme example of a company retreating to its core is Coats Viyella, which over the last few years has withdrawn almost entirely from the production of textiles and clothing in order to focus on its only genuinely international business, the manufacture of thread. (Coats is still in the fashion retail business, through Jaeger and Viyella, though these businesses may also be divested in due course.) Thread was the business on which the original company, J & P Coats, had built its success in the nineteenth century, and it has always been the main source of profits. One could describe what has happened to Coats over the past forty years as an extraordinarily expensive and value-destroying detour, at the end of which the company is back where it started. What we have seen, then, in the British textile industry over the last three decades, is a slow and painful process of adjustment to the realities of the world market, with several false steps along the way. While the story is not all gloom, performance has clearly been less good than in Germany or Italy. What did German and Italian manufacturers do right, that their British counterparts got wrong? Two important differences, which apply to both Continental countries, are that they did not have a Lancashire-type problem a huge cotton sector with capacity far in excess of likely demand and they did not face the problem of low-cost imports as

early or as severely as the British industry did, because of the Commonwealth connection. In addition, German and Italian textile manufacturers benefited hugely from the rapid expansion of intra-European trade in the 1950s and 1960s a process in which British firms, partly because of Britains delayed entry into the Common Market, participated to a much smaller extent (Table 9). The Common Market was still exposed to low-cost import competition, and German firms had to adjust to it, but they did so in a very different way from their British counterparts. There were no moves by the synthetic fibre manufacturers to integrate forward into spinning and weaving, and no attempts to create giant textile groups comparable to Courtaulds in Britain. Indeed, the few big groups that were created during the 1960s were later unscrambled, or went out of business. By the early 1980s some 60 per cent of the industrys employment was in the hands of companies employing less than 500 people; over the preceding decade average employment per company fell from 207 to 166.xi These firms were big enough to invest in modern machinery, but small enough to respond flexibly to changing customer needs. This was, moreover, a market-led adjustment, with neither the Federal nor the state governments seeking to slow down the process or divert it in particular directions; this is another difference with the UK, where the Courtaulds-led reorganisation was encouraged and to some extent supported by government although the support, particularly in the area of trade protection, was much less than Courtaulds had hoped for. During this period high German wages were making the manufacture of clothing increasingly uneconomic. The response on the part of clothing manufacturers was to shift some of their operations to low-cost locations, principally in Eastern Europe, and to do so in cooperation with their fabric suppliers. German-made fabric was sent to foreign clothing factories and shipped back in the form of finished products an exchange made easier by the preferential trading scheme known as outward processing, whereby the re-imported garments were subject only to the duty on the value added in the foreign country. The German textile industrys biggest trading partners in recent years have been Poland, the Czech Republic, Romania and Hungary. OPT, or outward processing trade, has been an important contributor to the German trade surplus in textiles and the other side of the coin is a very large deficit in clothing (Table 10). In the last few years, however, the textile industry has come under greater pressure, because some of the apparel-producing countries such as the Czech Republic have been building up their own textile industries. The German textile industry looks to be facing a period of further contraction, and the trend away from apparel fabrics into household textiles and industrial textiles seems likely to continue. Italy, as the table shows, is strong in both textiles and clothing. The sector as a whole has been one of Italys competitive strengths for a long time, and was enhanced by the creation of the Common Market, when Italy, as the member country with the lowest wage costs, was well placed to supply textiles and clothing to its EEC partners. Since then the Italian industry has built on that initial advantage, and its success today is based more on style, design and quality than on low costs. This has been achieved by an industry which, as in Germany, consists predominantly of small and mediumsized firms; the Marzotto group, which ranked 21st in the world in 1999, is a notable exception. Some of these firms are clustered together in industrial districts, like Prato and Biella in the case of wool textiles. This fragmented structure is highly conducive

