Impact of flexible labour market arrangements in the machinery electrical and electronic industries

Report for discussion at the Tripartite Meeting on
the Impact of Flexible labour market Arrangements
in theMachinery, Electrical and Electronic Industries

Part 8    

Copyright ® 1999 International Labour Organization (ILO)

8. The impact of flexibility
on competitiveness

In this era of global competition and technological change, firms that want to remain competitive have adopted production and organizational strategies that have an impact on the labour markets and hence the societies in which they function. The key question that arises is whether the strategies they have adopted have had the desired effect. In other words, have firms been successful at improving their competitiveness? There are many indicators that are frequently used to characterize a country's competitiveness in a given industry. These include some measures of turnover, productivity, unit labour cost, labour share of value added, exports and imports, as well as expenditure on R&D.⁽¹⁾

8.1. Competitiveness at the national level

8.1.1. Labour productivity

Figure 8.1 shows the trend in labour productivity in the electrical machinery industry (ISIC 383) for a selected group of countries, which are representative of countries that are said to have very flexible labour markets and countries with more rigid labour market structures. While most of these countries have seen an improvement in labour productivity, some have clearly fared better than others. Japan and the Republic of Korea have seen a vast increase in labour productivity since 1985, followed by the United States and the United Kingdom. Most other countries experienced moderate increases in labour productivity between 1985 and 1994, although in 1988 and 1990, labour productivity in Greece fell below 1980 levels.

Figure 8.2 shows the trend in labour productivity in the non-electrical machinery industry (ISIC 382) for the same countries. As in the electrical machinery industry, there has been a general improvement in labour productivity, with the Republic of Korea making the largest productivity gains, followed by the United States and Canada. Greece showed an initial decline in productivity but improved slightly over the 1980 level in the 1990s. The rest of the countries experienced stable but unspectacular increases in labour productivity.

8.1.2. Unit labour cost

Figures 8.3 and 8.4 show the trends in unit labour costs⁽²⁾ in the electrical and non-electrical machinery industries. In the non-electrical machinery industry, with the exception of the United States and Canada, all countries experienced a rise in unit labour costs over 1980 levels. However, for Greece, Italy and Spain, the rise in unit labour costs was much greater.

In the electrical machinery industry, the picture is slightly different. While the United States saw a large drop in unit labour costs between 1984 and 1995, unit labour costs in Canada rose, albeit modestly. Other countries to witness a decline in unit labour costs were the Netherlands, the United Kingdom and Japan, where they fell by more than half. All the other selected countries experienced rising unit labour costs during that period; the largest increase occurred in Greece, followed at a distance by Italy and Spain. The Republic of Korea appears to have experienced a significant rise in unit labour costs. Between 1985 and 1994, however, this steadily declined, and was only slightly above 1980 levels at the end of that period.

8.1.3. Labour share of value added

Figures 8.5 and 8.6 reflect the labour share of value added⁽³⁾ in the non-electrical and electrical industries, respectively. In the non-electrical machinery industry, with the exception of the United Kingdom and the Netherlands, both of which registered about a 10 per cent decline in labour share of value added between 1980 and 1994, most other countries experienced a fairly stable or rising share. For Canada, the United States, Germany and Italy, labour share of value added was fairly stable during the period. Japan witnessed an increase in labour share of more than 10 per cent, while in Greece it grew by over 30 per cent, from 58 per cent in 1980 to over 90 per cent in 1994.

In the electrical machinery industry, the story is a little different. Canada, France, Italy, the Netherlands, the United Kingdom, and the United States all saw a reduction in the labour share of value added. In Spain, Greece and Japan, on the other hand, the labour share increased by 10 to 15 per cent during the same period. Germany experienced an initial drop in labour share, which soon rose again to approximately 82 per cent in 1994, slightly higher than the 1980 figure of 78 per cent.

8.1.4. Exports and imports

Data on exports within the electrical and non-electrical machinery industries can also be used to assess the competitiveness of national industries. Tables 8.1 and 8.2 provide data on export specialization⁽⁴⁾ for a selected group of countries.

