Clusters and Competitive Advantage_5 docx

5 The Towel and Bathrobe Cluster in Denizli ‘The secret of success lies in courage’ a businessman from Babadag Textile production starts with the main inputs – natural or man-made fib

place to internationalize.’ In a similar vein, another interviewee stated thatthe real masters of this business were now in Istanbul Besides, he argued,since Istanbul had a larger number of a relatively well-off people there was

a significant demand for high-quality designer furniture there, whereasAnkara was a ‘civil-servant city’ (meaning customers with limited purchasingpower): ‘If you are looking for something of really good quality, you should

go to Istanbul Istanbul is also the place if you are planning to buy furnitureaccessories and imported materials As a producer, you have more opportun-ities to prove yourself in Istanbul Here you are in a way hidden Istanbul

is much better connected to the international markets than is Ankara, interms of both contacts and infrastructure.’

The decline in the image of the Siteler cluster is also evident in the followingremarks by another interviewee: ‘There is a street between my firm andSiteler When I say that, some potential customers are relieved.’ Despite therelative decline in its image, however, ‘made in Ankara’ furniture continues

to have a better reputation than furniture produced in many other clusters

in Turkey Interestingly, one of the firms in Siteler had considered opening

a branch in Inegöl in order to make use of the export connections of thecluster there, but had later decided that such a move could damage theimage of the firm because Inegöl was associated with cheaper and lower-qualityproducts Nevertheless the newly emerging clusters are severely affecting thefirms in Siteler by imposing a strong downward pressure on prices

A related issue is the limitation imposed by the structure of the buildings

in Siteler, which is one of the reasons why several of the larger firms aremoving out of the district Siteler is composed of apartment-style buildings

so production has to be spread over several floors, meaning that heavyfurniture, materials and machinery have to be moved up and down stairsand through narrow doors.12 It is also difficult to supervise employees inthis layout One interviewee argued that the buildings suited firms employing

10 workers at most, but not the bigger firms Interestingly, many of thefirms that have moved out of Siteler have formed another cluster, this time

in Akyurt (near Ankara airport) One manager spoke of how the firm tookthe decision to move to Akyurt: ‘We were suffering the constraints associatedwith the buildings in Siteler and were considering moving out When one ofour competitors moved to the area next to the airport, we thought that

it might be a good idea to own land there, and later we constructed

a factory.’ Then other firms followed suit, and as a result the germ of a newfurniture district emerged, this time composed of larger firms While thesefirms have maintained a presence in Siteler, this is often only in the form

The Furniture Cluster in Ankara 81

firms as it is for the followers (Shaver and Flyer, 2000) In this context,imitation is seen as a negative externality that is magnified in geographicclusters: ‘It is very easy in a district to copy what others do It is, on theother hand, very difficult to fight against it.’ Thus although, successful firmstend to be secretive about their new products, they are immediately copied

by competitors when they are put on the market Some firms eveninstall a partition between the showroom and the workshop to hide thedevelopment of the latest model Referring to the managers of rival firms,

a prominent and successful manager rather dramatically stated that he had

of a cluster With regard to the former, we need to identify the circumstancesthat lead to destructive price competition versus those which lead to theimprovement of competitive advantage in a cluster environment Regardingthe latter, we need to clarify the conditions for and the process of knowledgeaccumulation in respect of internationalization When the analysis of thiscluster is combined with those in the following chapters, which will bringnew dimensions to the issues raised in this chapter and open up some novelareas of discussion, we shall be better equipped to offer an understanding ofthe link between clustering and competitive advantage However one thing

is very clear even at this initial stage: some clusters are not internationallycompetitive, but we do not know about them because they are rarely discussed

in the literature, as noted by Amin (1994)

Concluding remarks and future prospects

The furniture cluster in Ankara presents a rather bleak picture with regard tointernational competitiveness The advantages enjoyed by the cluster – such

as low labour costs, its central location and its links with the constructionindustry, paving the way for direct and indirect furniture exports – do not

compensate for its drawbacks, which include difficulties with financingand acquisition of the main input (wood), unfair competition stemmingfrom the presence of firms in the ‘grey economy’ and, most importantly,problems with strategy, especially in respect of design and export marketingmechanisms

