The Complexities of Relocation and the Diversity of Union Responses:

Efficiency-oriented FDI in central Europe

G Meardi, P Marginson, M Fichter, M Frybes, M Stanojević, A Tóth

1. Introduction

Drawing on research findings from a study of the operations of German- and US-owned multinational companies in the automotive components sector in three central European countries, the paper has two main aims. The first is to examine the widely invoked, but loosely defined, claim that much foreign direct investment into central Europe in the manufacturing sector involves relocation from western Europe, and thereby to refine the conceptualisation of relocation. It is argued that in a sector where investment flows are primarily determined by efficiency considerations, the EU’s eastern enlargement has prompted the international reconfiguration of production, entailing complex multi-directional shifts in production across borders. Despite an apparent structural shift of manufacturing from the old to the new member states (Pilat et al. 2006) and some media alarm (e.g. ‘All roads in Europe are pointing East for carmakers’, Financial Times, 15/6/2006), relocation is a contingent, not a pre-determined, outcome. The second is to present and account for the range of responses from trade unions, in central Europe but also in the west, to this international reconfiguration of production. Appropriate trade union strategies, it is argued, can be focused at the local as well as at cross-national level, according to circumstances.

The paper is organised as follows. A first section will outline the different forms of contingency that affect the nature of relocations and, subsequently, trade union responses. The following ones will examine these factors in detail through sector-level information on the automotive parts sub-sector and through company case studies: three sections will discuss, respectively, sub-sector-level, company-and plant-level, and actor-level contingencies. The conclusion will consider implications for the Europeanisation of industrial relations in multinational companies.

2. The contingency of relocations

a) The complexity of relocation decisions

Despite widespread fears of, and attention to, the potential employment consequences of relocation amongst the EU-15 the available evidence suggests that relocation in its strictest sense, when productive activity is directly transferred eastwards from a location in the old member states to one in the new, is relatively rare. Of the job losses arising from company restructurings across Europe documented by the European Monitoring Centre on Change, around 5 per cent are attributed to relocation over the period from 2003 up until the end of 2005. These involved over 70,000 redundancies in some 200 companies (Pedersini, 2005). Even if the EMCC, given its methodology based on press reports, probably greatly underestimates the volume of restructuring cases, the proportion of relocations is unlikely to be overestimated, as these are exactly the cases that attract most media interest. An assessment prepared by the European Commission (2006: 65) cites findings on the employment effects of relocation from selected studies relating to Germany, Austria and the Netherlands. Estimates of job loss between 1990 and 2001 directly attributable to relocation in these countries varied between 0.3 and 2% of total job losses.

In addition to ‘direct’ relocation, there is also scope for ‘indirect’ relocation. This is where investment projects which might previously have been located in the EU-15 are instead located in one of the new member states. Because of the dynamic nature of investment decisions, and where to locate them, it is frequently less than clear cut whether an indirect relocation has indeed taken place; hence there are no reliable estimates of their possible magnitude. A further effect on employment comes from the threat of relocation, which frequently has the effect of inducing cost-reducing and/or efficiency-enhancing changes in existing operations in the EU-15 which themselves have employment consequences. Examples include the high profile cases of Siemens in Germany and Bosch in France, over the summer of 2004 (Pedersini, 2005). Again there are no reliable estimates of the scale of such ‘threat’ effects available.

In order to understand both why actual relocations appear to be less widespread than feared, but also to uncover the circumstances under which relocations – direct and indirect – and the threat to relocate are more (or less) likely to be occur, it is productive to adopt a contingent approach. The approach is based around a number of distinctions, each of which has bearing on the scope for relocation, actual and threatened. The focus is relocation of activities across borders within multinational companies, and not with international outsourcing of production to independent suppliers in other countries (for elaboration of this distinction see Galgóczi et al, 2005).

A first distinction is between market- and efficiency-oriented motivations for foreign direct investment (FDI), in which the potential for relocation largely arises under the second. An important part of inward investment into the new member states is ‘market seeking’ in nature, motivated by the opportunity of opening up new markets for products and services (European Commission, 2006: 64). Such investment by its nature is market expanding, and the largest share involves service activities which by their nature need to be produced close to the point of consumption. Scope for relocation is minimal and jobs may actually be created for some functions in western sites. In contrast, efficiency-oriented FDI is motivated by considerations of comparative labour costs and/or labour quality and/or labour productivity, in which companies are looking to take advantage of superior unit labour cost conditions in the new member states as compared to those prevailing in the EU-15. Given significant differences in labour costs, the presence of workforces with established skills and qualifications, and improving labour productivity amongst the new member states (Marginson and Meardi, 2006), the resulting scope for relocation is potentially extensive.

