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Corporate Responses and Strategies Th e essence of successful marketing and management is the strategic acquisition and utilization of resources (materials, labor, equipment, technology, and knowledge) in anticipation of, or in response to, changes in the environment. As pointed out in the previous section, during the 1960s and 1970s firms in the textile complex in all countries faced numerous changes in the environ- m ents in which they operated. Yet, there were considerable differences in the ways that firms responded to these changes. In general, most U.S. textile and apparel firms sought to isolate or insulate themselves from the adverse changes, most notable o f which were the shift of comparative advantage to developing countries and the resulting increase in import competition in the United States. On the other hand, Japanese firms made a strategic decision to invest and contract production in countries that were gaining the comparative advantage in order to develop and gain increased control of the textile complex in developing countries, particularly in East Asia and the PRC. 1 As for companies in the other countries involved, their responses were highly. mixed, depending on their existing international competi- tiveness and the policies of their respective governments. How- ever, virtually all firms in developed nations had to cope with the surging development and exports of East Asia and the PRC. U.S. FIRMS The basic problem facing U.S. textile complex firms was a signifi- cant increase in competition from both domestic and foreign (from both imports and direct foreign investments) sources. However, the nature of the increased competition varied in type an d intensity for each segment. 56

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57 Fiber Firms Investments in the United States by large European-based companies and vice versa resulted in new competition on the home front and additional production capacity. Until the latter part of the 1970s, competition and the imbalance between supply and demand in the United States helped put downward pressure on domestic prices and earnings. At the same time, however, surplus domestic capacity, increased foreign demand for U.S. man-made fibers, and a weakened dollar led to significant increases in exports by U.S. firms. With investments made earlier, to a large extent in Europe, and an increased ability to service other foreign markets by exporting, U.S. firms on the whole perceived little need to invest elsewhere abroad. The more appropriate strategy was to concentrate efforts on the U.S. industry's basic compara- tive advantage, greater production efficiency and new products and processes through increased RED. Virtually all of the major U.S. fiber producers increased their spending on RED during the 1970s, concentrating on cost reduc- tion and developing new, higher value specialty fibers. Major capital outlays were also devoted to modernizing existing facilities in the United States and to complying with OSHA and the Environmental Protection Agency (EPA) regulations. In general, the net result of these activities was a strengthening of U.S. international competitiveness, as reflected in trade statistics and corporate earnings. Fabric Firms During the 1970s sluggish domestic demand and increased com- petition, particularly from Asia, kept prices and earnings low. Increased protectionism abroad and particularly in regions where local demand for fabrics was rising, kept U.S. exports from achieving their maximum potential, even though the dollar was weak. However, some of this unrealized export potential was attributable to the management of U.S. firms. Most U.S. fabric producers lacked the international business expertise necessary to export successfully or were either unaware or unconvinced that the export opportunities existed. Domestically, most U.S. fabric producers were faced with a massive need to modernize their facilities and to meet the new and stricter EPA and OSHA requirements. Numerous marginally productive plants were closed, and employment was trimmed. Marketing strategies were also altered. As the domestic apparel industry weakened, many fabric companies put increased emphasis on non-appareFuse fabrics. The larger firms also put increased

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58 emphasis on bran~name lines and stepped up their advertising efforts to create strengthened demand. In so doing, they sought to insulate themselves from the increasing import competition in low-end fabrics. Finally, some firms concentrated production on long runs of staple products and sought cost leadership. Overall, the strong foreign demand for certain U.S.-made fabrics (particularly synthetic fabrics and cotton denim) and the weakened dollar during the 1970s resulted in increasing exports by U.S. fabric producers2 end lessened the perceived need for making foreign investments. The basic strategies pursued by the large domestic producers-were generally in line with what they should have been doing, given the U.S. comparative advantage and the changes in the environment. However, smaller producers gener- ally lacked the management expertise and the capital required to follow the strategies of the larger firms, particularly given the mandated management attention and capital outlays to comply with increased government regulation. Apparel Firms Of all three major segments of the textile complex, the apparel segment in the 1970s faced the greatest increase in competition. Again, sluggish domestic demand and increased imports (and in the case of apparel, truly significant import surges) kept prices and earnings low and may have caused many firms to fail.3 While explosive growth in foreign apparel production to some extent helped increase U.S. exports of fibers, yarns, and fabrics, it did not help expand U.S. apparel exports. On the import side, Japanese and East Asian producers utilized new equipment and enhanced marketing know-how to increase exports to the United States in middl~price range goods, while ASEA N and other developing countries filled in the lower-end portion vacated by the Japanese and East Asians. Thus, most U.S. apparel firms faced a dilemma, neither side of which was very promising: continue trying to compete on a price basis in low- and medium-range goods or alter their existing product mix to higher fashion, less price and import-sensitive goods. Given their comparative disadvantage in labor costs, the former strategy was not always successful. Some firms could only remain marginally profitable if they utilized offshore processing. In their movement offshore, few of the smaller firms had the international business skills necessary to make offshore processing successful. In fact even larger firms were not always successful in offshore processing. For the most part, the small, family-owned firms typical of the apparel industry were not overly successful in pursuing either of these strategies.