Recently, however, Turkey’s internationalization measures have facilitatedthe entry of inputs and consumer products, and this has been instrumental

in Turkish manufacturers paying increased attention to quality and adopting

a more customer-oriented approach (SPO, 1995) Moreover large Turkishindustrial groups have entered the furniture industry,13 a move that is likely

to bring about a structural transformation of the industry (Er, 1994) Variousforms of partnership with foreign companies have also been established,which might prove helpful in overcoming the weak product developmentcapability of the cluster firms Such developments will serve not only

to bring new capital and technology to the sector, but also to intensifycompetition, forcing firms to capitalize more on their advantages Finally,furniture firms have paid more attention to export opportunities since theFebruary 2001 financial crisis, and have extended their connections in inter-national markets beyond those they have via construction projects

In light of the analysis in this chapter, we can conclude that destructiveprice competition and the dominance of reproduction furniture rather thanoriginal design are the major barriers to the further development of thecluster The countervailing forces include increased competition, both inter-national and domestic, and technology transfer via foreign partnerships.The increase in exports is also noteworthy Cluster firms are showing aninterest in expansion, especially through investment in technology andmarketing There are also some early signs that the industry has started toaccumulate the necessary knowledge for new product development (ibid.)

In fact some of the managers interviewed were quite optimistic about thefuture of the sector: ‘There are lots of things to do, and we know that there

is a potential All we need is to professionalize our design, production andmarketing.’ Hence there is clearly an awareness of the importance of design,and it has been argued that independent design firms would be beneficial tothe industry (Erzurumluoglu, 1991) as they could serve firms that appreciatethe importance of design but cannot afford to employ full-time designers.14

As a final point, being a part of a global chain via subcontracting relationshas become an increasingly popular way of organizing production in thefurniture industry worldwide It remains to be seen whether Ankara’s furnitureproducers will become part of this global chain (either as subcontractors orsubcontracting firms), and if they do, whether this will enable them toimprove their competitive advantages This chapter has shown that a potentialexists but that considerable effort will be needed to mobilize that potential,the outcome of which will determine the future of the cluster and define itsposition as a local centre of global furniture production Given that there

The Furniture Cluster in Ankara 83

are successful examples of transformation (see for instance Parkin, 1999),the challenge is to identify the attributes of the local business environmentthat will provide the means to realize such a transformation These arematters that can only be properly addressed after conducting a thoroughanalysis of the experiences of more successful clusters The next chapteranalyses one of these: the towel and bathrobe cluster in Denizli

5

The Towel and Bathrobe Cluster

in Denizli

‘The secret of success lies in courage’ (a businessman from Babadag)

Textile production starts with the main inputs – natural or man-made fibres,dyes and chemicals – and involves two major operations, namely yarn prep-aration and fabric weaving Although there are firms of all sizes operating atthe various stages of production, larger firms have become increasinglydominant as the industry has become more and more capital-intensive Morethan half of the output of the industry is used by clothing manufacturers.The rest goes to the manufacturers of household goods (for example bed-clothes) and industrial goods (for example vehicle seat upholstery) Comparedwith the textile industry, the clothing industry is more labour-intensive and thetechnology used is less sophisticated Distributors have become increasinglyimportant in this sector due to the dominance of retail activities by largefirms, a phenomenon that has affected the organization and geography ofclothing manufacture (Dicken, 1998) since the Industrial Revolution FirstBritain and then other developed countries such as Germany and Francemoved into the mass production of textiles, often in localized clusters Later

on the industry grew rapidly in developing countries and either stagnated ordeclined in developed ones Despite this trend, however, several developedcountries (including Italy, France, Germany and Britain) continue to beamongst the leading exporters of textiles and clothing

In the case of towels and bathrobes,1 Turkey is amongst the leadingexporters in this product group, along with China, Pakistan, Germany, Italyand India During the period 1996–2000 Turkey was one of the top threeexporters, accounting for around 10–20 per cent of total world exports ofthese products The main destinations are the United States and the EUcountries, especially Germany, Britain, France, the Netherlands, Italy andBelgium Imports of towels and bathrobes into Turkey, on the other hand,have been negligible (ITC, 2002)

