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Institu te fo r Pro sp e c tive Te c hn o lo g ic a l Stud ie s

Advanced technology and the competitivenessof European industry:

The cases of textiles, steel, motor vehicles and

aerospace.

A report prepared by the IPTS forthe Committee on Economic and Monetary

Aff i d I d t i l P li f th E C i i

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Aff i d I d t i l P li f th E C i i

SUMMARY1

MAIN REPORT 6

1 Introduction 6

2 Competitiveness - a slippery concept 6

3 Textiles, clothing, leather and footwear 83.1 Overview 83.2 Sub-sectoral issues 103.3 Technology and skills 123.4 Integrating the value chain 133.5 Regional issues 153.6 Strategies and policies for the sector 16

4. Steel 16

4.1 Overview 164.2 Technology and skills 184.3 Overcapacity and rationalisation 204.4 Strategies and policies for the sector 21

5 Motor vehicles and components 235.1 Overview 235.2 Technology and skills 255.3 Strategies and policies 28

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2.7 Outlook: 642.8 Summary: 65

3 Motor Vehicles and Components 673.1 Production 673.2 Competitiveness: 683.3 Profitability: 703.4 Exports and Imports: 703.5 Research and Development: 713.6 Capital and Other Costs: 723.7 Human Capital and Skills Base: 72

3.8 Key Strategic Issues: 733.9 Summary 74

4 Aerospace Industry: 774.1 Production 774.2 Research and Development 794.3 Profitability: 804.4 International Trade 804.5 Costs 814.6 Productivity 824.7 Employment 834.8 Some Key Issues 834.9 Summary 85

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Summary

The report examines the competitiveness of European industry in four sectors: textiles,

clothing, leather and footwear; steel; automobiles and aerospace. It provides a concise

overview of each sector which concentrates on the major competitive challenges facing

them, an interpretation of the current implications for technologies and skills in

competitiveness and a short set of policy proposals.

It concludes that, the main drivers affecting these sectors are similar: low to moderate

growth in demand in EU markets, increasing pressure from low-cost commodity

producers in Asia and the increased use of labour saving technologies. Overall,

although employment in these industries can be expected even where the competitive

position of the industries is good. We three see main trends which are important in all

three sectors:

1. Increased specialisation and concentration on higher value more technicallydemanding markets or sections of the value chain.

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points towards the need for clear signalling of policy intentions, with sufficient lead

times for industries to respond and a match between the regulatory agendas andfeasible technological trajectories. This can only be achieved through co-operation

between policy makers and industrialists on short and most of all, longer term

planning, co-operation and experimentation.

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Main report

1 Introduction

This report examines the competitiveness of European industry in four sectors:

textiles, clothing, leather and footwear; steel; automobiles and aerospace. The report

provides a concise overview of each sector which concentrates on the majorcompetitive challenges facing them, an interpretation of the current implications for

technologies and skills in competitiveness and a short set of policy proposals. For each

sector an empirical appendix is provided which contains more detailed tables and

figures from which the main points in the overview were derived.

The overall aim has been to provide the basis for an informed debate on these specific,

and rather different, sectors. Nevertheless, we do see some general trends in the

emerging competitive position of European industry which are common to all these

sectors. In a concluding section, therefore, these are drawn out in order to try to

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remain implicit in the discussion and this leads to major misunderstandings about the

future prospects for European industry and misplaced policy debates.

In fact, as we can see from the questions we have just asked, competitiveness is a

multi-dimensional concept, and one on which there is unlikely to emerge a consensus.

Recently, there have been some major efforts to understand the main dimensions of

competitiveness as part of an overall attempt to map out industrial performance.

These include the growing numbers of benchmarking studies - which have also been

undertaken at national as well as firm level. Most of the time, therefore,

competitiveness reports are assemblages (whether in the form of an index or an argued

rationale) of indicators of firm performance, such as:

market share (changes) profitability return on investment levels and directions of inward investment flows turnover (rates of growth)

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In constructing this report, therefore, we deliberately adopted an empirically groundedapproach to the issue, based upon the idea that competitiveness relates to the

prospects for retaining market share in Europe and of expanding market share abroad.

In developing our accounts of competitiveness, therefore, we were mainly interested in

trying to explain overall changes in the structure of international markets, and

particularly to examine the role of technological changes in explaining the changes

which are taking place. Clearly, in order to do this we had to develop some kind of

notion of the key pressures of globalisation which are taking place at the moment

(another term which is open to widespread misuse). We were particularly interested to

try to understand the role of innovation in building up European industrial

performance, even though direct effects are rather hard to identify. In addition, we

wished to examine the role of policy as it affects the evolving competitive position of

European producers.

3 T til l thi l th d f t

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relatively developed countries in Eastern European, South East Asia, Japan and the US

labour costs in northern Europe can be quite high.

In the commodity end of the industry, which is highly sensitive mainly to price,

relatively high labour costs are competitively unsustainable. The extreme wage

differentials strike hardest at the labour intensive areas of production particularly

cutting and assembly operations in the clothing and footwear industries, and dyeing,

printing and finishing components of the textiles industry. But in the commodity areas

of TCLF, generally, strategies of increasing capital intensity in order to offset high

labour costs are confounded by the sheer size of the market which would be needed to

achieve a (competitive) economic scale of operation.

However, in other parts of the industry where non-price issues are more important

there is some scope for retaining the competitiveness of European producers. The

issue can be conceptualised as a competitiveness continuum (Figure 1). At the

commodity production end Europe may retain some residual manufacturing capacity,

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to use the remaining period of protection to strengthen their presence in relatively

defensible specialised areas of the market.

3.2 Sub-sectoral issues

The TCLF sector is very diverse, and in order to bring into focus the competitive

challenges facing European producers it is necessary to look in more detail at some of

the sub-sectoral and regional issues surrounding the prospects for the sector.

The key point is that the main area of competitive weakness is in the labour intensive

assembly and finishing operations. This means that in parts of the industry where there

is scope for labour substitution and where import penetration is more difficult

competitiveness might be retained. A number of sub-sectors potentially have these

features. First, Europe remains a major producer and processor of wool as a raw

material and, because many woollen garments are knitted rather than cut, there is a

foundation for a continued European presence even in the commodity end of the wool

trade. Secondly, non-woven materials based on synthetic materials and those which

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11

Increasing Contestability of Markets

Type of Market: Commodity First Stage Specialisation Advanced Specialisation

Demand Pattern

Production Pattern

Competitive Position

Strategic Response

Long runs ofbasic yarns, cloths

and products.

Mass production,

mass assembly ofstandard products.

Medium/long runs of standardproducts with minimal design

content.

Large batch production in quick

changeover equipment mode.Higher Product quality standards

High design content withspecialised and innovative materials.

Niche markets and fashion.

Technology intensive production,

quick response and flexibility.Emphasis on high product performance

The Competitive Position of European TCLF Products

Uncompetitive

by reason of Costs

Vulnerable by reason of costs

and the developing capability inemerging low cost economies.

Scope to compete successfully

Limited scope for

capital investmentin selected areas to

defend existing

markets

Capital investment in product

development and in productivityimprovement based on technology.

Increased emphasis on quality.

Concentration on product development

in collaboration with customers.Emphasis on R&D for improved

product performance and attributes.

Opportunities Increasing Specialisation of Markets

Figure 1

Threats

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The handling of such materials also tends to require a higher level of technological input

than in the basic commodity sector, even though the production runs might be quite longand the products themselves quite cheap. Thirdly, bulky products or those which are cut

or finished in the final markets such as carpets, soft furnishing materials, etc may also be

possible to retain in Europe, again because such products are relatively capital intensive

and they are less prone to cheap importation. The implication of these points is that

policies concerning the TCLF sector should be tuned to its inherent diversity. Inaddition, the fact that as competitive strategies are increasingly based upon specialisation

that this diversity is in itself a potential avenue of competitive advantage that should not

readily be discarded in favour of traditional industrial policies to encourage centralisation

and integration.