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59 As for the larger firms, many were able to pursue successfully one or the other of these strategies and, in some cases, both. To compete head-on with imports and to lower their costs (and some- times avoid unionization), many firms established offshore pro- cessing facilities (particularly in the Caribbean basin) utilizing the duty provisions of Item 807. Apart from offshore processing, the larger firms reduced their product concentration by adding new lines and tried to move up In price range within most lines by developing and strengthening private brands. Exemplifying these strategies was Levi Strauss, the largest and one of the most aggressive U.S. apparel companies. From its historic concentration in denim jeans, Levi's built a strong, private brand that commanded premium prices by concentrating on superior product quality and huge image and product adver- tising. It then opened foreign plants (directly or via licensing) to supplement its domestic production and its exports by directly supplying foreign markets. It also began a product line diversifi- cation strategy into other menswear, womenswear, and apparel accessories, using the established Levi name and image as the springboard. While most larger firms achieved some success, smaller firms continued to lose ground, resulting in the apparel industry's con- tinuing to shrink in renumber of firms and employment. The apparel firms' problems were also negatively impacted by the activities of 1 arge A merican retailers, who increasingly purchased directly from foreign suppliers. This phenomenon is discussed in more detail later. JAPANESE FIRMS In some respects the problems facing the Japanese textile com- plex have been identical to those facing the U.S. complex growing comparative disadvantage in labor cost, reduced employ- m ent and number of firms, increasing government regulations, increasing imports, and a host of new competitors in foreign markets. Unlike the U.S. firms, however, Japanese firms were faced with a currency whose value was rising sharply (affecting exports adversely) and by major reductions in Japanese tariff protection. Despite this situation, the Japanese textile complex actually gained strength and increased control over global textile v . _ cat _ complex activities. ~I~here was nothing magical or mystical about how they did it. The JaDanese firms simDlv made a deliberate . . , decision to streamline and upgrade their domestic complex and to pursue the shifting comparative advantage to developing countries through direct foreign investment.

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60 In the 1950s the large Japanese spinning companies invested in Latin America to gain access to cheap cotton yarn. In the 1960s these same companies, along with some of the larger apparel companies, established operations in East Asia--the spinning and weaving companies establishing foreign apparel operations that would buy their fabric from the Japanese-based plants. During the 1 970s the large fiber firms established or bought into foreign fabric companies, primarily in East Asia, supplying them with f iber made in Japan. As ASEA N countries gained comparative advantage in apparel, the same Japanese firms established or bought into apparel companies in ASEA N countries, supplying them with fabric from Japan or their subsidiaries in East Asia. The Japanese also upgraded their fabric and apparel operations in East Asia into medium-price-range products and their operations in Japan to upper ranges and specialized products such as apparel accessories. As mentioned in Chapter 1, the two most active and largest fiber firms, Toray and Teijin, went on to establish vertically integrated textile complexes in Korea, Taiwan, and several ASEAN countries. Via a mixture of foreign investment, licensing, loans, and extensive intricate supplying and buying contractual arrangements, the large Japanese firms played an active role in the emerging textile complex in East Asia and the PRC In many activities and pro jects, the Japanese manufacturer s worked closely with the Japanese trading companies. The latter's extensive marketing and distribution capabilities and expertise, comprehensive knowledge of changes in foreign government policies and supply and demand conditions, and financial strength were often critical to the success of the Japanese manufacturers' strategy.5 With their combined global activities and viewpoint, it made little difference where a process was done. They profited from all involvements, their Japanese operations, trade with Japan, their operations in foreign countries, trade among their foreign affiliates, and from foreign affiliate trade with the United States, the EEC, and other countries outside the Pacific Basin. In comparing the Japanese and American responses to the changing environment, the obvious question is why didn't the American companies pursue the Japanese strategy? There were several main reasons. First. the larger JaDanese firms were ~ , v already more vertically integrated, permitting them to export their fabric operation as they lost competitiveness while being able to supply their exported fabric operations with domestically produced fibers, thereby increasing overall profitability, growth, and competitiveness. The non-integrated firms in the U.S. complex could not do this and, hence, could not benefit similarly. Second, the Japanese had a significant cultural advantage in the region where the world's textile complex was growing the

