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International Journal of Social Economics
Fact and fiction: wage levels and the (re)location of production
A.J.C. Manders,
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A.J.C. Manders, (1995) "Fact and fiction: wage levels and the (re)location of production", International Journal of Social
Economics, Vol. 22 Issue: 5, pp.15-26, https://doi.org/10.1108/03068299510087903
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Fact and fiction:
wage levels and the
(re)location of production
A.J.C. Manders
Wage levels and
the (re)location
of production
15
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Utrecht University, The Netherlands
Wage levels and employment: the conventional argument
In order to support their claims that wage costs are far too high in The
Netherlands, top managers of large-scale Dutch enterprises adduce the
following reasons:
● the discrepancy between an employee’s take-home pay, and the gross
labour costs paid to the worker by the employer, is among the largest in
the world;
● labour costs per hour in processing industries are extremely high, and
more than half of what the employees earn must be paid to the treasury
or in social security fund contributions.
Dutch employees are therefore said both to be more expensive to employ and to
retain less disposable income than many of their counterparts in other
countries. The low number of hours worked, and the high level of taxes and
social contributions, are presumed to be the cause of this state of affairs (De
Onderneming, 1994). According to one of AKZO Nobel’s chief executives
(Loudon, 1994), gross labour costs in The Netherlands are approximately US$22
an hour, as against US$24 an hour in the former West Germany, US$6 in
Singapore and about US$3 in Hungary and Malaysia. The consequences,
especially in labour-intensive sectors in which many workers are unskilled or
semi-skilled, are presumed to be severe. Loudon (1994) admits that in the
chemical and processing industries labour costs account for a smaller share of
total costs than in several other sectors where wage levels play a less dominant
role. Some economists are of the opinion that the consequences of this cost
problem is felt even in sectors which employ skilled labour such as the
engineering industry and the electro-technical industry. Over the last three
years, jobs in these industries are reported to have been lost in The Netherlands
at a rate of 45,000 per annum, so that the workforce has declined in 1994 to
370,000 as a result of price erosion owing to competition from low-wage Eastern
European countries.
In order to support the argument, reference is made to the relocations which
took place in the 1960s in the textile industry and in shipbuilding, which had
been prominent sectors for so long in The Netherlands. Competition led to the
textile industry being moved to low-wage regions such as South-East Asia and
certain Mediterranean countries, and later to Eastern Europe and Portugal.
International Journal of Social
Economics, Vol. 22 No. 5, 1995,
pp. 15-26. © MCB University Press,
0306-8293
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Shipbuilding was relocated to what were then referred to as the newlyindustrialized countries (NICs), South Korea and Taiwan.
Against this background, the Dutch government is being encouraged to take
measures intended to reduce labour costs: Dutch captains of industry are
optimistically hoping that this will be done. The general opinion is that the
government is making good progress in controlling labour costs, but must
nevertheless “…continue its commitment to extinguish the remnants of the socalled ‘Dutch Disease’, consisting of high social security spending in combination with high taxation, high government net lending and low labour
participation” (VNO, 1993).
Do wage levels matter?
The first point to be mentioned in this context is that the net balance in
employment as affected by international competition in The Netherlands is
positive. A recent OECD Employment/Unemployment Study (1994) confirms
that, while it is true that during the period 1972-1986 approximately 250,000
Dutch jobs were lost as a result of intensified import competitiveness, 400,000
jobs were created as a result of growing exports. It follows that the wage levels
apparently do not constitute insurmountable obstacles, at least not in all
sectors.
The concept of wages being high or low is relative. Complementary concepts
such as labour productivity and the available infrastructure are equally
important for explaining the fact that existing firms remain in The Netherlands
and that new foreign companies are attracted. Labour costs constitute merely a
part of the wider concept of competitiveness. The Netherlands does not perform
badly with regard to attracting foreign firms. An EC report (1993) makes it
apparent that:
On the basis of the European Commission’s indicator for relative unit labour costs, it can be
stated that during the period from 1985 up to and including 1992 Dutch competitiveness
improved in comparison with the rest of the EC and Japan, while it deteriorated in comparison
with the United States.