3.3 Technology and skills

Overall, however, the future of European TCLF production depends to a large extent

upon how effectively it can build strengths in the high performance, higher margin areas

of the sector. These are the areas which are skill and/or technology intensive

(increasingly they are both). There are three levels at which we can see an increasing

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these kinds of effects most clearly in the case of the so-called technical textiles, which are

intermediate products for use in sectors such as transportation, geotextiles, technical

garments, health care, construction, and so on. In these applications, performance and

service may outstrip pure price issues by a long way. Also at 30 billion ECU (1993) this

market is significant and certainly worth pursuing, even if it cannot be regarded as the

saviour of all of Europes textile producers.

In order to service these kinds of demand, however, it continues to be necessary to

upgrade both skills and technologies in the TCLF sector. There has been a long term

upgrading of spinning machinery ( as shift to open-end rotors), weaving (shuttless

looms) the introduction of computer aided design and manufacturing in clothing

(especially in cutting, but also to some extent in assembly). Assembly processes,

however, remain quite labour intensive, which is one reason why the clothing industry is

more susceptible to pressures international competition than say textiles. Increasingly

important, also, has been the development of information networks in order to achieve

downstream integration with suppliers. These technologies increase the ability of

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price factors such as timeliness, customer service performance and so on are likely to rise

in importance, which can only create opportunities for European production.

To take as illustrations the contrasting patterns of development in the German as

opposed to the Italian TCLF sectors. In Germany, the more vulnerable labour intensive

stages of production have been outsourced to lower-cost Eastern European producers,

whilst German producers have invested heavily in upgrading the capital (and technologyand skill) intensive activities which have remained at home. In this case, a lot of effort

has been expended on the development of high quality logistical competences in order to

manage the complexities of an internationally outsourced production activity. Of course

this means that certain (mainly lower skilled) production activities are delocalised.

Taken together with the increasing focus on high performance intermediate products for

German industries (for instance upholstery for automobiles, etc), there has been a shift in

emphasis of the industry towards higher skilled workers in ancillary trades such as:

customer service, technical development, logistical support, marketing, etc. In essence,

the German story is that although the lower skilled labour intensive operations are

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aiming at less price sensitive (and fast changing) items, where physical proximity to the

design and fashion centres is important so that close social networks between designers

and producers can be maintained. At the same time, as is traditional in this sector, there

is a constant pressure to reduce the costs of craft stages in production - even in the high

fashion sectors of the market. The important thing is that the retention of a viable

production capacity nearby is a support to the vibrant Italian clothing and textile design

industry, because it permits the direct experimentation with new ideas and interactionbetween the producers and the designers. In essence the point is once again that the

attractive high skilled jobs to some extent rest upon the continued presence of the

practical industrial culture in Italy, and thus the multiplier effects of the retention of

TCLF manufacturing are probably more significant than would appear at first glance.

3.5 Regional issues

Given that the employment implications of the TCLF sector depend upon the important

multiplier linkages between the production activities and the higher margin links in the

value added chain, it is worth recalling the twilight stage which a large proportion of the

TCLF sector has reached in Europe. Although TCLF production is found in all parts of

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(either by building on links with design and fashion intensity by working closely with

customers which demand high technical specifications and customisation ). If not, they

will in head to head competition with lower cost regions outside of Europe (which, with

the aid of ICTs, are coming ever closer). This inevitably means working to improve their

technical performance, their technology and skill base.

3.6 Strategies and policies for the sector

As we note above, the TCLF sector is diverse and no simple ready to wear policies can

be prescribed for the sector as a whole. Rather, our main overall policy prescription is

that that a strategy exploiting diversity and specialisation should be pursued.

This would require the reinforcement of competences in the sector in areas such as:

1. increased awareness of how to meet differentiated and fast changing demands,especially establishing close working relationships with downstream intermediate

customers and retailers and upstream relationships with designers and fashion

houses;

2. greater search for and exploitation of the possibilities of new materials, designs of

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However, a key feature of competition in the steel industry is the high level of localised

consumption of production. That is roughly 80% (or more) of the production of any

major trading block is consumed within its own territory (Figures 2.3 and 2.4 in the

Appendix). Thus, whilst European producers do face competition from the rapidly

expanding capacity in developing countries and Eastern European countries they are by

no means subject to the level of import penetration seen in some other sectors (such as

TCLF discussed above).

One of the reasons why there is relatively low import penetration in the sector is that

steel production is already capital intensive, even though much of the technology is only

at a medium level of sophistication. There are exceptions to this such as in castings

which still can have a labour input cost of up to 50%. However, the generally highlabour intensity in the sector means that direct competition from low labour cost

countries is less marked because cost differentials are less extreme, except in very basic

commodity steels such as flat steel. Here, there is exposure to, for instance, extremely

cheap but low quality commodity production from countries such as China and Eastern

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overseas). Or to put it another way, the competitiveness of these major steel using

industries depends to a significant degree upon the ability of the steel industry to meet

international standards of performance, product quality and price.

An example of this last point is the competitive response of European steel producers to

the large volumes of semi-finished low alloy steel which have been globally available

from China since 1995. The European response has been to develop markets in areaswhere the Chinese producers cannot meet the quality thresholds, such as in high alloy

specialised steels and components. In particular, there is an attempt to lock engineering

industries into European production through the supply of complete critical sub-

assemblies, which are designed and marketed in collaboration with a downstream

customer. Such consortia have allowed European steel producers to compete, throughthe internationally sales of their customers.

In summary, the most important issue facing the European steel industry is how to deal

with the overcapacity/slow growth in demand. On the one hand, this is being met by on-

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Appendix). The challenge was strongest first in special steels, with shorter production

runs. However, they have increasingly penetrated the traditional markets integrated

plants, so that their share of the crude steel market has grown from 14% (1970) to

33.5% (1996).

There are several reasons why the minimills have advanced so strongly. The

technological set up is more flexible allowing steel producers to work closely withconsuming industries in order to tailor products to exact specifications in short

production runs. Secondly, the flexibility of the technological system allows a more cost

efficient matching of demand cycles (which can be quite severe in this industry) -

whereas integrated plants have to be operated at a high capacity all the time in order to

achieve their minimum efficient scale. Also, the EAF can use scrap as its feedstockwhich lowers energy demands and is more consistent with environmental pressures. For

these reasons it can be expected that most of the new capacity in Europe will be created

be of the EAF/minimill type.

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reliability, closer tolerances, reducing secondary processing and scrap and so on rather

than cost controlper se.

The overall impact of these changes on skill levels is that the industry as a whole is now

highly professionalised, with almost comprehensive use of process control, and science

rather than craft based techniques. The sole exception is probably foundries where

production often still takes place in small plants (of around 50 employees) providing ajobbing service to the industry. The increased stress on R&D in order to meet

increasingly discerning customer demands leads to complex developments involving

advanced metallurgy, engineering and process control techniques. Also, the shift

towards small production facilities with the minimills has stripped out layers of hierarchy,

leading to a greater emphasis on multiskilling of all levels of employees, while theemphasis on quality has led to efforts to improve the skills of even lower level workers.

Finally, the greater emphasis on customer needs is the shift towards service activities,

such as a growth in marketing, management, distribution, and logistical support

functions.

