Inter-actor Network Creation

The Case of Denizli (and Uşak) Home Textiles Cluster(s)

Important Notice

Launched in March 2007, “Development of a National Clustering Policy” is an EU-funded technical assistance project (the Project, hereinafter) that seeks to contribute to elaboration of a national clustering policy, through development of a “whitepaper” on clustering. The Project is being implemented by the Undersecretariat for Foreign Trade (UFT) with the technical assistance of an international consortium, contracted by Central Finance and Contracts (CFCU).

The methodology, deployed for the development of this and other Roadmaps reflects the key priorities of the DCP Project. Therefore, it, on the one hand aims at developing a roadmap that demonstrates how the cluster can be more competitive, and on the other, serves the key purpose of informing the process of cluster policy-making and development of policy-level and institutional recommendations. The Roadmap for Denizli (and Uşak) Home Textiles Cluster(s) has been developed with direct involvement of a broad range of stakeholders: enterprises, governmental and non-governmental organisations, academic and research organisations, and other relevant cluster actors. Cluster analysis began with secondary research, which was followed by primary research activities like interviews, focus group meetings and small workshops with businesses, NGOs, local stakeholders. The Project benefited, to a large extent, from Prof. Michael Porter’s Diamond of Competitiveness during the assessment of competitiveness of clusters.

Cluster Analysis

The assessment of the cluster competitiveness is based on the framework of “Porter’s Diamond[1]F” (diagram below), structuring its analysis along the following dimensions: factor conditions, firms strategy and rivalry, demand conditions and related and supporting industries, enhanced by the overview of related government policies and activities of institutions for collaboration.

1. Factor Conditions

Within the cluster competitiveness assessment framework, “factor conditions” refer to the presence or absence of inputs such as a workforce with [specialized] skills, the availability of particular raw materials, resources, physical infrastructure, financing etc. Here, the main objective of the analysis is to identify presence or absence of the factor conditions that have an impact on the competitiveness of the Denizli (and Uşak) Home Textiles Cluster(s). The cluster theory suggests that “to increase productivity, factor inputs must improve in efficiency, quality, and (ultimately) specialization to particular cluster areas" (Porter, 2000).

The studies conducted to assess the factor conditions concentrated on the following parameters:

• Location,
• Physical resources,
• Infrastructure,
• Human resources,
• Knowledge resources, and
• Capital resources.

Almost universally, all the businesspeople and NGO representatives, interviewed in Denizli, indicated that the province enjoys favourable factor conditions to the extent that “if one raises a wall to encapsulate the city, Denizli could still produce towels and bathrobes”

1.1. Location

A company’s location has a considerable impact on its competitiveness. The cluster approach suggests "that a good deal of competitive advantage lies outside companies and even outside their industries, residing instead in the locations at which their business units are based." (Porter, 2000, p.16) Location of a cluster can contribute to a cluster’s competitiveness, if it provides a cluster with unique advantages in terms of access to markets and/or resources.

A company’s location has a considerable impact on its competitiveness. The cluster approach suggests "that a good deal of competitive advantage lies outside companies and even outside their industries, residing instead in the locations at which their business units are based." (Porter, 2000, p.16) Location of a cluster can contribute to a cluster’s competitiveness, if it provides a cluster with unique advantages in terms of access to markets and/or resources.

The HT manufacturers in Denizli were asked whether they would move their production facilities to another province (provided that all the moving costs are covered). A vast majority of the respondents did not even demonstrate a small inclination of moving their facilities somewhere else, even if all moving costs are covered. This was interesting to observe at least for two reasons. First, business community of Denizli almost universally indicated that the local economy has “suffered” from law no 5084 that provides incentives to certain cities, which do not include Denizli. Second, as the work of the DCP Project in Denizli was progressing, the Government of Turkey has announced the so-called “Textile and Clothing Action Plan”, which is designed to encourage moving the manufacturing capacity from western parts of Turkey to the eastern parts.

Among the companies interviewed and participated into the working group meetings, only one did not indicate Denizli as the best location in Turkey for the HT Cluster. This one “outlier” company believes that Istanbul is a better place, as it is easier to access to international buyers, most of which have liaison offices in Istanbul or pay regular business visits to Istanbul. 