An important reason for this is probably that Dutch exports are not very pricesensitive. A second reason is that competitiveness is more affected by exchange
rate, that is by the solid Dutch guilder, than by high labour costs (ten Hove, 1988).
Discussing the levels of real wages in the OECD (1994) countries, the OECD
observes, for 1994, that these levels had returned to those obtaining in 1970:
Across the OECD area, growth of real wages moderated after the 1979 oil-price shock in an
environment of tight economic policies that reduced inflation to the low rates of the 1960s.
Wages shares in national income generally fell back to, or even below, their early 1970s levels.
The ensuing improvement in profits much enhanced the business investment climate (OECD
Jobs Study Facts, 1994).
United Nations Conference on Trade and Development (UNCTAD), in the
recently published 4th World Investment Report, speaks of the number of jobs
that are lost to Third World countries as a marginal phenomenon. According to
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this report, cheap labour plays no role whatsoever in direct foreign investments
considerations of international enterprises. Often, the advantage of low wages
is cancelled by low labour productivity. In fact, the report sees a danger to
domestic investment in the competition for foreign investment among
developing countries to secure inward investments. The governments of these
countries may be tempted to abandon social achievements and curb tradeunionists’ rights in the hope of creating more jobs. In the opinion of UNCTAD,
Western industry and commerce are increasingly seeking locations which offer
a well-trained working population with high labour productivity. It is certainly
striking that, while the multinationals’ foreign investments have considerably
risen in the last decade, employment levels in most firms have stagnated (De
Volkskrant, 1994a, p. 2).
In a recent study commissioned by the Dutch government about wage levels,
the conclusion is that, in comparison with other countries, Dutch labour costs
appear to be relatively low (De Volkskrant, 1994b, p. 1). The Dutch Ministry of
Economic Affairs commissioned Hay Management Consultants to find out
whether, from the employers’ point of view, Dutch employees are cheap or
expensive. Hay’s consultants applied two modes of measurement. According to
both yardsticks it transpired that their Belgian, German, French and Italian
counterparts were more, and sometimes a great deal more, expensive. In 1993,
these four countries were the most important outlets for Dutch exporters. They
received nearly 60 per cent of Dutch exports. A minimum wage earner in The
Netherlands is some 5 to 20 per cent cheaper than an equivalent employee in the
most important trading partners. Only British and American workers on
minimum wages are less expensive, but by less than 10 per cent. The point is
that, for example, a Dutch security guard, a porter or programmer, is faced with
the gnawing fact that, after the customary deductions, he nearly always takes
less home in his pay-packet than his foreign counterpart. The numerous taxes,
and particularly the National Insurance contributions which Dutch employees
are obliged to pay, are taking their toll. Nevertheless, it transpires from the
White Paper published by the European Commission, that the burden of social
contributions in The Netherlands is no heavier than in other EU countries. The
discrepancies between the member states of the European Union are apparent,
but a number of countries are not so very dissimilar one from the other. The
total burden of deductions (social contributions and taxes) amounts to
approximately 45 per cent of GDP in Denmark, The Netherlands, Belgium and
France. In the UK, this burden has remained stable, and considerably lower
since 1980. However, according to the European Commission’s White Paper
(1994), a drastic reduction in wages or radical interventions in social security
arrangements with the intention of bringing the European state-of-affairs closer
to that obtaining in developing countries, would not provide a means of
combating European unemployment. Such a socially-reprehensible and
politically-unrealizable “remedy” would only exacerbate the crisis. It would
diminish domestic demand which is a crucial factor in the promotion of the
economic growth which is required to maintain the level of employment (White
Wage levels and
the (re)location
of production
17
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18
Paper, 1994, p. 9). Between 1970 and 1991, the collective burden of social
payments and taxes in the community rose from 34 to 40 per cent of GDP.
