Microeconomics of Competitiveness    Apparel Cluster in Galicia (Spain)        May 8th, 2009      Team members  Gulcan Bozdemir  Joaquim Cristia Oliva  Pablo Jerez  Elixabete Larrea Tamayo    Selected Galician designer sketches taken from La Voz de Galicia, www.mujeraldia.com, www.yodona.com Apparel Cluster in Galicia (Spain)   Table of Contents 1.  Country analysis .......................................................................................................................... 2  1.1. Spain at a glance ................................................................................................................... 2  1.2.Spanish economic performance ............................................................................................. 3  1.3.Cluster diversification of Spain’s economy ........................................................................... 5  1.4.Galicia at a glance .................................................................................................................. 6  1.5.Assessment of country competitiveness ................................................................................ 7  2.  Galicia’s Apparel Cluster analysis ............................................................................................. 13  2.1.Evolution of the Galician apparel cluster ............................................................................ 13  2.2.Geographic context .............................................................................................................. 14  2.3.Performance of the cluster ................................................................................................... 15  2.4.Industry trends ..................................................................................................................... 16  2.5.Competing locations ............................................................................................................ 17  2.6.Cluster map .......................................................................................................................... 18  2.7.Galician apparel cluster diamond ........................................................................................ 19  3.  Recommendations ...................................................................................................................... 28  3.1.Country level recommendations .......................................................................................... 28  3.2.Cluster level recommendations ............................................................................................ 30  End notes ........................................................................................................................................... 34  Note: There are two team members from Spain (Joaquim Cristia and Elixabete Larrea) in the project team | 1 Apparel Cluster in Galicia (Spain)   1. Country analysis 1.1. Spain at a glance Spain is located on the most Southwestern part of Europe, in the Iberian Peninsula, bordering France and Portugal. Spain’s location has been historically strategic as main passage between continental Europe and the Atlantic Ocean. Recent Spanish history has been marked by four relevant periods. First, the 1970s marked the transition to democracy, after Franco’s dictatorship. Second, the 1980s saw the consolidation of democracy after a failed coup d’etat in 1981 and Spain’s inclusion in the European Union in 1986. Third, the 1990s marked the deepening of economic integration with Europe, with the joining to the European Monetary Union in 1990 and with the conversion to the Euro currency in 2002. Finally, the 2000s are shaping a new period in Spain’s history after a strong economic boom in the first half of the decade, followed by an equally big burst of the housing bubble and global economic crisis in 2008. The country currently has 45.5 million inhabitants (9.1% of total EU-27 population1), almost 80% of which are Catholics. Spain’s main official language is Spanish but has three additional regional languages; Catalan, Basque and Galician2. Politically, the country is divided in 17 autonomous communities or regions in which all of them have their own directly elected authorities, parliament and government. Due to the decentralized system in Spain the different Comunidades Autónomas (regions) have for example, the ability to manage their own regional education and health systems. Moreover, The Basque Country and Navarre can also manage their own public finances through some historical rights called “Fueros”. This level of decentralization generates some conflict between the central government and autonomous regions3. Because of its long colonial history, Spain has close ties to the Latin American Spanish-speaking markets providing advantageous bilateral economic and trade relations. | 2 Apparel Cluster in Galicia (Spain)   The location endowed Spain with a mild Mediterranean climate which is very suitable for the production of high quality agricultural products and which has contributed to the tourism sector, with a mix of leisure (beaches) and historic activities. 