to flexibility and quick response precisely the qualities that are most crucial in todays markets. Italy has no dominant retail chain comparable to Marks and Spencer, and the proliferation of retail outlets gives more scope for fabric and clothing manufacturers to establish their own brands in the market. Miroglio, for example, a leading manufacturer of printed fabrics for womens wear, sells five main lines and each aimed at a distinct segment of the market. The success of Italian fashion houses such as Gucci, Armani and Prada has also been helpful. Some of these houses, including Prada, have their own factories, but for the most part they rely on local firms to supply them with high-quality fabric and apparel. It may be though we enter the rather treacherous field of cultural differences between nations that the typical Italian customer is just more interested in stylish clothes than his or her counterpart in Britain perhaps that is why there is no Marks and Spencer in Italy. Certainly there appears to be a virtuous circle, with a large consumer demand for stylish clothing feeding back into textile and garment makers which are constantly under pressure to update their designs and improve their quality. Italian manufacturers are not immune to the economic pressures which have been at work in Germany and the UK. Some delocalisation of production has been taking place, especially on the clothing side. Benetton, for example, the knitwear company, now has factories in Croatia and Hungary, as well as Spain and Portugal; Miroglio has been investing in Hungary and Bulgaria; and Marzotto has gone to Lithuania. This process seems certain to continue, especially for basic products aimed at the mass market. But Italys strength at the high-quality end of the market, based as it is on a flexible industrial structure, a highly skilled labour force, strong branding and a receptive local market, seems likely to continue for some time to come. With hindsight, it seems strange that the planners at Courtaulds, when they were thinking about the future of British textiles in the early 1960s, did not pay more attention to Germany and Italy. Instead, they looked across the Atlantic, thinking that the European market would become more like that of the US. But if they were wrong in that belief, were they at least right in thinking that, within the US, a strategy based on scale and standardisation would work well? The answer is that, despite higher levels of protection than in the UK or Continental Europe, the American textile and garment makers have faced very difficult problems in the past thirty years, and the adjustment is far from over. In textiles, despite heavy investment in new machinery and an impressive increase in productivity, there have been several casualties among the largest companies. A few weeks ago Burlington Industries, the largest manufacturer, filed for Chapter 11 bankruptcy protection, citing import competition as the main source of its problems. Although Burlington had tried to reduce costs by shifting part of its production outside the US, principally to Mexico, and by investing in new technology, this was not enough to offset relentless pressure on prices and margins. Another hard-pressed company is Guilford Mills, which claims to be the largest warp-knitter in the world. Last year it announced a restructuring programme which involved, among other things, the withdrawal from commodity businesses and a new focus on industrial and speciality fabrics. It will also be transferring some of its apparel fabric production to Mexico and the Caribbean basin, in order to be close to its garment-making customers. In clothing, too, there has been a good deal of turmoil in recent years. One of the largest companies, VF Corporation, whose brands include Lee, Wrangler and The

North Face, has just announced plans to reduce its labour force by 18 per cent 13,000 out of a total of 71,500. It is withdrawing from private label knitwear, putting more investment in its jeanswear, intimate apparel and outdoor brands, and taking what it describes as a more aggressive approach to sourcing in low-cost countries. For companies such as VF brand management and this increasingly means global brand management is crucial. This point was underlined a few weeks ago when Warren Buffett, the famous American investor, bought control of another big garment company, Fruit of the Loom. This is one of Americas largest manufacturers of underwear and casual wear, sold mostly under its own brand name through mass merchandisers and discount retailers. It has responded to import competition by shifting much of its labour-intensive operations outside the US, but these moves caused severe production problems, provoking a financial crisis which led two years ago to bankruptcy. Warren Buffett is a great enthusiast for strong brands he is a large investor in Coca-Cola - and it seems fair to assume that in rescuing Fruit of the Loom he is more interested in its brands than in its factories. How necessary is it for branded clothing manufacturers to retain direct control of production? Some of the most successful US clothing companies, such as Liz Claiborne and Tommy Hilfiger, do no manufacturing of their own, but rely entirely on sub-contractors, either in the US or overseas. Sara Lee, on the hand, has retained a network of factories around the world, although its main concern, as its mission statement makes clear, is to increase the strength of its brands (Table 11). The statement gives a high priority to product development, but that does not necessarily require a large investment in manufacturing. Some American textile manufacturers have used technology to develop new products that overseas suppliers cannot match. One example is Malden Mills, based in Lawrence, Massachusetts. Its best-known product the outcome of a $100m investment in research and development - is Polartec, a 100 per cent polyester knit fabric finished in a special way to create a popular fleece product used mainly in winter outerwear; it comes in 100 styles, 5,000 colours and 1,000 patterns.xii Several other firms have also gone for low-volume niches, like the camouflage hunting suits made out out of a special polyester fabric developed and manufactured by Milliken. It is possible that the combined effect of new technology, lean retailing and product differentiation will slow down the shift of production from the US to low-cost countries. Some observers believe that the American textile and clothing industries are going through a process of creative destruction the disappearance of mills which are in the wrong sectors of the market or have the wrong strategies, offset by new entrants, targeting sectors of the market which foreign suppliers cannot easily attack.xiii To the extent that a substantial textile/apparel sector continues to exist in the US, it will be based on a very different strategy from the one which so impressed Courtaulds in the early 1960s. It is wrong to think that, in the changing international division of labour that is now under way, all the prizes will go to the developing countries. They, too, have had difficult adjustments to make, especially those which are in the mid-way stage between developing and developed status. Take the East Asian tigers, Hong Kong, Taiwan and Korea. These countries built up large textile and clothing industries during the 1960s and 1970s, building close relations with customers in the US and to a lesser extent in Europe. Now wage costs are at a level which makes clothing production uneconomic, and companies in these countries have been obliged to shift production to mainland China and other lower-