The most marked change in export specialization between 1980 and 1994 occurred in Ireland, which appears to have gained a revealed comparative advantage in both the non-electrical and the electrical machinery industries (a finding which is consistent with evidence presented in other chapters). Japan's exports in the non-electrical sector grew vis-à-vis the OECD average. In the electrical machinery industry, Japan continued to have a strong export advantage, but not as pronounced. The United States and Germany maintained a revealed comparative advantage in the non-electrical machinery industry, but while the former gained export specialization relative to the OECD average in the electrical machinery industry, Germany lost ground, with the export specialization index declining from 107.2 in 1980 to 88.77 in 1994. Italy lost ground in both sectors but continued to have export strength in the non-electrical machinery industry. The export specialization index for Spain and France in the non-electrical machinery sector fell during the 1980-94 period. In the electrical machinery sector, Spain's export performance seems to have improved. Australia's exports in both sectors grew between 1980 and 1994, but remained low relative to the OECD average. Switzerland continued to be strong in the non-electrical machinery industry. In general, those countries with a comparative advantage in the electrical and non-electrical machinery industries in the early 1980s held on to that advantage, with the exception of Sweden in the non-electrical machinery sector and Germany in the electrical machinery sector.

Table 8.1. Export specialization in the non-electrical machinery industry

Table 8.2. Export specialization in the electrical machinery industry

Table 8.3 shows the exports and imports of electrical and non-electrical machinery in Germany. There was an increase in exports of both types of machinery during the ten-year period ending in 1991. This was accompanied by an increase in imports of both sets of goods, but of a larger magnitude. This may suggest that Germany was less competitive in these industries in 1991 than before. Some data for the machine tool industry suggest a similar, if not worsening, pattern for Germany in the period from 1989 to 1994 (see table 8.4). During that period, of the top five machine tool-producing nations, which account for nearly 70 per cent of total machine tool production, only the United States experienced an increase in earnings from the production of machine tools. Production earnings in Japan, Germany, Italy and Switzerland declined. Nevertheless, these countries remained net exporters of machine tools, whereas the United States was a net importer.

Table 8.3. Exports and imports in the electrical and non-electrical machinery
industries in Germany (DM million at constant prices)

8.2. Research and development

Tables 8.5 to 8.8 show the overall trends in R&D in the electrical and non-electrical machinery industries in the OECD between 1980 and 1994. In the non-electrical machinery industry, almost all countries have seen a rise in R&D intensity, defined as R&D expenditures by an industry as a percentage of value added. In 1994, the Japanese non-electrical machinery industry's R&D intensity was more than 12 per cent, higher than all the other OECD countries for which information is available. It was followed closely by the United States, Sweden and Germany. The data for R&D investment ratio, defined as R&D expenditures by an industry as a percentage of total physical investment or gross fixed capital formation in that industry, also show a positive trend in the OECD, although it is evident that some countries are clearly investing more in R&D than others. These include Germany, Sweden, the United States, Finland, the United Kingdom and the Netherlands.

In the electrical machinery industry, the picture is a little less clear. R&D intensity steadily declined in the United States from 19.75 in 1980 to 11.8 in 1994, and in the United Kingdom from 20.43 to 11.73. In the Netherlands, it rose between 1980 and 1987, from 16.29 to 26.32, then declined to 15.41 in 1994. For all the other countries R&D intensity increased steadily, and in some cases, such as Sweden, quite dramatically, from 14.18 to 48.25. Looking at the R&D investment ratios for the industry between 1980 and 1994, again the United Kingdom and the United States experienced a decline, from 241.11 to 127.8 and 135.87 to 101.34, respectively, while most other countries saw a rise.