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For illustration of the weak position of EU producers of such steel products, we can look

at steel tubes production, which dropped by 12.74% or 1.645 million tonnes between 1989

and 1994. Mostly under pressure from lower cost imports. The average price per tonne for

imports dropped from 887 ECU per tonne in 1989 to 714 ECU per tonne in 1994, leading

to rise of 18% or 232,000 tonnes. Within this figure, Japan, US and Turkey took an

increasing share of EU imports, but Eastern Europe increased its exports to the EUfourfold from 55,000 tonnes to 226,000 tonnes.

The unavoidable conclusion is that in this sector of the steel market Europe faces a loss

of competitive performance, which against stagnating demand adds up to an

overcapacity problem of some significance. That this problems persists, despitecontinuous reductions in labour force and output, partly reflects the view that steel is a

strategic industry, so that capacity has been highly influenced by political pressures. The

recent trends towards privatisation and the increased competition from minimills and

non-European producers has certainly driven up productivity, but in this highly regulated

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the basis of supporting the longer term competitiveness of the European-based steel

using industry rather than any vested national interests;

2. The key potential avenue of growth for European steel producers will be throughincreased demand for the products of the steel using industries operating in Europe.

Many steel producers are already working closely with the major purchasers not only

to define higher performance steel products but to develop international markets for

critical sub-assemblies. This type of collaborative strategy is however still quite aliento the industry, so support in building the awareness and competences in such

approaches will be important not just for the steel industry but European producers

more generally. In addition, it might be appropriate to provide aid to help such

consortia in defining, meeting and servicing emerging needs for such steel-based

products.3. The shift towards EAF/minimills and the increased quality demands has encouraged

led to many incremental innovations which have made the steel industry much more

science-intensive. It is unclear to what extent the smaller scale of production which

is found in such plants can support the technical know-how necessary to take this

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5 Motor vehicles and components

5.1 OverviewProduction of automobiles is dominated by the US, EU and Japanese production,

accounting for 80% of world production. Between these three blocs, however, the

automobile manufacturing firms industry are increasingly operating on a global scale. At

the same time within each bloc production is taking place inside the consuming region.

In other words, in the auto sector a pattern of global localisation of production is

emerging. Section 3 of the Appendix provides more detailed quantitative data on the

sector.

Once this global-local pattern of competition is recognised it becomes clear that a

distinction has to be made between the competitiveness of European producers and the

competitiveness of producers based in Europe. Given that Europe will remain a large, if

slowly growing, market for cars we can be certain that a large production capacity will

remain in Europe. However, this capacity may not be European owned. Given that

there is slow growth in demand there is little choice for European based producers

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national markets (and eroding levels of national loyalty) the message is simple, get bigger

in international markets or decline at home.

This European owned industry has responded to this message to varying degrees. Some

European producers, particularly German manufacturers such as VW, Mercedes and

BMW, have traditionally had a strong presence in international markets, particularly the

USA. However, other firms such as the French (Citroen, Peugeot, Renault) and theBritish (Rover) have traditionally been quite weakly internationalised outside of Europe.

The recent trend has been for the international traders to seek to secure their presence in

non-EU markets by setting up transplants in the third country markets. Here again the

German producers have been at the leading edge, although FIAT has also had long term

globalisation strategies. In the past FIAT mainly concentrated on emerging countrymarkets and based its strategy on licensing models to local producers for foreign

markets, rather than internationalising its own capacity. This has now changed with the

purchase of the Polish firm FSM and investments in the Russias VAZ.

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This is certainly a situation which should be monitored, although at the moment most of

the new capacity in these countries has yet to come on stream.

5.2 Technology and skills

Beneath the discussion of global-localisation strategies in the auto industry lie two broad

sets of technological issues which help to shape the international patterns of

competitiveness. First, competitive auto firms have to be able to bring out successful

new models on an ever shorter timescale (even while the complexity and technical

demands on new product development is increasing). This requires not only large cash

resources, but very high levels of technological competence in design, testing,

production planning and so on. All major auto manufacturers have this capacity, but

they vary significantly in their abilities to manage this process efficiently and successfully.

Key pressures have been to introduce concurrent engineering practices, along with the

use of computer design tools in order to manage the development process. At the same

time, the major manufacturers are increasingly trying to access niche markets (e.g. four

wheel drives, multi-purpose vehicles, etc) and so are seeking to make savings by cost

sharing on product development and by building a wider range of model variants on the

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equally (and are not immediately a competition issue), there may be differences in the

ability of different manufacturers to respond given previous investments in R&D, the

existence of a supply industry or other technical resources and so on. For policy makers

the critical requirement is that regulatory changes should be introduced in phased in

steps, which can be accommodated within the incremental development cycles of the

industry

The other side of the technology issue is that all manufacturers have to have the tools

and skills to actually construct the cars. This also has been a major area of development,

and has been heavily debated in recent years as firms try to introduce concepts such as

flexible production systems, total quality management, just in time(JIT) techniques, lean

manufacturing and so on. One of the important findings of these debates has been thatautomation by itself is insufficient to maintain competitiveness in the production

processes. Making cars is as much about high quality management of the supply chain

and the work organisation processes in the plants as it is about technologies themselves.

As a result, much effort has been expended in recent years on: improving workforce

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The major challenge now is to upgrade the quality and performance of the first and

second tiers in the chain of industries which supply the main automobile assemblers.

Here, also, there has been much progress. European component suppliers have

upgraded their technologies, quality level and overall performance, particularly through

co-operation with Japanese auto firms, but also as European producers have imitated the

more co-operative style of product development and service relationships.

These trends in the components industry are important for several reasons. First, the

management of the supply chain is still the major area in which European owned

automobile firms have yet to achieve international performance levels. So these relations

will be an increasing focus in the next few years. Second, the components industryrepresents a growing slice of the value added in motor manufacturing as vehicles become

better equipped, and equipped with more sophisticated components (with items such as

fuel injection, air bags, air conditioning, engine management systems, etc) and as the

trend towards outsourcing gathers pace. Third, the Japanese experience has shown that

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assemblers and suppliers in existing areas, and to attract inward investments a

technologically vital local supplier base will surely be a strong attractor to the location of

new transplants.

In terms of international competitiveness, therefore, two issues arise. First, the

difficulties of internationalising the supply chain to transplants will probably reduce or

defer the threat to European auto assembly from Eastern European transplants. Theproblems of finding local sources of high quality components will certainly raise a barrier

to such imports. Second, an emerging trend is the internationalisation of this industry,

especially as the suppliers increasingly become technologically autonomous and as the

supply chain itself is rationalised into first and second tier suppliers. Under these

circumstances, a critical challenge will be for the components industries themselves toestablish transplants in emerging markets, whilst working with local second tier supplier

to improve local sources of sub-components.

Moving to the other major technological issue, a different set of competitiveness issues

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between the consequences of competitiveness as it is played out in the European market

and its effects on European owned firms.

1. The critical trend in the vehicle assembly industry is towards transplants being set upin all the regional markets in order to assemble the vehicles of each of the global

players. To stay competitive in an increasingly capital hungry business, European

producers will have to achieve a similar scale of internationalisation and market sizeas the leading US and Japanese firms. This implies both that further mergers and

rationalisations of European automobile firms are in prospect. In addition, the

European survivors will have to have an active internationalisation strategy to take

them into emerging markets either through transplants, co-operation agreements or

both. This is particularly important for the least internationalised of the bigautomobile producers.

2. The biggest area of competitive weakness of the European industry is in itscomponent suppliers, particularly the second tier component manufacturers. This

industry stands to gain from the new management approaches which have been

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consistent with the incremental changes and path dependency which faces the

automobile market. Large sudden changes are hard to achieve by the industry not

least because the automobile operates in a complex setting of social, legal and

economic practices which have to be complementary to the car to achieve the desired

policy outcome. In such complex circumstances changes are often slow and hard to

drive in the desired direction, even if there is goodwill on all sides.