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cost locations. If, as seems likely, textile manufacture moves in the same direction, will East Asian companies lose their position in the textile industry value chain? One strategy is to move downstream, getting closer to to the consumer by building or acquiring their own brands. One example is Fang Brothers Knitting, the big Hong Kong knitwear company which is a major supplier to American retailers such as Gap and Tommy Hilfiger. In addition to developing its own brands, this company recently acquired Pringle in Scotland, and the new owners appear to be breathing new life into this brand, repositioning it for a younger clientele aiming at the night club set rather than the golf club set. Another approach is to convert themselves from low-cost manufacturers into facilitators or coordinators serving their customers in Europe and the US by taking responsibility for organising the supply of garments, with production taking place in whatever locations best meet the buyers needs in terms of cost, quality, and delivery. The trend towards lean retailing could be helpful here, because it is putting more emphasis on the management of the value chain matching supply to demand more precisely. As one observer has written in relation to Taiwan, effective value chain management has the capacity to produce savings that dwarf the gains to be had by cutting labour costs by a few cents an hour. Taiwanese garment production will inevitably relocate to regions with lower labour costs, but the home firm has the potential to become the key force behind a smoothly operating, high-tech commodity chain. Because the parts of this chain are more highly integrated than they ever were in the past, the costs of switching becomes more costly to the lead retailer. A local firm in Southeast Asia or mainland China will quite likely be able to undercut even offshore Taiwanese operations, but they are far less likely to be able to handle electronic orders from buyers, and in response effectively forecast, plan, track production and manufacture apparel quickly and flexibly. In short, these skills are a far more enduring form of comparative advantage for Taiwanese firms than constantly scouring the globe for the lowest cost labour.xiv Another factor which could work to the advantage of well-established East Asian firms is the growing public concern especially in the US and to an increasing extent in Europe about labour conditions in developing-country factories that make apparel for Western companies. Campaigning by student bodies, trade unions and nongovernmental organisations has forced brand-name retailers to take a closer interest in the wages and conditions offered at each stage in the chain, and they may well delegate the monitoring task to trusted East Asian firms with which they have been built a close rapport. By playing to their strengths, and adapting to changes in the way the value chain is organised, East Asian firms may well continue to play a substantial role in the industry. It is worth noting that Taiwanese and Korean firms already figure in the list of the worlds top 100 textile companies (Table 12) One of the Taiwanese firms, ranked at no. 39, is Hualon. This company makes nylon and polyester yarn, which it sells to other textile manufacturers, as well as making a wide range of fabrics of its own. While its main operations are in Asia (including a large subsidiary in Malaysia), it has also moved into Europe by taking over the assets of a bankrupt German textile company, and transferring most of its weaving machinery to plants in the Czech Republic.xv Other Taiwanese and Korean firms have invested in Mexico to be close to their US customers. What we are seeing, then, throughout the developed and developing world, is a continuing search by manufacturers of textiles and clothing for the strategy which best