During the same period, the burden in the USA remained unchanged at slightly
less than 30 per cent. In Japan, the collective burden of payments has risen
considerably since 1980; in 1994 they represent 31 per cent of GDP. In a number
of member countries of the European Community, taxes and employment
contributions amount to more than 25 per cent and, in some, virtually 30 per
cent of GDP (The Netherlands, Belgium, Denmark, Germany and France).
Fiscal and social contributions appear on average to make up more than 40 per
cent of the total labour costs. These burdens are considerably higher than in
Japan (20 per cent) and the USA (30 per cent). On average, two-thirds of the
social contributions paid in the community are paid for by employers, and onethird by employees. However, in certain member states, among them Belgium
and France, the share of the employers’ contribution is higher, and in the order
of three-quarters of total social contributions. In contrast with this, in The
Netherlands, the burden borne by the employer for National Insurance is less
than half of the total amount paid in social contributions.
The facts stated above create a firm impression that The Netherlands is not
far out of step with regard to labour costs with the rest of Europe. Furthermore,
The Netherlands can be proud of its high level of the productivity of labour,
thanks to which it is even possible to speak of a relatively favourable position
when it comes to attracting new firms or retaining old established ones. This
impression is confirmed by the level of direct foreign investment in The
Netherlands. The Netherlands is apparently attractive to foreign investors. In
The Netherland’s Foreign Investment Agency’s annual report (1993), it says
that:
Because of the (general world) stagnation more than ever the right location under favourable
business conditions is of prime importance. There is also a growing need for companies to
be able to release their products on to the market at the same time all over the world and to
have a cost-effective stock management system. Another important point is that many
companies view their European operations and activities as a strategic decision not
fundamentally affected by the business cycle, but of course, influenced by financial
opportunities. The 1993 results show that The Netherlands is an ideal place in Europe for a
large number of companies. The relatively stable economic and political situation has
undoubtedly helped to create this view. The trend towards subcontracting is becoming more
and more important because of the creation of European and worldwide networks, which
involve operations at ideal locations. Suppliers are an important factor in the competitive
edge of companies.
Production technology and (re)location policy
On closer examination, the conclusion from the examples of the companies in
the textiles sector and in shipbuilding which moved to low-wage countries in
the 1960s and 1970s are found to be diametrically opposite to what those who
quote them have in mind. In his doctoral thesis on the decline of shipbuilding
and other industrial sectors, C. de Voogd (1993) presents evidence that there are
various countries in which shipbuilding did indeed become established because
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of low wages, but subsequently left these countries despite the remaining low Wage levels and
wage levels. In 1994, world market-share of Dutch shipbuilding stabilized at 2.5
the (re)location
per cent. The sector takes a leading position in annual output (compensated gross
of production
tonne) per person employed. In 1975, Dutch shipbuilding produced new ships to
an amount of 598,000 CGT (compensated gross tonne) by 20,000 persons. In 1994,
this is about 350,000 CGT by 4,100 persons (De Volkskrant, 1994c).
19
In the course of the 1960s, virtually the entire textile sector moved to lowwage countries, but it has since returned to The Netherlands in a new guise in
response to a new production technology. In the 1960s, some 65,000 people were
employed in this sector; after this, the numbers employed fell drastically but
rose once again to more than 12,000 in the 1980s.