Second, a crucial distinction has been drawn between a first wave of efficiency seeking FDI into the new member states, which involved outward processing activity based almost exclusively on the search for cheap labour, and a second wave, in which the emphasis is on labour quality, flexibility and productivity as well as costs (Fichter, 2003; Radosevic et al., 2003; Rojec and Stanojevič, 2001). This structural shift in the nature of efficiency-oriented inward investment into central eastern Europe, which has been underpinned by declining unit labour costs as productivity has risen faster than wages, has been widely documented (e.g Graziani, 2002; Ladó, 2001; Tholen and Hemmer, 2005). The Czech Republic and Hungary in particular have increasingly specialised in medium-high technology manufacturing: the share of high and medium-high technology in total gross value added in these countries rose from 6% in 1994 to 10% in 2002, against an unchanged average of 8% in the EU (Pilat et al. 2006).Whereas the first wave essentially involved the transfer of labour-intensive, low skilled operations, the second wave of efficiency seeking investment involves the reconfiguration of production networks in Europe.This results in a more complex reorganisation of activities across different locations than the direct relocations associated with the first wave of efficiency-oriented FDI. As both Galgóczi et al (2005) and Pedersini (2005) recognise, it becomes more difficult to assess the employment impact, either overall or at specific locations. Moreover, given the role of human capital in second-wave activities, employer commitment to the workforce (including job security and scope for social dialogue and compromise) tends to be stronger.

Third, the nature of these international production networks and the role of new and acquired sites in the new member states within the network is likely to have a bearing on the scope for relocation. Considering the nature of these networks, three possibilities can be identifed. The first two flow from the possibilities that the twin processes of market integration and enlargement open up for multinational producers to simultaneously segment and coordinate their operations on a pan-European scale. As a result numbers of MNCs are radically adjusting their ‘value chains’, in which different activities are segmented across borders, depending on skills and cost considerations (Kaplinsky, 2001). Such segmentation can vary in the extent, if any, of the vertical integration of sites within the international production network that it involves. This can range, first, from instances where sites solely supply other sites that are final assemblers of products (which we call segmentation) to, second, those where each site is itself the source of distinct products for the market, and sites compete for product mandates from the multinational parent (which is best defined as segregation.) Edwards and Zhang (2006) draw attention to an alternative logic for organising international production networks.This third possibility involves standardisation of production at a series of different locations that are comparable to each other. This is ofclear relevance in the service sectors where FDI is motivated by market access. But they show that it is also relevant in those parts of manufacturing under two conditions. The first is where products might be perishable and/or transportation costs high and/or major customers require just-in-time delivery or after-sales service, conditions which are consistent with a market access logic for FDI. The second is potentially relevant to efficiency-oriented FDI, and arises where production is technologically difficult to separate across borders. An example is large machinery manufacturing, where segmentation is not pursued. Relocation could occur if unit labour cost considerations prompted the establishment of a parallel operation in the new member states to source part of the enlarged European market. In other words, the similarity of sites across borders can lead to direct competition, relocation, and possibly vertical restructuring if a segregation strategy is followed; to coexistence,but under conditions of ongoing review of product mandates,if a segregation strategy is preferred; and to the establishment of new capacity, with potential future relocation consequences, is a strategy of standardisation is pursued.

A fourth consideration is the extent to which location decisions of companies are autonomous, or are driven by those of major customers. In some sectors, such as automotive components, the location decisions of powerful customers who demand just-in-time delivery effectively require suppliers to follow them to new locations (UNICE, 2005). In other sectors, companies have greater discretion over the choice of which locations to supply their customers from.

Fifth, the potential for relocation is far from being bounded by the enlarged borders of the EU; relocation has a global as well as intra-European dimension in which some production activities (not all low skilled) are moving to Asia, North Africa or extra-EU European countries. The extent to which there is scope for extra-EU relocation would seem likely to vary between and within sectors, according to factors such as technology, skill requirements and the need for proximity to major customers.

b) Implications for union responses

Potential union responses to relocation have been distinguished, in an actor-centred way, by Erne (2004) along the twin axes of democratic/technocratic and European/national. In drawing on this framework an analytical – as against normative – approach to actors’ strategies must, as urged by Ramsay (1997), be sensitive to the contingencies affecting both axes, such as product market, role of labour costs and vertical integration.

On the European-national axis, the nature of the product market (including the incidence of labour and transport costs, and the degree of production standardisation, segmentation or segregation) may make ‘European’ answers appropriate whenever the product market more or less coincides with the European space. By contrast, where Asian competition is stringent and relocation beyond Europe a distinct possibility, union interest in European-level action will be undermined. Alternatively when local production systems have a degree of autonomy, the strategies of local ‘competitive solidarity’ (Streeck 2000) could be most appealing.