6 Aerospace

6.1 Overview

The growth outlook for aerospace is good, given emerging demands especially in the

Pacific Rim countries and China. Nevertheless, it faces considerable demand cycles

which relate not just to business conditions but to government expenditure decisions,

especially in military markets and as they affect national airlines. In this industry the main

players by a long way are the US and European producers. Japan and other Asian firms

are far in the background. The Soviet air industry certainly has had the technological

competencies to compete in the past, but it is unlikely to be able to establish a presence

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Other sub-sectors of the industry are smaller but still important. They include engines,

equipment, space and guided weapons. The markets for engines exists largely

independently of the airframes industry in that most of the major firms (Rolls Royce

(UK), Pratt and Whitney (US), General Electric (US) and SNECMA (F)) can supply

engines for any of the main airframes. However, clearly the engine and airframe

manufacturers have to collaborate quite closely in specification and design integration in

order to meet demand. The equipment market is largely dependent upon the activities

and market success of the airframe and/or engine manufacturers. Whilst the civilian

space industry is dominated by the European Ariane rocket systems and the US facilities

based at Cape Canaveral. Military systems (guided weapons, military aircraft, etc) are of

course highly influenced by strategic and political issues, although there is an increasing

focus on open competition even in this sector.

Looking at airframes, which is the main area of competition, European aerospace is a

strong industry and has made considerable gains in both market share and

competitiveness in past years. The main basis for these gains has been the (heavily

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contracts involve complex financial, leasing and servicing agreements extending over

many years. In many cases, as each aircraft is to some degree customised for the

individual order, the choice of sub-components may reflect the carriers preferred

supplier. Such choices may be driven by national interest or by the wish to streamline

the number of different types of equipment in the fleet. This is an important

consideration in the competition in the market for engine. Third, the industry is highly

influenced by governmental policy. This is an industry where military and civilian

production are very closely allied and so there are shared learning effects. Similarly,

governmental decisions about subsidies, support for national airlines and so on can all

influence greatly the rate of market growth.

6.2 Technology and skills

The aerospace sector is incontrovertibly a high technology-high skill sector. The

technological systems are not only leading edge they are integrated into complex systems

which have to perform in hostile conditions with extremely high levels of reliability. As a

result the industry is characterised by very high costs which are directly related to the

R&D stages of production.

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issue here will no longer be competition for market share, but what the European

producers can bring to the project in terms of technological competences and resources

in order to negotiate a significant slice of the activity.

Below these overall considerations there are two areas in which technology will affect

competitiveness. The first concerns innovation in the technological systems and

equipment. The second relates to the ability to manage the complex process of co-

ordinating the design and construction of the aircraft.

In the first case there are a series of areas of technological challenges which dominate in

the industry these mainly concern fuel efficiency and noise reduction. One side to these

issues lies in engine technology, where there are major efforts in lean burn and cleanerfuels (possibly hydrogen), better turbine design, the use of ceramics and other new

materials in the engine and so on. The main effort in the design of airframes has been to

reduce drag factors and to reduce weight (through new laminar flow vertical fins, new

carbon fibre wing designs, new fuselage designs, etc). In addition, control systems have

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methodologies of concurrent engineering to compete on product development cycle

times given it devolved consortium structure. A significant part of the problem is non-

technological in that decision making is separate between the consortium members (and

still reflects national priorities). This is an area which will require close attention and

probably some rationalisation if Airbus is to continue to match Boeing in the introduction

of new aircraft which meet the operating demands of customers, changing environmental

demands and so on.

6.3 Strategies and policy

The European aerospace industry is currently highly competitive with its major

competitors in the US. In some areas it has a design and technology lead. However, it is

smaller and, in an industry which requires massive capital investments in R&D in order

to develop new models, is therefore exposed to a much greater degree of risk from a

product which performs poorly in the market place. The critical challenge therefore is to

expand its market share as far as possible to match the US producer.

In support of this overall aim, the aerospace industry will have to make further structural

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in anticipation. There may also be issues here which will require rethinking of

competition rules on an international level.

4. New developments by engine manufacturers are an important area in whichtechnological advances may improve the European competitive position especially

given demands for quieter more efficient power units. One issue is whether the

relatively small SNECMA may find its position under threat from the capital intensity

of the industry. Here collaboration between firms on development may be important.

5. In the equipment industry the relatively small size and national orientation of thefirms supply chain, which can often extend to three or four tiers, may be a cause for

concern. Given the complexity of the aircraft design and assembly there may be

scope for streamlining the supply chain and for greater support for the firms in this

industry to meet the ever rising quality and technological sophistication.

7 Conclusions

In this report we have examined the competitiveness challenges facing a number of key

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7.1 Diversity and similarity: general lessons from the sectoral stories

There are major differences between the industrial sectors which we have examined in

this report. Table 1 provides a brief summary of some of the main directions of change

in the overall industrial structure. The main messages in the chart are that all of the

industries confront low to moderate growth in demand in EU markets. High growth in

demand is only to be found in emerging markets particularly in the Asia/Pacific

Rim/China region. With the low growth in demand, increasing pressure from low-cost

commodity producers in Asia and the increased use of labour saving technologies this

means that direct European employment in these industries can be expected to fall.

It is important to recognise, however, that falling employment and even the loss of some

market share in Europe does not mean that European industry is uncompetitive. Rather

it reflects changing international systems of production. First, this leads to a greater

degree of globalisation of production. Second, it results in shifts in the international

specialisation of activities, so that more of the European centred activities are upstream

or downstream of the direct manufacturing processes, especially the more routinised

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trend in the industry towards the integration of production into seamless chain. With

such moves the economic calculation of competitiveness shifts because the costs of

production are taken over the whole value chain and so the outsourcing of low value

components may not be particularly significant as compared to say timeliness of delivery,

lowering of overstocks and so on.

In terms of the overall TCLF sector, therefore, the important step is that European

TCLF producers have to gain control the overall production chain so that the design and

distribution ends remain in Europe, even if some of the intermediate steps are

outprocessed to third countries. A secondary, but increasingly important issue, is that

technological leadership is necessary not only in the design, development and distribution

stages, but in production as well. If the production stage of specialist TCLFmanufacturing is lost then much of the practical know-how necessary to continue to

bring innovative materials and designs through to the market will be lost.

The easiest way to understand the European steel sector is as two overlapping sections.

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scientifically) dynamic as well as providing ever higher quality and performance

characteristics.

From the first two sectors we can clearly see two important features of the

competitiveness strategies which European producers are pursuing. These are, first, the

importance of strategies of specialisation, often based on enhanced technological

performance and; second, closer integration of the value chain in order to build up links

with downstream purchasers of products or indeed to gain control over the high value

stages of production in design, development and delivery. Exactly the same features can

be observed in the other two sectors, but here there we see an additional feature which

is the growing globalisation of manufacturing firms through regional production

facilities.

The motor vehicles sector is probably the most globally distributed in its production

capacity. The leading global firms are present in all the major markets. This is an

essential step for all firms hoping to remain serious players in the industry. Only by

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extremely high performance sub-systems and in order to integrate these systems to create

aircraft which meet extremely exacting performance requirements. In terms of the

component technologies it is clear that Airbus, the European leader, is fully competitive

if not slightly ahead. However, its ability to manage the complex processes involved in

bringing forward a new model of aircraft is undoubtedly hampered by its fragmented

organisational structure and the relatively small size of the partners in the consortium.

