Competitive Advantage and Upgrading in the Tile Industry:Integrating a Cluster and a Value Chain Perspective

Jörg Meyer-StamerClaudio MaggiSilene Seibel

Second Draft

February 2002

Content

1 Introduction 1

2 Conceptual framework: Clusters and value chains 2

3 General features of the tile industry 83.1 Features of the product and the production process 103.2 The role of suppliers of capital goods and glazing materials 123.3 The demand side 14

4 The competitive game in the tile industry: Italy vs. Spain 164.1 The Sassuolo cluster 174.1.1 Stage of industrial evolution: Consolidation 184.1.2 Structure of the value chain: Downstream activities 204.1.3 Structure of the value chain: Upstream activities 224.1.4 Structure of supporting institutions 264.1.5 Trends in upgrading 294.2 The Castellón cluster 314.2.1 Industrial evolution 324.2.2 Structure of the value chain: Downstream activities 354.2.3 Structure of the value chain: Upstream activities 364.2.4 Structure of supporting institutions 394.2.5 Trends in upgrading 414.3 Comparing governance patterns in Sassuolo and Castellón 42

5 Latecomer industrialisation and value chains in the tile industry: The case of Santa Catarina, Brazil 43

5.1 Location, value chain and competitive advantage 445.2 Santa Catarina in the global value chain 49

6 Conclusions 516.1 The quest for rents and the power structure in the global tiles value chain 516.2 The relevance of location 556.3 Conclusions for cluster research and cluster promotion 556.4 Conclusions for value chain research 57

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7 Bibliography 58

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1 Introduction

This paper is about competitive advantage and upgrading in the tile industry.1 Why did we choose the focus and the industry? The reason for choosing the focus is the interest in advan-cing the understanding of industrial change, in particularly with respect to latecomer industri-alisation. This is an issue which is not only of academic interest but also politically relevant. What is the pattern of upgrading in industries which have to compete an increasingly global-ised world, and what are the chances for industries in latecomer countries to enter competitive global markets? Apart from intra-firm efforts, what is involved in upgrading – what is the role of collective action and business associations, what is the role of government?

The starting point for the research was a territorial focus, related to an issue which was very prominent in the latecomer industrialisation discussion of the 1990s: to identify how local clusters connect to global markets. But the guiding question was not only addressing geo-graphical but also governance issues: What are the power structures involved in the relation-ships between local producers and their global customers, and how do they influence local governance, in particular local collective upgrading efforts? This is an important question since the prevailing view, especially in the cluster policy community, is quite optimistic re-garding the latitude for local policy making. Obstacles to local policy making seem to be de-termined mostly by local factors, such as weak business associations or lack of trust. How these obstacles are related to the insertion of local clusters into the global economy has only occasionally been addressed in any systematic way. We will show that in the case of the tile industry the mode of connection to global markets plays a decisive role in shaping, and also limiting, the options for collective action to upgrade at the local level.

We selected the ceramic tile industry because it is at the same time a highly globalised and a highly localised industry. It is dominated by companies from Italy and Spain, and in both countries production is concentrated in one cluster (Sassuolo / Italy, Castellón / Spain), both of which have a high export ratio (70 % in Italy, 50 % in Spain). For a long period, the cluster in Sassuolo was the leading one in the world, both in terms of production and technology. Castellón is a case of latecomer development where the transition from craft to industry began

1 The research presented in this paper is based on three fieldwork exercises which involved three clusters – Sassuolo in Italy, Castellón in Spain, and Santa Catarina in Brazil. We conducted interviews with tile firms and other actors in the Santa Catarina cluster in April 2000; this included a visit to the Construction Materi -als Fair in São Paulo (Feicon). All three authors conducted interviews with tile firms and other actors in Sas-suolo and Castellón in October 2000; this included a visit to the Tile Fair in Bologna (Cersaie). We conduc -ted a benchmarking exercise with six medium-sized tile firms in the Santa Catarina cluster in November/December 2000. We discussed the findings of the research with the firms in Santa Catarina in August 2001, thus gaining further insights. Apart from this, we exploited the information provided in trade journals and by internal papers and workshop documentations from sector associations. We are grateful for the time com-pany representatives, association officials, and other source persons spent with us. We are also grateful for the feedback we received on the first draft from Hubert Schmitz and ASCER, the feedback on the second draft we received during the workshop at IDS in February 2001, in particular the comments by Raphie Kapl -insky, and the subsequent detailed comments from Hubert Schmitz and John Humphrey. The usual disclaim-ers apply.

in the early 1970s. Apart from those two clusters we investigate the case of Santa Catarina, Brazil which is one of the most dynamic tile clusters in the developing world.

The structure of the paper is as follows. In Section 2 we present the conceptual framework for this paper. In Section 3 we introduce a number of key facts the reader should know about the tile industry. In Section 4 we investigate the clusters in Italy and Spain, as they shape the evolution of the industry. In order to understand how the interplay between Italy and Spain af-fects industrialisation efforts in latecomer countries, we present a case study of the Santa Catarina cluster in Section 5. In Section 6 we draw a number of conclusions.

2 Conceptual framework: Clusters and value chains

For several years now, the academic as well as the policy discussion on latecomer industrial-isation has been passing through a phase of profound redefinition. The 1980s and 1990s have witnessed the demise of heavy-handed, government-driven, top-down, centralist approaches to the promotion of industrial development in latecomer countries. As part of the “Washing-ton Consensus”, it was suggested that government intervention did more damage than benefit, even in the successful newly industrialising countries of East Asia (World Bank 1993). Even though this argument has repeatedly been challenged,1 it is probably fair to argue that in the course of the 1990s even those who saw industrial development in East Asia as a success story of developmental government started to have increasing doubts regarding the applicabil-ity of this approach in less-advanced countries.

The increasing scepticism regarding the effectiveness of centralised government intervention and traditional industrial policy was one of the reasons why industrial clusters and cluster pro-motion received increasing attention, not only among donor agencies and governments in de-veloping countries but also among enterprise promotion agencies in industrialised countries. Clusters, commonly defined as concentrations of firms of a given sub-branch of industry plus supporting industrial and service firms within a delimited region, started to become prominent in the discussion on industrial promotion in the 1980s, initially based on the striking growth and export performance of Italian industrial districts, mostly populated by small and medium-sized enterprises / SME (Piore and Sabel 1984, Pyke, Becattini and Sengenberger 1990). As clusters are frequent in developing countries, and the private sector there mostly consists of SME, promoting clusters appeared as a promising new approach to stimulate latecomer indus-trialisation (Schmitz 1989). Clusters promised to reduce all sorts of barriers – barriers to intra-firm competence building, as firms could specialise more; barriers to exports, as local firms could work jointly in export consortia; barriers to upgrading, since an agglomeration of many firms of the same branch created strong demand for business development services.

1 See, for instance, Killick (1994) and the April 1994 special issue of World Development.

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Firms in clusters which operated individually did already enjoy all sorts of advantages (e.g. the availability of specialised, experienced workers), but firms in clusters which managed to act collectively had a chance to create a competitive advantage beyond this. Building on the concept of “collective efficiency” introduced by Schmitz (1995), Nadvi (1999, 1608) has elaborated on this:

"Collective efficiency is defined as having two aspects to it: external economies that clustered agents accrue by virtue of their location, and joint action benefits that arise from deliberate cooperation between local agents. I view external economies as the 'passive' dimension of collective efficiency. The term passive describes the nature of ties required between local agents in order to obtain externality gains. In contrast, joint action is the 'active' dimension of collective efficiency requiring deliberate and active cooperation. These two aspects can also be clearly linked; joint action by some agents can generate cluster-specific externality gains for others. This process of upgrading by facilitating the flow of technical information on standards and by assisting in managerial training. Local institutions can also play a potentially key function in defining and regulating local product standards, and thus in creating a reputational basis for the cluster's products. This provides a powerful example of what I refer to as 'externalities of joint action'".

Collective efficiency is not just a microeconomic issue but also involves a governance dimen-sion. Passive advantages (easy access to suppliers, buyers and specialised workers) are based on market governance. It is the invisible hand of the market which is creating these advant-ages without deliberate collective action or government intervention. Active advantages may be based on hierarchical governance, if it is government which supports businesses’ efforts. More often, they will be based on network governance, if there is close interaction between government and non-governmental actors and joint upgrading efforts are based on negotiation and shared commitments. Enright and Ffowcs-Williams (2000, 4) summarise the rationale of cluster promotion as follows:

“Membership of clusters and networks can enhance the productivity, rate of innovation and competitive performance of firms. Clusters and networks can allow small firms to combine advantages of small scale with various of the benefits of large scale. Public policy on clusters and networks can help SMEs realise the opportunities and meet the challenges associated with globalisation. Essentially, a policy on clusters provides a framework for dialogue and co-operation between firms, the public sector (particularly at local and regional levels of government) and non-governmental organisations. This dialogue can lead to efficiency-enhancing collaboration amongst firms, such as in joint marketing initiatives, the creation of mutual credit guarantee associations, joint design and sponsorship of training, a more efficient division of labour among enterprises, etc. Such a dialogue can also lead to an improved quality of policy and government action (such as in training, the provision of information, and infrastructure supply).”

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Some case studies on clusters in developing countries indicated that local governance, espe-cially network governance, can contribute significantly to solving competitive challenges (Schmitz 1995, Nadvi 1996, Meyer-Stamer 1998). This was not necessarily surprising as one might have expected that local actors would respond more swiftly, and in a more targeted way, to new challenges than a distant, less informed central government ever could. Moreover, a stronger local economic development effort fits into the larger picture of decent-ralisation.

Over time, however, increasingly evidence surfaced which lead to a questioning of the pre-vailing view of clusters as favourable places for SMEs to become internationally competitive, and in particular as favourable places for collective efforts to create competitive advantage. Most relevant are two types of evidence: on structural change in clusters, and with respect to the interaction between clusters and the economy at large.

Regarding structural change inside clusters, it was first and foremost ongoing observation of industrial districts in Italy which lead to the discovery of different trajectories in the evolution of clusters. In the 1990s, it has been found that inside many of them concentration processes occurred, and that some others began to de-verticalize, i.e. to relocate certain activities to other locations (Brusco et al. 1996, 28 f., Ottati 1996, 45 ff., Crestanello 1996, 72 ff.). In Emilia-Romagna, a case study of four industrial districts found that 55.2 % of firms and 89.9 % percent of workers belonged to economic groups, a finding which indicates that the preval-ence of SME is a feature of the past (Brioschi, Brioschi and Cainelli 2001). Some industrial districts managed to adjust to increasing competitive pressure, whereas others started to de-cline (Belussi 1999). Government efforts to promote the competitiveness of clusters have be-come less effective, as the demands of firms are increasingly differentiated, specialised and sophisticated, whereas public support institutions are increasingly bureaucratised (Whitford 2001).

Regarding interaction between clusters and the economy at large, some authors have early on criticised the analysts of industrial districts for their excessive focus at the local and the neg-lect of global economic issues (e.g. Amin and Thrift 1994). In the course of increasingly deep investigation of clusters, notably in developing countries, it became obvious how important the interaction with the global economy actually is – sometimes in terms of stimulating massive local upgrading efforts, such as in the case of the surgical instruments cluster in Sialkot, Pakistan (Nadvi 1999), sometimes in terms of creating obstacles to local collective upgrading efforts, such as in the case of the footwear cluster in Sinos Valley, Brazil (Schmitz 1998).

These kinds of observations led some cluster researchers to have a closer look at one specific feature of international trade: the existence of global value chains. Economics textbooks sug-gest that international trade involves transactions between anonymous sellers and buyers. In practice, however, quite the opposite is the case. Rauch (1999) finds that what he calls “differ-entiated products”, i.e. products which are not standard commodities and usually involve some degree of direct interaction between producer and buyer to determine product quality

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and specifications, accounted for 67.1 % of world trade in 1990, up from 56.5 % in 1970. Dir-ect interaction may take different forms; typical examples are international business networks established by ethnic minorities (e.g overseas Chinese), international networks managed by trading companies (Rauch 2001), or intra-firm trade. Cluster researchers, however, have chosen to investigate yet another variation of direct interaction, namely the one which has been addressed under the heading of “global commodity chains” (GCC; Gereffi 1996a).