The leading ‘textile cities’ in Turkey have traditionally been Istanbul,Adana, Bursa and Izmir, but in the post-liberalization era they have been

The Towel and Bathrobe Cluster in Denizli 85

challenged by producers in the provinces of Thrace, Gaziantep and Denizli.The leading centres of towel and bathrobe production are the cities of Denizliand Bursa, with a higher concentration of employment in Denizli2 whichaccounts for more than 50 per cent of the country’s total production of towelsand bathrobes

The Denizli cluster is highly export-oriented, and more than 60 per cent

of its products are sold either directly or indirectly to international markets

(Temel et al., 2002) The Denizli Chamber of Commerce values the city’s

textile/clothing exports at US$1 billion per year, or about 10 per cent ofthe total value of textile exports from Turkey (TBMM, 2001a) More than

60 per cent of these exports are towels and bathrobes (Akaydin and Ay,1998) Denizli industrialists are very proud of their towels, which are used

at Wimbledon and in five-star hotels throughout the world Strikingly, over

40 per cent of Germany’s imports of towels and bathrobes come from Turkey(ITC, 2002), most of them from Denizli Terms such as ‘the shining star ofTurkey’, ‘the Anatolian tiger’ and ‘the Denizli miracle’ are frequently used byresearchers and policy makers to describe the city’s impressive performance

in international markets

While much has been written about Denizli’s success in this product area,the strategic management aspect of this has been largely ignored This chapterwill take a detailed look at the sources of competitive advantage of the Denizlicluster and the resilience it exhibited in the face of recent challenges, includingthe economic crises of the late 1990s and early 2000s and competition fromother locations The chapter will also discuss the underlying reasons for andthe associated costs and benefits of clustering in this particular case Theanalysis will enable us to identify key issues in the link between clusteringand competitiveness, which will in turn make it possible to consider thecompetitiveness of clusters more generally

Origins and historical developments

The beginnings of the cluster can be traced back to antiquity Textiles thatare estimated to be 2000 years old have been found in the region, rankingamongst the oldest found anywhere in the world These early textiles weremade of wool, suggesting the practice of animal husbandry With the devel-opment of agricultural activities in general and the cultivation of cotton inparticular, there was a shift to cloth made of cotton (Karaalp and Batmaz,1998) Denizli’s location in the Menderes Valley, the historic gatewaybetween the Aegean Sea and Eastern Anatolia, was very instrumental in thehigh level of development attained by this region in these early times (TCDenizli Valiligi, 1998) Historians claim that textiles took up the largestspace in the historical bazaar of Denizli, and each of the subsectors of theindustry (such as fabric, clothing and dyes) concentrated in certain parts ofthe bazaar (Gökçe, 2000)

Denizli’s brightest historical period was the Roman era, during which itsalready strong position in the production of textiles was enhanced In fact

‘trimita’, a type of fabric produced in the region, was so famous that the citywas called ‘Trimita’ by some (TC Denizli Valiligi, 1998) There is also evidencethat some of the material used for Caesar’s clothing was imported from Denizli(Sözkesen, 1998) There was a relative decline in the region’s economic pos-ition during the Byzantine era, mainly because the centre of commercialactivity shifted from the Aegean and Mediterranean to Constantinople(Istanbul) and its environs Nevertheless textiles continued to be amongstthe leading items produced in the region (TC Denizli Valiligi, 1998) It isalso known that the existence of various types of plant and water in andaround Hierapolis (Mutluer, 1995) laid the foundations for the development

of a closely related industry: dye production (Gökçe, 2000)