Airbus will have to rise to this structural challenge if it is to gain market share from

Boeing, its main rival. However, at the same time, like the auto manufacturers, it will

also have to seek out international alliances (possibly even transplants) in the merging

Pacific Rim countries and will probably have to streamline its rather complex and deep

supply chain.

Thus in arriving at an over view of these sectors we can see three main trends taking

place which will form the focus of competitive strategies for European producers in the

next few years (although to different extents in different markets). These are:

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streamlining of the supply chain that has been seen in the automobile industry and

which is probably also needed in aerospace.

3. Global-localisation gives some relief from the fear that the vast majority ofmanufacturing capacity will migrate out of Europe because of relatively high labour

costs. With rising technological sophistication and growing capital intensity, relative

labour costs are less important, especially in large consumer and intermediate

products. For this reason it is fairly sure that large amounts of production capacity

will remain in Europe. The question is whether it will be owned by European firms.

The risk is that if it is non-European then much of crucial the high multiplier, high

value added activities (the ones that will create jobs in the future) will mostly take

place in the home countries of the globalised firms. Rather counter intuitively, this

seems to imply support for a strategy of delocalisation of European producers,certainly co-operative arrangements with foreign producers should be sought.

7.2 Outlook and Policy Prospectives

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Against these intra-industry challenges we have also to place pressures which are being

created by broader changes which are taking place in the economy and society. For

these industries the most important changes which are looming relate to: the increased

liberalisation of markets; the more stringent environmental regulations and issues

surrounding governmental spending plans (Table 3).

Across the sectors, TCLF and steel are those most exposed to increasingly open market

structures due to their weak position with regard to competition in commodity markets.

However, the automobile industry is also facing challenges due to the greater openness

of markets, if only in terms of declining consumer loyalty to the national marque. The

question here seems to be how best to use the time during which the markets are

becoming more internationalised in order to build strengths in speciality sectors andthose areas of the market where technological advances (especially for steel and TCLF in

new materials) can provide the basis for longer term competitiveness. In all these sectors

it will be important to increase the efficiency and integration of the value added chain in

order to raise the efficiency of the innovation process.

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In the environmental areas all the sectors are affected by changing regulations, especially

in the areas of industrial pollution control. Of course the two transport sectors

(automobile and aerospace) are also affected through policies on issues such as noise

pollution, congestion and pollution from the combustion of fuels.

As the recent DGIII (1997) report on competitiveness suggests, regulations are not in

themselves inhibitors of competitiveness or innovativeness regulations . It depends on

how they are conceived and implemented. Industrially efficient regulations should:

1. focus on outcomes rather than forcing firms to adopt particular technologies orapproaches to solving problems

2.

provide a stable, predictable decision making environment in which delays,transaction costs etc are minimised, this raises transparency and reduces risks in

innovation;

3. be realistic about the speed and timing of new regulations, so that firms can adopt thenew approaches without putting competitiveness into jeopardy;

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Table 1 The status of the sectors: summary table

Sector MarketStructure

MarketGrowth

Employmentchange in theEU

Technologyintensity

Textiles,clothing,

leather andfootwear

Intenseinternational

competition,especially incommodity

markets

Low growth inEU. Expanding

markets in Asia

Substantialcontinuing

decline

Low to medium(except in new

materialsciences)

Steel Localconsumption-

production.But growing

internationalcompetition

Low growth in

EU. Expanding

markets forspeciality steels

Some further

rationalisation

in integratedplants

Low to medium

(except in

speciality steelsand metallurgy

sciences)

Motor vehicles Global Low growth in Further declines Medium to high

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45

Table 2 Current position of Sectors

Sector Strengths Weaknesses Industry Environment Current Action

Textiles, Clothing,Leather and Footwear

(TCLF)

Fashion based products Specialist materials technological base large local market

cost structure deficiency in

strategicmanagementcapability in manysmaller firms

commodity markets verycompetitive on price

moderate to low growth rationalisation in textiles outprocessing in clothing increasing specialisation

Steel

technological capability financial strength strong user markets restructured operations

overcapacity inintegrated operations

low growth pattern limited growth in local

markets

increasing competition inbasic products

continuing restructuring shift to minimills close co-operation with

user markets

Motor Vehicles andComponents

Good Engineering andDesign

large local market onwhich to supportproduct development

improving quality

low level ofinternationalisation

supplier system noteffectively organised

ability to fund modelfailure not assured

moderate local growthpotential

growing competitionfrom transplants

increasing regulatoryimpositions

emphasis on streamliningproduct development

improvement of suppliernetworks

Aerospace

technological capability good product family political support

structure of AirbusIndustrie is weak

military/civilian linkless than in US

defence spendingdeclining

oligopolistic and highlycollaborative

growth prospects good very high risk and capital

intensive

increasing collaborationacross industry

structural reformpromised for Airbus

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46

Table 3 Future position of Sectors

Sector Opportunities Threats Prospective developments Policy Actions

Textiles, Clothing,

Leather and Footwear(TCLF)

Emerging fashionmarkets

Specialisation ofmaterials, products

new Asian markets

improving capabilityin Asian producers

Competition fromEastern Europe

rising sophistication of tastedriven markets

new materials and newapplications for materials

Adequate response tochanges to Multi Fibre

Agreements encouragement of

demand led innovation

Steel

improved steel formotor vehicles

reduced complexity oforganisation

improved usercollaboration

general overcapacity

emerging Asiancompetition

competition fromother materials

continuing shifts to flexiblefacilities

more stringentenvironmental regulations

metal composite materials

planned phasing ofchanges in regulation inharmony with shifts inusage patterns

industry wide rather thannationally basedrestructuring

Motor Vehicles andComponents

Emerging marketalliances

strong componentsupply networks withtransplants based onquality

Existing globalsupply networks

Model failures Failure to form

international bases

impact of new materials Transportation policy

decisions which disruptmass markets

regulatory change

phasing of regulations onpersonal transportation tobe harmonised withadoption of technologicaldevelopments.

Aerospace

Prospects for growthin civilian air transport

Internationalcollaboration in space

Very strong UScompetition

Failure to joinappropriatealliances

Problematic decisions onfuture of supersonicpassenger air transport

Increasing R&D spendinglikely

Increased linkagesbetween military andcivilian projects to make

effective technologydevelopment.

Harmonise nationaldefence requirements

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Appendix: Sector descriptions

1 Textiles,Clothing, Leather and Footwear (TCLF)

1.1 Introduction

In this section the situation in the Textiles, Clothing, Leather and Footwear (TCLF) sector will be

explored. These four industries are classified as resource based, relying on many natural raw

materials, and producing consumer or intermediate products. The clothing and footwear sectors

depend significantly on economic development in general but their share of consumer spending

decreases with increases in personal income.

1.2 Growth in the Sectors:In the EU, consumption of TCLF has been stagnant since 1990 although there are signs of a

recovery recently. Growth in consumption over the period since 1985 was 1.9% per year in real

terms. Production in the period since 1985 has grown at 0.7% per year in nominal terms and with

growth in labour productivity of 3.6% per year, employment in establishments employing more

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1.4 Trade and International Structure:

There have been major shifts, in recent decades, in the location of textiles and clothing production.

More than half of the worlds exports of clothing and one third of the worlds exports of textiles

comes from developing countries, mainly in Asia. These countries have more than doubled their

export shares of the late 1960s. Even within Asia there have been migrations of textiles and

clothing industries, first from Japan to Korea, Taiwan and Hong Kong and then to China and

Indonesia and most recently to Bangladesh, Pakistan, Sri Lanka, Laos, Nepal and Vietnam. These

migrations have been driven by rising incomes and wage rates and by developments in

communications which have promoted greater specialisation of production with the labour

intensive segments of production operations being established in low wage economies whose

policies attract such development.