The textile “saga” teaches us the following: developments in productiontechnology during the 1960s, combined with the specific characteristics of the
textile industry, were such that the production of textiles could not to a
sufficient extent be automated. The processing steps in textile production
involve a natural product of which the physical-chemical composition is never
entirely uniform and not perfectly known and can never be known. Therefore,
the process is in many cases difficult to repeat. Its parameters cannot (always)
be monitored and rejigged in a straightforward manner. In addition, the textile
market is also difficult to predict and, because of its very nature, most of the
firms in this sector are unable to benefit from economies of scale. Also,
flexibility and quality are of primary importance in the textile industry. This
explains the technological backwardness of the textile industry. But since the
computer has made its presence felt in production equipment (having
previously ushered in dramatic changes especially in new product development and in the realm of information transfer) flexibility has come within
arm’s length in the domain of production proper. In this context, flexibility
implies the ability to produce small batches in a financially-responsible
manner, i.e. achieving “economies of scope”. The arrival of this has solved the
problems associated with the fact that, in the textile industry, economies of
scale had little to offer. Flexibility is achieved by virtue of the
reprogrammability of machines (Technieuws, 1994). The shift from mass
consumption to a more differentiated pattern of consumption, which has been
taking place in recent decades, can therefore be responded to better. Among the
new production concepts is the Toyota Sewing System (TSS) which features
short throughput times, short rejigging times, zero input stocks and just-intime arrangements with suppliers. If the time consumed in rejigging is still too
long, it is compensated for by an overcapacity in machinery to maintain the
desired flexibility (Peeters, 1988). Developments in production technology have
ensured that textile production has re-established itself in highly-developed
countries in which sufficient well-trained personnel are available to be able to
produce under the new circumstances.
The developments in production technology, which were initiated in the
second half of the 1970s, have resulted not only in a (partial) return of the
textile sector to the high labour costs countries, but also in a progressive
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shedding of industrial labour on grounds other than wages. For many years,
the substitution of labour by capital was primarily the consequence of
focusing of management on the most expensive item among the factors of
production. During the 1960s, the era of mass production and tight labour
markets, this was labour cost. In order to alleviate the burden of labour cost,
North European enterprises recruited “guest workers”, from Italy, Turkey,
Spain and other countries and transferred, in particular, unskilled and semiskilled production activities, such as assembly to low-wage countries like
Taiwan, Brazil, South Korea, Thailand and Portugal, etc. This was called the
“runaway strategy”. In 1970, according to an International Labour
Organization (ILO) estimate, 10 per cent of all foreign investments were made
with the exploitation of cheap labour their main objective. Incidentally, the
runaway strategy was adopted not only to reduce labour costs. One other
reason is the escape of environmental taxes. Since 1972, “runaway” is used in
the chemical sector by (among others) Japanese and American firms which
are investing in South Korea in order to escape the increasingly stringent
environmental protection and safety regulations in their own countries. A
second reason is that the governments of various countries required that
firms established themselves locally if they wished to gain access to their
market. This was the source of the “local-for-local” policy. A 1978 study by
Blackbourn makes it apparent that, for numerous US firms, the size of the
market was the decisive factor in selecting Europe as the location for their
activities. In the 1970s, the period which marks the heyday of “Island
Automation” (i.e. when automation was still only applied to discrete elements
of the production process), machine downtime was the most important
generator of high costs. Nowadays, the objective pursued by top management
is the reduction of stocks of finished products. Prime attention is devoted to
that element in the production process that is perceived as the bottleneck.
The new production method has particularly increased the flexibility of the
production process and the quality and diversity of the range of products. Its
most important characteristics are the potential of technical feedback
mechanisms, the reprogrammability of machines at machine level, at machinegroup level and (considering logistics) at plant level. The new toolbox contains
computers, data networks and servo-driven mechanisms. The creation of the
discipline of mechatronics, which is supposed to integrate the disciplines of
mechanics and electronics, is a salient manifestation of this development. The
developments which have consequently been brought within the realms of
possibility, such as miniaturization (products can be rendered more compact
and less expensive), the paring down of tolerances (reduction in nonconformities), the integration of the functions and the requirements which are
in turn generated by them, such as and (especially in electronics) dust-free
production, have vigorously stimulated the labour-saving element of
technological advancement. Simultaneously, the R&D costs associated with
both product- and process-innovation have risen dramatically. As a
consequence thereof, two important changes, which have a bearing on labour
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as a factor of production, have appeared: the share of wages in production Wage levels and
costs has steadily diminished, while unskilled labour has become redundant
the (re)location
but the demand for highly-skilled employees has increased (Spithoven, 1995).