During the early Ottoman period the key location of the city, then known

as Ladik, guaranteed a vibrant commercial life The careful processing ofhigh-quality cotton resulted in textiles of superior quality that were knownfor their durability as well as their beauty Ottoman historians report that acertain type of cotton fabric produced in Denizli and decorated with goldenyarn was unmatched anywhere in the world in terms of beauty and quality.Cotton fabrics produced in the region were preferred by the Ottoman aristo-cracy and were popular in Istanbul’s palaces (Mutluer, 1995) In fact Denizlifabrics and clothing were so unique and valuable that they were given aspresents to Sultans and other high-ranking people It is also known that fabricsproduced in Denizli were exported to various Mediterranean countries duringthis period (Gökçe, 2000)

In the fifteenth century, when new routes to the East were discovered, theregion lost much of its importance Moreover the capital of the OttomanEmpire shifted from Bursa to Edirne and then to Istanbul, which favouredthe development of the regions of Marmara, Thrace and Western Black Sea

In addition the restrictions imposed on foreign merchants damaged national trade and caused a relative loss of position for some key ports in theAegean, including Izmir, the negative consequences of which were transferred

inter-to nearby cities such as Denizli (TC Denizli Valiligi, 1998) Nevertheless, as itwas located in a region that produced one of the highest-quality cottons

in the world, Denizli continued to be widely known as a leading centre oftextile production

Like many other areas of the empire, Denizli underwent an economicdownturn in the late Ottoman era (Karaalp and Batmaz, 1998) This is mainlyattributed to the Industrial Revolution in the west, which, coupled with theextremely liberal trade policy followed by the empire at the time, seriouslydamaged the already underdeveloped indigenous industry One direct effect

of this on Denizli was that cotton yarn and fabrics began to be imported,the first large-scale imports of textiles taking place in the 1870s As a result,the production of inputs such as silk, raw cotton, wool and dyes gained

The Towel and Bathrobe Cluster in Denizli 87

importance in the region’s economy as they were in great demand abroad.Towards the end of the century, another noteworthy event for the Denizlieconomy was the construction of the the Izmir–Aydin railway, whose arrival

in the region triggered a revival of economic and commercial activities With the outbreak of World War I which was followed by the Turkish War

of Independence the few remains of Ottoman industry virtually peared Although there was a slight revival after the wars, following thereturn of some master craftsmen, the extent of destruction, especially interms of human life, had such an effect on Denizli that in the early years ofthe Turkish Republic economic progress was minimal (TC Denizli Valiligi,1998) In 1927 there were 1581 enterprises in Denizli, 27 per cent of whichwere textile-related and 98 per cent of which had fewer than 10 workers(Mutluer, 1995) Family members, particularly females, participated in theproduction process while the male members concentrated on obtaininginputs and marketing the products, mostly via tradesmen (Erendil, 1998)

disap-A noteworthy event in the mid 1930s was the emergence of cooperatives

in Denizli, which laid the foundation for industrialization by enabling viduals and firms to join forces to acquire cotton yarn at favourable terms,and thus reduce their dependence on yarn merchants (Mutluer, 1995; Karaalpand Batmaz, 1998) There was quite an increase in the number of small textilecooperatives in the 1940s, mainly because a state enterprise, the Sümerbankyarn Factory, was given the task of supplying cotton yarn to manufacturersvia the cooperatives (Mutluer, 1995).3

indi-In the 1960s the use of electricity became widespread, triggering the tion of electrical looms The modernization impetus was reinforced whenDenizli was included amongst the provinces that were given priority status

adop-in terms of development adop-in the early 1970s, which meant an adop-increase adop-inpublic investment.4 The Denizli Dyeing and Printing Factory was founded

in 1974 and provided high-quality cotton yarn treatment, dyeing and printingservices to producers Another novel development was that the remittancessent by the Turkish workers in Germany fed the private capital accumulation

in Denizli that had been initiated by the cooperatives.5 The 1970s alsowitnessed a rapid increase in subcontracting relations amongst the clusterfirms (Erendil, 1998)