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61 f astest. Their better knowledge of Asian governments, firms, language, and customs gave them competitive advantage over U.S. companies.6 Third, the rising yen, declining domestic protection, and smaller domestic market forced a more outwardly focused and aggressive strategy. Fourth, the Japanese manufacturers had the invaluable assistance of the trading companies, a group with no U.S. counterpart. Finally, many of the producers belonged to larger groups of firms whose diversified activities and growth provided employment opportunities for displaced textile employ- ees, relieving their textile firms from worry about the negative impact foreign investments or increased automation might have on their employees. EUROPEAN FIRMS It is difficult to generalize about the responses of European firms because there were major differences in their degree of inter- national competitiveness, the structures of their complexes, and the nature of their governments' involvements. However, as mentioned in Chapter 2, it is not difficult to generalize about the r esults of the changing environment on the European textile complex: Europe suffered the largest percentage reduction in f irms and employment of any developed region, despite ma jor efforts in Britain, France, and Italy to protect their complexes. As might be expected, European corporate responses were significantly influenced by the policies of their respective govern- ments. Companies in countries with strong currencies, strong economies, and relatively non-interventionist governments either moved more aggressively internationally or went out of business. The experiences of firms in the West German textile complex provided illustrative examples. Their larger chemical and fiber companies (Bayer, BASE, and Hoescht) made investments in the U.S. market and established several other types of operations in Eastern Europe, Latin America, and the Far East. As noted in Chapter 2, some West German apparel firms moved aggressively into offshore processing while concentrating domestically on product upgrading and making good use of the West German textile and equipment industries' technologically advanced m achines. Yet, because of the West German government's essentially laissez-faire policy of non-intervention, many of the smaller textile and apparel companies could not successfully pursue these strategies. The result was a 27 percent drop in West German textile and apparel employment between 1973 and 1979, with an obvious ripple effect on employment in other areas of the textile complex. my, .

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62 Th e employment experience in the N etherlands was even worse. Without as strong a textile complex to begin with as in West Germany, and an even more non-interventionist government policy, the Dutch textile and apparel industry recorded a 4 5 percent reduction in employment between 1973 and 1979. At the other extreme was the experience of the Italian textile complex. As mentioned in Chapter 2, throughout the 1970s and to the present, the Italian government's main objective vis a vis its textile complex has been to maintain employment at virtually any cost. Being the country within the European community with the lowest labor cost and one of the most advanced textile complexes, there was not as much competitive pressure for the Italian firms to invest in other countries. Italy's exports to other EEC coun- tries doubled from 1977 to 1981, its $5.3 billion trade surplus in textiles (1980-1981) was the world's largest,7 and its textile complex employment has fallen by only 2.5 percent between 1979 and 1981. Some of these patterns resulted from Italian firms' strength- ening their financial controls and improving their marketing by switching emphasis from bulk production to name brands. How- ever, these results were also significantly influenced by large government subsidies, primarily to keep labor employed, and by partial nationalization of the Italian complex, i.e., those firms that were going bankrupt. The government subsidies and nation- alization also helped keep the small Italian firms in business. In between these two extremes were the experiences and strategies of other European firms. One of the larger problems they faced was the shifting policies of their respective govern- ments. Unlike the rather clearly stated and consistently applied policies of the Dutch, West German, and Italian governments, the policies of the French, Belgian, and the British vacillated back and f orth between those oriented toward increased protection and those oriented toward industrial restructuring and competitive enhancement. Several of the larger French and British man-made fiber firms established operations of various kinds in the United States, Eastern Europe, and Latin America and experimented (not too successfully) with vertical integration, e.g., ICI and Courtaulds. In the United Kingdom, the stated policy of Marks and Spencer, one of the largest British retailers, to buy 90 percent domestically produced goods helped some of the British fabric and apparel companies stay afloat and at least provided some time for adjusting their competitive strategy. Even though France lost some of its established leadership as the apparel fashion center of the world to the United States, Italy, and Japan, the French textile complex was still able to capitalize on its image both domestically and abroad. In the latter case, it increased export

