čný ondřej, Šerý ondřej - globalization · 2012. 2. 13. · the manufacturer of power plant...

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The Influence of the Global Economic Crisis and Local Context on Decision-Making of Industrial Companies

Konečný Ondřej, Šerý Ondřej Konečný Ondřej Masaryk University, Brno, Czech Republic E-mail: [email protected] Šerý Ondřej Masaryk University, Brno, Czech Republic E-mail: [email protected] Abstract This paper addresses the recent world economic crisis whose scope and impacts clearly

showed the increasing coherence of the global economy. The authors of the text use as an example the South Moravian companies of electrotechnical, mechanical and vehicle manufacturing industries to refer to the fact that a decision-making capacity of individual companies plays an important role in an increasingly globalized economy. Managements of companies deciding about anti-crisis measures are naturally compelled to react to global economic development, but in their final decision, they take into account national, regional and local specificities of the territory in which the companies operate.

Keywords: global economic crisis, the South Moravian Region, electrotechnical industry,

mechanical and vehicle manufacturing industry, companies, decision-making Introduction The increasing interconnection of national economies in the current world represents a

process known as economic globalization. Since 1960s, especially multinational companies have gradually become its bearers, as their primary characteristic is an ability to operate outside (or beyond) of nation-states. Many such companies dispose nowadays of even greater economic importance than some countries. Aoyama, Murphy and Hanson (2011: 122) directly state that "economic globalization is being driven by the geographical dispersal of markets, the functional integration of production activities, and the increasing interconnections and interdependencies between people and places in the world economy". Giddens (2003) considers the volume and speed of global links in the 21st century as unprecedented, creating entirely new opportunities but also threats.

And one of these threats significantly manifested itself several years ago in the world economy, which was hit by a global economic crisis (the largest since the Great Depression in 1930s). Its causes can be found in the mortgage crisis in the U.S. between 2007 and 2008, which eventually led to a global financial crisis in the autumn of 2008. It gradually turned into an economic recession which also rapidly spread worldwide and caused a significant decline in economic performance - especially in the manufacturing industry. Therefore, millions of people lost their jobs, a number of companies went bankrupt and the remaining firms faced significant problems. It seemed that the world economy had begun to stabilize and return to a standard development during the years 2010 and 2011, but large government budget deficits raise fears of another wave of a global economic crisis.

Konečný, Ondřej, and Ondřej Šerý. “The Influence of the Global Economic Crisis and Local Context on Decision-Making of Industrial Companies.” In The Scale of Globalization. Think Globally, Act Locally, Change Individually in the 21st Century, 150-156. Ostrava: University of Ostrava, 2011.

ISBN 978-80-7368-963-6 http://conference.osu.eu/globalization/publ2011/150-156_Konecny-Sery.pdf.

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Disproportionately over-indebted economies, whose debts exceed even more than half of annual GDP, are represented especially by economically developed countries where the headquarters of most multinational companies dominating the current globalized economy are located. Massey (1984) pointed out the relationship between the hierarchy of regions and the hierarchy of companies and their headquarters from which the different decision-making and planning powers derive subsequently. Markusen (1985) mentioned the crucial importance of different behavioral strategies of corporations in various stages of product cycles and prosperity (Blažek and Uhlíř 2002). Approaches such as the Global Production Network emphasize different priorities in the times of business growth, profitability and economic development, and add that even within the same industry, firms differ in terms of their strategic priorities (e.g. selective attitudes of companies to product, process and functional upgrading - see Pavlínek and Ženka 2011), attitudes to the workforce or the nature of relationships with suppliers (Henderson et al. 2002). This approach pays attention to the distribution of power within the chain of companies involved in the production of a product (from research to marketing and distribution) and the process of value creation and transfer (Henderson et al. 2002). The asymmetry in the management and decision making is described within the network, when the dominant firms (flagships) control resources and decision-making power in the network (Ernst 2003).

The paper aims to demonstrate on firms from the model South Moravian Region (SMR) that even in the case of the global process modified by local specificities, the dealing with its manifestations is a question of decision-making skills, procedures and practices of individuals, or managements of companies. The paper is part of the project "The impacts of global environmental change in the landscape sphere of the Earth" (PROGLEZ) at the Institute of Geography, Faculty of Science, Masaryk University, which is funded by Masaryk University (MUNI/A/0966/2009).

Methods The first part of the paper uses some of the findings of the "Employment Survey" - an

annual survey of economic subjects of the SMR organized since 2003 by the Regional Office of the SMR. The surveys seek to obtain detailed information about the structure of employment and its annual and predicted development. Despite its voluntary nature, surveys involve a relatively representative sample of companies and numbers of employees. Only about 20% of the South Moravian companies with more than 20 employees are not involved in the surveys and the overall share of employees covered by the surveys exceeded at least 2/5 (in the manufacturing industry even ½).