Despite the decline, the R&D intensity and investment ratios in the electrical machinery industry in the United States and the United Kingdom, as the tables show, are still fairly high. Furthermore, because these countries had fairly high levels of R&D intensity and R&D investment ratios in the early 1980s compared with other OECD countries, other countries have had to "catch up" in terms of R&D investment, which the United Kingdom and the United States had made earlier on.

These figures could also reflect the move towards core competencies and shifts in competitiveness. For example, the rapid growth of the United States information technology industry and the decline of its consumer electronics industry is reflected in the drop in R&D intensity in the electrical machinery industry coupled with a rise in R&D intensity in the non-electrical machinery industry. The increase in telecommunications equipment development and production by Swedish and Finnish companies could explain the high level of R&D expenditure.

Table 8.4. The top five machine tool producing countries: Production,
trade and apparent consumption, 1989-94 (US$ million)

Table 8.5. R&D intensity* (value added) in the non-electrical machinery industry

Table 8.6. R&D intensity* (value added) in the electrical machinery industry

Table 8.7. R&D investment ratio* in the non-electrical machinery industry

Table 8.8. R&D investment ratio* in the electrical machinery industry

8.3. Flexibility through outsourcing in the
United States electronics industry

Although the United States has always been a leader in the electronics industry, during the 1980s the industry was in crisis. Competition from East Asia, Japan in particular, had all but wiped out the consumer electronics industry. Hardest hit were the television producers, and the computer and semiconductor industries were struggling to hold on to market share. By the mid-1990s, the United States semiconductor and computer industries were back on top. According to the OECD, in 1994, in the computer industry, the five largest producers were Japan, the United States, Singapore, Taiwan, China, and the United Kingdom, followed by Germany and France. In 1996, it was estimated that the United States was the largest producer. The United States industry reaffirmed leadership in high-growth new products.⁽⁵⁾

According to Michael Borrus,⁽⁶⁾ there are two explanations for the revitalization of the United States electronics industry. One has to do with the nature of the new electronics products. "Specifically, new electronics product markets have begun to converge on a common technological foundation of networkable, 'open', microprocessor-based systems (of which the PC is emblematic). Such new product markets are characterized by a predominant form of market rivalry, namely competitions to set de facto market standards -- as Microsoft and Intel have done so successfully in PC operating systems and processor architectures." Because of the size of the United States market, it became the "principal launch market", where world standards in these new products were set.

The second and related explanation for the re-emergence of the United States electronics industry has to do with the highly flexible nature of the United States labour market and with changes in the way production is organized.⁽⁷⁾ Until the 1980s, the United States electronics industry was characterized by large vertically integrated firms. In response to competition from East Asia, in the 1980s, American electronics firms, particularly in the semiconductor and computer industries, began to adopt a more flexible organizational structure. Features of this included the outsourcing of non-core or specialized activities and a focus on core competencies through "downsizing" and moving increasingly towards "flexible specialization". Firms decided that, rather than create internal capacity in important but non-core or non-essential activities, it would be more efficient, both in organization and cost terms, to subcontract or outsource to firms that specialize in the necessary activities. This led to the development of an organizational strategy based on "production networks", a concept that was already in practice in Japan. Outsourcing led to the expansion of areas like Silicon Valley, California, and Route 128 in Massachusetts, as clusters or concentrations of hi-tech firms grew to meet the demand created by the outsourcing activities of larger firms and became a part of the production network.⁽⁸⁾

Increased competition in the electronics industry made United States firms re-evaluate the role of their affiliates, subsidiaries and suppliers in East and South-East Asia (the Republic of Korea, Malaysia, Singapore, Thailand, Hong Kong, China, and Taiwan, China). Cost considerations had been the initial and primary motivation for setting up subsidiaries in the region. Labour-intensive activities, such as assembly of consumer electronics and computers, were relocated to Asia to take advantage of the low labour costs. Once assembled, the electronics goods were re-exported to the United States and other developed country markets. As the demand for computers and semiconductors grew and became more sophisticated in the developed country markets, and as competition from Asian electronics firms became more intense in the early 1980s, American firms responded by transforming the nature of their production networks in Asia. Their Asian affiliates were upgraded so that more sophisticated, higher value added production activities could be undertaken. Furthermore, there was a decentralization of certain production decisions, as the affiliates were given greater responsibilities. A result of this was that "as they gained more autonomy, US affiliates began to source more parts and components locally (e.g. a range of mechanical parts, monitors, discrete chips, and even power supplies)": a new supply base was being created in Asia.⁽⁹⁾