The work of Gereffi is mostly based on the investigation of production networks in the gar-ment industry and trade, and even though he introduces a distinction between buyer-driven commodity chains (e.g. in garments) and supplier-driven commodity chains (e.g. in cars), his own work is mostly on the buyer-driven apparel chain. Other authors have investigated buyer-driven chains in other industries, such as footwear (Schmitz and Knorringa 1999), horticulture (Dolan, Humphrey and Harris-Pascal 1999), coffee (Fitter and Kaplinsky 2001), and furniture (Kaplinsky and Morris, undated). The common feature of these industries is the dominating position of buyers vis-à-vis producers in developing countries, which is due to a high degree of concentration among buyers in industrialised countries and relatively low barriers to entry for producers in developing countries. What these studies mostly do not investigate is the competitive pattern among the buyers in the industrialised countries, and the extent to which producers in developing countries might be able benefit from oligopolistic competition between buyers.

But this is only one of the limitations of the available literature on commodity chains. To start with, the term chosen by Gereffi is a contradiction in terms. As Humphrey and Schmitz (2000, 10) point out, he investigates commodity chains precisely because they do involve dif-ferentiated products, i.e. they are not about standardised commodities. This is one of the reas-ons why they and other authors prefer the term “value chain”.2 The main deficiency, however, is the mostly descriptive nature of Gereffi’s work. It involves dense descriptions based on ex-tensive field research, but little theory. The purpose of his work is to identify power structures within the international political economy, but he does not provide a clear theoretical frame-work in doing so. Similarly, other authors (e.g. Humphrey and Schmitz 2001) emphasise that global value chains involve governance, but the do not conceptualise this governance from a theoretical perspective. Kaplinsky (2000, 9 ff) presents “three key elements of value chain analysis”, name barriers to entry and rent, governance, and systemic efficiency. The latter is another descriptive category, not being embedded in a theoretical framework. In terms of gov-ernance, he distinguishes between legislative, judicial and executive governance, which is helpful in his description but also not exactly state-of-the-art in terms of theory. What is most useful, however, is his reference to barriers to entry and rent, which are, from an economic perspective, two key conceptual elements.

Another deficiency of the GCC concept is that it lumps together entirely different arrange-ments. What Gereffi calls producer-driven commodity chains are arrangements which are co-

2 This, in turn, leads to a terminological inconsistency with the earlier work by Michael Porter, who refers to intra-firm interaction as “value chain”, whereas he addresses inter-firm transactions as “value system”.

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ordinated by transnational industrial corporations. To some extent they organise their supplies on a market basis, to some extent as relational contracting. What Gereffi calls buyer-driven commodity chains is a different arrangement altogether, and in fact are two different arrange-ments. First, there are companies such as Nike, which have organising production as their main rationale. Second, there are companies such as Ikea, which have selling products to final individual customers as their main rationale.

Another weakness of the literature on value chains is its relatively limited focus, and this in different respects. It suffers from the same weakness Bell and Albu (1999) identified in the cluster discussion, namely neglecting a systematic discussion of technology issues. Related to this is the fact that many case studies also suffer from a very narrow focus. Gereffi’s research on the garment value chain is a case in point, as he looks exclusively at apparel producers and retailers (Gereffi 1996b, 1999; Bair and Gereffi 1999). However, it is no secret that this value chain starts on cotton fields and in chemical plants, and it involves not only spinning and weaving, as well as dyeing and finishing, but also the chemical and other inputs used for these processes, as well as the machinery. Technical progress in this value chain is to a large extent driven by capital goods manufacturers and chemical firms (Breitenacher, Vieweg & Vogler-Ludwig 1995). This suggests that including them in the analysis might render some relevant insights on the dynamics of the apparel value chain. A different school of value chain re-search, namely the one which looks at ecological issues, has been pursuing this much broader view and delivered a more differentiated perspective at the structure of international value chains (Aarts 1996, Claus & Völkle 1996).

This is not to say that value chain analysis is not useful. The opposite is the case, and this case study will illustrate how useful it actually is. The problem with value chain analysis so far is its too narrow focus, its bias for buyer-driven chains and its shallow theoretical foundation; even clumsy attempts to formulate typologies (e.g. Sturgeon 2001) can make their way past referees. But what are adequate theoretical points of reference in analysing value chains, in-cluding their interaction with local clusters?

The answer is relatively simple: Both value chains and clusters are about patterns of transac-tion which are neither markets nor hierarchies, but networks. Powell (1990) argues that it is useful to introduce networks as a third pattern of transaction. He suggests that networks are not an intermediate pattern to be located on a continuum somewhere between the extreme points of market and hierarchy, but rather a distinctive pattern of organising economic trans-actions. Storper and Harrison (1991) address networks in terms of the link between the spatial organisation of production and governance. They provide a typology which straddles the gap between cluster- and value-chain-research, as clusters are usually integrated into value chains and value chains often connect different clusters. They also point at the fact that clusters are not necessarily agglomerations of SMEs, thus anticipating the findings of Markusen (1996). Hollingsworth and Streeck (1994) emphasise that not only networks but also hierarchies and markets are profoundly shaped by different patterns and traditions of governance in different countries. Hollingsworth (1998) reminds us that economic co-ordination happening at differ-ent, interrelated levels, from the local to the global, is not exactly a new phenomenon, though

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the different levels have become more interdependent. In other words, looking at the interac-tion between local clusters and international chains is nothing radically new. Neither is the in-troduction of the governance issue (in the sense of political governance, not corporate gov-ernance). What we can do is develop a better understanding of the interaction between clusters and chains.

What about the theoretical perspective at networks? From an economic perspective, the ra-tionale of networks is based on the existence of transaction costs and principal-agent problems (Richter & Furubotn 1996). Market-based transactions can involve high transaction costs if products are not standardised, contract enforcement is unpredictable, costly and/or time in-tensive, or for other reasons. Hierarchies may involve high costs of supervision due to the agency problem. Companies prefer network-based relationships in those cases where they ap-pear as more efficient than market-based transactions or hierarchies. Typical examples are long-term relationships with suppliers of differentiated products which are more efficient than market-based transactions (because the reliability and competence of the supplier is known) and hierarchy (because the supplier is specialised in what he does and thus more efficient). Chains emerge in situations where buyers find it inefficient to draw on markets, in particular due to the necessity to have some control over the product characteristics (due to customer preferences, or legal requirements such as phyto-sanitary standards, or issues such as labour, environmental or other standards which are difficult to supervise and enforce), and where buyers also find it inefficient to organise the whole operation as a hierarchy, i.e. a vertically integrated firm. Chains are the more globalised, the bigger the difference is between chain elements in terms of cost composition, economics of scale and technological sophistication.

Complementary to the perspective of institutional economics, innovation economics emphas-ise the importance of networks as places for learning-by-interacting (OECD 1992). This refers both to local and international networks. Their emergence reflects the fact that technical change is much more a process, involving permanent interaction between different actors, than the outcome of isolated events (such as the sale of a license or blueprint). An important factor in this respect is that technical know-how is never fully codifyable, and that the transfer of tacit know-how is usually based on ongoing interaction.

From a governance perspective, networks are an alternative to hierarchy in those cases where resources are distributed among different actors so that decision-making is based on negoti-ation rather than command, even though there are usually power asymmetries. This has been thoroughly investigated with respect to governmental policies which rely on the know-how and other resources, as well as the voluntary co-operation, of non-governmental actors (Mayntz & Scharpf 1995, Messner 1997). The categories which have been formulated in the conceptual work on policy networks can as well be applied to business networks which are based on negotiation (Messner & Meyer-Stamer 2000).

What is the use of the value chain concept for this study? First and foremost, it is the em-phasis on factors which shape competitiveness and upgrading which are located outside local clusters. As the subsequent sections will show, in the case of the ceramic tile industry it is

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tempting to choose the local cluster as the focus of research. But we will see that limiting the focus in this way would lead to an entirely inadequate understanding of competitive patterns and upgrading. It might lead to entirely unrealistic suggestions for collective action and gov-ernment intervention to strengthen the competitiveness of the clusters.

In this paper we will show that local factors played the crucial role in shaping the structure of the tile industry. Until recently, a cluster-centred perspective rendered most of the insights ne-cessary to understand the evolution of the industry and the dynamics of competitive advant-age. This, however, is no longer the case. Local factors continue to play a very important role. But in order to understand the competitive dynamics in the tile industry it is essential not only to analyse the interaction between the two leading clusters, in particular with reference to the upstream activities in the tile value chain. It is also essential to look at their interaction with downstream activities in the value chain, i.e. commercialisation.

In the following sections, we will look at each of the three clusters in turn, addressing their competitiveness both from a local cluster and a global value chain perspective. We will take a wide perspective at the value chain, including activities both upstream and downstream from tile manufacturing. We will investigate the value chain looking at technological interaction, but also at the power structures.

3 General features of the tile industry

There is surprisingly little literature on the tile industry from an economic or social science perspective (Russo 1985, Porter 1990, Rowley 1996). We have investigated the Santa Catar-ina cluster before (Meyer-Stamer et al. 1996), and subsequently a further investigation has been conducted on that cluster from a "local systems of innovation" perspective (Campos et al. 1998). Moreover, Brazil's National Development Bank, which is the main creditor of tile firms in Brazil, has repeatedly investigated the sector (Romero et al. 1994, BNDES 1995, Gorini 1999). This body of literature does not give an adequate view of the current competit-ive pattern in the sector.

What does this pattern look like? Let us take a narrow perspective first, just looking at tile production and consumption as such. First, there is China. It is by far the largest producer and consumer of tiles. Production increased from 272 million square meters1 in 1991 to 1,842 mil-lion square meters in 1997, with a strong contraction since.2 But China is a self-contained market so far – there are no imports and little exports of tiles, and the boom of machinery im-

1 The common statistic measure in the tile industry is the square meter (except for the U.S., where it is the square foot). For participants in the industry this has the advantage that they do not have to talk about sales, let alone profit. However, the analytical use of this measure for our purposes is low, except in terms of changes in the relationship between sales value and square meters sold. We will come back to this point later. – The source of square meter data, if not otherwise mentioned, is the trade journal Ceramic World Re-view, usually based on data from ACIMAC, the association of Italian tile equipment manufacturers.

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ports which marked the first half of the 1990s seems to be over as well. Industry insiders do not expect Chinese producers to enter export activities on a relevant scale anytime soon. Ac-cordingly, we will take no further look at China.

Second, there is a group of countries with a strong tile consumption, namely Brazil, Spain, the U.S., Germany, and Italy (Figure 1). Three of them are major producers, namely Italy, Spain, and Brazil, whereas the other two are major importing countries. With respect to these coun-tries, there is a clear pattern:

2 Data from Ceramics World Review, various issues. It must be noted that some industry sources have serious doubts regarding the accurateness of these data.

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Italy was the lead-ing producer and exporter until 1999 (Figure 2). It was the first coun-try where tile pro-duction moved from craft to in-dustry. Italian firms achieve the highest average price per square meter, a fact that reflects the high quality of Italian tiles, not only in terms of physical characteristics but especially in terms of features such as design, style, fash-ion, and image. It also reflects the higher cost of Italian producers, in particular in terms of high-quality inputs for high-end products. Italian firms dom-inate the German market but have a strong presence elsewhere as well. Italian production

is concentrated in the Modena province in the Emilia-Romagna region (about 80% of total), especially around the city of Sassuolo.

Spain’s tile industry is more recent than the Italian. It enjoyed very strong growth in the 1990s; around 1999/2000, Spanish production was overtaking that of Italy in terms of square meters, albeit not yet in terms of sales value since the average price of Spanish tiles per square meter is about 60 % of that of Italian tiles. Spanish production is concentrated

Figure 1

Figure 2

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around Castellón de la Plana in the Autonomous Region of Valencia (with more than 90% of total Spanish production).

Brazil is the second largest tile market in the world. Import penetration is close to nil, whereas domestic producers have recently increased their participation in the world mar-ket. Production is concentrated in the states of Santa Catarina and São Paulo.

The U.S. have been, and continue to be, the most dynamic market open for ceramic tile exporters, with consumption increasing from less than 100 million square meters in 1990 to more than 200 million square meters in 1999. Two thirds of this is met by imports, and part of the domestic production comes out of plants owned by Italian firms.

Germany is by far the most important import market in Europe, with only one third of the market being served by domestic producers. However, sales growth is very limited.

3.1 Features of the product and the production process

To understand the tile industry it is essential to take a wider perspective, taking a look at the entire value chain from inputs to retail sales. Competition is based on innovation – in terms of production processes, products, and merchandising and after-sales services. In terms of product and process innovation the tile industry is a supplier-driven industry. There are two types of suppliers which drive innovation in the tile business, namely manufacturers of capital goods and producers of glazing material. To understand their respective role, it is useful to take a look at the technical aspects of the process and product. Table 1 summarises the steps and the main issues regarding the production process.

