Big news down under this week has been the announcement that our largest clothing/textile firm is shutting down its local manufacturing and shifting all such activity offshore, principally to Asia. Pacific Brands which controls a huge portfolio of household names in Australia, has conceded that it can’t compete with lower cost environs.
At the same time it has indicated it will be paring back its range of offerings very considerably, as it has a very unbalanced portfolio. The top 20 brands make up two thirds of sales, the Top 10, 49 percent, the Top 5 a third. More than 200 make less than $0.5m a year each.
It has been asked what the impact of the current financial crisis will have on firm boundaries (i.e. how far they stretch themselves in terms of range of products and activities). Pacific Brands look to be reducing their extent of horizontal reach (or perhaps their extent of duplication within existing product markets). Carrying slow-moving product is a lot harder to justify when your financiers are looking over your shoulder and are nervous about debt levels.
What is missing in the above linked discussion about boundaries, is the actual physical dimension – namely whether firms might be more or less likely to redistribute activities in the current climate. It would seem Pacific Brands have been contemplating this shift for quite a while. Australia has been pretty ruthless in cutting protection of the textile, clothing and footwear industry (although there was a stay on proceedings for a few years), and the firm can now very easily bring in overseas product. The rapid drop in the Aussie dollar during the crisis could have justified a delay, but it would be simply postponing the inevitable. It may well be a good time to lock in any necessary asset purchases, supply contracts and the like in Asia as firms there also deal with high uncertainty about some of their key export markets.
Such relocation to a substantially lower cost location could be seen as a de facto substitute for the sort of vertical specialisation Lien predicts. The firm might be more comfortable substituting one hierarchical governance arrangement with another, even if the new FDI-driven one is presumably more complex, rather than taking on the vagaries of market transactions (especially as the latter will shift in nature as the economy inevitably recovers).
I will keep an eye out for more instances of substantial readjustment of firm boundaries in these tumultuous times. Feel free to share your examples too.