In recent years, there has been a trend towards deepening the production network. Much of the research, design and development activity is still in the domain of the parent companies and is undertaken in the United States. Most of the production activity is carried out overseas. Their affiliates or their suppliers in East and South-East Asia produce the more sophisticated components and sub-assemblies. The final assembly and the simpler, lower value added tasks have been assigned to other countries in the region, such as China, or to other regions, as in the case of the maquiladoras in Mexico.

Some United States firms have begun to outsource the entire manufacturing process to original equipment manufacturers (OEMs). Under this type of arrangement, the client (principal company) provides the OEM with the design and specifications for the product, which is eventually marketed under the client's brand name. Some pioneering firms have started to divest themselves of any manufacturing capacity or have not invested in manufacturing plants opting instead for what has been termed "turnkey contract manufacturing". What this means is that everything from design to final assembly is contracted out to a manufacturer; only the brand name and the marketing responsibilities remain with the client. Ernst reports such an arrangement between Compaq and Mitac International, a computer company based in Taiwan, China, in which:

Compaq [...] has outsourced all stages of the value chain except marketing for which it retains sole responsibility. Mitac in turn will be responsible for the design and development of new products, as well as for manufacturing, transport and after-sales services at its manufacturing facilities in Taiwan, China, Britain, Australia and the United States. Compaq expects to save up to 15 per cent in overall life-cycle costs.⁽¹⁰⁾

Apple, the United States computer company, has also undertaken similar arrangements.⁽¹¹⁾

The story that emerges from the revival of the United States electronics industry is the role that flexibility in the organization of the production process has played in enhancing the competitiveness of the national industry. By outsourcing the bulk, if not all, of the production activities, firms have been able to concentrate on research and development in the innovation of new products. They are also able to meet fluctuations in demand without having to invest in or to leave idle production capacity.⁽¹²⁾

8.4. Improving competitiveness through
flexibility in the workplace

According to a report by the European Commission's Competitiveness Group, as cited in the EC Green Paper Partnership for a new organization of work, there are many case-studies demonstrating the potential for productivity and prosperity of a new work organization. The findings confirm that these innovations in the organization of firms lead to improved business performance, better job protection and job enrichment. The same message comes from the German programme on work and technology and the Scandinavian programmes, showing that the firms that have restructured their work organization and industrial relations have been far more successful than those that have attempted to meet the challenges solely through the introduction of advanced manufacturing technology.⁽¹³⁾

A 1992 study on the incidence of workplace education programmes and reorganization of work strategies in manufacturing and non-manufacturing firms in the United States found that firms reported improvements due to the implementation of one or more of the following changes in the organization of the workplace: empowerment, training, total quality management, profit-sharing, teams or quality circles and reduced management. "The most frequently cited improvements are in productivity, worker morale, and customer satisfaction. However, improvements in delivery time, scrap/error rates, and profits are also reported by a majority (or near majority) of firms. The probability of reporting positive outcomes increases steadily with the number of reorganizational changes that have been made."⁽¹⁴⁾

Evidence of the impact of flexible labour market arrangements on firm performance can be found in the auto industry. A 1995 study of automotive assembly plants tested the hypothesis that innovative human resource practices improve firm performance and that, in an assembly plant, firm performance is further enhanced when these practices are combined with a flexible organization of production. The term "innovative human resource practices" covered work teams, problem-solving groups, employee suggestions made and implemented, job rotation, decentralization of quality-related tasks, and HRM policies such as recruitment and hiring, contingent compensation, status differentiation, and training of new and