Dealing with location competition:

trade union and policy responses in Europe

Bela Galgoczi

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

http://www.etui-rehs.org

WZB conference on `Relocation in the automobile sector`

29-30th November 2007, Berlin

Identifying the problem

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

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

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

3

The new global background of factor mobility

Increased capital mobility under new framework conditions:

Excess labour supply (500 Mn workers?) with different factor conditions – low cost, medium to high skills

Technological change (ICT) – more activities tradeable /subject to relocation/

New business organization principles of TNC-s -global production sharing networks –Financialisation of the economy: Private equity& hedge funds

4

Theoretical background

New forms in reorganizing international value chains, permanent redefinition of core-business

Contracting out > outsourcing > offshoring – relocation

The great unbundling – trade in tasks; location of tasks (Baldwin, 2006)

Sharing of knowledge and work in real time in a global web-enabled playing fields (T.L. Friedman 2005)

Branch specific supply chain management strategies e.g. in automobile and ICT manufacturing sector

5

The new global background of factor mobility

New international division of labour – cross border investments (FDI) and trade of intermediary products in dynamic growth (OECD, 2006; World Bank, 2005) – /Fig.1/

Result: fierce location competition fuelled by pressures of global capital and product markets

balance between labour and capital shifted, pressures on workers grow

Restructuring has become everyday phenomenon at each location

6

What is relocation all about?

Difficult to identify clear ‘relocation’ cases, as it is the case in the household appliances sector (such as e.g. Electrolux /AEG/).

Most transactions have a mixed character with diverse impacts on both source and target countries Certain branches show clearcut patterns, based on specific business organisation models (ICT, car sector)

It is crucial to understand the complexity of the phenomenon in order to develop proper policy responses!

The key challenge is: managing change

7

Concerns to EU15

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

Shrinking vale added content?

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

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)

But also net job loss – (European Restructuring Monitor, anecdotal evidence)

Source: WTO, 2005, OECD 2005.

Studies on relocation and employment effects

Study author Country/region

Sector Time period No. Jobs

Bardhan and Kroll USA All sectors Long term 14 million.

Note: maximum potential for offshoring

Deloitte research

USA Financial services

2004-2010 20% of ‘cost base’

EMCC EU all 2000-05 1.5% of all job losses. Note: Based on newspaper reports - questionable representativeness

Forrester USA IT services 15 years 3.3 million

Gartner USA IT services 1/10th IT jobs

ILO World Employment Report 2001

US and EU Services 1-5% service jobs

McKinsey US, EU, JP all One year 600.000

McKinsey June 2005 global services 160 million (11%). Note: total potential; actual forecast 2003-2008: 2.6 million.

TUC UK Private services Long term 150.000-750.000

UK treasury EU Services 2015 5 million

World Bank G7 services Long term 1-5% of total employment. Note: maximum potential for offshoring services (technically feasible and cost-savings of 30-40%)

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Relocation > restructuring - outlook

When trying to formulate potential policy responses and develop trade union strategies, we have to be aware of the

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

Relocation and restructuring go ‘hand in hand’: permanent structural change at each location (also in NMS) - 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 andinvestments (responsibility of enterprises)

Public sources (active labour market policies, flexicurity)

Source: AMECO

Growth of nominal unit labour costs in Euro, 1999-2006 (%)

0

10

20

30

40

50

60

DE AT FI SE LV BEEU15 SI FR PL DK NL MT GR UK ES IT CY LU EE PT IE EU10LT HU SK CZ

Challenges and policy types

There are two major dimensions of socially responsible location management under increased location competition induced by global capital mobility:

- fair distribution of the costs of restructuring, among workers,employers and the state (now workers take up most of the cost, while profits thrive);

- maintaining the competitiveness of the location through the `high road` in an advanced looking way.

Trade union strategy options

1. Reducing incentives for relocation by joint efforts to secure the long term viability of the location

2. Dealing with the social consequences of unavoidable relocation/downscaling cases

3. Building networks of international solidarity among workers to decrease the probability of employers strategies to play out employees at different locations against each other

1. Reducing incentives for relocation: high road vs low road

How to manage structural change in the enlarged Europe underglobal conditions? To get out of the defensive position..