In terms of access to export markets, Denizli HT Cluster uses the port of Izmir. Although some of the cluster actors indicated the costs associated are high and hence a source of competitive disadvantage, there was also a consensus that Denizli is in a more advantageous position than the low-cost suppliers in the eastern parts of Turkey and the Asian countries. Additionally, Denizli is located at the centre of a growing rail network. Reportedly, the construction of the [freight] railway connecting Denizli to Izmir will be completed soon. Once completed, this railway will decrease the lead times and transportation costs significantly. Furthermore, Denizli OIZ, in which almost all of the HT companies are located, is one of the designated logistic centres. 

1.2. Quality and Presence of Physical Resources and Infrastructure

In addition to a favourable transport infrastructure, the HT Cluster in Denizli benefits from the presence of Denizli OIZ, which is established on an area of 400 hectares, with all the infrastructural investments, including the waste water treatment facilities, completed. The presence of a waste water treatment facility, from which companies involved in dying can benefit, is quite important for a number of reasons. First of all, this facility protects the environment, and thereby ensures that OIZ companies (especially dyers) meet the buyers’ requirements in that particular area, and secondly reduces manufacturing costs, which would otherwise have to born by the dying companies individually.

1.3. Human Resources

According to a report[2] issued by the Denizli Chamber of Industry the total [registered] employment created by the textiles industry (including products other than HT) was 54.745 in December 2005, since then the employment decreased gradually to come down to 46.222 in August 2008. The employment in this industry represents more than 30% of the total [registered] employment in Denizli and nearly 6% of total [registered] employment in the national textile industry.

The number of employees that the interviewed companies employ is 7637, providing a representative sample of the HT Cluster for the purposes of statistical analysis. Some 93% of the employees are working at manufacturing. Interviewed companies indicated that more than 50% of their employees have only completed primary school, indicating that a considerable portion of the workforce have acquired the core skills on the job. University grads are employed mainly in administrative departments and/or marketing, accounting for 4% to 10% of total workforce. 

The cluster companies indicated that the quality of labour force was sufficiently developed, as being demonstrated by the Cluster’s ability to meet consumers’ expectations in the sophisticated markets, such as the US and the EU. The labour productivity has increased as well; in 2002 the total employment in the textiles industry was 55K and the total exports was $640 million, whereas in 2006 total employment in the textiles industry was 50K and the total exports was $1325 million. As indicated earlier, when asked whether they would move their facilities to another province in Turkey, if all moving costs are covered, cluster companies indicated they would not. Further inquiries revealed that most of the cluster companies do not think that they could find labour force elsewhere in Turkey that would be on par, in terms of qualifications, with the labour force in Denizli.

Companies interviewed also indicated that the qualifications of white-collar labour force have improved as well. Reportedly, in the 90s proficiency in a foreign language was considered to be sufficient for becoming the exports manager of a company; however exports managers, today, are expected to have vocational and technical qualifications on top of proficiency in a foreign language. Although, the recent developments such as establishment of recreational facilities and shopping malls have contributed to the improvement of quality of life in Denizli, there is still a significant room of improvement, if Denizli is to become an attraction centre for high quality white-collars.

In terms of human resources, the most notable competitive advantage that the Denizli HT Cluster enjoys is the “tacit knowledge” of the local human resources, which is neither transferrable nor imitable.

1.4. Knowledge Resources

Denizli is home to Pamukkale University (established in 1992), which provides undergraduate and graduate degrees in various disciplines of engineering, including textile engineering and in economic and administrative sciences, including business management.  The university operates some [applied] research centres and institutes; however none specifically deals with textiles. Pamukkale Techno-park is being established within the premises of the University. The cluster companies and business representative organisations have indicated that the collaboration between the HT Cluster and the university is not strong.

Reportedly information on domestic and foreign markets is available from a number of sources, including the Chamber of Commerce, the Chamber of Industry, and the GS of Exporters’ Union. However, as the surveys conducted within the scope of the DCP Project have demonstrated, there remains a strong and unmet demand for strategic market information on opportunities.