On the democratic/technocratic axis, contrary to Golden (1997) the choice to mobilise against job losses does not necessarily follow from a shortage of information, a misunderstanding of the situation, or specific political conditions. In multinationals, information on inter-site comparison may be available (e.g. through the EWC), and there is potential for union cross-border information and therefore ‘informed’ democratic strategies (events at Renault and GM Europe contain elements of this). The range of available options depends on the seriousness of competitive pressures on labour costs stemming from ‘coercive’ employer comparisons if they are weak, local development strategies may be preferred to European solutions, while if they are extreme, there are unlikely to be any market-viable solutions, and therefore political intervention remains the only safety net. Only in mid-way situations of serious but not extreme threats, and when the product market is European, will European answers be appropriate and viable. In such situations there is potential for EWC intervention, starting from information-sharing in order to assess the real nature of the threats.

In addition, integrated production is more conducive of union strategic action; so too is a degree of similarity of business activities across sites in different countries (Marginson et al, 2004). An important implication is that, as argued by Huzzard et al., 2004, the technocratic and democratic approaches can be combined, at both the local and the European level.

Table 1 shows the effects of each contingency on union responses to relocations. The five contingent factors are not mutually independent, though. The first, in particular, affects the second, third and fourth. The second in turn affects the third and fifth. However, all should be considered in a multi-level analysis (sector, sub-sector, company). Higher level constraints limit the choices available at lower level, but do not obliterate them, as the variety detected in section 4 will illustrate.

3. The automotive component sector in the enlarged EU

Through a comparison of the motor, apparel, and maritime industries, Anner et al (2006) highlight how union answers to international competition are sector-dependent. Here we add the importance of sub-sector and geographic contingencies: the specific product and labour-market contingencies on the one side, and the regional dimension on the other. In this regard, the automotive component sector in the new EU member states differs from both the motor industry as a whole, and from the ‘global’ and the former EU15markets.

As a whole, the automotive sector is considered as among the ‘winners of globalisation’, due to its high fixed- and human-capital intensity. Its process of internationalisation has allowed a specific form of trade union cross-border co-operation, focusing on firm-level European (and in some cases global) works councils, which have coexisted with the maintenance of national union strategies in each country in the form of pacts for employment and competitiveness (Zagelmeyer 2000). Fixed capital means that labour-cost driven relocation are not that a viable short-term option, and high human capital involves space for employee ‘voice’ and participation, as well as the possibility of defending high wages through high quality and productivity. As an effect, national-level compromises have remained distinct in spite of converging global pressures (Katz and Darbishire 2000.)

The opening of global markets and the increase of foreign direct investment in this sector has reduced neither employment nor relative wages in the triad of core producers (Japan, USA and Western Europe) between the late 1970s and the late 1990s (Spatz and Nunnenkamp 2004.) In 2003, the opinion-making German magazine der Spiegel could still title ‘Autoindustrie: die Job-Maschine’ (Spiegel, no 37, 8/9/2003), referring to the major planned investments of Daimler, BMW, Porsche and Volkswagen within Germany.Such a rosy picture, however, hides important sub-sector and regional differences. Notably, the parts and components sub-sector (whose importance is increasing due to the parallel process of outsourcing and value chain fragmentation) reacts differently to globalisation than vehicle production. The degree of labour intensity differs: in Germany, the ratio of workers to sale is 2.5 higher in the production of autoparts than in that of automobiles and engines (Spatz and Nunnenkamp 2004.)Weight and therefore the transportability of the product also differ: because they are more easily transported, parts are more exposed to foreign competition.

The implication for trade unions in traditional car-making countries is that in the component sub-sector it is more difficult to keep both high wages and employment. Liberal-market economies such as the USA have witnessed an increase in intra-industry wage differentials, while a country with centralised sector-level wage bargaining such as Germany has avoided this but could not prevent a decline in employment in the components sub-sector (ibidem).

This divergent intra-industry process must be seen in the context of internationalisation. While in 1978/79 the German automotive industry imported only 6% of its inputs from low-income countries, by 1997/98 the figure was 30%, and increasing (ibidem). The main origin of these parts (over a half of electrical parts, and a rapidly increasing share of engines) is Central Europe. Internationalisation of automotive production chains does not involve far countries (such as the Asian ones, where foreign direct investment in this sector is market-seeking) but proximate, lower unit-labour cost countries within the context of regionalisation: NAFTA and the enlarged EU.