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There are two types of tiles, conventional tiles and porcelain tiles (porcellanato). The body of a conventional tile mainly consists of clay, feldspar, kaolin, and quartz, with other substances such as salt being added for visual effects. These are ground into a very fine granulate which then is formed and pressed to create a biscuit. The biscuit is then covered with a glazing ma-terial; this is the crucial step in terms of colour and surface pattern. The material then passes through a kiln where it is being fired for less than an hour at temperatures of more than 1200° centigrade. At the end of the kiln the tiles are inspected, mostly visually, but increasingly by

Table 1: Production process in the tile industryProduction process

Features Technological issues Manufacturers of capital goods

Weighing of raw materials

Important to control the characteristics and content of each raw material

Brazilian producers underestimate the importance of scientific control of this part

Milling Dry or wet milling Wet milling used to be superior to control the process, but the difference is fading away, especially as Italian producers start to improve dry milling to reduce the water intensity of the sector

Italian and Spanish

Atomization Essential to control the quality of the biscuit

Italian and Spanish

Silo Stocking and homogenizing of mixture of raw materials

local in each cluster

Press Current maximum weight 7,200 tons

Essential for product quality. In case of porcellanato, most important step of the whole production process regarding product quality and visual appearance.

Italian, with local manufacturers for tools

Dryer Using recycled heat from the kiln ItalianIntermediate stock of biscuits

First quality inspection. Waste often not counted in quality statistics

Italian (for handling along the whole process)

Mixing of glazing material

Italian and Spanish

Covering of biscuit with glazing material

May include printing process Efforts to reduce the thickness of glazing = reducing costs.Different printing technologies

Italian and Spanish

Firing Continuous moving inside the kiln (single, double, or triple firing)

With progress in roller technology, kilns are getting wider to give more flexibility in terms of tile sizes

Italian

Product inspection

Grading of tiles into two or three different quality grades

Move towards automation, especially in terms of color shade

Italian, UK

Packaging Fully automated process

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automatic inspection machines, and graded into different qualities. The end of the line, which is usually fully integrated, is packaging. A glazed tile may suffer a second or even third trip through the kiln, with further glazing material being added to create a more refined visual ap-pearance. An important part of the glazed tiles segment, especially those with elaborate pat-terns and colours other than white, are subject to relatively quick changes in fashion, with prices being lowered after a year and the product life-cycle for the more fashionable segment not extending over more than two to three years. Standard tiles, such as white, glossy, and 20 by 20 or 30 by 30 cm are a permanent part of the product spectrum. They are the bread-and-butter segment of the industry, having low margins but making an important contribution to the amortisation of production equipment. It appears that for most firms they make up the lar-ger part of sales not only in terms of square meters but also sales value.3

Porcelain tiles (gres porcellanato) go back to a traditional Italian product which was ugly but very resilient (“gres rosso”). In the course of the 1980s its production was continuously re-fined, in the end leading to a product which for the layperson is not distinguishable from marble or granite; “improving upon nature” is the leading idea of manufacturers of such products, who systematically look around in the world to understand which natural stones are preferred by customers and then proceed to reproduce them. The chemical composition of a porcelain tile is only slightly different from that of conventional tiles, with colours sometimes being part of the biscuit since most porcelain tiles are not glazed. But its physical characterist-ics are clearly different, with porcelain tiles being more dense, with water absorption being less than 0.5 % and often achieving 0.05 %, thus making the product viable for outside install-ation in cold climates (both for pavement and covering of building surfaces); this, in turn, opens new markets for tile producers. A porcelain tile may be covered with glazing material, something that according to some industry sources does not really make sense but reflects the sales effort of producers of glazing material. The current main trend in porcelain tiles are non-glazed, full-bodied tiles, i.e. they look the same from both sides. In the production of such tiles, the press is becoming the most important part of the production process. Whereas it is just pressing the mixture of raw materials in the case of conventional tiles, it is defining not only physical but also visual characteristics of a full-bodied porcelain tile. Understanding and controlling what goes on inside the press becomes paramount. Full-bodied porcelain tiles are comparable to marble or granite in terms of appearance and physical characteristics (“marmi / graniti di fabbrica”), but they are cheaper (although more expensive than a conventional tile). Life cycles of porcelain tiles are longer than those of conventional tiles.

3.2 The role of suppliers of capital goods and glazing materials

Let us come back to the two types of supplying industries which play the main role in pushing the technological frontier in the tile business forward.4 First, there are suppliers of capital

3 Firms are unwilling to unveil any data in this respect. 4 Other suppliers, such as producers of clay, are not discussed here because they neither shape the techno-

logical evolution of the tile industry nor are particularly powerful.

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goods. They are located almost exclusively in Italy. They have in-house development depart-ments for both machinery and tiles, and the large ones also have experimental production lines. They constantly come up with incremental innovations for each step of the production process. Typical examples go like this:

A capital goods manufacturer comes up with a new line of tiles with an innovative surface structure which appeals to tile manufacturers since it offers the opportunity to produce a differentiated, higher-margin product. However, in order to manufacturing this new tile they will have to acquire a new, more powerful or better controllable press.

Another capital goods manufacturer launches a printing machine which is using a rotating drum with a silicon surface rather than the conventional serigraphic printing process. Thus, it is possible to print colour patterns onto tiles which are never the same, opening the possibility to create, for instance, marble-appearances with conventional glazed tiles. This innovation not only opens the way to substantial sales of the new machine but also secures a constant inflow of cash since the manufacturer offers its customers to produce the rotating drums according to their specifications.

Second, there are producers of glazing materials (colorifici). Technically, this is a subsector of the chemical materials industry. It is a sector which has undergone profound restructuring in the past 20 or so years. In the old days, manufacturers came from different countries, and not always from places with strong tile industries; leading manufacturers then were Colorob-bia (Italy), Degussa (Germany),5 and Ferro and Johnson (U.S.). However, today the sector is dominated by Spanish firms, all of which have their headquarters and main laboratories in the Castellón region, and the four firms mentioned before also have located their main tile-related operations there, with both types having affiliates in several other countries as well. This was due to strong and sophisticated demand from local tile manufacturers which differed from their Italian competitors in two respects:

They used a different kind of clay, one which was more tricky in achieving high-quality, especially a homogeneous quality of the surface. Learning to deal with this challenge was one of the elements in establishing a technology-based competitive advantage for Spanish glazing producers.

They pursued a more scientific approach to the production process, trying to get a pro-found understanding of issues such as sintering kinetics inside tiles while they move through the kiln. This, in turn, is one of the basis of their ability to give technical assist-ance to the tile manufacturers.

Since rivalry between producers glazing materials is strong, they are constantly seeking for ways to establish a competitive advantage. One way of doing so is free technical assistance to customers. Another way is to offer new designs for free to the customers, thus creating a de-mand for the own glazing product. The core competence in design is therefore moving from

5 In August 2001, Degussa sold its glaze-related business unit to Ferro.

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tile to glazing manufacturers. Producers of glazing materials have large in-house design de-partments. While a typical tile manufacturer in Castellón may have three designers, the lead-ing producer of glazing materials has 40 in Castellón and more in the affiliates, while the total number of employees is less than one thousand, distributed across factories in eight countries and representative offices in some more.

Competition within each of these two supplier industries, as well as between them, is defining a key element of the pattern of competition in the tile business, namely frequently changing products, not with new, but only incrementally different designs being launched on a quarterly basis but also radically different designs coming up every year.

3.3 The demand side

So far we have looked at the supply side, i.e. the input and production stage of the tile value chain. Let us now have a look at the demand side, i.e. the distribution and sales part of the tile value chain. In order to get an adequate understanding of the tile business it is essential to re-call that, first, it is part of the construction material industry and that, second, tiles are compet-ing with other materials used to cover floors and walls, be they inside or outside buildings. This may appear trivial, but it has important implications for the industry:

It means that tiles are a durable consumer good, and a specific one since an individual over the course of his lifetime will purchase tiles less frequently than, say, a car or a TV set. This, in turn, gives rise to problems of information asymmetry which create specific problems in terms of brand-name strategies.

Being part of the construction industry in many places also means that informality is a is-sue which is not alien to the business. This, in turn, creates a specific setting in terms of business-government relationships, and it also means that the mindset of tile firm owners is not necessarily of the MBA-variety.

Competing with other covering materials means that tile manufacturers have to be aware of tendencies in neighbouring industries with substitutive products. It is, however, import-ant to note that in the recent past it was rather firms in neighbouring industries, such as marbles, granite, vinyl, wood, and carpets who were losing market share to tiles.

Competing with other covering materials means different things in different markets. One of the reasons why Italy and Spain are the leading suppliers of the world market is that do-mestic demand has been very strong in these countries, something that can be explained with customer preferences shaped by the peculiarities of the local climate. In these coun-tries, it is not rare to find that all the floors in a house are covered with tiles. In countries with moderate climates the use of tiles tends to be more limited, especially to those parts of a house where hygienic considerations are important, i.e. kitchens and bathrooms.

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A further issue in being part of the construction business has to do with the structure of com-mercialisation. There are two issues, namely who exactly is the customer and who is going to attend the customer.

There are basically three types of customers, i.e. tile-purchase decision-makers, namely consumers, architects, and construction companies (in countries such as Germany this in-cludes small specialised tiling firms). Each of them has a different way of making a pur-chasing decision, and is using different criteria. Consumers have usually little information, make their decision based on aesthetic and price criteria, and demand basic advice at the point of sale. Architects are well-informed, need more sophisticated information, and have a more refined set of aesthetic criteria, making them the most sophisticated customers in this respect. Construction companies are mostly interested in a low price. This diversity creates challenges for tile producers in terms of advertising and product information.

There are three, and in some countries four, types of points of final sale. First, there are in-dependent shops specialising in tiles. They cater to the medium- and high-price segment. They often have alliances with tiling firms, or even have their own tilers. Second, there are home-centres and DIY shops, such as Home Depot, Obi, and Le Roy Merlin. They cater to the low- and medium-price segment. Third, there are construction companies. Fi-nally, in the U.S. there are floor covering shops which used to sell mainly carpets and vinyl but have recently started to sell tiles as well. All of them may purchase tiles from wholesalers, but it is increasingly common for manufacturers to deal directly which final sellers, especially large chains of home-centres and DIY shops.

What are the main tendencies in terms of commercialisation? So far, commercialisation of ceramic tiles is not particularly concentrated. A large tile manufacturer may have as much as 4,000 customers. However, industry insiders are anticipating, and in mature markets such as Germany already clearly discerning, a strong concentration process in commercialisation, in particular a strong growth of chains of home-centres and DIY shops. This tendency would have two collaterals. First, intermediate actors, such as import agents and wholesale traders, may suffer or even disappear. Second, it is likely that there will be a polarisation in tile de-mand, with a strong demand both for cheap tiles (sold in home-centres and DIY shops) and for fashionable, design-intensive, high quality tiles (sold in specialised shops), with the middle segment slowly disappearing.

What is the importance of brand names in this industry? Regarding final customers, especially individual consumers, it is low. Only few firms found it worth the effort to create a brand im-age with individual customers; examples are Marazzi from Italy and Porcelanosa from Spain (albeit mostly in its home market). Brand image seems to be more important in terms of inter-action with shops. We will come to this point in particular in analysing the Italian cluster.

We summarise this section by mapping the value chain of the tile industry (Figure 3). It de-picts the actors, but from a rather technical perspective. It gives a rough overview of the vari-ous types of supporting industries and institutions, it mentions the alternatives for vertical in-

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tegration at the early stage of the production process, and it depicts the different sales chan-nels.

4 The competitive game in the tile industry: Italy vs. Spain

The dominating forces in the tile industry are the companies in the clusters of Sassuolo, Italy, and Castellón, Spain. In this section we will look at each cluster. An investigation of the com-petitive advantages and disadvantages of each cluster leads to the observation of striking dif-ferences. Table 2 summarises the main observations. Essentially, the strengths of one cluster are the weaknesses of the other and vice versa: Italian firms have a profound tacit knowledge, Spanish firms a profound scientific understanding of the production process. Italian producers have a keen sense of design and style, something their Spanish competitors find difficult to match, but they are good when it comes to technical specifications. The Italian cluster has very competent capital goods producers and is not very sophisticated in glaze production, in Spain it is vice versa. Italian firms excel in sales and customer service but are heavily depend-

Figure 3: The value chain of the tile industry

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ent on few export markets, whereas the Spanish firms are less competent in sales but very good in identifying niches and diversifying export markets.

