Inter-chain Transitions:The Spatialities of Learning and Mobility

Meenu TewariUNC Chapel Hill

New Spatialities of ProductionJuly 8, 2012

Issues

• Learning in the context of chain transitions in labor intensive sectors

• Shifts in work organization and technology use• Shifts in end markets domestic to export• Forward linkage from textiles for the domestic market to

garment exports • From exports to outward FDI and purchase of overseas

equity MNC integration into global production networks• Changing geography of production

• What are the implications for firm productivity/profitability

• What are the implications for workers

Framework Three generations of GVC narratives

• First generation narrative – the lean, linear model

• Buyer and producer driven chains; Large lead firms drive the value chain and there are implicit assumptions about dependency of smaller firms lower down the chain; high degrees of concentration severely limit their ability to move up the chain. Upgrading is a complicated and contested process

• Second generation narrative -- varieties of upgrading

• Characterized by the rise of contract manufacturing, and quite powerful first-tier contractors who blur the line of control between those at the top of the chain, and their primary suppliers.

Cont.

• Third Generation GVC narrative:• How learning occurs within the chain, resulting in

various kinds of upgrading (functional, product, process and full package). Documents how a new tier of supplier is emerging that operates within standard buyer driven chains but with surprising degrees of autonomy and global reach.

• This paper documents processes of learning associated with the third kind of upgrading and explores the implications of this upgrading for both firms and labor.

The Case

• One of a set of Tamil Nadu based firms that I have followed for 12 years . – Started operations in 1946 as a textile firm: cotton

yarn (spinning) and fabric making.

– Well known in its field, leader in key trade associations.

– US$37 million in sales in 2000, specializing in fine counts below 20 or 30; sales have more than doubled in the last decade. Later integrated forward into garment exports, and technical textiles. Now preparing to launch its own brand in the domestic market.

Origins - Domestic Textiles• End markets: Till the mid-1990s - focus was on textiles for the

domestic market. • Predictable demand• Output stable:

– 40% of output mid-to-fine count yarns– 60% grey fabric (for the domestic market)– Since the mid-1980s, gradually fine count yarn exported (20-30% of total output)

• Key challenge: Shifts in commodity prices (cotton) the main uncertainty

• Location of production: • Urban. Initially Mumbai, then since the late 1960s, Chennai city

• Inputs: from Coimbatore, Salem, other southern locations

• Technology: Gradual upgrading; liberal use of TUFs program since the late 1990s

• Work organization: vertically integrated; some hub and spoke capacity sub-contracting; wet processing was subcontracted, but has been in-house since the 1980s; set up an R&D department in the 1980s.

• Workforce: 90% male till the late 1970s-early 1980s; systematic feminization since mid-1980s– Unionized in Mumbai; moved to Chennai to be rid of it; but became unionized

again

Chain types: Quasi-hierarchical

As a Lead Textile Firm (Original Functions)

Carding

Spinning – counts below 20s and 30s

Weaving

Fabric Blends

Finishing

Linked forward to garments

Fabric making

Wet Processing

Design

Garment production

Logistics

Yarn for i. Domestic marketii. Export

Garmenting functions internalized

Prototyping

Design

Production

Finishing

Labeling

Dyeing/Wet-processing

Buying agent

Export Market

Branding

Domestic Retail

logistics

1: 1946-now 2: Mid-1990s-now

3: Under consideration

Phase-II: Integrated forward into Garments in the mid-1990s

• Why?: Overcapacity in the spinning sector in the 1990s was driving profits down; and company wanted to diversify.

• Already had some experience with exports since the mid-1980s in yarn and grey fabric (Driver of that was change in government policy in the mid-1980s, with a shift towards export promotion.)

• First order came from a long time buyer of their yarn and grey fabric.

• The buyer was a small/medium-sized Italian wholesaler/distributor of garments and yarn, with a focus on uniforms for public and private sector employees.

Learning a new craft• What to produce, where to begin?

– Began with uniforms (boiler suits, first bottoms, then both tops and bottoms)

– Choice of product segment meant that there was – (a) little competition, – (b) Fairly standardized, little requirement of complex design capabilities (in contrast to

women’s wear)– (c) where the company had some competitive advantage – fabric, innovation in fabric and

investment in technology– (d) Key was that it allowed them to start small, but with the possibility of scaling up

– So a deep-pocketed elite yarn-and-fabric-maker in one segment, became overnight a “small firm” struggling to learn and meet orders in another segment of the chain.

