`Relocation: `double edge sword` – impact on source and target countries ?

29th June 2006, Brussels Ecosoc

Béla Galgoczi

European Trade Union Institute for Research, Education and Health and Safety

http://www.etui-rehs.org

2

Taking stock of the impacts of relocation: should be based on in depth analysis of the phenomenon

Macroeconomic aspects

Relocation in explicit and implicit forms

Impact on source regions

Impact on destination regions

Policy outlook from trade union point of view

A proper and differentiated analysis of the phenomenon is needed in order to explore a wide range of impacts

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Measuring relocation: a very difficult, hopeless(?) exercise..

Relocation is not only there, where the pain appears (directly) – it often has latent, hidden forms, shifts of focuses – that might have massive future consequences (and cumulative ones)

Is the applied `relocation` definition too narrow

Some of the developments remain hidden

Research on different levels might be necessary to get the pieces of the puzzle together

4

Background factors

When trying to formulate potential policy responses and develop trade union strategies

an understanding of the `relocation` phenomenon is needed

- the full complexity (implicit forms, secondary effects)

- business strategies of multinationals

- branch specific business organization models

Strong interrelation between: `relocation` - `restructuring` - collective bargaining – workers participation

Trade unions have to address the complexity (especially on European level)

5

Background

Increased international share of labour – cross border investments (FDI)– cross border trade of intermediary products in dynamic growth (OECD, 2006; World Bank, 2005)

New forms in reorganizing international value chains

Contracting out > outsourcing > offshoring – relocation

Trade theory (Helpman, Krugman 1985), Theory of the Multinational firm (Merlitz, 2003) – FDI vs trade

‘Vertical – horizontal FDI’ – outdated: new complexity in integration strategies (Feinberg, Keane 2003 – US-Canada, survey, E. Helpman 2006).

Intra-industry trade, intra-firm trade on the rise, also with emerging economies (previously characteristic for trans-actions among rich countries)

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Measuring relocation

When talking about ‘relocation’ (or ‘delocalisation’), a great variety of terms are used, often in a confusing way.

There are two starting points:

foreign direct investment (FDI) – /not just fresh capital..as eg. at mergers, acquisitions, takeovers/ - look behind the numbers..

and international trade:

Within international trade, the rapid growth in the intra-industry trade of intermediaries is due to the emergence of (international) outsoucing or offshoring.

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Relocation - /substitution/

In reality, it is hard to draw the balance of operations, as explicit and implicit forms of factor substitution get mixed and processes of specialisation and structural change play a great role

How the use the term ‘relocation’ as a working method – define the substitution effect (when production /value added/ shrinks and import grows)?? – in order to examine the phenomenon on basis of aggregated trade and FDI data (not just as anecdotal evidence, or media reports)

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Relocation - substitution

The concept of ‘relocation’ formulated, as: ‘the process of shifting economic activities towards foreign sites, including the closing of domestic sites or scaling down their activities’ – is a starting point

The key is ‘factor - substitution’

Relocation in the narrow sense: when a substitution of factors takes place in respect to the domestic market: when imports from the offshored production site supply the domestic market, as well.

when a subsidiary company in abroad is established to target third markets instead of exporting from the domestic location – loss of opportunity.

location competition for new investment – where new investments are placed

any expansion abroad that does not result in expansion at home – is relocation?

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Measuring relocation - /substitution/

How to define and measure relocation, the ‘substitution effect’? Example of Germany’s and France’s trade performance vis-a-vis NMS-s and China (also using sectoral breakdown) /Sachwald, IFRI, 2006/, Austria (Altzinger, wiiw)

Then compare it with FDI pattern and branch composition

Trade, FDI and employment analysis (Germany vs. France)

Trade analysis: specialisation, branch specifics, intermediary products

FDI flow and stock analysis: structure, by branch, skill level, technological level, value added – any trend? Upgrading?

Thesis: Germany’s intensive trade and vertical FDI with NMS contributed to its competitiveness (also on global scene..)

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General comments

If both output and employment grow, relocation could still happen – e.g.: German automobile industry (see later)

One branch can grow to the detriment of the other – value added counts

Cross-sectoral structural change

Relocation is not per se detrimental, in certain cases can dynamise the economy and the particular enterprise (this is why traces of relocation can not only be found at contracting sectors) – e.g.: leading computer firms (Intel, IBM, Dell) consciously `relocate` low margin manufacturing functions, thus dynamising the company – huge restructuring impact (upgrading, specialisation).