4.1 The Sassuolo cluster

90 % of Italy’s tile production capacity is located in the Emilia-Romagna region, with 80 % being concentrated in 80 km² of ten municipalities around Sassuolo in the province of Mod-ena, with some firms being located in the neighbouring province of Reggio Emilia. The in-dustry builds upon a centuries-long tradition in craft-based ceramics manufacture. Today’s firms were mostly created in the post-war period, when the reconstruction of Italy created a strong demand for construction materials. Business-founders often had a background in agri-culture, and it was not rare that the availability of clay on a rural estate was an important ele -ment in generating the idea to start tile production.

Table 2: Industrial organisation in Sassuolo and CastellónSassuolo Castellón

Cluster paradigm

Style, design, image, tacit knowledge Technology, scientific understanding of production process

Main competitive advantage

DesignBrand image, Made in ItalyCompetence of sales repsCustomer service; quick delivery

Aggressive business culturePrice/quality ratioSpecific designReliability

Cluster weakness

Collapsed infrastructure (transport); limited effectiveness of collective action

Dominance of technology-based paradigm

Competitive strategy

Technological leadership (capital goods)Design leadershipNew applications for tilesForward integrationInternationalizationMergers and acquisitions – economies of scale in production, diversified brands

Product / design differentiationProduction competenceFast follower

Product diversification strategy

To complete the product scope to supply a larger range of end markets; implemented by acquisition of medium sized specialised firms

To complete the product scope to supply a larger range of end markets, with different demand levels; only local investment in expansion of production capacity

Commer-cialization structure

Own distribution network seen as key by leaders; own managers present in main markets; specialised retail shops offer specification and installation services

Leaders target high-end segment by own distribution network building; brand development; specific design

Vertical integration of tile firms

Medium to high Low

Industrial structure

Holdings of several specialised, legally independent firms

Few groups, mostly independent family-owned firms

Internationalization strategy

Global presence in all potentially relevant marketsFDI in main markets

FDI by glazing producersNo FDI in tile production

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4.1.1 Stage of industrial evolution: Consolidation

In order to understand the evolution of the Sassuolo cluster it is useful to look at the evolution of the number of firms and the number of employees (Figure 4, Figure 5). The number of firms grew until the late 1970s but has been decreasing ever since, whereas the number of em-ployees has been more or less stable. Behind this is the fact that since the 1980s the industry has been going through a process of concentration, with no new tile manufacturers entering and many producers being taken over by other firms. But there is not just concentration. Re-structuring of the cluster displays a tendency towards polarisation. The dominating trend is to-wards consolidation. The secondary trend is towards specialisation, in particular on special parts. The final row in Table 5 indicates that the number of specialised firms is decreasing, but there is still a substantial number of them.

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There are two typical pat-terns of concentration. First, there were frequent minority cross-holdings between firms which at some point in time were transformed into more formal ties, creating a holding. Second, basically all the firms were family-owned, and in some cases families opted for selling the firm rather than going through the trouble of an intra-family management succession.

Figure 4

Figure 5

Figure 6

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One would expect that concentration involves an attempt to create economies of scale. This has been the case regarding production, but much less regarding branding and sales. A typical pattern was that the formation of a group led to better utilisation of existing production capa-city. As overall demand was growing more or less all the time, every firm was expanding all the time. However, competitive pressure forced the groups to improve on efficiency of pro-duction. Consolidation was linked to upgrading as with the formation of a group the produc-tion of a given brand could take place in any factory of the group, leading to improved utilisa-tion of production capacity.

Why were there only few cases where a group would create a single brand? Marazzi, the largest firm, is a rare example in this respect. A typical large group, such as Iris or Cisa-Cerd-isa-Ricchetti, has something like four to six different brands. One or two of them may be product- or segment-specific brands, whereas the other brands cover the same, usually the en-tire, product spectrum and thus compete against each other. This may appear bizarre, but there is a clear logic behind it which is related to the fragmented structure of commercialisation. Let us assume that in a given region, say Sussex, there is one major tile store which is selling Ric-chetti, apart from Iris and Marazzi. If we now assume that in the same region a major home-centre establishes itself, the Cisa-Cerdisa-Ricchetti group would like to get some shelf-space there, too. But if the home-centre started to sell the Ricchetti brand, the tile store probably would kick it out of its offer. The way out is to continue selling Ricchetti to the store and to sell Cisa to the home-centre. This is the reason why many groups do not only maintain paral-lel brands but also parallel sales organisations (albeit not necessarily parallel logistics opera-tions).

Current changes in terms of segmentation strategies refer to the issue of branding. There are two distinct manifestations. First, some firms opt for brand image transfer, for instance by launching a tile collection under the Laura Biagiotti name. This is part of an effort to widen the high-end of the market. It is not yet clear whether this is really an important tendency. Second, some large firms are producing private labels for large customers, especially home-centres. This is part of an effort to stimulate growth at the low-end of the market. In other words, producers have a clear notion that upgrading by moving exclusively towards the upper end of the market is not a viable option.

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4.1.2 Structure of the value chain: Downstream activities

For the Italian tile producers, a key issue in upgrading has been restructuring of the down-stream part of the value chain. Starting in the 1970s, Italian firms started systematically to ex-plore export markets. Leading firms, such as Marazzi, undertook a serious effort to create a brand identity abroad, but it was mainly the Tiles from Italy label which made the difference, with Italian tiles having both a different appearance and more diversified sizes than those pro-duced locally in target markets. Tile manufacturers also started to collaborate with external designers and artists to create innovative designs. In this era, it was essentially by combining a superior production technology and efficiency with superior production design and market-ing effort that the Italian tile industry established a clear leadership position, driving tradi-tional competitors such as German firms out of the market.

More recently there has been a causal link between concentration and internationalisation. Ex-ports have doubled in the 1990s (Figure 6). Italian firms argue that there are minimum size re-quirements in order to be able to be present in several export markets, which are due to pro-duction capacity and size of the sales force. Internationalisation so far mostly means having sales representatives and in many cases distribution warehouses in target markets. Internation-alisation of production so far is a rare phenomenon. An early mover in this respect was Marazzi, which set up factories in Spain and the U.S. in the 1980s. The second largest group, Iris, keeps all its production in the Sassuolo region. The third largest group, Cisa-Cerdisa-Ric-chetti, has affiliates in Finland, Sweden, and Germany, which is not so much due to a clear strategy but rather to the fact that Ricchetti for some time was owned by a foreign conglomer-ate which merged it with its factories in those countries and then decided to leave the tile in-

Table 3: Diversification in Cluster of Sassuolo (number of firms)1987 1990 1995

One-product specialised firms 252 207 143Two-products specialised firms 74 101 50Diversified firms 29 39 147Total 355 347 340

Table 4: Sassuolo: Number of productive facilities by Firm1987 1995

Firms with 1 plant 315 283Firms with 2 plants 25 39Firms with 3 and more plants 13 20Total number of plants 415 435Total number of firms 353 340

Table 5: Sassuolo: Vertically Integrated and Specialised FirmsType of Firm 1988 1995Vertically integrated 123 172Specializ. on tile body 8 5Specializ. on glazing or 3rd. fire 128 83

Source: Cer Annuario, in Bursi (1997).

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dustry altogether. The only other group with a strong manufacturing presence abroad is Florim which has taken over a major but bankrupt U.S. manufacturer.

Italy’s tile export structure is highly concentrated, with about half of total exports going to just three markets (Figure 7). Two of them are growing very little, whereas the U.S. market is displaying strong growth. Italy’s market share in the U.S. is twice that of Spain, its main com-petitor, and it is essential for Italian firms to defend their leadership in the U.S. market if they want to keep their exports growing strongly.

Italian tile manufacturers, especially the leading firms, appear to be relatively powerful actors in international value chains. This does not mean that they can dominate the chain to any ex-tent. But they play an active role in shaping the chain, especially in terms of influencing changes at the commercialisation stage. This is particularly evident in the U.S., whereas in Europe it appears that home-centres are, at least in some countries (such as Germany, the largest market), the more aggressive actors. Table 6 gives a overview of the different constel-lations. Particularly important is the difference regarding the sophistication of markets, in par-ticular with respect to the competence of sales chains. In the German market, where tiles have a long tradition, the sales structure is much more mature than in the U.S., which are an emer-ging market in terms of tiles. In the German market a tendency towards consolidation of sales chains is clearly visible, changing the distribution of power between suppliers and customers. In this setting, it is more difficult to keep the customer happy than in the U.S. There, tile pro-ducers are constantly training sales personnel of their customers, starting from a low level of sophistication. In a mature market like Germany this kind of approach is not promising.

Figure 7

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4.1.3 Structure of the value chain: Upstream activities

So far we have looked at the downstream elements of the value chain and their importance for upgrading among tile firms. But it is not only downstream that we find elements to understand upgrading. Let us now look at the upstream elements.

The first part of the value chain of the Sassuolo cluster is the delivery of clay, mostly white clay, most of which has to be imported from Germany and the Ukraine; yet access to clay does not seem to be a strategically important issue. Processing of the clay, atomisation and preparation of the biscuit are usually in-house activities conducted by each tile manufacturer; to a limited extent large firms are selling atomised clay to smaller manufacturers. But there are specialised providers for many other important inputs and services: glazing materials, cap-ital goods and informatics, design and special parts, transport, and marketing and sales. We will look at the capital goods sector, which plays a crucial role in the cluster, in more detail in the next subsection.

The production of glazing materials nowadays is dominated by Spanish producers. Even the single remaining important Italian producer, Colorobbia, has moved central functions to Cas-tellón. The reason for this shift is the fact that Italian tile manufacturers have shown much less propensity to outsource more than routine production of glazing materials. There was less de-mand, and in particularly less sophisticated demand, for glazing materials in Sassuolo.

Table 6: Structure of commercialization in key marketsDestination Market Distribution Structure Italian Position / StrategyUSA (North) Large intermediaries (Home-centres,

Carpet-chains). Product parameters trend to be supply-driven.

Market advantage of “made in Italy”, competent sales force, and design oriented to local taste. Logistic efficiency. Assopiastrelle wants to provide sea cargo in the Atlantic routes.

USA (South) Rather smaller distributors. Broad network of both Italian and Spanish representatives, which contact directly to retailers. Tastes are more similar to Mediterranean.

Competent sales force to contact retailers. In addition, direct investments of some groups to produce in USA the lower quality tiles. Effort to integrate forward into sales.

South America Less sophisticated market, price oriented; large importers/distributors

Marginal position, no advantages of Italian product (too expensive)

Germany Strong tendency of polarization between low- and high-end. Growth of home-centres to the detriment of traditional shops and wholesalers

Leadership due to better image of white body tiles and loyalty of customers.

South-West Europe Dominated by small distributors. In many cases, direct contact between manufacturer and retailer

Strong position in domestic market and Greece. French market is shared with Spanish product.

Central Europe Dominated by large distributors which serve small retailers. Tastes trend to follow the German market, but there are some differences

Similar to German market, but there are exceptions (Poland)

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Another important type of specialised firms are design and special parts firms. The largest of these firms has more than 100 employees, many of them designers. They develop design con-cepts and entire collections of tiles. They are also subcontracted by tile producers to manufac-ture special parts.

Another type of specialised firms are those active in sales, in particular tradings. Italian tile manufacturers so far do not have their own sales chains (with the exception of two large groups in their U.S. operations), and not all of them have their own sales reps in target mar-kets. This opens an important niche for trading firms.

Performance of the capital goods industry

Italian firms are dominating the production of capital goods for the tile industry. More than 56% of the capacity are located inside the Sassuolo cluster, and many of the other firms are not far away (for instance SACMI, the largest manufacturer, is located in Imola, some 40 km away). Capital goods are thus not only a crucial part of the tiles value chain but also of the cluster.

Since the 1970s capital goods producers came up with major innovations such as wet grind-ing, pressing with high tonnage machines, roller kilns, and increasingly sophisticated control instruments (Burzacchini 2000, 98). Wet grinding allowed a much better control of the mass which enters into the press, thus homogenising product quality. Improved pressing had the same effect. The introduction of roller kilns shortened the firing process, thus not only im-proving quality but also reducing production costs and improving the control of the firing pro-cess. Another important innovation (albeit pioneered by customers in Spain) was the single firing process. Whereas traditionally there were two firing processes, with the glazing mater-ial being added and fired after the biscuit had already passed through the kiln once, with the single firing process the pressed biscuit was covered with glazing material before entering the kiln.