• Challenges emerged, related to:– Quality/consistency - high rejection rates– Productivity - cost per unit unsustainably hight– Adaptiveness - (how to handle fluctuations in demand, uncertainty of orders, and small batch production)– Time to market– CostsThe Buyer soon began to complain about high unit costs, low productivity, inconsistent execution and fairly high

rejection rates

• The model of vertical integration that had worked for decades in the textile mills did not work in garments – they had to institute changes in work organization and in the forms of shop-floor management

– Workstations– Modularization of work– Automation and – Training

Market channel became a key source of learning

• The firm learned from its buyer, levering the buyer’s expertise in understanding consumer demand in this area and experience of sourcing from multiple countries across the European rim.

• Tunisia comparison and visit: “They make 12 boiler suits per worker per day, you make less than half of that 5 suits/tailor/day.”

– During the visit the supplier saw that the role of technology, production targets and training/multi-skilling was key.

– Automated all key repetitive tasks, and quality-intensive tasks • (e.g. cutting stations, button-holing, collar and cuff attachments)

– Structured production into two tightly structured shifts– Established production targets for each team and instituted incentive pay– Created three week training and worker rotation modules for the workers who would

work on the new machines– Re-organized the factory floor in a combination of workstations and assembly line– Conducted an energy audit to cut costs– Invested in ISO 9000 certification– Revamped the company’s canteen, creche and medical station

• Within 6 months the plant’s productivity had gone up to 16 suits/tailor/day.

• This became the start of feedback intensive relational ties with their buyer

Points to note• Learning occurred, but was not automatic – agency mattered as did the nature of

the buyer - small/medium, European, inserted into wider global procurement networks across regions – and one that was interested in longer term relational ties

• The upgrading was process-related, it occurred in a rather standardized product segment, but had spillovers across the company’s domestic operations. Productivity increased across all units

• Ironic that the Indian supplier was several times larger (in size, scale and financial worth) than its Italian buyer -- qualifies to some extent our assumption that learning flows from large western buyers to smaller suppliers in developing countries.

• What is striking is that while the integration with overseas partners was through logistics, the main motivation of the Tamil Nadu firm was “not to earn dividends overseas,” or merely gain access to a new market—it was to “use the European company as a key channel for distribution” for their own products.

• But an important kind of knowledge flowed in the other direction as well – from the large supplier to the small buyer: of management consulting, warehouse management and logistics.

• This led to the Indian firm eventually buying majority equity stake in the Italian distributor, a prelude to other acquisitions between 2000 and 2009 (in the UK, Greece, Sweden and Egypt).

Logistics, Equity & Spillovers• The backbone of the partnership was logistics

– “The Italian distributor would first sort supply by item (bottoms, shirts), then by size (e.g. separating size 40 pants from size 42 pants), then by order. They managed to do only one container per month; we saw they should be able to do more than 15.”

• The TN company developed a logistics plan that involved:

– Off shore warehousing in India, if the scale of orders exceeded 1000 garments per order– A system of using pallets to deliver goods by order, rather than merely by size or country

of origin. – Modernization of the small warehouse in Italy (12 feet deep) through a vendor based in

India– An India developed IT-driven system for tracking inventories and shipments 24/7 that

allowed orders to be delivered in 24 hours than the week that was needed previously.

– logistics costs fell substantially -- from 2 ½ to 3% down to 0.3%. Profits rose to 35% for the warehousing company with these reforms.

• Product Innovation

– Even though the firm produced a “simple” product like uniforms, it widely across trades and soon realized that its investment in fabric making was a key draw for uses. Orders came from fire-fighters, chemical companies , electricity companies, and others that needed heat resistant, flame resistant, stain resistant fabric, and special materials.

– This led the company to invest back into R&D in the development of cotton based technical textiles, its core strength

Bifurcated implications for Labor

• So what did all this upgrading mean for workers? We found that the outcomes were very mixed.– Originally, the company’s workforce had been 60-70% male in the textile plants and

about 50% female in the garment plant.

• After the first round of upgrading there were four key outcomes:

• Women benefited from improved working conditions, but with investments in machines and automation in the garment factories, nearly all the newly automated and multi-skilled tasks were shifted back to men.

– “Men have higher literacy rates than women” and would understand the new CNC operated machines better.