Table 1.1 Textile and Clothing exports at current prices, 1980 and 1995Textiles Clothing

1980 1995 Change 1980 1995 Change($USm) ($USm) % ($USm) ($USm) %

Asias Chinab 2540 13918 448 1625 24049 1380Taiwan 1775 11908 571 2430 3256 34

Hong Kongc

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From Table 1.1 it can be seen that, while the value of world textile exports rose by 177% between

1980 and 1995, export value for Asian countries rose by 298%. The corresponding increases for

clothing exports were 289% for the world and 308% for Asian countries. The clothing increase in

Asia is largely attributable to the increase in China of $US 22 billion in the period and, to a lesser

extent, growth in Korea and Malaysia. However the largest growth in clothing exports occurred in

the other country category reflecting the global diversification of these industries.

Table 1.2 Textile and Clothing imports at current prices, 1980 and 1995

Textiles Clothing

1980 1995 Change 1980 1995 Change($USm) ($USm) % ($USm) ($USm) %

Asia China a 1100 10914 892 n.p n.p n.a

Taiwan 288 1792 522 6 882 14600Hong Kong(gross imports) 2967 16859 468 695 12654 1721

Hong Kong(net. imports)b 2106 4858 131 383 897 134Indonesia 217 1170 439 n.p n.p n.a

Japan 1663 5985 260 1537 18758 1120Korea 409 3959 868 14 1073 7564

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followed by China, Italy and South Korea.(see Fig. 1.2) Japan had slipped from second place in

1980 but part of the reason was investment by Japanese companies in production bases in low cost

locations to supply Japans needs.

The share of textile exports in merchandise trade fell in the EU from 3.7% in 1980 to 3.0% in 1995

while the fall in the US for the period was from 1.7% to 1.3%. By contrast, in clothing export

shares rose in both countries; in the US from 0.6% to 1.1% and in the EU from 1.6% to 1.9%. At

the same time import shares have risen more; textiles - EU 2.0% to 2.9%, US 1.0% to 1.4% ;

clothing- EU 2.4% to 5.9%; US 2.7% to 5.4%.

From Fig 1.3 the emergence of China as a major force in clothing exports is clear, while the

continued strength of Italy and Germany is also a feature.

China5% Germany

11%

Japan9%

S. Korea4%

Rest ofWorld56%

China9%

Germany9%

Japan5%

S. Korea8%

Rest ofWorld56 %

Figure 1.2 Principal textile exporting countries, shares of world exports of textiles. 1980 and 1995

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1.5 Labour Costs:

A major influence on the competitiveness of European textiles, clothing, leather and footwear

industries is the level of labour costs. In the following table it can be seen that European countries

are at a severe disadvantage against Asian competitors and even against the US. Particularly in the

labour intensive clothing and footwear this cost penalty is difficult to overcome in the low cost

commodity product areas. Similar disadvantages exist with other areas of the world which have not

yet entered the world markets but which will inevitably follow the established dynamic of

industrialisation by developing textile and clothing production.

Table 1.3 Hourly wage costs in the clothing industry ($US): wages + socialcontributions.

Country 1991 1993 Country 1991 1993

Europe Asia

Germany 14.81 17.22 Japan 7.44 10.64

Belgium 12.57 16.20 China 0.24 0.25

Denmark 15.91 17.29 S.Korea 2.75 2.71

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The problems of the industries in the developed countries are highlighted in Table 4. Little data is

available for the developing countries but, in the case of Malaysia, capital inputs as reflected by

fixed assets per employee grew at a rate of 13.6% per annum in textiles and 5.9% in clothing in the

period from 1986 to 1991. This contrasts sharply with the static or declining capital inputs in

Europe.

Table 1.4 Growth rates of Output, inputs and productivity (1980-1993)% per annum

Country or Zone Output Labour

Input

Capital

Input

Labour

Productivity

Cap.Lab.

Ratio

Total Factor

Productivity

European Union -1.18 -2.97 0.34 1.84 3.40 1.33

US -0.51 -2.95 0.20 2.52 3.24 1.82

Japan -1.01 -0.72 4.65 -0.29 6.37 -1.77

France -2.84 -4.09 0.41 1.30 4.69 0.82

Germany -1.60 -3.61 -0.79 2.08 2.93 1.57

Italy 0.59 -1.10 2.48 1.71 3.61 1.37

UK -2.00 -3.58 -0.77 1.64 2.92 1.09

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1.6 Employment

Table 1.5 sets out the dramatic changes in employment which have accompanied the restructuring

of these industries in the various areas of the world.

In 1980 the numberof employees in these industrieswas divided equally between G7 countries

and Asian countries with just over 6 million in each group. By 1992 TCLF workers in the Asian

countries outnumbered those in the G7 countries by two to one. The increase of 2.4 million

workers in the Asia group was dominated by the 2 million increase in China.

1.7 Strategic responses

Four response to these competitive pressures have been discernible in developed countries:

(a) Use of protection through the Multifibre Arrangement (MFA) and direct industry support

programmes,

(b) Capital investment to increase labour productivity,

(c) Assistance to facilitate labour mobility and retraining for restructuring of the industries

(d) Support for research and product development to increase competitiveness.

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1.8 Summary

The sector displays all the classic problems of retaining competitiveness in developed economies.

Commodity production requires very low costs and technology has limited effects on reducing unit

capital costs. Textile manufacturing and downstream subsectors such as carpetmaking are capital

intensive and have not been subjected to the same level of competitive pressure as clothing

manufacturers but all segments will be pressured as the removal of the protections, which existed

under MFA, gains pace towards 2005. The main consumption markets remain Europe, US and to alesser extent Japan. As suggested by the summary table (Table 6), the longer term challenge for

European producers is to build on their strengths and leadership in high value areas and activities in

the sector.

For the moment, however, the main problem for Europe is to maintain the strength of those

segments which have strategic competences until the markets in emerging countries gain the

necessary level of development to constitute reciprocal markets for the sophisticated high design

content products in which Europe might retain competitive advantage.

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55

Table 1.6: Textiles: Key Challenges and Chances

Production phase Commodity Fashion Niche Rate of Change Main competition toEurope

Design Normally moderatelyimportant except when

design of textile can be

linked to specialisedequipment fashion

demands reduce

commodity

strong source of

competitive advantage

but when garment maker

moves offshore failure toretain loyalty can be a

threat for textile

manufacturer

presents opportunities

for viable development

of new fabrics which

may be later adopted tomass or fashion markets

fashion changes have

increased from two per

year to five or six.

opportunities for designoriented supply firms

USA. and some of the

emerging nations.

Manufacture ofTextiles

Cost the principal factor.

The emergence of Asian

companies who can

acquire and use modern

technology a threat

Difficult to retain

economies of scale in

fashion fabrics but price

competition is less at

present

Opportunity to

experiment with new

fabrics.

overall rate of change in

fabric types is increasing

and may require product

line rationalisation by

individual firms

Strong competition

from Asia.

Make-up andAssembly

Almost impossible for

Europe to operate in this

sub sector because ofcost structure. Some use

of outprocessing can

help.

integrated firms such as

Benetton, can retain

make-up and assembly inEurope. Other smaller

fashion producers may

send some work offshore

because of the nature of

the market and the high

innovative contentcompanies in this

segment can retain

work in Europe.

fashion changes have

increased from two per

year to five or six. strongopportunities for suitably

organised firms

In commodity products

Asia is the principal

competitor. In thefashion and niche areas

Asia will increase its

competitive presence.

Distribution linked with the overallproduct cost. has not

protected European

companies even in home

markets

Integration through the

supply chain is an

effective competitive

strength for European

manufacturers.

strongly linked within

the overall supply

chain.

adoption of industrial

practices for inventory

control and lead time

reduction have been used

to compete.