The capital goods industry has gone through a turbulent decade. Demand expanded strongly in the first half of the 1990s, driven by domestic expansion, but much more by a strong in-crease in exports, in particular to Asia. In the peak year 1996 more than half of total exports, i.e. about EU 650 million, went to Asia. With the Asian crisis demand dropped sharply, amounting to just EU 130 million in 1998. The impact on the industry is clearly visibly in Figure 9, i.e. the number of firms in the industry and of employees dropped.

One of the main responses in dealing with fluctuating demand is outsourcing. Bursi and Mar-chi (2000) report an increasing tendency towards outsourcing, being used by 50 % of the firms. For the subcontractors, the main customer represents on average 30% of the sales, and the main 3 around 55%. More than 25% of subcontractors concentrate on the main 3 custom-ers more than 75% of their sales. There have been no major changes regarding this latter over the last decade. The perception of subcontractors with regard to its relation with final produ-

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cers is one far closer to a buyer oriented chain. To confirm this, the subcontractors inform that the average duration of the subcontracting relationship with a customer firm is 7 to 8 years.

In the second half of the 1990s, there was not just a drop in demand but also a change in the type of demand. The demand for turnkey plants dropped close to zero, and sales of kilns in 1999 were less than half of the 1996 value. Sales of presses, glazing equipment, and handling equipment remained roughly stable. There are two distinct reasons for the latter:

Presses and glazing equipment have to be upgraded constantly to keep abreast with product innovation. To put it differently: There is a clear incentive for machinery produ-cers to come up with new types of tiles which can only be manufactured with new kind of equipment, i.e. in-house development of tiles by machinery producers generates a demand for machinery.

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The tile production process is highly automated, and still there are continued efforts to re-place labour with machinery. In the case of Sassuolo, the motivation is not only high wages but also the sheer lack of workers. Ongoing automation has led to features such as fully automated packaging and palleting and laser-guided vehicles.

Interaction between machinery and tile producers

The relationship between tile manufacturers and capital goods firms is profoundly different from that with glazing producers; it is much less hierarchical, and if there is a power disequi-librium, then it is to the detriment of tile manufacturers. To start with, the large capital goods producers are much older than most tile manufacturers; the largest firm, SACMI, started as a co-operative of craft-shops in 1920. In the case of Sassuolo, it is capital goods manufacturers

Figure 8

Figure 9

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who drive technological innovation. When they come up with new types of equipment, they will often install it at one of the tile factories and refine it through on-site experimentation. This will involve the acquisition of a new piece of equipment for free, or at least at a substan-tial discount, for the tile manufacturer. This is the main explanation for the claim, sometimes heard in other countries, that Italian tile firms pay less for equipment. They also enjoy some privileges in terms of access to latest innovation. However, this does not involve exclusive re-lationships. The capital goods manufacturers sell their products to whoever is willing and able to pay. For instance, in the first half of the 1990s they sold huge numbers of turnkey plants to Chinese firms, and there is no indication that this involved any outdated equipment.

One might expect that there is highly conflictive relationship between capital goods and tile manufactures, since the former are very active in creating competitors for the latter. But they seem to have found a way of not letting that conflict become too manifest. It is notable that even though Chinese or Brazilian firms may have the same equipment which is in use at Italian tile manufacturers, the style and elaboration of their products comes nowhere close to that of Italian producers. This has to do with the transferability of tacit knowledge. First of all, tacit knowledge by definition is difficult to transfer. But there seems to be another important factor. As our research in Brazil clearly showed, customers in that country conceptualise tech-nology transfer as the acquisition of equipment plus some training, whereas Italian suppliers are well aware of the fact that it is the other way around, i.e. some equipment plus lots and lots of training. But the suppliers are happy to leave customers abroad in their misbelief rather than enlightening them since this reduces the level of conflict they have with domestic cus-tomers who are not quite happy about the creation of production capacity elsewhere. By leav-ing customers abroad in their self-chosen ignorance, capital goods producers are causing somewhat less headache for Italian tile manufacturers.

Perspectives of technological upgrading

At the Ceramics Technology Fair in Munich in October 2000 the machinery firm System (which is based in Fiorano in the Sassuolo-cluster) launched a new product and production process. System had already revolutionised the glazing process in the 1990s when it intro-duced the Rotocolor machine. This time, the impact of its innovation may become even lar-ger. The new product, called Lamina, and the new process, called Sinterflex, are radically dif-ferent from established practices. Lamina has an appearance and physical characteristics which are similar to porcelain tiles, but it is just 3 mm thin (very thin tiles come down to 6 mm) and it comes in panels of 90 x 250 cm. The process departs from the current practice in several respects. The press is much smaller but stronger. The kiln is based on electricity, per-mitting much shorter shutdown times and a better control of the process. The whole produc-tion line has an extension of less than a third of a conventional kiln; counting the extension of a normal glazing line as well, the size comes down to one tenth. The new process will be tested for another two years in collaboration with something like five manufacturers and will then be launched commercially.

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The response of the tile producers in the cluster gives an idea of their current level of compla-cency. Five of the large firms jointly asked System for an exclusive contract, promising quick amortisation of the investment involved in development of the new technology. At the same time, firms from all over the world are queuing at System to be the first to acquire the new process, and this includes not just tile manufacturers. As the new process invalidates a large part of the tacit knowledge which is one of the advantages of the Sassuolo cluster, it opens a window of opportunity for competitors such as Pilkington or Eternit to enter the tile industry – or whatever this industry will then be called.

Inside the cluster, at the time of the launch the predominant view was that this was not really a product competing with tiles. Current efforts to make sense of the new product point at ap-plications such as surface covering of buildings or use to cover furniture (for instance, in the kitchen). Another suggestion is that the panels may be cut into parts of the usual tile size, but this is not particularly convincing. It is rather likely that the new product will be used for pur-poses which nobody can imagine right now. It certainly will be very important for technical applications, e.g. floors in airports, train stations, etc. But this is where many industry sources also see a strong growth potential for porcelain tiles. One can conceive that Lamina induces a process of cannibalisation, seriously cutting into the market for porcelain tiles, i.e. the flag-ship product of Italian tile manufacturers and the backbone of the Sassuolo cluster.

The trend from glazed tiles to porcelain tiles so far benefits, most of all, the Italian industry since it is the Italian machine producers who dominate this technology. In the Spanish in-dustry, the colorifici have a very strong position and are main push element in terms of tech-nological innovation. However, their position is bound to weaken with the increasing use of porcelain tiles.

On the other hand, the advent of new products such as Sinterflex is jeopardising the Sassuolo cluster. Science-based products and processes erode one of the two locational advantages of Sassuolo tile manufacturers, namely the employees' tacit knowledge, enormous experience, and deep familiarity with tiles; the other advantage is style and design creation, but this fol-lows a product-out logic and may be jeopardised by other clusters which develop a good un-derstanding of final customers’ behaviour. Initially, all this will put a pressure on tile manu-facturers and may induce a major crisis of the Italian tile industry. But since the machine pro-ducers very much rely on close interaction with local producers, they are at risk as well.

4.1.4 Structure of supporting institutions

The story of Sassuolo we have told so far does only to a limited extent fit with the textbook model of an Italian industrial district. Large firms and groups are emerging, which are vertic-ally integrated. Informal horizontal collaboration between tile producers is limited. There is close, informal collaboration between machinery manufacturers and tile producers, but then the machinery manufacturers sell to customers from all over the world. To what extent is there formal collaboration to create the active dimension of collective efficiency?

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The big event in the tile industry is Cersaie, the annual trade fair in Bologna. Cersaie is being organised by Assopiastrelle, the association of Italian tile manufacturers. Assopiastrelle, which occupies an impressive palazzo in Sassuolo, is one of the two main associations in the cluster; the other one is Acimac, the association of the capital goods manufacturers. Looking at the palazzo and realising that Cersaie is the one big event in the tile industry one may get the impression that the Sassuolo cluster is good at collective action, thus verifying what is commonly perceived as a strong point of Italian industrial districts. Yet a closer look does not quite corroborate this expectation.

Apart from Cersaie, Assopiastrelle is pursuing a number of activities which can be subsumed under three main headings: services for member firms, representation of the sector, and re-search and documentation of trends in the industry. The most effective services are those which relate to sales or to immediate problems. Cersaie is an example of the former, and the organisation of a strong Italian presence in trade fairs in other countries is another example.

Regarding immediate problems, there are two of them which Assopiastrelle is currently tack-ling. One of them is transport, the other one the environment. There are 5,000 trucks which are circulating in the cluster per day, and the sad truth is that much of their time they are not circulating but stuck in congestions. Assopiastrelle has founded Assocargo, which is operat-ing as an independent firm to co-ordinate transport in the cluster, both for incoming clay and for outgoing tiles. The idea is to use the truck capacity more effectively and thus to reduce the overall number of trucks. In fact, this is also the main environmental challenge these days, since other problems such as hazardous emissions and waste generation have by and large been solved (the latter by developing low-price products based on scrap and residuals of the process).

As a matter of fact, the current state of the infrastructure in the cluster casts doubt at the state-ment one sometimes hears that Assopiastrelle is politically a relatively influential association. One of the firms not related to tiles which is located in the cluster is Ferrari. If Ferrari wants to run a test to figure out how its cars behave under rough road conditions, it has to send a test driver out of the factory and let him turn right at the next crossing. There he enters the main east-west axis of the cluster, and this road is literally breaking apart, being in a state which is comparable to roads in Eastern Germany before reunification. If Assopiastrelle were really powerful one would have expected that it had leveraged its influence to have that road re-paired.

The other important association is Acimac. Its profile is similar to that of Assopiastrelle, but it appears more effective. In terms of services, it is promoting the tile machinery industry, for instance by organising joint stands at foreign fairs. It is also supporting member firms in terms of information about technical standards and quality issues. Moreover, it is organising short-term training courses abroad which cater to employees of customer firms. In terms of interest representation, it is representing the sector vis-à-vis Italian embassies abroad, and it is lobby-ing in the context of international negotiations about tariff reductions. In terms of information, Acimac is the most important place regarding information about the global tile industry. Since

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Acimac members sell to firms all over the world, it is essential to be up-to-date with sector trends all over the world. Accordingly, the trade journal which is sponsored by Acimac (Ceramic World Review) is a gold mine of information about the tile industry.

Apart from the two associations, the structure of supporting institutions is remarkably under-developed. There is one technology institute related to the sector, the Centro Ceramico Bo-logna (CCB), which recently set up a small affiliate in Sassuolo. CCB is part of the ERVET system of business support institutions which is maintained by the regional government. It is doing research about several issues related to ceramics, but its main activity is related to test-ing and certification, and this seems to be clearly separated from research activities. CCB is collaborating with the Universities of Bologna and Modena to offer engineering courses with a specialisation in ceramics. In any case, CCB is in no respect comparable with the techno-logy centre in the Castellón cluster. Then there is the Scuola de Arte in Modena which is an important source of design talent for the industry, although it is not specialising in tiles. And finally, there is Cerform, the vocational training centre in Sassuolo which, after intense nego-tiation between municipal governments and the two associations, was dedicated exclusively to training of ceramics professionals since the mid-1990s. Its annual output amounts to some 60 graduates, which is short of the needs of the industry.

Evolution of local governance

There are several examples which show that local governance for upgrading the cluster is working to a degree. The redesign of Cerform is one of them, the creation of Assocargo is an-other one, and the Cluster-EMAS may become another one in the near future.

An issue which is related to upgrading and competitive advantage is the environment. One of the big issues in the cluster is EMAS, the EU certification for environmental management which is more comprehensive than ISO 14 000. Many of the firms have already been certi-fied, and Assopiastrelle propagates the idea to certificate the cluster as a whole. Behind these achievements is the fact that the tile industry is not necessarily environmentally benign. In the early 1970s, daily emissions of fluoride in the cluster amounted to 2 tons. With the use of fil -ters and changes in the production process, this has been reduced to 0.5 tons, with a much lar-ger overall production volume. Other issues are the high energy intensity and water consump-tion.

However, it appears to the external observer that collective action is not what it might, and what it probably ought to be. The cluster appears somewhat complacent, something that is not surprising given the successes of the past. But it may jeopardise the future of the cluster; the box develops a possible scenario of how the decline of the cluster may occur.

In fact, some local actors do complain about the deterioration of the effectiveness of local governance. However, the opinions regarding the underlying reasons are divided. Some people point at traditional rivalries between families. Others complain about a lack of stra-

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tegic vision, and sometimes relate this to a lack of "hunger" which is supposedly due to the fact that all the founding families are quite rich nowadays. We shall argue below that, even though these arguments are certainly valid, a look at the evolution of value chains provides us with a more rational explanation.