• The beneficiaries of the training programs were men because “these investments” would be more likely to stay in the factory and not be lost as the unmarried women who constituted the bulk of the female workforce

• The opposite happened in the spinning and weaving segment. Cost-rationalization pressures took the form of a concerted feminization drive. This included filing cases in district courts to allow women to work night shifts on equal opportunity grounds.

• Simultaneously, the geography of production began to change. The company began to shift its spinning and weaving mills to green-field rural areas across the state. These highly modernized worked 3 shifts.

• The model was 50% local and 50% migrant/contract workers. The locals were bused; the contracted migrants stayed in hostels.

2nd round of adjustments and new-er spatialities

Post NREGA and Post Recession• Skill shortages, labor shortages and rising wages have led the firm

to further rethink its production strategies

1) “Wages had to be raised from Rs.120 per day to up to Rs. 180-200 rupees a day. In the last three years you can see a difference of over10-15%, month on month.”

• “We can increase our wages because we have automated quite substantially, quite substantially.”

• In the last five years the firm has instituted:– Lean production systems with two hour inventories between cutting and packing

• “So any defect shows up immediately and then we are able to correct it immediately. If there is a pattern mistake, or a cutting mistake or a particular sewing machine mistake, it is making missed stitches or something like that, it shows up immediately and then the number of pieces we have to do correction is very few.”

– Mechanization of tasks has been stepped up: • “We have gone for computer profile stitching machines. All the flaps we made on computerized machines,

all collars are made on computerized machines, the cuffs we make on computer machines. Pockets are set by automatic pocket setters. Belts are attached by belt loop attaching machines. The waistband is attached by waistband attaching machines. And then ironing is done by steam and iron air dummies.

– Conveyer belts are adopted where a single piece is passed to the operates and packed at the other end.

– “From cutting to garmenting everything is now traceable, we can trace from which piece we have made the garment, which batch it was processed in and by whom”• “100% traceability has increased productivity. “Basically we have reduced our consumption because any

wastage is now immediately thrown up. If there are missing pieces and anybody wastes anything, they have to account for it. it is not easy to get away with slackness.”

Cost-driven Spatial shifts in labor intensive work?

2) The firm is also eying newer locations for expansion and production.

– Skill shortages: “ we don’t want cheap, we want availability. We want skill.”

– Land costs: “land is a problem if you are in a city. But it is stupid to want to expand a textile mill in Chennai. If you go to rural areas, there is plenty to land. Land is not a problem.”

– Energy: “Energy is the thing. Very costly, shoddy quality and totally inadequate. Captive plants are costly. Energy is a big problem.

– Logistics costs: “Logistics is very important. Not only how to get to ports, but everything in between. We depend on land transportation and our land transportation is the worst in the world.”

• “In the textile segment, the number one cost is energy, number two is pollution control, number three is labour cost. ..I would say the number one destination today for textiles will be MP…. About 3 million spindles have come up there in the last 3-4 years. It is a very attractive place because you have got cotton, you have got low cost labour, you have got a lot of coal and ports are not too far away.”

• “For garments…[we] are looking at Bihar (Darbhanga), West Bengal, Orissa. Some firms are even looking at U.P.”

Human capital merely as a retention strategy?

• But the firm and others like it are also offering “better quality hostels, better quality of life” to retain workers.

– as well continuing education programs (320 girls will graduate with a distance learning degree this year

– And Learn and earn schemes – National Skill Development Program, CII, local chapters

• Others are “going green” to arguably cut costs

Conclusions• Fordist and post-fordist strategies co-exist

• In the 3rd generation narrative of global value chains, indigenous “MNCs” emerge, as lead firms and suppliers simultaneously

• Their competitive advantage is not only leveraging lower production costs but providing an ensemble of services – manufacturing services (warehousing, logistics, IT systems) at low cost

• Part of the advantages stem from the legacies of ISI – i.e., mid-tier managerial skills, particularly, the management of small scale systems in an environment of imperfect and missing markets

• Economic profitability and upgrading for firms depends centrally on human capital based innovations, but the outcomes for workers are janus faced – and labor is still seen as a cost to be economized.

• A more enlightened set of pro-firm and pro-worker industrial policies and a variety of institutional supports for labor (by the state and non-state actors) will be key. Global standards, or the pressure of competition is not enough to create the conditions for social upgrading and economic upgrading going hand in hand.

• Worker organization that is cognizant of the pressures of global business is of great relevance.