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Changing pattern – impact on source and target countries

Changing pattern - less horizontal, more vertical FDI (market exploration is mostly over)

Shrinking manufacturing share in industrialised countries:

Whereas manufacturing is shrinking in EU15 (UK – 30%, DE – 10% - 1990-2003), on the rise (again) in NMS

Share of manufacturing in total employment (2003) – UK: 13%, DE: 22%, HU: 25%, SK: 27%, CZ: 30%

Growing manufacturing market share for NMS in the period 1995-2003:

SK: + 87%, HU: +116%, whereas DE: + 5,2%, FR: -5.0% (OECD, 2006)

Clear indication of ‘relocation’: share of intra-industry trade in total manufacturing trade is above 70% in CZ, HU, SK (OECD, 2006)

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changing pattern: impact on target countries

Relocation and structural change goes hand in hand – upgrading process towards higher value added activities – increasing specialisation – both in source and target countries

From buyer driven networks (lengthened workbench) to producer driven supply chain networks – capital, skill intensive /automobile, ICT/ (World Bank, 2005)

Upgrading in the NMS by growing value added content – changing factor intensity of merchandise exports (1996-2003) – HU: unskilled labour down by 47%, capital intensity: up by 78% (World Bank)

Share of high tech industries in total manufacturing exports –

HU: 35%, DE: 18%

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changing pattern: impact on target countries

Clear indication of ‘relocation’: share of intra-industry trade in total manufacturing trade is above 70% in CZ, HU, SK (OECD, 2006)

What trends can be identified?

Shifting trade specialisation of CEE between 1993 and 2003: clothing fell dramatically, automobile and parts increased to the same extent as clothing fell; high increase in telecommunication and data processing, substantial decrease in wood manufacture and furniture (WIIW..).

But net job creation in target countries (CEE) is marginal

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Impacts - trends

Evidence by trade statistics between EU-15 and CEE NMS-s:

Trade surplus of EU15 with CEE8 decreased from 23bn Eur in 1997 to 13 bn Eur in 2003; German trade surplus turned into deficit

Interesting example of Germany: while Germany is the only major EU-15 country having developed a trade deficit with the NMS – 5bn Eur surplus in 1997 to –0.2 bn Eur in 2003 (German exports at the same time are 8 fold of the exports of France (which maintained its surplus) – (Sachwald, ifri)

Germany is also the greatest investor in the CEE region and its investments are more vertical, while France more horizontal

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Trends

At the same time Germany is the only developed economy that could reverse the downward trade balance trend with China, from 50 bn Eur deficit in 2000 to 30 bn Eur deficit in 2003 (Sachwald, 2006, ifri)

Question: global competitiveness through intensive trade and FDI (vertical) with the NMS?? Viable strategy?

Germany: competitive enterprises – extensive use of international share of labour (relocation) – but negative and persistant labour market impact

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Concerns to EU15 – labour market impact

Core activities on the move? – sustainable process?

Decreasing share of manufacturing in EU15 (future?) (OECD, 2006)

Shrinking value added content?

Structural challenge due to offshoring and new division of labour: increased specialisation, upgrading of activities

Labour market impact in source countries

> labour demand for high skill labour increases, demand for low skilled work decreases > segregation of labour markets, unemployment due to lack of adaptability, less social cohesion

Huge adjustment challenge

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Concerns to EU15 – labour market impact

Up till now, a massive exodus of jobs to low wage countries did not happen

The overall balance is (still) positive (but local tensions grow)

Local and regional impact might be harsh

But also net job loss – European Restructuring Monitor:

In EU15 between Jan 2002 and June 2004 739 thousand jobs were lost due to restructuring, out of which 76% was due to internal restructuring, 4.9% - 36.500 – to relocation and 2.5% - 18.300 to outsourcing..(not reliable, anecdotal evidence)

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Explore impacts > branch examples needed

As patterns of investment, trade and division of labour have a great complexity, branch examples help in orientation

Different supply chain management strategies in automobile and ICT manufacturing sector /in both: shift from OEM towards suppliers/ that makes relocation easier

In ICT manufacturing: vertical specialisation (OEM-s) > CM-s take over flexible manufacturing > vertical reintegration of CM-s into global EMS provider (e.g. Flextronics) – SOMO, 2006, MHM 2006.