of production
In the USA, logistic costs account for a mere 18 per cent of production costs,
while in Germany they amount to between 27 per cent and 35 per cent. In the
European context, Dutch logistic costs are relatively low. In 1972, at Philips
21
Electronics, the wage costs incurred in the final assembly of TVs made up
some two-thirds of the total production costs. By 1994, a Philips’ investment of
500,000,000 guilders in a new chip factory in The Netherlands created no more
than 300 new jobs. Top managers freely admit that capital-intensive firms do
not help to solve the European unemployment problem. A lone voice among
them even claims that labour costs have become less important than other
expenditure. For example, with respect to the production of a TV, it is accepted
that:
…the know-how that goes into the manufacture of a television set is more and more to be
found in the construction of sub-assemblies themselves and in welding and adhesive
technologies than in their configuration. This explains the increasing strategic importance of
the chip industry for the entire electronics sector, and why this industry plays a key role in the
determination of industrial strategy. This is far more important than labour costs, which has
become strategically far less significant as a result of the decreasing trend in the labour
intensity of industrial production (Philips Koerier, 1987).
In a discussion held at Philips Electronics in 1986 on the question of whether
Philips should transfer the production of vacuum cleaners, kitchen appliances,
etc. to low-wage countries, a Philips manager was convinced that:
A more judicious use of materials often saves more than the scrapping of a couple of jobs. We
are confronted with 70 per cent material costs (inclusive of energy costs) and 30 per cent added
value, where the latter figure is not only including labour costs (which make up half of these
costs at most), but also depreciation and overheads, etc. If we aim to lower the cost price, we
need not therefore rely on employing fewer people (Het Financieel Dagblad, 1986).
Thus the fact that top management is much less influenced when it comes to
location policy, and by labour costs than it used to be, is plausible. This
conclusion is confirmed by developments in the migration of firms. Research in
this field reveals that there is a marked trend towards migration within the
three large trading blocs: America, Europe and the Far East. Comparison of
wage and productivity levels in the countries within the blocs is more realistic
than comparison with the low-wage countries outside these blocs.
Location policy since the 1960s: the case of Philips
The history of Philips, which mirrors the location behaviour exhibited by
other multinationals in micro-electronics, reveals that the transfer of
production to low-wage countries started in the early 1960s. The employment
offered in such countries at that time was particularly for young girls and
young women. In 1970, for the first time, the mass production of chips led to
overproduction on a global scale. The large-scale chip manufacturers
responded in three ways: by embarking on a price war, by cutting back
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22
capacity, and by transferring even more of their production processes which
could autonomously be carried on to low-wage countries. In the case of
integrated circuit manufacture, this, in the first instance, involves the transfer
to low wage countries of the second phase of production: the assembly phase,
which is labour-intensive in comparison with the first (diffusion) and the third
phase (final continuity testing). The first (black and white) TV manufacturers
to seek a bolthole in developing countries were American firms.
Considerations of competitiveness obliged Philips to follow Fairchild and
National Semiconductor, both of which are American concerns in adopting
the runaway policy. Fairchild was the first to locate in Hong Kong in 1963,
South Korea in 1964 and Indonesia in 1972; while Semiconductor arrived in
Malaysia and Taiwan in 1972. By 1974, Fairchild’s semiconductor plants were
established in six Asian countries, and National Semiconductor’s in five.
Philips’ runaway operation took shape via the takeover of Signetics, the
owner of two firms in the USA and factories for integrated circuit (IC)
assembly in South Korea, Thailand and Portugal.
Since the early 1960s, Philips has distributed the production of colour TV
tubes internationally, particularly across Europe, following the local-for-local
strategy and in Latin America and Taiwan because of the low wages. Aachen
(Germany) was of special importance since Europe was the largest market. In
1969, Philips started assembling ICs in Taiwan. Philips followed the American
example which was directed towards maximization of the use of Far-Eastern
assembly plants. While the second overproduction crisis, in the period 19741975, had no significant consequences for employment levels resulting from
transfer of location by Philips, the third crisis, in the period 1981-1982, had an
impact. From the beginning of the 1980s, a policy directed towards the
concentration of locations was pursued in the sense that larger production
units were increasingly brought into service. An important reason for this was
that the management wished to locate the development and innovation of new
products (R&D) in the near vicinity of the production process. This policy
helps to explain the return to locations in the developed countries. The
abandonment of the segregated location of R&D, and the increasing pressure
on R&D departments to make direct contributions to the expansion of the
turnover of the enterprise meant that enterprises had to be able to recruit
highly-skilled and educated persons in the area which was opted for the
settlement of a production plant.