An important upturn in the Denizli economy took place in the 1980s,when the textile industry engaged in a significant export drive, making gooduse of the liberal government policies of the period Meanwhile importing therequired machinery became much easier, further facilitating the transitionfrom home/workshop production to larger, sometimes factory-based production(TC Denizli Valiligi, 1998) Following an initial learning period, a real increase

in exports took place in the second half of the 1980s and throughout the1990s Bigger firms and sectoral foreign trade corporations were usually thefirst vehicles by which small and medium-sized enterprises in Denizlibegan to export.6 Denizli towels and bathrobes were in great demand in

international markets, which prompted firms to increase their production

of these product categories Other items such as bedclothes and babies’clothing were also exported, but their share of total exports remained wellbelow that of towels and bathrobes An examination of the cluster firms’date of establishment highlights the importance of the post-1980 period inDenizli’s development in that around 80 per cent of the enterprises wereestablished from the mid-1980s onwards, more than half of these after 1990

(Temel et al., 2002) As Sengün (1998) argues, it was this process of

interna-tionalization that created the economically vibrant environment that exists

in Denizli today In summary, the revival of the ancient tradition of textileproduction began in the early 1970s, developed in the 1980s and expandedboth nationally and internationally in the 1990s

This section closes with a summary of the current general economic ture of Denizli in order to put the towel and bathrobe cluster into that context.According to a survey by the State Planning Organization, there are around

struc-6500 industrial establishments in Denizli, more than 90 per cent of whichare small firms with up to nine workers The total number of workers isalmost 50000, 65 per cent of whom work for the larger firms (ibid.) Table 5.1provides a breakdown of employment in Denizli by economic activity, inwhich the dominance of textile, apparel and related businesses is clear.Other sectors with a considerable presence are tourism-related activities,metal-working and machinery production, cutlery, leather footwear, earth-enware products, products of marble and glass, food and beverages (especiallyflour, non-alcoholic beverages, roasted chickpeas, pasta, olives, wine, spices,milk and animal feed) and furniture It should also be noted that the variety

of industrial activities has increased in recent years (Sarica, 1997) In terms

of export success, the textile/apparel sector is followed by the metal-workingand food and beverage sectors, in that order The leading item with regard

to imports is machinery, followed by a range of textile-related products.Imports are mainly from Germany, Italy, Japan and Switzerland

Sources of international competitive advantage

Basic factors of production

The principal items in the total cost of a typical textile product produced by thecluster firms are raw materials (especially cotton), labour and energy Around

30 per cent of the major inputs are imported from abroad and another 30 percent from nearby provinces The remaining 40 per cent, are procured outside

the regional economy (Temel et al., 2002).7 Although Turkey is amongst theworld’s top ten producers of cotton and the best quality cotton in Turkey isgrown in the Aegean region, where Denizli is located, Denizli has to importaround 30 per cent of its cotton yarn requirement as cotton production fallsshort of the domestic demand However the local availability of high-quality

Table 5.1 Employment in Denizli, by economic activity 1

ISIC Sector

Location quotient

Denizli’s share of national employment

in the sectors (%)

1723 Manufacture of cordage, rope, twine and netting 28.3713 39.08

1711 Preparation and spinning of textile fibres;

weaving of textiles

1721 Manufacture of textile articles, except apparel 7.6795 10.58

1421 Mining of minerals for chemicals and fertilizers 5.5022 7.58

2923 Manufacture of machinery for metallurgy 5.3998 7.44

1729 Manufacture of other textiles n.e.c 2.5550 3.52

2925 Manufacture of machinery for food, beverages

and tobacco

2411 Manufacture of basic chemicals, except

9214 Dramatic arts, music and other arts activities 2.1006 2.89

1820 Dressing and dyeing of fur; manufacture of fur

articles

7020 Real estate activities on a fee or contractual basis 1.8562 2.56

2429 Manufacture of basic chemicals, except

fertilizers etc

2022 Manufacture of builders’ carpentry and joinery 1.6286 2.24

3000 Manufacture of office, accounting and

computing machinery

5040 Sale, maintenance and repair of motorcycles

and related parts

cotton was of great advantage to the cluster in the early years of its development,and more recently it has enabled the firms to build up a reputation for quality

A comparison of international labour costs in the textile industry revealsthat the wage rate in Turkey, at about US$2 per hour, is much lower than in

Notes:

n.e.c = not elsewhere classified.