Aim: adaptation through the high road (innovation, training, investments) to exploit the innovative potential of the location instead of relocation or adaptation through the low road of pure cost cutting and concession bargaining (through wage cuts andlonger working hours)

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

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

Anticipating and managing change

company levelproductivity improvements through upgrading of skills andwork organisation and through innovation and R&D

sectoral and national levelsindustrial policy strategygeneralised support for research and innovation specific sectoral policies, (e.g. renewable sources of energy, clean technologies, environmental friendly transport)Downside: emergence of `protectionism`, `economic nationalism`

Labour market policiesFlexicurity – basic principle: support change instead of preservingstatus quo; high external numerical flexibility + high level ofsecurity during LM transition + support retrainingConflict: high LM spending (up to 5% of GDP) is not alwaysfeasible; negative side of flexicurity is immidiate, but the positive side is more `elusive`

2. Dealing with actual relocation/ downscaling -adjustment challenge

advance notification

Permits workers to adjust, workers’ representatives to negotiate solutions and public employment service to assist adjustment

a right to re-adjustment support for every retrenched worker

European-level globalisation fund

Use of EU structural funds

National policies

Sectoral initiatives by social partners

Defend unemployment benefits and employment protection legislation, but stimulate change

Offer security

Promote mobility

Facilitate good job matches

3. Building networks of international solidarity

strengthen information and consultation rights

EWCs key role, good practice cases GM European Employee Forum (beyond EWC)

Intensify efforts to coordinate collective bargaining

Doorn

EMF

ETUC, etc.

Capacity building of TU-s in the NMS and globally

Strengthening social dialogue especially on branch level in CEE

Framework for minimum social and labour standards in Europe,

ILO standards globally with monitoring, codes of conducts, international framework agreements, CSR

Concrete examples to deal with relocation -Germany

General debate: `Bazaroekonomie` (Sinn) vs `Exportweltmeister`

The end of `Deutschland AG` - with more equity based financing ofcompanies, and shareholder-value mentality on the rise

`Mitbestimmung` is often seen as a negative `location factor` by business,

In practice it works as a de facto `location factor` in location choicedecisions

foreigners often claim a home country `bias` due to `trustworthyinternal relations` in boards at DE multinationals (e.g VW Brussels, former decision of BMW for Leipzig instead of Kolin, CZ)

The other claim raised outside Germany: wage dumping throughconcession bargaining (ULC in Germany dropped by far the most in the Eurozone, putting pressure on France, Italy, Spain and Portugal).

Reducing incentives for relocation: concrete examples - Germany

`Sozialtarifvertrag` - to maintain production location: wagemoderation + innovative forms of work organisation + technological investments

Passive and active measures, `low road` and `high road` elements get mixed (In case of AEG the stake at the end was raise the price of the exit option)

Siemens case: innovative agreement, still could preserve the location on short term only

Volkswagen `Auto 5000` model: mix of wage restraint and innovative work organisation + supply chain management practices – `result`: Golf platform re-located from Brussels + new models

Reducing incentives for relocation: concrete examples - Italy

More defensive strategies on the level of politics and by tradeunions, but innovative strategies on local and regional level

`Whirlpool Neaples: new location management strategy based on local cluster building

Strong territorial foundations of industrial and location development, high `relocation` regions perform the best and have the highest density of industrial districts, as well

Source: Luigi Burroni, ETUI Relocation project

ITALY: Regional outward foreign direct investment as percentage of the regional GDP

REGION NET REGIONAL FOREIGN DIRECT INVESTMENTS

Lombardia 3,376

Lazio 1,276

Veneto 0,663

Emilia - Romagna 0,369

Friuli - Venezia Giulia 0,353

Abruzzo 0,321

Campania 0,295

Puglia 0,257

Toscana 0,244

Umbria 0,199

Valle D'Aosta 0,168

Marche 0,113

Basilicata 0,055

Trentino - Alto Adige 0,047

Sicilia 0,041

Calabria 0,005

Sardegna 0,004

Labour market in High Relocation Regions (HRRs) and in Other Italian Regions (OIRs) - 2005

EMPL, RATE

YOUTH UNEMPL, RATE

UNEMPL, RATE

LONG TERM UNEMPL, ON TOTAL UNEMPL,

DIFFERENCE BETWEEN MALE AND FEMALE EMPL, RATE

HRRs 64,2 15,7 5,0 37,0 20,3

OIRs 57,2 25,3 7,9 43,7 24,7

Competitiveness in High Relocation Regions (HRRs) and in Other Italian Regions (OIRs) – 2003/2005

PERCENTAGE OF EMPLOYMENT LOCALIZED IN INDUSTRIAL DISTRICTS

LABOUR PRODUCTIVITY IN MANUFACTURING INDUSTRY [ADDED VALUE IN MANUFACTURING PER LABOR UNITS IN THE SAME SECTOR (THOUSAND OF EURO)]

LABOUR PRODUCTIVITY IN SMES [ADDED VALUE IN MANUFACTURING PER EMPLOYEE IN SMES IN THE SAME SECTOR (THOUSAND OF EURO)]

EXPORT COMPETITIVENESS [PERCENTAGE OF EXPORT ON THE GDP]

HRRs 30,9 48,2 34,9 24,4

OIRs 14,8 38,0 27,4 15,6

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Southern Europe vs CEE NMS

The challenge of relocation is especially serious for SouthernEuropean countries that were targets of `relocation` fromWestern Europe previously (based on lower costs)

PT, ES have manufacturing locations set up by foreignmultinationals > these tend to be moved to NMS

Loss of competitiveness – large gap in relative unit labour costs(RULC) between Germany – PT, ES, IT (between 1999 and 2006 RULC of DE down by 12%, in PT up by 12%, in ES and IT up by 8%

Why is the competitiveness case of PT, ES different than that ofthe NMS (RULC in NMS grow faster, than in PT and ES)?