1.5. Capital Resources

In terms of access to financial resources, Denizli is one of the leading provinces in terms of bank braches per capita. Reportedly, the resources of EXIM Bank are also used effectively. This said, the cluster companies and business representative organisations almost universally indicate that Denizli, in general and the HT Cluster in specific cannot benefit from the public finance, as provided to some other provinces and clusters in Turkey.

As described above most of the cluster companies believe that Denizli HT enjoys favourable factor conditions. This is also evidenced by the fact that some of the cluster companies, which had moved to other provinces to benefit from the incentives offered within Law No: 5084 had had serious difficulties in terms of accessing qualified workforce, raw materials and markets, and finally turned back to Denizli.

2. Firms’ Strategy and Rivalry

This aspect of the diamond framework refers to the conditions governing corporate organization and aspects of rivalry among firms in a cluster. The benefits of promoting rivalry among the companies in a cluster is counter-intuitive, however are proved and well-documented. Porter himself has long said that rivalry is an essential part of cluster dynamics. The cluster theory suggests that one of the most important dimensions of localisation is that it acts to boost domestic rivalry. With a few exceptions, recent empirical research confirms that knowledge in clusters is created through increased competition and intensified rivalry.

Another dimension that this particular parameter takes into account can be summarised as “company formation”. This is important to analyse as it provides hints of level of conduciveness of the business environment for establishing new businesses. A disturbingly low level of new entrants to the cluster might indicate, inter alia, that cluster’s business environment is not favourable for fostering entrepreneurship.

Cluster theory further suggests that “knowledge in clusters is created through spill-over following from the local mobility and sociability of individuals”. Here the strategy of the firms in a cluster and their attitudes towards collaboration (while competing at the same) are critical elements to consider.

If companies compete with others in the same cluster, they will be motivated to constantly innovate in order to differentiate themselves from their rivals. Both firm strategy and rivalry contribute to regional competitiveness drawing on regional innovation dynamics.

The studies conducted to assess the firms’ strategy and rivalry concentrated on the following parameters: (1) The nature of competition, (2) New business formation, (3) Firm strategy, and (4) Firm structure.

2.1. Competition

The nature of competition in Denizli HT is one with interesting features that can be best described as “co-opetition”, a term coined by B. Nalebuff and A. Bradenburger by combining the notions of cooperation and competition into a single business concept. The Cluster companies proudly indicate some unique ways of cooperation, which are claimed to be present only in Denizli. Reportedly, cluster companies make their production lines and raw materials readily available to the others, especially at time when a company experiences problems with its own manufacturing lines and/or runs out of yarn on the run to meet a production deadline. Combining manufacturing capacities to meet a large-scale order is also a commonly observed practice, which demonstrates the level of cooperation among the cluster companies. This said, however, cluster companies are also concerned about the increasingly price-based local competition. Being an HT manufacturing base, in which buyers can access to many suppliers within one day, sometimes paves the way for cluster companies undercutting others’ quotations. This price-based competition is also a result of the strategies that the cluster companies follow, expressed below.

Among the companies interviewed for the purposes of cluster analysis, 67% indicated that the nature of local (price-based) competition is harmful to their businesses. Reportedly, most of the less experienced and smaller scale companies do not have the management skills and capabilities to account for their costs properly, and thus often offer unreasonably low quotations. Again reportedly, sometimes Cluster companies offer very low rates to the buyers just to close a short-term loan, repayment of which is approaching. Here, the cluster companies suffer from “negative externalities of cooperation”, which emerge in the form of knowing competitors’ price quotations, and undercutting them, especially at times of contracting demand and/or approaching loan repayments.

A few companies, on the other hand, indicated that the nature of competition in the Cluster is what drives further competitiveness by creating incentives for the cluster companies to monitor their costs closely and develop new collections for buyers.

Finally, when naming competing clusters or countries, Cluster companies make a distinction between the commoditised and advanced HT products. For the latter, cluster companies are competing with each other, and for the earlier the competition comes from other parts of Turkey (especially from those regions that benefit from Law No: 5084, such as Adiyaman, Afyon etc.) and low-cost countries such as India, Pakistan, Egypt and China.