Collective action in the Sassuolo cluster exists, but, as we will see, to a lesser degree than in Castellón. The reason mentioned by local sources (personally motivated rivalries and aver-sions between families) appears not particularly convincing, since the situation in Castellón is not different in this respect. It makes more sense to assume that there is limited collective ac-tion because the key actors believe that this is sufficient. This is even more so as the industry has not really suffered a major crisis (like the one which hit the Brazilian industry in 1990) for decades. The Sassuolo cluster sees itself as the leader in the industry, and there seem to be few actors who have any inclination to consider strategic challenges, let alone suggest pre-ventive action to prepare for those challenges. At the same time, it is difficult to guess what may happen once a major challenge appears. The most likely challenge is a contraction of the U.S. economy with a concurrent severe drop in tile demand. One might argue that such a situ-ation might hit the Sassuolo cluster much harder than its competitors. But since the institu-tions are in place and there is probably still some social capital left, one might also conceive a strong collective response of the cluster.

We have argued above that the concentration in the tile industry process is, among other things, motivated by marketing considerations. It seems that the concentration process in itself is one of the factors which contribute to the deterioration of local governance – firms are get-ting larger and thus more confident to be able to solve problems on their own. But there is a further aspect which connects marketing and local governance. What has been receiving the largest attention in the industry in the last years has been the U.S. market. This market ap-pears to be in a process of profound transformation, and it appears that firms perceive the cur-rent situation as a window of opportunity, a kind of now-or-never-constellation. They try to establish for themselves a position which is expected to guarantee them success in the future. The implicit key hypothesis is that there is only so much opportunity to either take over one of the few existing relevant sales chains or set up an own distribution structure from scratch. Those firms who do not establish this kind of position now are facing an uncomfortable fu-ture. In other words, a fierce struggle is on, not only putting Italian firms against Spanish ones but also, and most of all, putting the major Italian firms against each other. Our hypothesis is that this is creating a constellation where collaboration between these same firms is unlikely, except for the most pressing issues.

4.1.5 Trends in upgrading

To sum up the analysis of Sassuolo let us come back to the issue of competitive advantage and upgrading. The tile firms in Sassuolo benefit from specific competitive advantages along the entire value chain, and they try to leverage them to sustain their competitive position.

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Product development

One of the key competitive advantages of Italian tile manufacturers continues to be differenti-ated product design. There is constant upgrading in this respect. In order to explain the design competence of Italian producers, one can point at two aspects.

First, there is the Italian lifestyle explanation. Italians, this explanation goes, in general have a special sense of aesthetic values, they are just better in design than most other people, and local demand is particularly sophisticated in this respect. This applies to all sorts of products, including tiles. And in fact there are strong influences between different segments, with trends in fashion and in other areas of industrial design having a strong influence on the design of tiles. Moreover, this explanation also includes a further aspect, namely that by purchasing an Italian tile one does not just acquire a piece of floor or wall covering but actually a little bit of the Italian way of life, something which seems to be highly valued in many countries.

Second, there is a high level of professionalisation and sophistication regarding design, not just within tile firms but also among specialised design and special parts firms and capital goods producers. Design firms come up with highly differentiated collections, most of glazed tiles, whereas capital goods producers have been the main force behind the emulation of nat-ural stone with porcelain tiles.

Production

Italian producers (more specifically: highly experienced and skilled, albeit often not formally high-trained workers) have a touch and feel for ceramic tiles which is undisputed. It has been accumulated over centuries and may therefore be engrained in the genetic code of the local population. Rather than controlling production in a scientific way, they just know what kind of minor adjustment in kiln temperature, mix of mass or glazing material will create exactly the appearance they want, in particular when it comes to creating a rustic look. Spanish or Brazilian producers are perfectly capable of creating attractive rustic tiles, but they do not quite look as Italian as those from Italy.

Apart from the tacit knowledge of tile firms’ employees there is also the thorough understand-ing of the technological issues of tile production which is resides in the capital goods firms. They do not only maintain a quick rhythm of innovation but also assist tile manufacturers in solving production problems. Close interaction between tile manufacturers and capital goods producers creates a competitive advantage for both.

Distribution and sales

Italian firms have excellent salespeople, who are not just extremely well-dressed and well-mannered but actually extremely competent in creating a feelgood atmosphere which appeals

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to customers not only of the female gender, whereas for instance the service culture in the Castellón region ranks even behind that of Germany regarding features such as friendliness. Therefore, even if the Italians had just the same product as everybody else, they might be able to sell it for a better price; even their Spanish competitors recognise this.

A more tangible competitive advantage of Italian tile manufacturers is quick delivery. This is based on two factors. First, stocks are deliberately kept large; they amount to about three months of production. Second, there is also upgrading, in this case in terms of distribution where manufacturers have created systems which allow them to deliver a given lot of tiles to any place in Germany, the main export market, within four to five days. The most recent up-grading initiative in this respect was the creation of Assocargo, a collective logistics solution.

The competence of Italian firms in sales and after-sales services is thus undisputed in the in-dustry. In emerging markets such as the U.S. further features are important, such as training of vendors, product information, and providing general information on tiling. It is obvious that somebody who has been selling carpets for most of his life will need more than just a bro-chure to give qualified advice on selecting tiles, and Italian firms are offering training in this respect. Also, apart from individual firm advertising efforts it is important to launch generic promotion campaigns for tiles.

The current effort to create a competitive advantage focuses at the final stage of the value chain, i.e. retail trade. Leading firms expect to establish a decisive competitive advantage by controlling final sales outlets.

4.2 The Castellón cluster

Tile production in Spain has grown strongly in the 1980s, with total output doubling. In the course of the 1990s, production has virtually exploded, growing almost threefold (Figure 10). In 1998, there were 242 tile manufacturers in Spain, of which 190 were located in the Cas-tellón cluster which accounts for 93 % of Spanish production. The overall number of employ-ees in tile firms grew from 16,800 in 1995 to 23,200 in 1999.

The Castellón region has a long tradition in tile manufacturing which goes back to the era when Arabs ruled the region. The process of modernisation of the industry started in the late 1950s with the introduction of electrical presses which were imported from Italy and which substituted traditional man-powered presses. The next important step, beginning in the mid-1960s, was the introduction of tunnel kilns which substituted the traditional circular “Arab kilns”. The tunnel kilns were further upgraded in the 1970s with the introduction of second firing. One of the factors driving demand was the strong expansion of the hotel industry in the region, i.e. the Costa Blanca and the Costa de Azahar. At the end of the 1960s, there were 138 tile manufacturers with 5,500 employees producing 25 million square meters.

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After the second oil crisis, firms started to increase their export effort, in particular to-wards the two neighbouring countries, Portugal and France. One factor to motivate this was a drawback scheme introduced by the national government to reduce the defi-cit in the trade balance. It was important for the tile manufac-turers since they continued to depend on imports of capital goods from Italy. Looking back to that period, industrial-ists admit that the product quality was inferior but im-

proved with increasing exports, reflecting a process of learning by exporting.

4.2.1 Industrial evolution

The turning point of the cluster is the beginning of the 1980s, when several factors converged to improve the competitiveness of the industry:

Government-sponsored efforts to promote the local capital goods industry led to failure and success at the same time. The attempt to build-up a local production base for kilns failed, but the effort led to a better bargaining position vis-à-vis the Italian suppliers, which reduced their prices substantially and started to sell latest-generation equipment in Spain.

In 1981, the region was connected to the pipeline which brought natural gas from Algeria. This was essential to be able to actually employ latest generation kilns, and it implied a massive reduction of energy costs. The earlier generation of kilns had been based on oil.

In 1984, the single firing production process was launched.

The story of massive upgrading in the cluster actually starts with the single firing process. This was the first major innovation emerging from the cluster. Before that, the industry was using a double-firing process, firing first the biscuit alone, then glazing it and firing it again. The point of departure for single-firing was the fact that the Spanish clay is red because it has a higher iron content which leads to different sintering characteristics. The Italian kilns were designed to work with white clay, using double firing, and the quality of the Spanish final product did not match that of Italian tiles. Between 1981 and 1983, engineers from a tile man-

Figure 10

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ufacturer (Zirconio), a producer of glazing materials (Torrecid), and what was to become the Institute of Ceramics Technology (ITC), first part of the University of Valencia and then in the University of Castellón, developed a new process. It involved the development of differ-ent glazing materials and the adaptation of Italian kilns. The result was a process which was superior both in terms of production efficiency and quality of the final product.

Single firing spread quickly in the cluster, reaching the majority of the firms until the end of the 1980s. But it was more than a one-time radical innovation. It shaped the paradigm of the cluster, which has three main elements:

Competitiveness is, first of all, based on technological excellence. It is engineers who rule in the cluster.

Interaction between tile manufacturers and producers of glazing materials is strong, with the latter being a strong push factor in terms of constant upgrading. Both types of firms are interacting on the base of equality (unlike in Italy, where tile manufacturers are stronger).

Interaction between firms and local supporting institutions, in particular ITC, is strong and a key element in technological upgrading.

The second half of the 1980s lay the ground for the massive expansion of the cluster in the 1990s. Tile manufacturers expanded their production capacity and upgraded their products, and the producers of glazing materials did the same. In the case of the tile manufacturers, the strong growth of the 1990s was due both to a strong local economy and a strong increase in demand from abroad.

There are continuing entries into the cluster, both producers of glazing materials and tile man-ufacturers. The typical pattern continues to be the family-owned firm. The vast majority of firms are small- or medium-sized businesses. The typical firm has some 200 employees (Table 7).

So far there is no concentration trend in the tile industry, and as a collateral multi-brand firms are rare. So far, there seems to be sufficient sales potential for everybody, and there is also no generational change which might stimulate mergers or take-overs. Moreover, there is no inter-nationalisation trend in terms of production. There are several reasons for this. First, Castellón displays remarkable locational advantages. It is not by chance that Marazzi, the largest Italian firm, set up its Spanish subsidiary in Castellón. Second, average firm size is smaller than in

Table 7: Size structure of tile manufacturers in Castellón (no. of employees)Size class < 25 25-50 51-100 101-200 201-500 > 500Share of firms (1998) 19,4 % 33,1 % 24,8 % 12,0 % 8,7 % 2,1 %Estimated share of total employees

3 % 13 % 19 % 18 % 31 % 16 %

Source for share of firms: Ascer.

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Italy, and in fact most firms are SME, with insufficient managerial capability to deal with the challenges of managing a multinational operation. Third, there is no necessity since the sector is doing exceptionally well with its current modus operandi.

Despite their smaller size, the general preference of manufacturers in Castellón is to have a broad spectrum of products, i.e. both floor and wall tiles, low- to high-end, and glossy as well as rustic. This reflects an important feature of the business, namely the fact that distributors tend to deal with a limited number of producers, so that gaps in the product portfolio may lead to a discontinuation of business relations with a given customer. The exception from this role are the producers of special parts. Whereas some manufacturers of normal tiles have an in-house production of special parts, many other outsource this activity to specialised producers.

Some manufacturers pursue some rough market segmentation, others rather a country seg-mentation (“this kind of product is much accepted in Germany”). However, the segmentation effort inside the industry seems to be very limited so far, the overall pattern being similar to the product-out strategy which can be observed in the case of Italy.

The marketing competence and sales system of Italian firms seems to be superior (Generalitat Valenciana et al. 1999, 87), but there seems to be only a limited effort among Castellón firms to upgrade in this respect. What they do is to copy something the Italians started to do in the 1980s, namely promoting a “Tiles of Spain” label. Apart from that, it appears that they can count on the fact that potential buyers turn up to acquire their product, which is one of the reasons why tradings play hardly any role in Castellón.

4.2.2 Structure of the value chain: Downstream activities

Even though the export ratio of the Spanish tile industry is lower than that of Italy, Spain is by far the second most important exporter of tiles. Both production and exports are growing, but since domestic demand is also growing, the export share remains stable at around 55 % of value and 51 % of volume.

Spanish exports are less concentrated than those of Italy, at least so far: the strong growth of the U.S. market, and the strong presence of Spanish producers there, may change this in the future. In 1999, the 7 largest markets accounted for 50 % of exports, the 14 largest for 66 % (Figure 11).

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The Spanish tile industry is involved in a global value chain which has a network structure, i.e. involves neither arms’ length relationships nor hierarchical relationships. This applies both to inputs and sales. The problem of one-sided dependency on Italian capital goods manu-facturers was solved long ago. The relationships with glazing producers are based on partner-ship. Local tile manufacturers in Castellón are not exactly happy about the fact that the glaz-ing producers sell their products and give away their know-how and designs to tile producers everywhere, but it is not causing a serious headache, either.