Even if average unit labour costs of total economy in NMS growfast, ULC in manufacturing is not growing (productivity in manufacturing grows faster)

Responses from Southern Europe: a mixed picture

Portugal: no trace of offensive strategies, the dominant view isdefensive, push for intervention from state or European level

Spain: a more open-minded, offensive approach by tradeunions (CC.OO: stands managing change, upgrading ofactivities, high road strategies),

Trade union research foundation (Fondacion 1 Mayo) uses sectoral studies to monitor comparative advantage and makemproposals for offensive strategies

Responses from Southern Europe: a mixed picture

France: an ambiguous attitude

Whereas France, mostlty its multinationals are `winners` ofglobalisation, globalisation `factor mobility` has a very badimage (such as `flexicurity`)

Trade unions and the government (in several instances) for `social protectionism`, `economic nationalism`

Strategy papers by close to government institutes on the otherhand, identify the challenge in a subtle, differenciated way (Ifri, Pascal Morande group), Germany is under close monitoring..

France: alternative scenarios by government institutes

FRANCE’S FUTURE DEPENDS ON DECISIONS WHICH WILL BE TAKEN NOW, `WILL FRANCE BE A COUNTRY THAT RAPIDLY SLIDES INTO POVERTY BY CUTTING ITSELF OFF FROM THE WORLD, A COUNTRY WHICH SUFFERS ECONOMIC STAGNATION, AS A RESULT OF ITS PROTECTIONIST POLICIES, A COUNTRY THAT STEADILY LOSES MOMENTUM IN AN INCREASINGLY RICH EUROPE, OR A ROSPEROUS COUNTRY WHERE WEALTH IS BASED ON INTELLIGENCE`four scenarios:1. “Lost Illusions"—France on the margins of progress,2. “Scenes from a Courtesan’s Life”—a nostalgic France, caught between its former grandeur and inexorable decline (France as victim of globalisation);3. “The Magic Skin”—an immobile France. France proves incapable of making clear choices;4. "The Elixir of Life"—a prosperous France that modernizes in order to take advantage of the new world order.

France in the world market, by ifri

Germany is under close monitoring..France’s distribution of strengths and weaknesses is different from that of Germany. France underperforms Germany in most sectors. The only industry where France outperforms Germany is aerospace, where it gained 1% market share. In the automobile industry, France has gained 0.7% market share, while Germany gained 2.3%. In automobile components, the contrast is even clearer, with a 4.3% gain for Germany, against a 1.8% loss for France.France has also lost market share in other important sectors of specialisation, such as machinery, pharmaceuticals and foodstuffs, which have been dynamic sectors at the world level since 2000. France has also lost market share in agriculture, one other sector of specialisation which also receives substantial public support. These lacklustre performances in traditional sectors of specialisation largely explain the deteriorating trade balance over the last couple of years. Overall, France exhibits a positive specialisation in high tech industries, but loses market share for those products – the reverse of the situation of Germany

UK: TUC view

On the whole, the UK gains from globalisation, but the gains are not spread evenly, and some workers face unemployment or lower wages.

One of the key tasks for public policy is the question of how to provide for the future of those workers whose jobs are most at risk. At present, when companies switch production to other countries the workers who lose their jobs do not get a fair deal.

Although protectionism is not the route forward for UK policy, we do think it important to support individual workers and their jobs.

We agree with the Chancellor that the best response is to raise UK productivity by fostering innovation and skills.

the UK response to globalisation must incorporate an adequate minimum level of employment protection, and be linked to furtherenhancements of in- and out-of-work benefits.

UK: greatest decline in manufacturing in Europe

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%

The UK made a successful shift for a service based economy, but lost it manufacturing base

In concrete cases, it was clear: effected regions and workers are helpless (Rover, Electrolux UK plant, debate over the relocation of Aston Martin production) – effective trade union strategies in such cases are missing

Nordic attitudes: a unique view in Europe, positive and advance looking

Sweden, Denmark..: rosy picture on globalisation, effective local and regional strategies, innovative role of trade unions

“Our conclusions for the future of Swedish firms is that in the (increasingly global) environment, a very strong pole of attraction is required, in the shape of cooperation in cross-functional clusters for development of leading-edge competence. Otherwise, key operational parts of firms will be systematically closed-down in Sweden.

Nordic trade unions have a confident view: ”the supply shock (fromglobalised markets) leads neither to depressed real wages, nor to increasing unemployment.” (unlike Germany, in the Nordicenvironment, they would add – if this self-confidence is justifiedin the long run, is another question

Flexicurity at work…