2.2. Firm Strategy

The drivers of competitiveness have changed drastically. In the 80s and 90s, the Cluster companies were racing with each other to fulfil large-scale orders. One of the interviewed companies indicated that previously they were able to “export bathrobes without pockets and get away with it”; quality was a secondary concern for the cluster companies, which tried to fulfil large batches of orders, “pouring” to the Cluster. As the Cluster enlarged to reach a “critical mass” of competing companies, quality, cost and after-sale services become more important parameters of firms’ strategies. Some of the cluster companies have improved themselves by adopting better exports management practices and developing a better understanding of the functioning of the distribution channels, and buyers’ expectations and needs.

Although increased orientation to consumer needs is encouraging, it is also evident that none of the companies have had the financial resources (or the incentive) to invest in R&D, innovation and branding, which would help them climb up in the global value chains. These are the areas, though which cluster companies can differentiate themselves from the “crowd”, and since almost no progress has been achieved in these higher value-added areas, the nature of competition has remained price-focused.

The increasing supply of the HT products has slowed down investments in expansion or modernisation of manufacturing systems. Out of the twelve companies interviewed, only three have had made an investment (in the form of buying new machinery) over the course of last year.

All the interviewed companies have web presence, at a basic level, to promote their businesses online. Only one of the interviewed companies has indicated that it uses the corporate webpage to take and monitor orders. Adoption of online marketing and pro-active promotion is one of the areas that the Cluster companies can improve.

Finally, the Cluster companies actively participate in national and international fairs to promote their business and products.

2.3. New Business Formation

Porter suggests that “The advantages of a cluster new business formation can play a major role in speeding up the process of cluster innovation. Large companies often face constraints and impediments of various sorts to innovating. Spin-off companies often pick up the slack, sometimes with the blessing of the large company ... Because of new business formation; clusters often grow in depth and breadth over time, further enhancing cluster advantages.[3]”

As the discussion in the preceding sections implied, the number of new businesses have increased rapidly in the late 80s and throughout the 90s. New business formation in Denizli HT Cluster contributed to creation of a “critical mass” of HT producers in Denizli, however it would be hard to argue that the new business formation have created all of the positive externalities, mentioned above. Most of the new businesses merely mimicked what others are doing, and tried to offer lower quotations to gain a foothold in the Cluster. This in turn, pushed “some” of the larger scale companies to focus on quality, developing new collections and developing a better understanding of the distribution channels and markets.

Although, the Denizli HT Cluster still offers the advantages that the critical mass brings forth, such as access to specialised inputs (i.e. work force etc.), the rate of new business formation has fallen down significantly over the last years, mainly as a result of the falling profit margins that the price-based competition has caused. Companies, interviewed during the field studies, also indicated that incentives offered within Law No: 5084 made Denizli less attractive than the adjacent provinces that are eligible for the incentives under the said Law.

The work of the DCP Project in Denizli coincided with the break of the global financial crisis, “pandemic” affects of which on the Cluster became more evident especially in October and November 2008, with some textile producers closing their businesses temporarily or permanently, and laying off 100s of employees[4].   

2.4. Firm Structure

Most of the HT Cluster companies are family-owned businesses, managed mostly by first generation owners (i.e. the “founding fathers”). Most (ca. 85%) of the companies interviewed, indicated that they are not planning to change the ownership and/or management structure of their business and that they are content with the flexibility that the current form of management structure provides.

The first generation owners are those with the business insight and the tacit knowledge, and these are the main sources of competitive advantage that the HT Cluster enjoys. As the second generation of owner families are taking over the business, the cluster companies are expecting more collaborative actions, to which second generation owners are more open than the first generation.

3. Demand Conditions

Within the Diamond framework, demand conditions refer to the nature of the home market. According to the cluster theory there are three broad attributes of home demand that has an impact on the competitiveness of clusters: (1) Composition of home demand[5], (2) The size and pattern of growth of home demand, and (3) The mechanisms by which a nation’s domestic preferences are transmitted to foreign markets.