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suits their circumstances their history, their acquired capabilities, their domestic market situation. If there is a common theme, it is if you will forgive the business school jargon the importance of focus doing the things you are best at, and abandoning or outsourcing the things that other people can do better. But this very general prescription still leave companies with difficult strategic choices. Take as a starting point the three main functions in the textile-apparel chain (Table 13) - I am omitting for this purpose technical textiles and household textiles. These are: product design and promotion (the brand creators); display and distribution (the retailer, the internet website, the mail order company); and manufacturing. Should a company engage in only one of these three activities, or two, or all three? For some brand creators, especially those serving a mass market, it makes no sense to engage in display and distribution that is better left to the retailer and distributor; several of these companies, as I mentioned earlier, also choose to do no manufacturing. At the top end of the trade, by contrast, there are firms which make their own products (sometimes going all the way from fabric to finished garment), promote their own brands, and operate their own shops. Zegna, a leading worsted fabric producer based in Biella, is one such case. A related question is the pros and cons of vertical integration. The focus prescription argues against it, but it is not difficult to find examples which point in the other direction. The Spanish company, Zara, has a design and manufacturing centre at La Coruna in Galicia, supported by a network of local subcontractors, and it sells through its own own stores. Zaras designers are in constant touch with store managers to find out which items are selling well. As they are supported by real-time sales data from all the stores, they are able to feed repeat orders and new designs into the manufacturing plant. The plant, in turns, ships the goods to the stores twice a week, which eliminates the need for warehouses and keeps stocks low. Zara needs only three weeks to make a new line from start to finish, compared to an industry average of nine months.xvi Given the large number of possible strategies, it is hard to come up with general rules about what companies should do, or what they should have done in the past. Equally coming back to the theme I touched on at the start of the lecture - it is hard to assign precise weights to company-specific and country-specific factors in explaining success or failure. In the case of the UK, some serious mistakes were made by companies in the 1950s and 1960s, and those mistakes were difficult to reverse. It is possible, in the light of German and Italian experience, that more British mills would have survived if they had not been overcome by merger mania, but one cannot be sure of it, and in any case that is only part of the story. There were other factors, outside the control of management, which constrained what companies could or could not do. One, which I have already mentioned, was the legacy of history, especially in Lancashire. Another was the dominant role of the chain stores in the clothing market. As for institutions and policies, some observers attach a good deal of importance to deficiencies in the British training and education system, leading to badly trained workers and badly trained managers. The effect in textiles and clothing, according to this view, was to make it more difficult for British than, say, for German firms to move up-market into high-quality, technically demanding products.xvii Although I think there is some force in this argument, I would put more weight on government policy. The erratic approach to the industry from the late-1950s onwards half-hearted intervention as in the 1959 Act, half-hearted promises on protection

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which were never fulfilled, partial support for the creation of big companies offset by continuing worries over competition left companies unclear about where they stood. The government would have done better to have the left the industry well alone, allowing firms to work out their own salvation. One might add although this is not specific to textiles the disincentive effect of high taxation, both on existing familyowned firms and on new entrepreneurs coming into the industry. This is a point made by Eric Pasold in his autobiography, and it may partly explain why we never maintained that tier of privately-owned, medium-sized businesses which has proved such a source of strength in Germany and Italy. Would the industry have done better if Britain had joined the Common Market in the 1950s rather than the 1970s? Most British textile firms in common with their counterparts in other industries - were slow to recognise in the early post-war years that the key to survival lay in Western Europe, or, if they did, like Frank Kearton and his colleagues at Courtaulds, they misread the European market. It is a striking fact that in the mid-1980s in an industry which was already more global than any other Courtaulds Textiles carried out 90 per cent of its production in the UK and derived 90 per cent of its sales from the UK. Earlier entry into the European Community might have made a difference, but perhaps not a decisive one. In the end one has to recognise that the British textile industry had a big adjustment to make between the 1950s and 1980s, and for a mixture of reasons some stemming from history, some from mistakes made in the post-war period itself it found the adjustment extremely difficult. One may regret the outcome, but perhaps it is unreasonable to expect that an industry which dominated the world in the 18th and 19th centuries should have remained top dog in the 20th and 21st.