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63 sales of its products or the licensing of its brand names for foreign production, examples of which in the apparel segment were Yves St. Laurent and Izod/LaCoste. In addition, more than the governments in most of the other European countries, the French government embarked on a sizeable R&D effort to improve manufacturing productivity and product upgrading. While it was too early to judge the results of this effort, the effort is expected to result in improved competitiveness of French firms. Thus, for European firms, in general, the impact of the chang- ing environment was more severe than for firms in the United States or Japan. If their strategic responses to these changes were more mixed in orientation and success, it was because each country's complex was at somewhat different levels of develop- ment and strength, and their respective government's policies toward the complex were different. RETAILERS A N ~ DESIG N ER S Before closing this section on corporate activities, some mention should be directed to the activities of large retailers and fashion designers. From the 1960s to the present, increased competition among large department stores, mass merchandisers, and dis- counters led to increasing foreign purchases of fabric and apparel (particularly low-end merchandise and from the developing Asian complex) and the opening of U.S. buying offices abroad. As they learned that foreign production was not always as reliable as domestically supplied goods, U.S. firms began to assist foreign producers by providing them with technical and managerial know-how, such as designs, specifications, and quality control measures. Rather than following the historical method of shopping around for existing garments and fabrics in excess supply, the retailers began to contract with foreign production under a method called specification buying, a method they had already developed domestically. The entire process means that the- retailers themselves design a particular garment (or join with a leading i ndependent designer to provide an exclusive design for the retailer), or copy an established design, and then decide which fiber to use, from whom the fibers will be obtained, who will make the fabric. where it will be dyed or Printed and finished. and so , ~ ~ r~ on. The retailers provide the maze of contractors with exact specifications, production schedules, shipping instructions, and usually letters of credit to finance the operations and transac- tions. This method of operation is similar to that of Japanese trading companies, except that the retailers do not take equity participation in the producing firms.

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64 In order to compete with the huge buying power of the mass merchandisers, such as Sears and J.C. Penney, department stores banded together to form joint, cooperative buying offices abroad. The combined sales of the U.S. department stores represented by coop buying offices and U.S. mass merchandisers and discounters exceeded $100 billion in 1980 (all products, not just apparel and fabric)--an enormous buying power, to be sure. This buying power, the access to the U.S. market that went with it, and the related flows of needed expertise and funds provided U.S. retailers with increased power over the textile complex both domestically and abroad. While the European and Japanese retailers followed similar strategies, their impact was not as large. As the retailer's role became more important, so did that of fashion designers. Above a certain level of demand for fabrics and apparel based on need, there is a growing demand based on preferences: preferences of fashion, style, comfort, and wearing/ cleaning properties. While price is virtually always important to buyers, products purchased on preference demand tend to be less subject to price competition. It is in this area of preference demand that designers played their most important role--and a role that increased in importance particularly in developed countries. While historically considered to be the domain of French and Italian designers, fashion designing spread to more and mor e countries (including the United States and Japan) and to products other than apparel, such as sheets, draperies, and upholstery. Yet, like the textile and apparel equipment sectors, the expertise of leading fashion designers could be purchased on world markets by m anufacturers via contract or licensing if the manufacturers themselves did not have their own design staff. Thus, Yves St. Laurent designs and labels appeared on products made by several firms, both in France and in other countries, including the PRC. The importance of all of this was that the skills and images of designers were influencing textile complex production more so than in the past--not only in terms of what was being produced, but where and by whom. While still a lesser influence than other economic or strategic factors, the role and importance of design appears to be increasing, and the increased use by manufacturers in developed countries is one major way to increase their com- petitiveness against developing country producers. ~ . , N OTES 1. Domestically, Japanese firms made many of the Sam e shifts in strategy and activity that U.S. firms were making.

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65 2. Theimpactof fluctuating currencies has a major impact on trade in textiles and textile products. In the late 1970s the dollar weakened, and fabric exports rose from 400 million pounds in 1978 to 600 million pounds in mid-1979, while fabric imports declined. When the dollar strengthened toward the end of 1980, U.S. fabric exports fell back to 400 million pounds in 1981, denim and corduroy fabric exports declined by 55 percent and 73 per- cent, respectively, and fabric imports rose 40 percent. (Source: ATMI and Johnson Redbook Service). 3. During the period from 1970 to 1976, the bankruptcy rate among U.S. apparel firms averaged over 200 per year. According to Dun and Bradstreet, the bankruptcy rate from 1977 to 1980 was roughly one firm every three days. See Focus: Economic Profile of the Apparel Industry, American Apparel Manufacturers' Asso- c iation, 1982. However, because of the large number of companies (over 17,000) the actual percentage rate was about 1 percent. 4. Under Item 807 firms can ship U.S.-made components to foreign operations that can then assemble the products and ship them back to the United States, paying duty only on the value added abroad (rather than on the total value of the goods, which importers of products made entirely abroad must do). By aver- aging foreign and domestic production costs of garments, these firms gained a price advantage over strictly domestic producers and better supply capability than offered by strictly foreign producers. Alternatively, some U.S. firms produced low-end garments offshore and devoted domestic production to middle- and upper-range garments, allowing them to offer a more complete line than many strictly domestic or foreign producers. 5. The benefits of the trading companies' expertise was more often needed and sought by the small- and medium-size Japanese manufacturers and for countries less familiar to Japanese firms. 6. However, Japanese dominance in some East Asian coun- tries has now placed them in an unfavorable light. 7. Source: The Economist, December 12, 1981. 8. Unfortunately, no publicly available data could be found to provide the exact percentages of purchases by U.S. retailers of foreigm versus U.S.-made textile products.