While the role of the “runaway” policy was significant in the case of black
and white TV, the role of “runaway” production of colour TVs and colour
television tubes in the totality of production was insignificant. As a result of
the decline in the importance of labour cost in the overall costs, which resulted
from automation, and high quality of labour required for the production of
colour television tubes, “runaway” scarcely played a role here. The production
phases which had been transferred to low-wage countries fell victim to
automation. In 1983, at Signetics Korea, Philips cut manpower back to 2,300
persons from between the 3,000 and 3,500 it employed there in the period
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1978-1980. The Signetics factory in the Philippines which had employed 900 Wage levels and
workers was closed down in 1983 as a result of the further mechanization of
the (re)location
assembly lines. In the USA, chip assembly began to increase once again during
of production
the 1980s.
While, in 1977, automation, standardization and the stepping up of
production had still been the spearheads of Philips’ policy in the “runaway”
23
firms, in 1983 a shift in investment policy was announced, signalling a
relocation of production into the most lucrative market zones, namely Western
Europe and North America.
“Re-runaway” and cut-backs must therefore be seen against the background
of a chip industry whose character had undergone fundamental changes. The
era of the small-scale newcomer firm is well and truly over. The balances of
power have crystallized. The investment and development costs required for
mass production of integrated circuits have risen. Expensive innovations in the
production process are embarked on, because miniaturization in the domain of
production results in the crossing of technical barriers.
In 1994, The Netherlands remain an important location for Philips. Five per
cent of the entire turnover (3,100,000,000 guilders) is realized in The
Netherlands, and some 17 per cent of Philips’ employees are working in The
Netherlands. In 1992, there were 37 Philips factories on Dutch soil, a fifth of the
total number of Philips factories worldwide (Timmer, J. in Philips Koerier, 1993).
The availability of centres of excellence (among the large number of scientists
employed by Philips, 60 per cent are working in The Netherlands) (De
Volkskrant, 1994d) also leads to the establishment of pilot plants in Holland. In
August 1994, Philips Semiconductors decided that the lion’s share of its
investments should be committed to The Netherlands. The manager, Dunn,
among other things, justified this decision by remarking that pursuing low
labour costs is not in itself the best road to salvation. Asia, he said, is ideal for
assembly activities but, when it comes to the development and production of
chips, Europe owing to the available know-how infrastructure achieves a higher
score.
Theoretical considerations
Economists who subscribe to the rationale generally adopted by employers
heavily rely on the Heckscher-Ohlin approach to international trade which
maintains that free trade will be a perfect substitute for factor mobility and
leads to the equalization of factor prices. This implies that wages in countries
which conduct an intensive trade with one another must ultimately converge.
Implicit in this supposition is the assumption that convergence is first and
foremost leading to a cut in high wages rather than a rise in low wages. This
theory neglects attention to institutional and technological developments at
regional level. Porter (1990), however, is by no means guilty of such an
oversight. He demonstrated that the migration of firms is impeded by
institutional and logistic costs as well as by a shortage of information.
Moreover, he sees linkages between factors of production and their organization
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or location: “cluster relationships”. Many economists are, however, still
primarily regarding displacement or relocation as the results of differences in
labour costs. In fact, there are also various other costs determining the location
behaviour of enterprises, such as the ones associated with taxation, energy
consumption, environmental surcharges, and the cost of land and capital. In the
case of Philips Europe and California, with its centres of excellence, it is
regarded as an inevitable choice for the location of pilot plants when it comes to
trying out new products such as the electronic super highway. Economic theory
would be well served if greater attention was more emphatically paid to the
strategic behaviour of firms. The point is that, over and above achieving cost
reductions, there is emphasis on the raising of productivity, and/or on
innovation and on new production concepts such as lean production,
Toyotaism, flexible specialization, and others.