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TABLE 1 WORLDS TOP 25 TEXTILE COMPANIES IN 1978 - RANKING OF UK COMPANIES 1. COURTAULDS

9. COATS PATONS 13. TOOTAL 21. CARRINGTON VIYELLA OTHER NATIONALITIES IN TOP 25: 10 FROM US 5 FROM JAPAN 3 FROM FRANCE 2 FROM SOUTH KOREA 1 FROM TURKEY Source: TextilWirtschaft TABLE 2 WORLDS TOP 25 TEXTILE COMPANIES IN 1999 - RANKING OF UK COMPANIES 11. COATS VIYELLA

24. COURTAULDS TEXTILES OTHER NATIONALITIES IN TOP 25: 15 FROM US 5 FROM JAPAN 1 FROM FRANCE 1 FROM GERMANY 1 FROM SWITZERLAND Source: TextilWirtschaft

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TABLE 3 CONCENTRATION IN TEXTILES AND CLOTHING PERCENTAGE SHARE OF TOP FIVE COMPANIES IN TEXTILES/CLOTHING TURNOVER IN FIVE COUNTRIES IN 1999 TEXTILES UK FRANCE GERMANY ITALY US Source: Euratex TABLE 4 EXPORTS AND IMPORTS OF TEXTILES IN 2000 (figures in $bn) EXPORTS IMPORTS BALANCE ITALY GERMANY FRANCE UK 11.96 11.02 6.76 4.21 6.12 9.32 6.75 6.91 5.84 1.70 0.01 -2.70 52 28 20 12 31 CLOTHING 33 35 46 25 NA

Source: World Trade Organisation

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TABLE 5 THE TEXTILE INDUSTRY VALUE CHAIN PRODUCTION OF FIBRES, NATURAL AND MAN-MADE CONVERSION OF FIBRE INTO YARN PRODUCTION OF FABRIC BY WEAVING OR KNITTING FINISHING OF FABRIC BLEACHING, PRINTING, DYEING ETC TRANSFORMATION OF FABRIC INTO: APPAREL HOUSEHOLD TEXTILES CARPETS AND FLOOR COVERINGS INDUSTRIAL TEXTILES (CAR UPHOLSTERY, FILTERS, MEDICAL TEXTILES ETC) RETAILING DEPARTMENT STORES, DISCOUNTERS, MAIL ORDER, INTERNET SHOPPING ETC TABLE 6 WORLD PRODUCTION OF TEXTILES AND CLOTHING IN 1998 (based on values in US$) TEXTILES ASIA 39% CLOTHING 45% 26% 26% 2% 1%

AMERICAS 29% EUROPE AFRICA OCEANIA Source: OETH 29% 2% 1%

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TABLE 7 WINNERS AND LOSERS IN WORLD TEXTILE EXPORTS 1980-2000 (% share of total world exports in each year) 1980 CHINA 4.6 2000 10.2 8.1 7.6 7.4 7.0 3.4 2.9

SOUTH KOREA 4.0 ITALY TAIWAN US INDIA PAKISTAN 7.6 3.2 6.8 2.1 1.6

TURKEY 0.6 2.3 ------------------------------------------------GERMANY 11.4 7.0 JAPAN FRANCE UK 9.3 6.2 5.7 4.5 4.1 2.7

TABLE 8 WINNERS AND LOSERS IN WORLD CLOTHING EXPORTS 1980-2000 (% share of total world exports in each year) 1980 2000 CHINA MEXICO TURKEY INDIA 4.0 0.0 0.3 1.5 18.1 4.4 3.3 2.8

INDONESIA 0.2 2.4 ------------------------------------------------HONG KONG 11.5 5.0 KOREA TAIWAN ITALY GERMANY FRANCE UK 7.3 6.0 11.3 7.1 5.7 4.6 2.5 1.5 6.6 3.4 2.7 2.1

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TABLE 9 THE COSTS OF NON-EUROPE EXPORTS OF TEXTILES AND CLOTHING TO THE SIX ORIGINAL EEC MEMBERS AS % OF TOTAL EXPORTS 1960-1980 1960 UK Textiles Clothing GERMANY Textiles Clothing ITALY Textiles Clothing 13.0 17.0 20.8 23.0 31.1 36.0 1970 14.7 17.6 42.3 59.8 44.5 68.0 1980 33.4 34.6 43.0 54.0 48.7 65.1

