Competitive Advantage in the Tile Industry

6Conclusions

6.1The quest for rents and the power structure in the global tiles value chain

We have argued above that competition in the tile industry is around technological upgrading and restructuring of the value chain. We have also argued that in order to understand the evolution of the tile sector, it is essential not only to look at the interaction between producers and buyers, but also and particularly at the interaction between key suppliers and producers.

Technical innovation in the tile industry is to a large extent driven by suppliers. This does not only apply, as one would expect, to the suppliers of new machinery which induce process innovation. There are two types of suppliers which play a key role in innovation, namely Italian capital goods manufacturers and Spanish glaze producers. Their goal is to create demand for their products:

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  Machinery producers do not only come up with new machines to do the same things better. They also develop new products which require new machinery. A machinery producer which comes up with a new product in this way creates the demand for its machinery. In some cases (such as Rotocolor, mentioned in the section on Sassuolo) the machinery producer even creates a captive market for subsequent services.
  
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  Glaze producers do not just produce standardised glazing materials. Rather, they have large in-house design departments which offer entire collections to tile producers, usually for free. For an outsider, a glaze producer’s stand at one of the industry fairs does not look different from that of a tile producer: what is exhibited there are tiles, not the powders which are the product of the industry. Accepting a glaze producer’s design proposal of course means purchasing his glazing materials as well.
  

This innovation behaviour is creating a game which involves four groups of players (Figure 16). They are the tile manufacturers in Sassuolo, the tile manufacturers in Castellón, the machinery producers which are mostly located in Sassuolo and the glaze producers which are mostly located in Castellón. There are four types of interaction:

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  Localised rivalry within each of the four groups.
  
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  Competition between the tile manufacturers from different locations which are essentially competing for the same markets. The main weapon in this competition used to be product innovation, thus creating the opportunity for machinery and glaze producers to constantly launch new product proposals to create demand for their machines and glazes.
  
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  Formal and informal co-operation between groups. This does not just happen locally but also, as indicated by the diagonal arrows, between clusters.
  
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  Figure 16: Key Actors and Interaction in the Tile Industry
  
  
  Rivalry between the machinery producers and the glaze producers. The machinery producers prefer to develop innovation which reduces the relevance of glazes for a differentiated product, and preferably make glazes unnecessary. The glaze producers are working on innovation which permit new, differentiated products without major investment in new equipment. In other words, there is a strong, albeit tacit, strategy of either group to undermine the other’s market position.
  

Behind the innovation behaviour is the quest for rents. A substantial share of the tile market consists of commodity products, like white 20 x 20, where prices and margins are low. Therefore there is a strong incentive for tile producers to come up with differentiated designs or with unique products to create a specific advantage. Likewise, commodity products account for a substantial share of the markets for capital goods and for glaze. Therefore, the same productive rent-seeking logic applies to capital goods and glaze manufacturers.


Figure 17: Changes in the Value Chain


The restructuring of the value chain is, to a certain extent, an outcome of the struggle between the two groups of suppliers. There has been a time when innovative, differentiated design was the main competitive weapon of tile manufacturers. However, much of the design function has been taken over by machinery and glaze producers, which are thus expecting to develop additional sources of innovation- and differentiation-based rents. For the tile producers this means that they have to look for other means to create competitive advantage and rents, and they find them downstream, in terms of customer services, distribution and sales. In this perspective, there is a tendency towards a generalised movement downstream by the main groups of actors in the tile business. The upper part of Figure 17 describes the earlier constellation, the lower part the current trend.

It is important to note that the smaller size of the “Shops” box in the lower part of the figure is exactly what many actors in the tile production business want to see in the future. They do not only perceive that a stronger position at the distribution & sales stage improves their competitive position vis-à-vis their competitors. They also perceive that the margins at this stage tend to be higher, so that a strong position here may enhance the company’s profitability.

It is also important to note that this change in the structure of the value chain is not just the outcome of atomised actors (the “invisible hand of the market”). One of the characteristic features of the tile business is reflexive structural change:¹ There is constant discussion going on, not just inside the clusters but also among them, organised by Acimac (e.g. Acimac 2000). This discussion is not just about general industry, technology and market trends but also about the change in the structure of distribution and sales. As the construction sector is something of a latecomer in terms of consolidation, actors in the tile industry are closely observing trends in other industries’ distribution and sales segment where restructuring is more advanced, and they try to pre-empt a kind of structural change which would weaken their competitive position.