Regarding sales, it seems that tile manufacturers are in a strong albeit not dominating position vis-à-vis buyers. In Spain, there are more than 200 tile manufacturers, and the bigger among them attend the majority of the 3,000 distributors which currently exist in Spain (Bigné 1998) plus a number of customers abroad. It is difficult to imagine that either side can acquire a dominating position. However, it is notable that – unlike Italian producers – Spanish firms display little propensity for forward integration into commercialisation (Table 8). Given the fact that there is a clear concentration process at the commercialisation stage, this may prove to be a strategic error in the long term. At the same time, it must be acknowledged that even the large Spanish firms probably are too small and do not have the necessary capital to pursue a strategy of forward integration into commercialisation, in particular in foreign markets.

Figure 11

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In a diagnostic of the cluster conducted in 1999, the consultants of Cluster Competitiveness recommended that firms should seek a clearer market positioning, forward integration into sales, and internationalisation (Generalitat et al. 1999). For an outsider, this appears as a plausible suggestion, not the least since it comes down to replicating the successful recipe of the Italian industry. However, for the cluster firms the suggestion is less plausible. The firms are hugely successful with their current business model, so there is not reason to move to an entirely different model which poses all sorts of risks and uncertain benefits, even more so since growth and profitability of the Spanish industry are stronger than those of their Italian competitors. At the same time, in particular forward integration appears as a risky, costly concept.

At the same time, it is notable that the Cluster Competitiveness diagnostic is an important point of reference for industry actors, especially since it was based on an exercise which strongly involved them. It may happen that in the near future a learning and discussion pro-cess occurs in the industry which leads to an re-evaluation of the recommendations, especially in the light of the discernible restructuring of building materials commercialisation chain.

4.2.3 Structure of the value chain: Upstream activities

Regarding the structure of the value chain, the Castellón cluster shows several differences compared to Sassuolo – not only, as described before, in terms of downstream activities (i.e.

Table 8: Structure of commercialization in key marketsDestination Market

Distribution Structure Spanish Position/Strategy

USA (North) Large Intermediaries (Home-centres, Carpet-chains). Product parameters trend to be supply-driven.

Followers

USA (South) Rather smaller distributors. Broad network of both Italian and Spanish representatives, which contact directly to retailers. Tastes are more similar to Mediterranean.

Direct investments of the larger firms to have their own magazines. Better position to approach the Hispanic population

South America Markets not so sophisticated, price oriented

Leadership, but it is a relative limited market

Germany Strong tendency of polarization between low- and high-end. Growth of home-centres to the detriment of traditional shops and wholesalers

Marginal position, behind Italy, local supply and Turkey

South-West Europe

Dominated by small distributors. In many cases, direct contact between manufacturer and retailer

Stronger in Portugal, UK and local market. French market is divided, and exporting even to Italy and Greece.

Central Europe Dominated by large distributors who provide small retailers. Tastes trend to follow the German market, but there are some differences

In some countries like Poland Spanish product is the leader, due to design and a more dynamic marketing than Italy.

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only a limited effort to get directly involved in commercialisation activities), but also regard-ing upstream activities.

About 80 % of the clay comes from the larger region, i.e. no more than 150 km away. Whereas Italian manufacturers used predominantly white clay, the Spanish prefer red clay since it is more easily and cheaply available. Both sides claim that their raw material is super-ior, but in fact there is no difference in terms of relevance for the quality of the final product (the only exception being many varieties of unglazed porcelain tiles which can only be manu-factured using white clay). With single firing, Spanish producers were launching products which were comparable to those from Italy. The main difference involved the reverse side, which was red rather than whitish. According to the Spanish firms, the Italian industry launched an advertising campaign which claimed that white-body tiles were superior to red-body tiles, an argument which was repeated over and again by sales staff and thus engrained into the minds of the customers. This campaign apparently was particularly successful in Central Europe, where Italian producers continue to have a dominating position. In fact, the red vs. white controversy to some extent may appear as a conflict between science and belief-systems. But there is also a real issue involved, namely the capacity of Italian manufacturers to create, by means of an advertising effort, the image that white-body tiles are better.

Atomisation, and in several cases also the production of biscuits, has been outsourced to spe-cialised firms which usually have been created jointly by some tile manufacturers. There are clear economies of scale in atomisation, and an efficient atomisation plant would have been too large for most of the tile manufacturers in the 1980s. While this may appear perfectly ra-tional, it is important to note that often the manufacturers which jointly own an atomising op-eration otherwise are rivals. There is, in other words, less vertical integration in Castellón than in Sassuolo; and as further de-verticalisation does not make sense due to the technical logic of the production process, this is a significant difference.

Spanish firms continue to depend on Italian manufacturers for most types of capital goods, the major exception being glazing equipment, where the proximity to the leading glazing produ-cers created an opportunity for local machinery producers. However, it is a mutual depend-ency today. Demand for capital goods is stronger in Spain than in Italy, and Spanish produ-cers appear to be more demanding in terms of technology than those in Italy. Moreover, they tend to be very competent in terms of specifying what exactly they want, rather than just pur-chasing what the Italians want to sell. Accordingly, it is paramount for Italian capital goods manufacturers to have a close contact with Spanish tile manufacturers to remain at the leading edge. An indication of the relationship which is evolving is the fact that Acimac, the Associ-ation of Italian firms manufacturing capital goods for the tile industry, is apparently consider-ing to set up a branch in Castellón.

There is a strong rationalisation potential in logistics, something the tile industry association found out in a recent study. One of the reasons is the fact that delivery lots are getting smaller all the time, as demand becomes more differentiated and distributors reduce their stocks, so that a typical lot size is headed from one container to one pallet to one package. However, so

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far there seems to be little effort to realise this potential. Stocks at tile manufacturers remain somewhere around three months of output.

A serious problem on the domestic market is the low quality of tiling. Consumers complain about the quality of tiles which are breaking apart after installation, but this is due to the inad-equate competence of the tiler rather than the quality of the tile. The obvious response is train-ing of tilers, something the industry is currently promoting.

The role of glaze producers

Looking at the upstream part of the value chain in Castellón, the most important element are the producers of glazing materials. Just as the interaction between tile producers and capital goods manufacturers is shaping the evolution of the Sassuolo cluster, the interaction between tile and glazing producers establishes the paradigm of the Castellón cluster.

The producers of glazing materials have gone through an impressive upgrading process since the 1980s. There was not only an extraordinary growth in exports (Figure 12) but also a massive internationalisation push. Many of the 24 firms from Castellón set up factories or at least distributors in many of the main tile producing countries.

Producers of glazing materials con-tinue to be very important for con-stant product upgrading, even though firms try to strengthen their internal design capacity in order to have some unique designs. Nevertheless, design departments at glazing producers continue to be larger than at tile man-ufacturers, and the top graduates of design courses join glazing rather than tile firms. It appears that the power position of design specialists is stronger in glazing than in tile firms, with the latter being dominated by production engineers.

What may become a challenge for the industry is the Lamina/ Sinterflex-innovation which was mentioned above. Lamina will most likely cut into the sales of porcelain tiles and thus hit Italian firms harder. Glazing producers have already found a way of dealing with porcelain, namely promoting glazed porcelain which makes little sense but sells anyhow. At the same time when System launched Lamina, the largest of the glazing producers came up with a rad-

Figure 12

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ical innovation as well, namely a tile-body which consists largely of glazing materials and frits (and hardly any clay), permitting differentiated designs (“plac-up”).

In fact, the transition to porcelain tiles has not been the kind of challenge to the Castellón cluster the Italian competitors hoped it would be. There is only a slow adoption of porcelain tiles, a finding that reflects the close relationship between tile producers and glaze suppliers, which inevitably would deteriorate with a swift introduction of porcelain. Although at least one local producer is manufacturing porcelain tiles using red clay, the big shift towards por-celain that has been forecasted by Italian industry observers so far has failed to materialise.

4.2.4 Structure of supporting institutions

One of the distinctive feature of the Castellón cluster is the density and competence of the supporting institutions. First, there are several business associations. Ascer is the association of tile manufacturers. It appears to be the main actor in the cluster when it comes to collective action and strategic initiatives. It provides information for and about the industry. It is articu-lating the industry’s demands vis-à-vis government, from the local to the regional to the na-tional and EU level. It is organising joint purchasing for gas, electricity, telephony and mobile telephony. Ascer has a staff of about 20 full- and part-time professionals. All the local tile manufacturers are affiliated, and when elections come up, there tend to be more candidates than offices. However, unlike its Italian counterpart in the case of Cersaie, it does not particip-ate in the organisation of Cevisama, the Spanish ceramic tile fair.

Basically all the tile manufacturers are affiliated with Ascer, and when it comes to elections for offices there are more candidates than posts. Like the other business associations in the cluster, Ascer does not appear particularly fancy, but it fulfils the essential tasks in a very ef-fective way, both in terms of political representation and services to affiliated firms. Regard-ing the latter, joint purchasing is probably the most tangible service provided. Further evolu-tion of joint purchasing is, however, difficult to predict due to the emergence of e-commerce and the entry of private e-commerce operators into the purchasing business.

Anffecc is the association of the 24 glazing producers. It is being administrated by a legal firm, a feature which gives an indication of the fact that it operates in a different way from Ascer. Its role is, first and foremost, as a lobby organisation vis-à-vis government. One of the reasons is the fact that glazing production has a serious environmental impact so that constant negotiations with government bodies are essential. For other activities, Anffecc convenes commissions with professionals from firms. Two years ago, Anffecc also started to organise short-term courses for firm employees. Asebec is the association of the capital goods manu-facturers. Its status reflects the fact that the local capital goods industry is relatively weak. 35 firms, with an average of 24 employees, are affiliated. The main professional organisation is the Associación de Tecnicos de Cerámica. Then there is the Chamber of Industry and Com-merce (Cámara Oficial de Comercio, Industria y Navegación de Castellón). Its activities in-clude, since 1992, the organisation of the biannual technical-scientific forum Qualicer.

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Apart from these associations, there is a well-developed set of institutions. First of all, there is the Ceramics Technology Institute, ITC. It emerged from an institute for chemical technology which was founded at the University of Valencia in 1969 and increasingly focused at the tile industry in the 1970s. In 1983, a part of the institute was relocated to the Castellón campus of the university. In 1984, the Research Association of the Ceramics Industry (Asociación de In-vestigación de las Industrias Cerámicas, AICE) was founded to facilitate co-operation between ITC and firms. In 1991, the first chemical engineers with a specialisation in ceramics received their graduation at the institute. In 1992/93, the name changed to ITC, and the insti-tute was integrated into the now-independent University of Castellón. ITC’s activities com-prise training professionals for the tile and glazing industry, conducting tests for firms, and working independently and with firms on R&D projects. ITC has its own pilot plant for ex-perimentation with tile production issues.

The Institute for the Promotion of Ceramics Design (Asociación para la promoción del diseño cerámico, ALICER) was founded in 1993. Its main activities are training and support for firms. ALICER offers a five-year course at tertiary level. The majority of the 20 students which graduate every year are employed by glazing firms. In contrast, joint projects with firms are almost exclusively conducted with tile manufacturers. – Before becoming an inde-pendent institute, ALICER was a department within CTI. It was created as the perception was spreading that limited design competence was a severe competitive disadvantage of the Span-ish tile firms. As the department grew, ITC’s management decided to spin it off since it felt that design was outside the main focus of ITC. However, this spin-off is not necessarily as plausible as it may appear at a first glance. To create, say, a wallpaper design, a doctoral de-gree in materials science is probably useless. Things are different when it comes to tiles. Even though not being mandatory, advanced knowledge in physics and materials science is highly useful.

Another training institution is the vocational training centre (Escuela de Artes y Oficios), which is offering, inter alia, basic training in design. It is also involved in the effort to train tilers.

Apart from supporting the training institutions, government has created the Instituto de Promoción Cerámica, an institution which organises activities such as expositions about the history of tile production. Then there is the SME promotion agency of the regional govern-ment (Instituto para la Pequeña Industria de la Comunidad Valenciana, IMPIVA) which is providing financial support to several institutions. From the side of the national government, the export promotion agency Icex plays an important role in supporting the Tiles of Spain la-bel campaign.

Another important supporting institution is Bancaixa, the region’s bank, which is the main source of credit for the firms. Since the performance of the sector is essential for the bank’s performance, it is playing a leading role in organising a process of reflection inside the cluster. For this purpose it organised a series of seminars with key actors from the cluster, but

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also from Italy, in 1999, and it co-sponsored the analytical work of Cluster Competitiveness (Generalitat Valencia, Bancaja & Cluster Competitividad 1999).