Another theoretical consideration is that Vernon’s (re)location theory seems
no longer adequate. Vernon attempted to develop a new dynamic theory of
trade which was based on the concept of the “product life cycle”. He introduced
a spatial dimension into the product life-cycle concept which originally was
entirely devoid of a spatial element. The theory assumed that each new
product passes through a number of phases. After the introduction phase there
is the breakthrough on to the market, followed by a phase of large volume
sales, and finally market saturation phase and sales decline. The idea is that,
in the phase of large volume sales, production plants are transferred to lowwage countries. In the initial phase of the product life cycle, the low degree of
standardization in the character of the new product, and the associated
production technology, results in the need for rapid and frequent liaison among
producers, subcontractors, and customers (spatial concentration). In the
second phase, as the product and the technology become more standardized
and overseas sales increase, the enterprise will embark on establishing
production facilities abroad. In the final phase, in which production costs are
playing the major role, production activities may be transferred to developing
countries where production is feasible at lower cost levels. In this stage,
developing countries may be effectively exporting products to developed
countries. The theory carries with it the important implication that, at a certain
stage of maturity, high labour costs lead to a transfer of production activities to
low-wage countries (Lambooy, 1993). The theory provided an underpinning for
the transfer of firms to low-wage countries in the 1960s. In the face of the
computerization of the design and production process (CAD/CAM), this theory
seems now to have lost some of its relevance, certainly as far as consumer
electronics is concerned, and very likely for an increasing number of other
products in the future. The reason for this is that the design and production
phases of a product (a new one or a variation of an old one) have been so
drastically telescoped, and the options for new products have so dramatically
increased, that consumer electronics producers are confronted with a product
life cycle which is shorter than six months. The introduction phase of a product
had formerly been long enough to enable the high R&D investment to be
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recouped so that, at a later stage, the price could be lowered and total revenue Wage levels and
increased without affecting profit margins by the advantages of economies of
the (re)location
scale. Under these circumstances, it had also been possible to produce for
of production
stock. In the final phase, attention was focused on lowering production costs
by means of more efficient production equipment and/or reorganizations as
well as “re-runaway” and by plant closure. At present, the time available for
25
earning back the R&D costs of consumer electronics products (that is the
period during which a high price can be commanded by the product by virtue
of its exclusiveness) is reduced to weeks rather than months. The whole idea of
producing for stock is rendered imprudent; the days when Philips could start
production in August in anticipation of demand at the end of the year
(Christmas shopping) are well and truly over. The system of production to
order, which replaced production for stock, requires with regard to production
design, namely the producibility of the product, an entirely different point of
departure. The product life-cycle theory held implicitly that a new product, as
far as strategy is concerned, was the starting-point of the entire cycle which
covers many years. In the past, this was indeed the case. However, the
technology race created a surplus of research capacity whereby new
technologies supersede one another in rapid succession. This resulted in the
recognition that the road from the original idea to the product should be
shortened, and rendered obsolete the traditional sequence of work, namely the
sequence of first research, followed by applied research, development,
manufacture, and finally sales.
Conclusion
A two-pronged conclusion can be drawn from the data presented in the article.
First, the examining of the location policy of huge corporations, side-by-side
with the observation of the developments in production technology during the
last three decades, demonstrate that, while wage costs played a significant role
in determining the location policy in large-scale enterprises in the 1960s and
1970s, their importance has, since the 1980s, much diminished. Second, the
“electronification” of production equipment and the arrival of producibility as a
central concept in corporate strategy brought with them a different industrial
strategy and reduced the relevance of product life-cycle theory as an
explanatory tool for the analysis of industrial strategy.
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This article has been cited by:
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1. Ann Hodgkinson, Chris Nyland, Simon Pomfret. 2001. The Determination of Location in New South Wales. Regional Studies
35:1, 39-55. [CrossRef]
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