The birth and growth of Denizli HT Cluster have been predominantly export-driven. Almost universally, the Cluster companies indicated that the home demand has always been considered as a secondary market, which has had only limited impact on the growth of the Cluster. This said, however, there are also signs that would indicate Cluster companies’ lack of knowledge of the home demand. For instance, some of the companies indicated that they cannot monitor (and thus respond to) home demand. Only a few companies indicated that they have embarked on initiatives, geared towards addressing the home demand through branding and establishing working relations with local (national) retailers. As such it would hard to argue that the local (regional and national) demand has created any source of competitive advantage for the Denizli HT Cluster.

Most of the Cluster companies, interviewed during the field studies, indicated that demand to their products has fallen over the last three years, with a distant smaller share of companies indicating growth in demand for their products and even a lower share of companies indicating a stable demand. This said, however, Cluster companies and business representative organisations, almost universally, expects a steep decline in global demand.

Similar to the rest of the textile and clothing industry, the global HT value chain is dominated by the large-scale retailers, such as Chicco, Marks & Spencer, IKEA, Target, JC Penny, Carrefour, Wal-Mart, Sears etc. Retailers, enjoying their proximity to the final consumers, track the trends and consumptions patterns on a daily basis, and determine the product specifications, delivery times, and prices. The HT products are subject to a growing number of product and process standards (i.e. WRAP[6], Carbon Footprint[7], SA8000[8] etc.).

When asked to comment on the distribution channels that they work through, Cluster companies almost universally indicated that they prefer working directly with the retailers (buyers) rather than the intermediaries. However, most companies also indicated that the increase in the real value of YTL against hard currencies (i.e. USD and EUR) has significantly decreased their bargaining power, and that they are not as “picky” in terms of interacting with the intermediary agencies as they once used to be.

4. Related and Supporting Industries

Within the Diamond Framework, presence of competitive related and supporting industries is yet another determinant of cluster competitiveness. In addition to being present, the related and supporting industries need to be linked strongly with the cluster.

The Denizli HT Cluster commands the entire HT supply chain. There are integrated HT production facilities, which are self-sufficient, as well as companies that collaborate (on a buyer-seller scheme) on different phases of the production. As indicated earlier, Cluster companies believe that even if Denizli is encapsulated with walls, the Cluster would still produce HT products. The Denizli HT Cluster hosts companies that specialise on HT accessories (such as zippers, labels), embroidery, packaging and logistics.

• Yarn production: The yarn production capacity in Denizli has decreased since 2001, as a result of the competitive pressures stemming from low-cost countries. However none of the Cluster companies indicated any problems in terms of access to yarn.
• Machinery: There are machinery producers in Denizli, however especially during the times of rapid expansion most of the machinery has been imported. Presence of a local machinery production capacity is considered advantageous especially for maintenance purposes.
• Hangers: Most of the local hangers are not accredited by international buyers, enforcing Denizli HT producers to buy hangers from Istanbul.
• Transportation and logistics: There are locally established transportation and logistics companies that handle domestic deliveries. For international shipments, Cluster companies work with the logistics companies in Izmir.
• Quality Control and Assurance: Intertek Group PLC (an international renowned company in providing testing, inspection, auditing and system certification services throughout the world) has a branch office in Denizli.  

However the field studies also revealed that the Denizli HT Cluster suffers from absence of cluster actors that provide services in the areas of strategic market information (including trends), R&D, innovation, technology transfer and design.

5. Institutions for Collaboration and the Government

Government policies and actions have an impact on the competitiveness of clusters. Cluster theory suggests that governments should provide the clusters with a favourable operating environment that would boost their competitiveness.

During the field analyses and working group meetings, Cluster companies and other actors have repeatedly raised concerns (if not complaints) on the government policies. Although some level of concern has been observed across all clusters, on which the DCP Project has worked, the level of concern with government policies and actions was more pronounced in two clusters: Denizli HT Cluster and Mugla Yacht (Boat) Building, with the latter concerns were expressed even at more exacerbated levels.

Almost universally, all the local businesspeople indicate that the textiles industry in general, and HT Cluster, in specific, in Denizli have totally been established by private sector without any support from the State. The official statistics, however, prove otherwise. As demonstrated in the following table Denizli also benefits from the incentives[9].  

Table 4: Investment Incentives (provided within the scope of Investment Encouragement Certificates)