1 Top 50 industries by share of national employment and industries with an LQ of more than one

Table 5.1 (Continued)

ISIC Sector

Location quotient

Denizli’s share of national employment

in the sectors (%)

1543 Manufacture of cocoa, chocolate and sugar

confectionery

7414 Business and management consultancy activities 1.5067 2.08

1513 Processing and preserving of fruit and vegetables 1.4822 2.04

2710 Manufacture of basic iron and steel 1.4416 1.99

5020 Maintenance and repair of motor vehicles 1.4043 1.93

2811 Manufacture of structural metal products 1.3337 1.84

2519 Manufacture of other rubber products 1.3170 1.81

9301 Washing and (dry-) cleaning of textile and fur

products

1544 Manufacture of macaroni, noodles, couscous etc 1.2440 1.71

7412 Accounting, book-keeping, auditing activities etc 1.2270 1.69

9219 Other entertainment activities n.e.c 1.1843 1.63

2914 Manufacture of ovens, furnaces and furnace

burners

2930 Manufacture of domestic appliances n.e.c 1.1388 1.57

2212 Publishing of newspapers, journals and periodicals 1.1122 1.53

6021 Other scheduled passenger land transport 1.1082 1.53

5149 Wholesale of other intermediate products,

waste and scrap

2696 Cutting, shaping and finishing of stone 1.0378 1.43

5260 Repair of personal and household goods 1.0294 1.42

5231 Retail sale of pharmaceutical and medical

The Towel and Bathrobe Cluster in Denizli 91

developed countries (for example about $17 in Italy and $22 in Germany)but higher than in some other developing countries For instance in China,India, Pakistan and Indonesia the rate can be as low as $0.5–0.6 per hour(SPO, 2001) In Denizli it is not uncommon to employ uninsured homeworkers, who are willing to work long hours and demand relatively lowwages, providing cost advantages for the smaller firms (Eraydin, 2002a).However the fact that there is a high demand for workers increases theirbargaining power One of our interviewees, a manager of one of the leadingcluster firms, said that his boss had warned him about this issue on his firstday in office: ‘ “Treat the workers well”, said my boss, when I first started towork here The unemployment rate is very low in Denizli; if they quit, itwon’t take much time for them to find a new job.’ The shortage of qualifiedpersonnel is another problem, specifically managers, engineers, designersand marketing specialists The recent establishment of apprenticeship centresand an occupational high school in the organized industrial zone are positivedevelopments in this regard Our interviewees emphasized the importance

of improving the quality of life in Denizli and promoting the positive aspects

of the city in order to attract suitable personnel.8 ‘If we manage to attractqualified human resources’, one interviewee argued, ‘the life span of thecluster will be longer, which in turn will help to realize our dream: to makeDenizli the capital of textiles.’

The use of earnings from previous commercial activities and familyassets to finance the founding of an enterprise is very common In a surveyconducted by the State Planning Organization, more than 90 per cent

of the enterprises in Denizli reported that the owners’ equity had beenused to finance the initial investment, falling to around 80 per cent for

subsequent investments (Temel et al., 2002) The main reason for the low

utilization of bank credit was its high cost The fact that the use of term credit created severe problems in subsequent years when the Turkisheconomy was hit by a series of crises further increased the perceived risk ofusing bank credit (TBMM, 2001a) Financing is therefore a major problemfor the cluster

short-In general the infrastructure in Denizli is poor with the exception of theindustrial zones In particular, manufacturers complain about the poor quality

of the motorways that link Denizli to other provinces, the high cost of energy(the highest among OECD countries) and the severe shortages of energy(ibid.) The airport is far from the city centre and the number of flights islimited Although there is a railway to the Izmir port, there is no stationclose to the industrial zone In short, infrastructure-related problems pose

a threat to the long-term development of the cluster

With regard to factors of production, then, Denizli enjoys advantages in

terms of raw materials and labour costs vis-à-vis developed countries but not

compared with some other developing countries The principal disadvantagesare the lack of qualified human resources, the cost and shortage of energy,the cost of capital and the poor infrastructure