Source: European Commission TABLE 10 TRADE IN TEXTILES AND CLOTHING IN FOUR COUNTRIES IN 2000 (figures in $bn) EXPORTS IMPORTS BALANCE GERMANY Textiles Clothing ITALY Textiles Clothing UK Textiles Clothing US Textiles Clothing 11.02 6.84 11.96 13.22 4.21 4.11 10.96 8.65 9.32 19.31 6.12 6.07 6.91 12.90 15.71 66.39 1.70 -12.47 5.84 7.15 -2.70 -8.79 -4.75 -57.74

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TABLE 11 SARA LEES STRATEGY TO BUILD LEADERSHIP BRANDS IN MARKETS AROUND THE WORLD, FOCUSING ON PRODUCTS AND BUSINESSES THAT: ARE GLOBAL, OR HAVE THE POTENTIAL TO EXPAND GLOBALLY HOLD LEADING BRAND POSITIONS (No.1 OR No. 2) REACH CONSUMERS THROUGH MULTIPLE CONSUMER CHANNELS BENEFIT FROM INNOVATIVE PRODUCT DEVELOPMENT EFFORTS CAN ACHIEVE BREAKTHROUGH ECONOMICS, DEFINED AS A COST STRUCTURE THAT BENEFITS FROM SCALE AND IS NOT EASILY MATCHED BY THE COMPETITION Source: Sara Lee Corporation, 2001 annual report TABLE 12 NATIONALITY OF WORLDS TOP 100 TEXTILE COMPANIES IN 1999 US 31

EUROPEAN UNION 27 JAPAN TAIWAN SOUTH KOREA OTHERS Source: Euratex TABLE 13 WHERE TO FOCUS? PRODUCT DESIGN AND PROMOTION THE BRAND CREATORS DISPLAY AND DISTRIBUTION THE STORES, THE INTERNET RETAILERS, THE MAIL ORDER COMPANIES MANUFACTURING 24 5 4 9

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For a recent study of the link between company-specific and country-specific factors in determining corporate strategy in textiles, see John Singleton, The world textile industry, Routledge, 1997 ii Michael Flanagan and Liz Leffman, Global apparel sourcing: options for the future, Textile Outlook International, July 2001 iii Alan Braithwaite, Impact of the World Trade Organisation on global textile trade, Textile Institute?Date iv Frederick H.Abernathy, John T.Dunlop, Janice H.Hammond, David Weil, A stitch in time, lean retailing and the transformation of manufacturing lessons from the apparel and textile industries, Ocford, 1999 v Abernathy et al, A stitch in time, p9 vi For a more detailed account of these events, see Geoffrey Owen, From Empire to Europe, the decline and revival of British industry since the second world war, HarperCollins, 1999, Chapter 5 vii Eric W. Pasold, Ladybird, Ladybird: a story of private enterprise, Manchester University Press, 1977, p653 viii Allen Ormerod, An industrial odyssey, The Textile Institute, 1996, pp215ff ix For an account of Pretty Pollys success, see Stanley Chapman, Mergers and takeovers in the postwar textile industry: the experience of hosiery and knitwear, Business History, Vol 30, No 2, April, 1998 x Textile Outlook International, March 2001. xi U.Hartmann, Experience of restructuring the textile industry in Germany and some other industrialised countries, in The Textile Institute, World textiles: investment, innovation, invention, 1985 xii Abernathy et al, A stitch in time, p200 xiii Jim Levinsohn and Wendy Petropoulos, Creative destruction or just destruction? The US textile and apparel industries since 1972, National Bureau of Economic Research, Working Paper No 8348, June 2001. xiv Eric Thun, Growing up and moving out: globalisation in the Taiwanese textile/apparel and automotive sectors. MIT Industrial Performance Center, Working Paper 00-007, June 2000 xv Textile Outlook International, January, 2001 xvi Economist, May 19, 2001 xvii H.Steedman and K.Wagner, Productivity, machinery and skills: clothing manufacture in Britiain and Germany, National Institute Economic Review, No. 128, 1989

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