1.2.Spanish economic performance Spain’s GDP in 2007 was US$1.4 trillion and has had a yearly average real growth of 3.61% in the 2000-2007 period, higher than the average 2.7% during the 1990s decade4. The country’s real GDP growth was in the 3-4% range for 2002-2007, see Figure 1A, above the 2% of European-15 growth average. Also, Spain has increased its GDP per capita 1.4 times in the last 8 years, which is in the higher range for European countries which have similar geographical advantages and similar macroeconomic and trade policy environments, see Figure 1B. Figure 1 – Selected statistics of Spain’s economic performance5 A – Real GDP growth rates 2000-2009 B – GDP per capita comparison Real GDP  GDP per capita 2009  x times GDP/capitain 2000 growth (%) (adjusted PPP) 11..55 11..33 11..44 11..22 11..33 11..88 Spain’s entry in the European integration efforts (EU, EMU and Euro currency) has been a major driver of the country’s growth, through increased trade with the region and improved macroeconomic credibility. The above has helped Spain in increasing capital inflows to the country, especially Foreign Direct Investments (FDI). The levels of FDI in the 2000s have been higher in average than those in the 1990s; with 3.78% of average | 3 Apparel Cluster in Galicia (Spain)   FDI as percentage of GDP for the 2000-2007 period and 2.32% in the 1990s decade. However, after 2005 FDI into Spain has slowed down. One possible explanation for Spain’s slow down in FDI in the middle of the 2000s decade is that new less developed countries became part of the EU, bringing 10 more member countries competing for the attraction of capital inflows beside the structural and cohesion funds, which were an important resource for the rural development of the country in the past and helped the country increase its sophisticated demand expansion at home. In spite of the above, the growth in the Spanish economy has been accompanied with sustained decreases in productivity, both total productivity factors and labor productivity, figure 2A and 2B. Figure 2 – Productivity indicators evolution in Spain A – Total factor productivity evolution B – Labor productivity evolution Total Factor Productivity annual growth averages Overall productivity of labor (GDP at PPP, per worker, US$) ‐0.5% 0.8% Spain EU‐15 1995‐00 2000‐05 1995‐05 This counterintuitive evolution of productivity is mainly explained by three elements. First, Spain has experienced increasing immigration of unskilled labor from Latin America and North of Africa (jumping from a 2.4% to a 10% of total population during the 2000-2007 period)6, mainly in the construction sector, which has reduced average productivity. Second, the main economic growth in Spain’s economy has been in less productive sectors; for example, construction in 2004 accounted for 23% of employment generation. Third, a chronic low level of R&D investment in the country (below EU averages) has reinforced the dependence on low productivity sectors. Hence, the higher GDP growth rates in Spain were attained by the higher participation rates of the immigrants and women7 rather than from technological upgrade of industries or increase in labor productivity rates. | 4 Apparel Cluster in Galicia (Spain)   As previously shown, GDP growth rates for 2008 and 2009 are much lower than in previous years. This is explained mainly by the burst of the housing bubble in the Spanish real estate market and the impact of the global economic crisis. This has translated into large unemployment in the Spanish economy, which could reach 20% by the end of 2010, see figure 3A and 3B. Figure 3 – Unemployment statistics for Spain8 A – Unemployment rate in Spain B – Construction and unemployment Percentage Unemployment rate Construction approvals for  (left scale) new homes (right scale) 18.0 300,000 16.0 250,000 14.0 200,000 12.0 150,000 10.0 100,000 8.0 50,000 6.0 0 1999    2000     2001     2002    2003    2004    2005     2006     2007     2008 The fact that Spain is heading into a deep recession is very worrisome. First, it will change priorities in the government. For example, Spain’s Prime Minister José Luis Zapatero initial agenda of deepening ties with the region through foreign policy will most likely be postponed to solving the current crisis. Moreover, the crisis will probably force the government to reduce revenues (less economic activity) and increase expenditure (e.g. stimulus and recovery packages to the housing sector) to reduce the impact of the crisis. With this intervention, Spain’s fiscal deficits could reach 10.1% of GDP in 20109. Additionally, the structural problems in the Spanish economy will slow the economy’s recovery. As will be detailed later, these problems include lack of investment in R&D for innovation and rigid labor markets. Unfortunately, a slow recovery together with high unemployment rates and large population of immigrants encompass a significant risk of social unrest. 