This leads us back to a point we made in Section 2: the relevance of network concepts, and in particular the perspective at networks as a third type of transaction apart from markets and hierarchies, instead of something on a continuum in between the extremes of pure market and pure hierarchy. In analogy to the policy network concept introduced by political scientists, we address networks as systems of ongoing negotiation. This is not about spot bargaining, such as on commodity exchanges. It is also not about somebody commanding what is going on. The tile industry, from the production of capital goods and inputs to the production of tiles down to the commercialisation, is marked by a relatively large number of actors at each stage, and we did not observe that any single one has a strong power position. What we did observe, however, is strong and relatively stable relationships between actors. A producer of machinery would have a number of key customers, which play an important role when it comes to testing new machinery. A producer of glazes would also have a number of key customers, which would be involved in intense interaction to develop new products, and beyond those it would have a relatively stable customer base. Similarly, the tile producers would have very close relationships with some key accounts and overall a relatively stable customer base.

Figure 18: The power game in the global tile industry


What is going on in this system is not just constant negotiation and communication, but it is also something like a global power game (which does not contradict the argument that this is a network – as Mayntz and Scharpf [1995] point out, power games are a key feature of networks). We have argued above that tile producers in Brazil can exploit the rivalry among Italian machinery producers and Spanish glaze producers to their advantage. The same holds true for manufacturers in other countries. We sketch the shape of the power game in Figure 18; it extends the argument we have depicted in Figure 16. Our information indicates that the evolution of the tile industry in China is influenced by the Italian pattern, especially in terms of a high share of porcelain tiles in the overall production. The pattern in Brazil rather follows the Spanish pattern, with a strong role of the glaze producers. Regarding Turkey and the NAFTA countries, which are the next most important producers, we do not discern a clear pattern. One might speculate whether the relationships depicted in Figure 18 indicate how the future evolution of the tile industry may look like, especially if Italian tile production moves from maturity to decay and when Spanish production reaches maturity. More specifically, it might give an idea of where Italian tile producers will look if they start to go for subcontracting, something that has not yet occurred in the Sassuolo cluster but that has been happening in other industrial districts for several years. If and when this will happen, it will introduce a new element into upgrading.

What exactly does upgrading mean in the tile industry so far? Humphrey and Schmitz (2000, 3 f) suggest that there are four types of upgrading:

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  “Process upgrading: firms can upgrade processes - transforming inputs into outputs more efficiently by re-organising the production system or introducing superior technology.
  
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  Product upgrading: firms can upgrade by moving into more sophisticated product lines (which can be defined in terms of increased unit values).
  
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  Functional upgrading: firms can acquire new functions in the chain such as design or marketing.
  
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  There is a fourth type, ‘inter-sectoral upgrading’ ... Inter-sectoral upgrading occurs when firms apply the competence acquired in a particular function of a chain (e.g. competence in producing particular inputs, or in export marketing) in a new sector.”
  

As we have seen, in the tile industry the first three types of upgrading are happening at the same time. They are closely related, and actually reinforcing each other, and this is because the competitive game in the industry does not permit firms to limit their effort to just one type of upgrading. Humphey and Schmitz suggest that clusters can pursue any one type of upgrading. The case of the tile industry does not support this view. It rather suggests that the four types imply something like an escalator which firms and cluster have to take as competitive pressure intensifies. In the tile industry, competition has become more intense as more firms and clusters became capable of producing tiles which comply with the basic quality requirements expected by customers. In order to differentiate their product, and thus achieve a temporary rent, firms first went for product upgrading and then for functional upgrading. Product upgrading has to some extent been driven by tile producers themselves, but producers of machinery and of glaze played an increasingly important role in this respect. Functional upgrading has very visible with respect to glaze producers since the 1980s, which took over tile design, and with respect to tile producers more recently, as they pursued forward integration strategies, i.e. tried to establish themselves at the commercialisation stage.