Europe retains some

advantages in this area

but Asian economies

are familiar with just-in

time concepts too.

Retail marketing branding is being usedincreasingly to sell

concepts of quality incommodity type products

development of brands is

principal source of

strength with otherintangible assets

embedded in service

not as important as

industrial marketing but

integrated service isstrongly competitive

emergence of heavy

discounting in major retail

chains with retainedquality image is increasing

US can compete on

branding.

Strategy Continued advance intechnology linked to

specialist attributes of

products

Further development of

Integration and design led

total service concept

Innovation in fabric use

and product design and

links with fabric

producers

constant review and

refocus in the face of

intense competition from

emerging areas.

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2. Steel Sector

2.1 Introduction

The steel sector is undergoing substantial evolution. From the recovery of iron ore to casting

and rolling of the final form, far reaching change is occurring and has been for some time.

These changes have presented challenges and opportunities to firms in the industry which have

been prepared to adapt. The pursuit of efficiency and cost containment has been particularly

intense in the past ten years. The advent of new technologies, such as continuous casting, along

with the economic difficulties at the end of the 70s and early 80s are reflected in the statistics.

The growth in crude steel production since the mid 1970s has been only 0.5% per annum.(see

Fig.2.1)

Figure 2.1

WORLD STEEL PRODUCTION

800

900

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Asia. Despite the slow growth of steel consumption expected and the consequent slow growth

of production, capacity increases, particularly in the newly industrialised countries, are

predicted to increase the capacity available by the year 2000 to almost 1.2 billion tonnes. Figure

2.2 shows that virtually none of the increase is expected in the OECD countries while countries

like India, China, Taipei, Malaysia and Thailand will be adding significantly to available

capacity.

Figure 2.2

Crude Steelmaking Capacity

600

800

1000

1200

milliontonnes

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picture is one of localised production but with significant markets to be competed for and a

threat of increased competition from additional capacity being installed in newer developed and

developing countries with lower wage costs.

Because of this localised phenomenon over supply in one area of the world and shortages

elsewhere do not always lead smoothly to trade. Shortages of steel in Asia have been projected

in the short-term while there will be over supply in the advanced countries. This should provide

opportunities for efficient operators in the EU and US at least until new capacity in Asia comes

on stream.

Total Cons

18.26

12.06

16.0853.605.59

1.09

5.79

87.52

0.2494.71

0.0020.0040.0060.0080.00100.00

Percent

Percentage of Own Production Consumed by CountryFig.2.3

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EU

Japan

US

Others

EU

Japan

US

Others

2.97

0.58

3.08

46.53

0.03

0.02 11.59

0.600.04 11.43

0.26

3.00

15.22

0.03

1.14

3.47

0.0010.00

20.0030.00

40.00

50.00

Percent

Consuming

Country

Producing

Country

Fig.2.4 Percentage of Total Production by Consuming andProducing area

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2.3 Technology

The major technological development impacting on the shape of the steel industry in recenttimes has been the emergence of the electric arc furnace (EAF) and the minimill. Although

the technology has been available for many years the EAF and associated minimill are

significantly changing the industry in the 1990s. Facilities using EAF have encroached on the

traditional markets of the large integrated steel plants and increased their share of crude steel

production from 14% in 1970 to 33.5% in 1996. Planned capacity increases are mainly of the

Blast Furnace(BF) or electric furnace type with many of the older open hearth furnaces being

retired for environmental reasons. The development of the minimill on a smaller scale and with

a modular approach to steelmaking has allowed synergy to be developed with the consuming

industries and minimills to be tailored to specific market sectors. As a result, it is unlikely that

integrated blast furnace or basic oxygen furnace(BOF) plants will enjoy more than very modest

growth. Electric arc furnaces originally used 100% scrap steel as feedstock and their strong

growth has led to an increase in the price of scrap. The latest technological advance, direct

reduction iron (DRI), allows iron ore to be used thereby alleviating the problem. Figure 2.5

shows the pattern of technology use in steel production.

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2.4 Research and Development:

In Figure 2.6 the pattern of R&D expenditure in this sector for the three main trading groups

suggest that the US which has recovered much of its competitive position has done so through

purchase rather than development of new technology. European R&D spending is much higher

than US spending but lags Japan significantly. This research effort needs to be increasingly

focused on raising quality and enhancing value-added as a counter to lower cost imports.

Europe has the capability to be a strong competitor in specialist property steel and should

orient development towards that market with the co-operation of user industries.

Figure 2.6

R&D EXPENDITURE IN IRON AND STEEL 1985-1994

1000

1200

1400

1600

1800

2000

ILLIONS$

JAPAN

EU

US

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The EU coal and steel treaties have had similar effects alongside large scale rationalisation.

Preference for local production and local suppliers has kept the prices of steel to industries like

the auto industry high and has helped to maintain profit levels. While Returns on Total Assets

in the steel industry since 1980, in both Japan and the EU, have been low, they have at least

been positive (Figure 2.7). By contrast in the US where price competition has been strong

since 1980, profitability has been low with large negative levels of return on total

assets(ROTA) from 1982 until 1989. The impact of new competition has increased the

dynamism and innovation of the US industry as minimills continue to make inroads into the

markets and weaker integrated players exit. Profitability has returned to US steel making since

the early 1990s based on significantly improved productivity and new investment.

Figure 2.7

Steel Industry Profitability 1980-1992Return on Total Assets

4

8

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have been achieved by the minimills and newly restructured operations in the US where the

industry average man-hour content of a finished ton of steel has been reduced from 10.1 in

1982 to 3.9 in 1995. Table 2.1 sets out the respective positions of the main trading blocs.

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Table 2.1 Factor Markets

Cost

Category

Europe Japan US

Inputs(material

and energy)

High cost of energy(electricity)

Moderate cost of scrap

High cost of energy(electricity)

Moderate cost of

scrap/ low availability

Low cost of energy(electricity)

Low cost of scrap/ high

availability

Capital

Low cost of capital frombanks

Less pressure to perform

No venture capital

Low cost of capitalfrom banks and

unrealised gains

High cost of capital

High hurdle rates/ shortpayback requirements

Labour

Relatively inflexible

labour forceStrict legal constraints

Flexible workforce

throughsubcontracting

Lifetime employment

Integrated producers

face more constraintsMinimills non-unionised

Other Issues

Management/workforce

Strained /regulated Cooperative Adversarial inintegrated production

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semi-finished steel to make final products. Such a strategy could be very viable in Europe with

the availability of cheap blast furnace iron from former communist countries. However the

employment reduction in the restructured companies would be high.

2.8 Summary:

Steel making has undergone dramatic changes within the recent past with upheavals in world

trade with the collapse of the former Soviet Union and in production with the growth of

minimills and the emergence of China and Korea as major producers and users. The response

of steelmakers in the US and Europe has been to restructure and improve dramatically labour

and capital productivity and to invest in R&D to combat the technological advantage which

countries like Japan and Korea had established.

The world market for steel will grow at only 1% or 1.5% per annum. Asian countries are

developing capacity based on the most modern technology reducing opportunities in these

growing markets. Investments in R&D are expected to increase in Asian countries and must be

at least matched by Europe. For the moment, however, steel trade remains largely localised for

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66

Table 2.2: The steel sector: key challenges and chances

Sub-sector Growth Technology and R&D Skills Costs Competition and StrategicResponse

Primary

Processors

Overall Low Overcapacity in many areas

such as tubes, investmentconfined to productivity andquality improvement

Medium level

skills withlittle newtechnology

Costs currently

competitive fromrestructuring.Problems with low

cost imports

Mostly Eastern Europe

Further rationalisation andcross border mergers and co-

operation

Construction Moderate Development of steel framingfor housing and commercialbuildings presents a future

possibility

Medium levelskills

Structural steel costsin Europe under

severe pressure fromEastern Europe

Rationalisation and jointventures with Eastern

European partners

VehicleManufacture

Moderate butcyclical

Improvement in productperformance capability is

holding of challenge from othermaterials. Continued R&D

investment needed.