1.3.Cluster diversification of Spain’s economy As figure 4 shows, the majority of Spain’s exporting clusters are increasing their share in the world (65% of Spain’s exports and 26 out of 42 clusters). They are being lead by the large and fast growing hospitality and | 5 Apparel Cluster in Galicia (Spain)   tourism cluster, which has made Spain the second most visited country in the world after France. Another cluster that has become large, and is also dependent on Spain’s natural endowments, is the agricultural products sector. The construction services cluster has been the fastest one in gaining share in world exports; it will be interesting to see if it can survive the crisis. Finally, the apparel cluster, which will be analyzed in detail later, is the fourth fastest growing cluster in Spain. Contrastingly, only 16 of the exporting clusters (35% of exports) are decreasing their world share. The losing clusters are being lead mainly by two relatively bigger clusters: metal mining and manufacturing and automotive. Particularly metal manufacturing and automotive have seen increasing competition from emerging countries. Figure 4 - Spain national cluster export portfolio10 35% of Spain’s exports 65% of Spain’s exports  16 clusters (out of42) 26 clusters Construction materials 7 0 0 2 Hospitality and tourism e,  ar Automotive h t s Agricultural products e k Transportation and logistics r ma Fishing and fishing products rt  Footwear Cseormvimceusnications Biopharmaceuticals o Business services p x Motor driven  e products rld  mMaentaulf macitnuirnign g/ Construction services o w n’s  Prefabricated enclosures pLeroatdhuecrt sand rFeulranteitdu re Apparel ai and structures p Textiles Aerospace engines S Production technology Forest Products Communications  Aerospace vehicles and defense equipment Entertainment and reproduction equipment Information technology Plastics Processed food Oil and gas products Financial services Change in Spain’s world export market share, 1997‐2007 1.4.Galicia at a glance Figure 5 provides a summary of Galicia’s economic and demographic context. It is interesting to see that although less productive and poorer than the rest of Spain, this autonomous community has a much lower unemployment rate. | 6 Apparel Cluster in Galicia (Spain)   Figure 5 - summary of Galicia’s economic and demographic context Galicia at a glance  Key demographics Elements that define the personality of Galicians (cid:131)Population: 2.8 Million inhabitants (cid:131)Their Celtic origin (cid:131)Official languages: Galician and Spanish (cid:131)The millenary “Camino de Santiago” (cid:131)Capital: Santiago de Compostela (cid:131)The massive emigration that took  place at the end of the 19thCentury (cid:131)Run by the Xuntade Galicia (regional  government) and regional parliament Economic Performance and competitiveness Composition of the economy Comparison of key figures Percentage of GDP in 2008 Productivity (€/hour) in 2007 Unemployment % March 2009 7.60% 17.60% €20.1  Annual  17.36% 12.20% growth  Industry €18.6  1985‐07:  10.00% Services +2.5%* Construction Spain Galicia Spain Galicia Agriculture 64.80% GDP per capita in 2008. Euros 25,100 24,020 20,619 EU 27 Spain Galicia *Highest than average annual growth of Spain Sources: INE; IGE; www.bygalicia.eu; www.investingalicia.com; EstudioFundaciónBBVA ‐Iviemarzo2009 1.5.Assessment of country competitiveness Although Spain has been considered as a growth example in Europe over the last three decades, golden days seem to be coming to an end as the country’s competitiveness is presenting clear signs of erosion. It is undeniable that Spain’s transformation during the last thirty years has been remarkable, however, the magnitude of the challenges that lay ahead demands another wave of transformations that will need to be done urgently. According to the Global Competitiveness Ranking11, Spain has lost six positions in the last seven years going from being ranked 23rd to 29th relative to GDP per capita. This decrease is mainly driven by the decline experimented in the elements related to the country’s business environment (from 24th to 33rd in the last seven years). | 7 Apparel Cluster in Galicia (Spain)   Figure 6 – Analysis on Microeconomic Competitiveness A. Global Competitiveness Ranking analysis Strengths are focused on the quality and  Weaknesses are particularly evident in factor  quantity of local suppliers conditions and context for strategy and rivalry Decline  30 2001‐08 (cid:131)Extent of marketing 14 (cid:131)Firm level technology absorption  50 ‐14 Company  (cid:131)Degree of customer orientation 43 ‐13 operations and  (cid:131)Extent of staff training 66 ‐25 strategy (cid:131)Extent of regional sales 62 ‐27 31 (cid:131)Doing business, paying low taxes 7 (cid:131)Quality of math and science education 88 ‐30 (cid:131)Soundness of banks 18 (cid:131)Quality of educational system 67 ‐43 (cid:131)Domestic credit to private sector 11 (cid:131)Quality of telephone infrastructure 68 ‐18 Factor Conditions (cid:131)Quality of management schools 5 (cid:131)Ease of starting a new business 84 ‐17 (cid:131)Brain drain 18 (cid:131)Burden of government regulation 110 ‐52 (cid:131)Time required to start a business 102 +9 (cid:131)Number of procedures to star a business 75 ‐10 37 (cid:131)Presence of demanding regulatory  23 (cid:131)Government success in ICT promotion 95 ‐36 Demand  standards (cid:131)Government procurement of advanced  57 ‐23 conditions technology products 25 Supporting and  (cid:131)Local supplier quantity 10 (cid:131)Availability of latest technologies 45 ‐5 relating industries  (cid:131)Local supplier quality 25 (cid:131)Extent of cluster policy 44 n/a and clusters (cid:131)Local availability of process machinery 12 44 Context for  (cid:131)Low tariff rate 6 (cid:131)Rigidity of employment 114 1 strategy and  (cid:131)Low extent of market dominance by groups 8 (cid:131)Quality of competition in ISP sector 97 n/a rivalry (cid:131)Intensity of local competition 16 (cid:131)Pay and productivity  89 ‐27 (cid:131)Distortive effect of taxes 82 ‐43 (cid:131)Business impact of rules on FDI 82 ‐52 (cid:131)Restriction on capital flows 79 n/a B. Spain’s national “diamond” analysis Context for Strategy and Rivalry (‐)  Rigid labor conditions (hiring/firing) (‐)  High presence of unions (impact on  wages) (‐)  Significant degree of decentralization  makes difficult to launch nation wide  policies Factor Conditions (+)  Intense local competition (SMEs are  very common and increase  Demand Conditions (‐)  Low quality of educational system  fragmentation) (‐) Lack of government involvement  (below EU) and promotion of latest  (‐)  Low quality of scientific research  technologies  centers (below EU) (+) EU membership provides access to  (‐)  Need to improve physical  more sophisticated pool of  infrastructures consumers (‐)  Very bureaucratic administration (+) Increasing sophistication of national  (‐)  Labor costs increasing and no  consumer (higher income per  longer competitive capita, higher access to new  (+) High quality management schools  Related and Supporting industries technologies,…) (exception) (+) Presence of World Class banks (+) Low tax environment (‐)  Presence of clusters is only very  developed in certain regions (eg. The  Basque Country) (‐)  Low investment in latest  technologies (+) Critical mass of capable and high  quality local suppliers (SMEs) (+) Consolidation of strong clusters (eg.  tourism) | 8 Apparel Cluster in Galicia (Spain)   Strengths In terms of factor conditions, there are some elements that present clear opportunities for Spain. First of all, Spain is home to some of the strongest banks in the world (SCH Bank and BBVA with capitalizations of €69.5 and €42.8 thousand million)12. It is almost unbelievable how such world class banks have been developed in a country with challenges such as lack of innovation, high level of bureaucratization and rigid labor market. As the Economist suggested in its latest country overview both Santander and BBVA have a strong capital and deposit base and have largely stuck to commercial banking, eschewing investment banking and derivatives13. Apart from the strength of banks Spain presents a low tax environment in comparison to other European countries, which in principle should be good news for those interested in doing business in the country. Regarding context for strategy and rivalry, the most remarkable factor is the intensity of the local competition which makes upgrading and constant evolution an imperative to survive in the competitive landscape. The number of SMEs in Spaini is higher than the average of the European Union countries14 with strong world class competitors. However, there is also a group of companies that are continuously struggling to upgrade and to meet the standards to avoid getting stuck in the middle. With the current economic and financial crisis, it is expected that some of them will disappear. In regards to demand conditions in the country, EU membership has provided a great access to a more sophisticated pool of consumers and has raised the Spanish consumer’s standards, acquisition power and access to new education and technologies. Nowadays, the Spanish consumer is likely to be at par with its EU counterparts. Finally, in terms of related and supporting industries, as mentioned above, there is a critical mass of capable and high quality local suppliers, mainly SMEs as well. Spain has particularly strong suppliers in the area of the automotive and aerospace (eg. ITP, Gamesa and Aernova), hospitality (Sol Melia and NH) and transportation and logistics industries (eg. CAF and Irizar)15. Moreover, strong clusters in the economy such as the hospitality and tourism have consolidated in the last decade16. Spain is nowadays a top destination for tourism (2nd in number of tourists)17 with very high quality offer and a wide range of services.                                                              i More than 3,000,000 in January 2006 which represents 7.1 SMEs for each 100 inhabitants | 9