Win-win situation can be clearly seen in two major sectors: automobile and ICT: vertical and horizontal integration of production chains had a stabilising and positive employment effect on source countries also, in case of ICT sector it contributed to world market expansion of Europe

‘pure’ relocation with negative employment effect is characteristic to sectors with shrinking market in EU15 (e.g. household appliances)

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Car sector - shift in value added (prognosis) Share of Production Share of development

2000 2010 2000 2010

OEM 28 % 20 % 70 % 50 %

Supplier 72 % 80 % 30 % 50 %

Source:WZB, Dudenhöffer/Büttner 2003

World production 2002 2015

No. of cars 57 Mio. cars 76 Mio. cars

Value 645 Bill. € 903 Bill. €

OEM 228 Bill. € 35 % 23 % 203 Bill. €

Supplier 417 Bill. € 65 % 77 % 700 Bill. €

OEM No. 12 9

Supplier No. 5.500 2.800

Source: WZB, Mercer/FhG 2003

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Foreign country location of the German automotive industry

1990 % 2004 %

Total 722 100.0 1.959 100.0

Western Europe 245 34.0 666 34.0

Eastern Europe 65 9.0 353 18.0

USA/Canada 87 12.0 333 17.0

Mercosur 79 11.0 156 8.0

China 22 3.0 137 6.9

Other Asia 137 19.0 218 11.1

Africa/Australia 87 12.0 98 5.0

Source: WZB (Gesamtmetall 2005, VDA 2005)

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Employment in the German automobile industry 1991-2003 (number of employed)

7578

71

6847

87

6416

85

6610

06

6590

15

7275

29

7460

20 7702

93

7635

22

7725

80

6722

81

7104

81

8027

03

500000

550000

600000

650000

700000

750000

800000

850000

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

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Trade balance of the German automobile sector with the CEE-4 in 2003 (bn Euro)

-0,2

-2,7

-0,6-0,5

-0,4

0,3

-1,8

0,3

-3

-2,5

-2

-1,5

-1

-0,5

0

0,5

Poland Czech Republic Slovakia Hungary

passenger carschassis, bodies, engines, parts and accessories for motor vehicles

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Eastern European countries have high level of ICT production

ICT production

Share of ICT value added (in % of GDP)

0

2

4

6

8

10

12

Source: MHM

European CEM production (bn$)

3,2 3,9 4,3 5,4 7,2 8,6 10

,6

13

,1 16

,1

24

,1

25

,4

19

,9

19

,9

19

,9

18

,6

17

,6

1,0 1

,4 1,9

2,6

3,7

5,2

7,5

12

,0

13

,5 17

,5

22

,3 28

,5

9,1% 9,0% 10,7%11,5%

12,5%14,3%

15,2%

16,8%

18,6%

17,6%

22,8%37,5%40,4%

46,8%

54,5%

61,8%

0

10

20

30

40

50

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Western Europe Central/Eastern Europe

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ICT sector – win-win case

In contract manufacturing of electronic parts and components – (CEM) the share of CEE-8 in total EU /EU15+CEE8/ production grew from 11% in 1993 to 54.5% in 2005 while the output value of EU15 grew to from 4.3 bn $ to 18.6 bn $ in the same period (MHM Business Services, 2006)

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Employment impact

The challenge of relocation is serious, but the situation should not be dramatised

The amount of FDI to NMS is not high, although the impact of relocation appears in trade statistics, potential relocation has real impact (concession CB) – is current concession CB trend sustainable – any real alternative…

The pattern of FDI changed, less market driven, more cost cutting + upgrading in CEE - the overall impact on the EU25 still positive

Western Europe extensively profited from the market opening in the 90-s that contributed to the 7% employment growth of the EU15 (1990-2002) - at the same time 15% employment loss in CEE (6 million jobs!)

Employment balance for EU15 still positive, but more job losses appear, especially in certain branches (structural tension in LM)

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Challenges and policy types

1. Reducing incentives for relocation

2. Coping with actual relocation

3. Dealing with the threat of relocation

General aim: active management of structural change in a forward-looking way with the involvement of social partners and with strengthened workers participation to promote a ‘high-road’ adjustment path and avoid a downward spiral

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Relocation > restructuring - outlook

relocation and restructuring go ‘hand in hand’: permanent structural change at each location

Two sides of the coin

The major way to preserve high quality workplaces in the long run: upgrading activities through specialisation and higher value added

But who is paying the transition costs:

Employees? (as mostly the practice)

Enterprises – through efforts made to push innovation, training and investments (responsibility of enterprises)

Public sources (active labour market policies, flexicurity)

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Challenges for trade unions - outlook

How to manage structural change in the enlarged Europe under global conditions? How to get out of the defensive position?

Aim: adaptation through the high road (innovation, training, investments) instead of adaptation through the low road of pure cost cutting (either through relocation or through wage cuts and longer working hours)

This requires active management of structural change in a forward-looking way with the involvement of social partners and with strengthened workers participation

To think ahead 2-4 years – what we will produce? – in a co-operative way through social dialogue