The development in individual industries according to the number of employees was quantified on the basis of the survey findings, and then electrotechnical (36 firms) and mechanical and vehicle manufacturing (35 firms) industries (firms for which it was possible to obtain data for the number of employees at least for the years 2007 and 2010) were selected for a more detailed study at the company level. It was based on an analysis of the information contained in the final (annual) reports of companies and their web presentations, newspapers and thesis of one of the authors (Šerý 2010). The narrowing of the analysis only to the manufacturing industry was purposeful, as the global economic crisis manifested first (and very strongly) at these industries and rather secondarily transferred into the service sector.

Labor market during the crisis The labor market of the SMR is one of the more problematic among the regions of the

Czech Republic (CR), the unemployment rate as well as the number of applicants per vacancy exceed the average of the CR in the long term. While at the end of 2007, the South Moravian labor market exhibited positive trends, the first impacts of the global economic crisis already



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started to appear in 2008, such as the rapid decrease in the number of vacancies by 40%. Therefore, the year 2007 was chosen as the beginning of the studied period in the present paper.

The economic recession became more pronounced during 2009. The dramatic annual increase of job seekers by more than 50% has not been recorded since the beginning of the transformation of the Czech economy and the possibility to find a job significantly narrowed due to the low number of vacancies. The unemployment rate even exceeded 10% in the SMR. In the following year, the characteristics of the labor market even worsened, but the tempo clearly slowed. The year 2011 finally witnessed a drop of the unemployment rate once again below 10 percent in the SMR, but the number of vacancies still remains very low. Job opportunities however strongly differentiated - while the unemployment rate did not rise above 10% during the crisis in the districts Brno-City and Brno-Country, in Znojmo and Hodonín reached 17% with more than 45 job seekers per vacancy (in Brno-City only 13).

Manufacturing industry and employment of the South Moravian Region The secondary sector ensured approx. 2/5 of all jobs, but especially in the last two years,

this sector faced an important decrease as a consequence of the global economic crisis. A constant increase of jobs has taken place in the tertiary sector in the region over the past two decades; it accounted for 61% of all jobs in the last quarter of 2010, thus exceeding the level of the CR. Apart from traditional manufacturing and electro technical industries (now largely internationalized), branches focusing on computer technology, telecommunications, software development and other hi-tech branches of the service sector develop dynamically in the region currently.

The majority of employees in companies operating in the monitored electrotechnical and mechanical and vehicle manufacturing industries is concentrated in Brno - other centers are important secondarily (see Figure 2). Although there are no longer many giant companies with thousands of employees (e.g. Zetor, Zbrojovka Brno or Královopolská engineering plant), there still are several companies employing more than 1 000 people (Tyco Electronics, ABB, or European Data Project).

Employment Surveys show that the importance of electrotechnical and mechanical and vehicle manufacturing industries, as well as the manufacturing industry generally, decreased in the time of the crisis. While employees in the mechanical industry still represented 7.5% of all workers captured by the survey (6.6% electrotechnical) in 2007, by the end of 2010, their number went down to only 4.5% and was already lower than in the electrotechnical industry (5.6%). The intensity of the decline of this industry was comparable to the overall tempo of decrease of the manufacturing industry, but still the decline of mechanical and vehicle manufacturing industry was more rapid.



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Figure 1: Share of employment in sectors, changes in selected industry in the SMR in the period 2007 - 2010 according to the Employment Survey

In 2008, no significant dismissal of employees took place in the case of the monitored

companies, but at the end of 2009 the number of employees fell by almost 1/5 in the mechanical firms and by 15% in the electrotechnical companies (the dismissal of more than 1.5 thousand people in each industry). In 2010, the negative trend of the layoff of workers reversed and some jobs were created again, but the number of jobs reached only 90% of the 2007 level (in both industries). This trend is evident in the attitudes of individual companies towards dismissing or hiring of new employees. While firms dismissing their workers prevailed in the period 2007 – 2009, a reversal was observed in the last year (fig. 2).

Fig. 2 Electrotechnical and mechanical and vehicle manufacturing industry in the SMR in the period 2007 - 2010 according to the Employment Surveys



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Responses of companies to the crisis - individual attitudes and examples The economic crisis affected more or less all companies in the SMR (although it differed

in intensity, duration and specific factors) - the decline of orders was significant which then reflected in lower sales and profits. The manufacturer of power plant boilers Alstom Power Brno recorded a drop of orders by 38% in the fiscal year 2009, which ultimately led this firm to the decision to close its plant in Brno. The volume of orders of the engineering firm Antreg Vyškov dropped to the 2004 level and significant declines in orders were reported also from EDP Rousínov, the metallurgy and engineering company Kovolit Modřice, Fritzmeier Vyškov or the electrical company Metra Blansko.

Companies were forced to respond to these worsening conditions on the demand side in various ways which they considered effective to reduce the impact of the crisis to a minimum. Some companies decided to limit the standard working week, usually to four days. The manufacturer of sewing machines Minerva Boskovice implemented the work week with free Fridays for 65% of the average wage. From February to October 2009, also the manufacturer Zetor Tractors Brno applied the four-day work week. Employees of Zetor received 80% of salary and only 70% of salary after one month for free Fridays.