Higher levelskills in terms

of processcontrol andmonitoring

Specialist area withcost competitiveness

based ontechnological

capability

Competition from Japan,particularly for transplant

business. Strategic responselies in increased collaboration

with Japanese auto makerson product development.

MetalProducts

Low Diverse segment withcompetition from alternative

materials very strong.

Medium levelskills

Basic commoditysteels are used and

lowest costs prevail,severe competition

Competition from low costemerging economies. Productspecialisation and innovation

strategies based on nichemarkets.

Canning Moderate Investment in R&D has

restored t inplate as preferredalternative to aluminium.Continued investment in

product performance needed

Higher level

skills in termsof processcontrol andmonitoring

Specialist area with

cost competitivenessbased on

technologicalcapability

Competition more from

alternative materials. Europeis competitive on tinplate butproduct improvement must

be continuous based onR&D.

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3 Motor Vehicles and Components

This industry sector covers not only the manufacture of motor vehicles and engines but

also the manufacture of parts and components. Motor vehicles are dominated by

passenger motor cars with a significant commercial vehicle sector traditionally

segmented into light vehicles(less than 6 tons carrying capacity) and heavy commercial

vehicles.

The motor vehicle industry is a major industry with world wide sales of almost 35

million cars. Production is dominated by the EU, US and Japan who between them

manufacture over 80% of world consumption. Manufacture of parts and components is

a derived demand industry which moves in step with the motor vehicle sector.

3.1 Production

(see Fig. 3.1 for passenger car production)

The EU, as a unit, has been the largest manufacturer of motor vehicles, with Japan and

the US closely grouped in second and third place. Since 1980 the respective positions

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Passenger Car Production 1980-1995

0

2000

4000

6000

8000

10000

12000

14000

EU

US

Japan

The motor vehicle components and parts industry has demand patterns which reflect

the demand for new vehicles in the first place and the vehicle life cycles and

maintenance practises in the second. However the new vehicle demand is the principal

factor. Production units tend to be located near the major vehicle assembly plants and,

except in a few cases, exports are not a significant element in production. The recent

Fi ure 3.1

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who make up the bulk of the manufacturing capability of the sector. By contrast in

Europe more than 3200 companies deal directly with the manufacturers.

There is also higher degree of specialisation and concentration in the industry in Japan

than in Europe. European component manufacturers have traditionally had lower

product quality, longer development cycles and lower labour productivity than the

Japanese equivalents. This is beginning to change as Japanese vehicle manufacturers in

Europe have chosen European suppliers and worked with them to reach traditional

Japanese quality standards. The issues of productivity and development cycles are the

focus of industry improvement efforts and the introduction of concurrent engineering

and rapid prototyping techniques, again under the influence of new Japanese customers

in Europe, is raising the performance of local supplier companies.

A significant element in the operation of parts suppliers in the different areas is the

degree of responsibility placed on the supplier for the design of the component.

traditionally in the US and Europe the motor manufacturer carried out the entire

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3.3 Profitability:

The profitability of companies in the motor vehicle industry has been variable over

recent years. In all areas profit levels have been affected by the business cycle and

consumer confidence which dramatically affects their readiness to purchase such a

relatively costly consumer durable. Allied to periodic swings in popularity for product

offerings individual companies can experience wide variations in profit (or loss) levels.

The three major US manufacturers have had short periods of heavy losses during the

years when large scale restructuring of the industry was taking place. Similarly all the

manufacturers in Europe have had a period of profit seesawing. With the current

recovery in demand, profit levels are recovering.

3.4 Exports and Imports:The picture in relation to imports of motor vehicles into the EU region is one of

stability. In 1989 EU national manufacturers supplied 65.9% of the EU market, while

US multinationals operating in Europe supplied 21.1%. Of the remaining 13% Japan

supplied 8.9% and others 4.1%. By 1995 the proportions had changed little, with non

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of the trade balance. The growth in imports is a consequence of the arrival of Japanese

assembly plants and their insistence on sourcing key component supplies, with their

traditional suppliers.

3.5 Research and Development:

The technological state of the motor vehicle industry reflects the expenditure on R&D

over the years. Fig. 3.2 illustrates the position.

When truck manufacture is added to car manufacture all three groups are of

comparable size in terms of output with the EU some what the largest. however it can

be seen that the investment in R&D in the US is regularly twice that of Japan and

consistently 20% to 30% higher than Europe. This investment is not reflected in

productivity higher than Japan, although recent measures would suggest that US

levels may have significantly closed the gap which was 25% in favour of Japan in the

early 1990s. Higher levels of R&D in Europe relative to Japan have not closed its

productivity gap with Japan. This must raise questions about the focus of such

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solution to these problems will have little short term effect on the industry as it exists

today.

It is not clear from the available data how much of this research is devoted to

improvement of production processes and work organisation but EU levels of

productivity are still about 25% below those of the US and Japan.

3.6 Capital and Other Costs:

In a study in the early 1990s, McKinsey concluded that capital intensity as reflected in

advanced labour saving technologies did not explain the differences in labour

productivity between the US and Japan and that in fact the level of capital intensity for

the industry in Japan was slightly lower than that in the US. This situation also applied

within Japan where Toyota was the clear leader in productivity over its rivals but its

level of capital intensity was similar. By the early 1990s the industry in Japan, the US

and the EU had reached roughly similar levels of capital intensity and therefore little

additional advantage was to be gained in that area.

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In the components industry similar results are found. Japanese transplant factories

using US staff achieved Japanese levels of performance. There were differences in the

distribution of highly skilled personnel. In the US plants the highly skilled were evenly

distributed over all plants whereas in Japan, they are concentrated in the large plants of

the first line suppliers. The situation in Germany is similar to the US but this

distribution of high skills does not translate into high productivity.

3.8 Key Strategic Issues:

The response of EU motor vehicle manufacturers to globalisation will be an important

factor in the retention of competitive advantage. Already the industry has followed

market opportunities by building facilities in Eastern Europe and North America. Asia

is likely to be a growth market and should be the focus of the next phase of

globalisation by EU manufacturers. The same issues apply to the component

manufacturers.

The current deficits in productivity will have to be eliminated in order to be able to

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The move towards a restructured components industry will have major implications for

existing producers. The main motor manufacturers will be increasing outsourcing of

major systems and the suppliers of these in turn will be relying on specialist sub-

suppliers for much of their input. Improvements in quality and production flexibility

will be top of the demand priorities. This in turn will require improvements in

organisation and people skills. On top of this will come an increase in the responsibility

for design and performance of the products being made at the various stages. This

process of change is under way and will be continuous in its nature.

3.9 Summary

The automotive industry in the EU, encompassing motor vehicle and component

production is the largest of the Triad in terms of output. It has retained its competitive

position by continuously improving its products and its productivity. Because growth

in physical output has been only moderate, productivity improvements have led to

reductions in employment. The principal source of competition has been Japan but

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Japanese levels in many European plants. More rationalisation and re-organisation is

required, particularly in the component and parts supply industry which is still too

fragmented to allow fully effective operation of the industry sector.

Research and development in the sector is being concentrated on improving efficiency

of power units, improving safety and environmental impact and the use of new and

advanced materials. The industry in the EU has established technological strengths in

many of the development areas but will need to at le