Some firms reacted even more vigorously as they decided to shut down production. Adast Adamov – a company engaged in the production of components for printing machines – proceeded to shut down production until early 2009; this measure however did not have a sufficient effect, and the company went bankrupt in April 2009. Not only the companies linked with the automotive industry, such as the IAC Group Hodonin and Kovolit Modřice but also Metra Blansko and Minerva Boskovice experienced shutdowns in the late 2008 and 2009.

Many companies (see Figure 2) responded by the dismissal of employees. First, agency workers (often foreigners) were fired, followed by employees with fixed-term contract and finally the regular staff, as E. Kislingerová (2009: 167) states: "termination of employment with long-term employees is a measure which the managements try to avoid as long as possible". Thus, employees who worked in companies for a shorter time, who were single or for whom the loss of employment did not represent a social burden had to leave in the first waves of dismissals. Celestica in Ráječko first fired more than one hundred temporary and agency workers, but later decided to sell its plant to the competitor Tyco Safety Products Kuřim. In the company Apos Auto Blansko, dismissals significantly affected members of the Mongolian community (the largest in the CR). Kovolit Modřice dismissed preferably those employees whose performances were evaluated as lower by managers. "Forced" retirement of older workers into early retirement was another often used method.

Some employers also offered a voluntary termination of employment agreement for which higher compensation was paid than prescribed by law. The unionists of Alstom Power were probably able to provide the highest compensations in the CR for the redundant employees, amounting to 16.6 average wages per one employee.

Little or no wage increase and limiting employee benefits during collective bargaining represent yet another form of response. For example, the unionists of ČKD Blansko Holding demanded three per cent wage increases at the end of 2009. The company however proposed to either meet its demands, which would mean a partial dismissal, or to maintain the current wage and number of employees. Eventually, a wage increase of one percent was negotiated.

Some companies took advantage of the "Educate Yourself" project, an initiative of the Ministry of Labor and Social Affairs of the CR. Firms could send their staff to training and educational courses, thus not having to fire them (employees increased their qualification and were not present in the workplace where no work was there for most of them anyway). Fritzmeier Vyškov and Otis Břeclav can be named from the South Moravian companies.



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Finally, companies decided to suspend or revoke various investment projects, which included the expansion of production, construction of new buildings and halls or introduction of new models. Novibra Boskovice put into operation a new production hall at the beginning of 2008. However, due to the crisis the hall was not used fully as originally planned, with only a limited number of work shifts. The Zetor Tractors had to postpone the start of production of new models of Forterra Power and Maxterra due to the crisis and the lack of funds for investment.

Some companies, despite these negative effects, managed to improve their performance by the late 2010 so that they extended their production and created new jobs, such as the Mikulov branch of the Austrian cable manufacturer Gebauer and Griller Kabeltechnik, the Znojmo branch of the German automobile components company Egston Electronic System, the supplier of electronics Beta Control Brno, the microscope manufacturer FEI Czech Republic (U.S.) located in Brno or the similarly focused Czech company Tescan Brno, which acquired a majority share of Tuscan USA inc. in 2010 and expects its sales to increase by 100 million in 2011.

Conclusion The financial crisis which began in the U.S. in 2008 confirmed the significant global

interconnectedness of national economies. Evolving into a world economic crisis, it had negative impact on individual states and regions. However, the specific influences of the crisis on economic performance and the labor market varied in their intensity due to the local specificities of the territory (industry specialization, degree of openness of the economy, regional policy, etc.). These differences were not limited only to the level of regions, but also to individual companies which were forced to choose their own strategy to cope with the unfavourable consequences of declining sales due to a weakening demand of customers. Managements of companies deciding about anti-crisis measures were forced to react to global economic development, but in their final decision, they took into account national, regional and local specificities of the territory in which the companies operate.

Our study of reactions of electrotechnical and mechanical and vehicle manufacturing industry companies operating in the South Moravian Region showed the different individual strategic decisions of top managements adapted to the need of effectively bridging the economic crisis and low consumer interest. One of the most documented effects of the crisis (also in the set of the studied companies) – dismissals - represented only one of many other reactions of companies; these can be broadly classified into several groups, although the real solutions applied by the firms significantly differed in their scale, targeting and/or duration:

• reducing of standard working week • shutdown of production • liquidation of the company • dismissals • motivation for voluntary termination of employment • restrictions of employee benefits and increase of wages • use of educational programs organized by public administration • restrictions of investment activities Even at the beginning of the crisis, there were many companies whose management was

confident about its ability to use the crisis to significantly strengthen the company´s market position and profitability (Kislingerová 2009). Suitable measures taken by some companies not only met the request to bridge the global economic crisis with the minimum of negative consequences, but in some cases, companies actually became "healthier", more competitive and even increased the number of employees and improved the position of the firm in the



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market. Among these companies we can find for example the FEI, Tescan or Beta control located in Brno.

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Kislingerová, E. 2010. Podnik v čase krize. Praha: Grada. KÚ JMK. 2007 – 2010. Průzkum zaměstnanosti v JMK (2007-2010). Brno: KÚ JMK. Massey, D. 1984. Spatial divisions of labour: social structures and the geography of

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