Then there is the issue of infrastructure. The truck traffic in the Castellón region is more in-tense than in the Sassuolo district; in 1998, there were about 10,000 trucks per day, compared to 5,000 around Sassuolo. However, there are notably less congestion problems in Castellón, and the overall quality of the roads is visibly better. This reflects, among other things, the fact that the whole region of Valencia is classified as a Objective 1 region within the EU’s struc-tural policy, thus receiving substantial financial support from Brussels (somewhere in the or-der of magnitude of EU 180 million annually).

An issue which may become a limiting factor in the medium term regards the availability of real estate. When one of the municipalities recently launched a new industrial estate, half of the firms which intended to acquire a piece of real estate were put on a waiting list. Industry representatives complain that the development of estates is seriously lagging behind the exist-ing demand.

Collective action

Apart from business rivalry between firms, there are two other elements of rivalry which strengthen cohesion inside the cluster. First, there is rivalry between the production towns. Most of the firms are not located in Castellón, but rather in Onda, L’Alcora, Almassora, and Villareal. Although they are just a few kilometres apart, each of these towns has a distinct his-tory, tradition, and local culture, and there seems to a strong, albeit not destructive, element of “us vs. them” in terms of collective identity in each of these towns. Second, there is a strong sense of rivalry with Italy. With Italy appearing as the leader in the industry and Castellón be-ing the latecomer, it is an obvious point of reference and a constant challenge for all the actors in the cluster.

One indicator of the importance of social networks for business success in the cluster is the limited success of external investments. Firms such as the manufacturer of bathroom ceramics Roca have set up or purchased plants in the cluster, but they are clearly not a leader in any re -spect.

4.2.5 Trends in upgrading

The Castellón cluster enjoys a broad set of competitive advantages. Some of them are quite simple and straightforward, such as the use of regionally available red clay instead of white imports which creates a cost advantage vis-à-vis Italian manufacturers. But then there is the countervailing element of Italian marketing in terms of superiority of white-body tiles.

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Upgrading is strongly based to cluster effects, and in particularly active advantages of cluster-ing. Most importantly, there is a strong scientific and technological competence, which is based on a strong effort in training of professionals at all levels and the existence of compet-ent and business-oriented support institutions. Learning-by-interacting, in particular between tile manufacturers and glazing producers, and informal communication inside the cluster cre-ate a strong dynamism of technological upgrading. The fact that there is little patenting going on, not only by tile manufacturers but also by glazing producers, indicates the prevalence of tacit knowledge and learning.

A further competitive advantage, especially compared with Italy, is the low “Custo España”, i.e. the fact that government seeks to remove obstacles for business ventures and creates a good infrastructure and supporting institutions. In fact, talking to business representatives in the cluster the limited degree of complaints about government is notable. Another feature mentioned by business representatives is the embeddedness of the industry in the society, meaning that it suffers little harassment from environmentalists or other problems.

4.3 Comparing governance patterns in Sassuolo and Castellón

There are numerous issues which we might raise in terms of comparing the two clusters. One option is to come back to the issue of competitive advantage and upgrading. We have started with the proposition that understanding upgrading in the tile industry requires an analysis of the localised factors, i.e. cluster issues, and an analysis of global factors, i.e. the structure of the global value chain. We will look at the latter issue in the final section of this report, since the look at the case of Santa Catarina adds important insights. At this point, we will have a look at localised factors, and specifically at the governance patterns.

We summarise our findings in Table 9. There are a few notable differences between the clusters, and the main observation is that governance patterns are stronger in Castellón. It does not suffer from the kind of rivalry we observed in Sassuolo between capital goods and tile producers. Moreover, the cohesion among tile producers is stronger in Castellón.

What is behind these differences? We cannot offer a simple, straightforward answer. In our view, three factors are likely explanations. First, there is the issue of restructuring of value chains, especially the downstream part. We have argued that this may create a situation where firms find the idea of working jointly implausible, and not just at the commercialisation stage but also at other stages. The observation that Assopiastrelle in terms of new activities is not even addressing all the very pressing issues (it addresses environmental and transport prob-lems, but is not effective in achieving a renovation of the infrastructure) is compatible with this explanation. It is not by chance that collective action in Castellón is strong, and that firms there are so far not going for forward integration.

Second, there is the consolidation process which is occurring in Sassuolo but not in Castellón. There is some indication that firms in Sassuolo think that they are now big enough to sort out

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problems by themselves, rather than relying on collective action, whereas among firms in Castellón there seems to be a clear notion that they are still quite small and need collective ac-tion.

Third, one might speculate that collective action has to do with the degree of professionalisa-tion. The argument would be that the decision in favour of or against collective action in-volves a mixture of objective and subjective considerations, such as a rational calculation of costs and benefits (objective) and the relationship with a neighbour who has been a nuisance all the time (subjective), and that objective considerations become more relevant with a rising level of professionalisation. It appears that in Sassuolo the degree of professionalisation in the capital goods sector is higher than in the tile sector, with the former having a strong engineer-ing base and the latter relying more on tacit knowledge than on a scientific approach. The ob-servation that ACIMAC presents a much stronger analytical competence than Assopiastrelle would be in line with this argument. Regarding the case of Castellón, local actors emphasise the process of professionalisation which has occurred not only in terms of production man-agement but also regarding other management functions. Firms may still be family-run, but the family members in decision-making position have gone through extensive formal educa-tion plus on-the-job training in firms outside the tile business.

5 Latecomer industrialisation and value chains in the tile industry: The case of Santa Catarina, Brazil

In this section we will look at the evolution of competitive advantage in the tile cluster in Santa Catarina, Brazil. We will pursue two questions:

Table 9: Governance patternsFactor Sassuolo CastellónOrganization of value chain

local machine producers mostly Spanish colorifici local tile producers sales reps

Italian machine producers mostly local colorifici local tile producers

Power structure in the cluster

So far strong position of tile manufacturers

Power struggle between machine and tile manufacturers

Strong but not dominant position of glazing producers

Partnership between glaze and tile producers

Role of government

Very limited Supportive role of national, regional and local government

Evolution of institutional fabric

Relatively strong business associations, some degree of internal fragmentation

Limitations in terms of other supporting institutions

Very strong and united business associations

Very strong environment of supporting institutions

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1. What does this case tell us about the relative importance of localised factors and value chains? We have seen that in the case of Sassuolo the increasing importance of down-stream issues in the value chain militates against effective collective action at the local level. We will show that a similar process can be observed in Santa Catarina.

2. What does the evolution of the Santa Catarina cluster tell us about the functioning of the global value chain in the tile business, in particular the interaction between the elements which are further upstream? We have mentioned that there is an internal tension in the clusters in Sassuolo and Castellón. The producers of capital goods and glazes appreciate the existence of customers in emerging countries, whereas the tile producers are not so happy about the emergence of new competitors. We will show that the fierce rivalry among and between capital goods and glaze producers creates a constellation which bene-fits the emergence of a competitive tile industry in a place like Brazil.

5.1 Location, value chain and competitive advantage

The cluster in SC is geographically concentrated in the south-eastern part of the state, around the city of Criciúma. One large and one medium-sized firm are located in the Greater Flori-anópolis region, about two-and-a-half hours away, and another medium-sized firm is located in the northern part of the state. The first firms in SC started operating in the 1950s. The first phase of evolution was between the 1950s and 1970s, when the first firms entered production and were learning the basic features of tile production. The second phase, in the 1970s and 1980s, was marked by expansion of production capacity in order to be able to satisfy a grow-ing market (which is today the western world's largest market), regardless of product quality; the tile market was a seller’s market then. The third phase began when the sector stumbled into a deep crisis in 1989, caused by macroeconomic factors. By 1991, sales had dropped by a third, one of the large firms filed for chapter 11, and other firms came close to following suit. The firms reacted by defining technological upgrading as the way out, opting for quality in-stead of quantity; collective action played an important role in this context. Production capa-city in SC has increased only slightly in the 1990s.

There are three tile clusters in Brazil, one in Santa Catarina (SC), two in the state of São Paulo. The clusters in Santa Catarina and in Mogi-Guaçu, São Paulo, were created in the im-port-substitution phase, and their expansion was facilitated with financial support of the Na-tional Development Bank BNDES. One of the main problems of the firms is that some of them are technically bankrupt (Table 10). Tile production is a capital-intensive business, and therefore firms rely on credit to expand or modernise production facilities. At the same time, a sound business strategy in Brazil is to minimise, and preferably to avoid, any long-term credit. As the country is hovering from one macroeconomic crisis to the next, real interest rates are unpredictable, except for the fact that they never come down to single digit figures. In the two most recent crisis, the central bank charged close to 50 %. As the companies’ rep-resentatives point out, the only business viable with such credit cost is drug trafficking. So companies are facing a tough choice. Basically, their solution has been to constantly renegoti-

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ate their debt with the National Development Bank. Nevertheless, this solves their problems only partially, since they stay indebted and are occasionally in arrears, with the latter creating obstacles in obtaining further credit, for instance for export financing. Moreover, the firms also tend to be in arrears with the public utilities, something that further increases their vul-nerability.

The third cluster, located in Santa Gertrudes, São Paulo, has a completely different history. It started as an informal sector operation and grew producing cheap tiles for poor and lower middle-class households. Figure 13 shows that Brazilian tile production has been growing continuously since the crisis of 1990/91; in the last three to four years this has been mostly based on the expansion of the Santa Gertrudes cluster, whereas Santa Catarina has rather stag-nated in the domestic market, but increased its export sales.

In the course of the 1990s, the Santa Gertrudes cluster emerged as the main competitor for SC. The competitive strategy of firms in SC was essentially designed to counter this chal-lenge. Its main elements were the following:

improve the quality of the product to create a visual difference which is appreciated by the customer;

Table 10: Leading ceramic tile producers in SCCompany Locality Net

Turnover (Real$ th.)(99)

Gross Profit (99)

Net Assets (Real Th.)(99)

Cash Flow (Real$ th.)(99)

Employees(98)

Liability(Real$ th.)(99)

Cecrisa Criciúma 203.325 74.260 141.380 3.560 1.435 135.392Portobello Tijucas 177.873 65.495 89.225 2.449 1.393 81.461Eliane Criciúma 141.092 18.200 11.707 5.351 1.827 8.871Itagres Tubarão 39.090 14.817 9.347 26 281 21.089Ceusa Urussanga 26.941 12.136 60.309 2.224 200 6.136Icisa Imbituba 19.619 886 6.935 9.267 452 5.636

Source: BNDES (1988); Projeto Plataforma (IPEN/USP); Balanço Anual da Gazeta Mercantil (1 US$ = 1,60 Real$)

Figure 13

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create specific, distinctive designs, and build-up in-house design teams to achieve this;

upgrade the production process in order to reduce waste, improve efficiency and increase the share of top quality (as opposed to tiles with minor variations in shade or visual de-fects which have to be sold at a discount price);

certify products with the ISO 13006 product standard to transport the image of a high-quality product.

This strategy was based on the assumption that firms in Santa Gertrudes were manufacturing tiles of inferior quality, and that with tiles from SC having a strong visual appeal and the cre-ating the perception of high quality consumers would be willing to pay a higher price; average price for Santa Gertrudes tiles is around $ 1.5 – 2.5 per sqm, whereas for tiles from SC it is between 3.5 and 6.

In practical terms, the strategy involved four activities:

technological upgrading of the factories, in particular via training of professionals and the introduction of new organisational techniques, such as total quality management. Invest-ment in new equipment was of secondary importance due to the financial difficulties of most firms. A key issue was the upgrading of the training infrastructure.

organise collective action to get access to the Bolivia-Brazil pipeline for natural gas, in or-der to reduce the energy cost.

the creation of a technology centre to check inputs and products and to assist in product certification; essentially, the idea was that, compared to in-house laboratories, such a centre created economies of scale.

upgrading the commercialisation structure, in particular by setting-up show-rooms in the most important cities all over Brazil.

This strategy has only had a limited success. Most of it was implemented, but not always in an effective way. But the cluster failed to achieve its main goal, namely establishing a decis-ive competitive advantage vis-à-vis Santa Gertrudes. Let us look at each of the four activities.

Technological upgrading and skills development

All the firms have put a great effort into upgrading their organisation and their technological capability. Most of them are ISO 9000 certified, even though this does not seem to establish a competitive advantage, either domestically or abroad; some firms decided not to renew the certification. The advantage rather lay in the reorganisation of the production process, leading to improved efficiency. Some firms are ISO 14 000 certified, or preparing for certification, and one of the large firms is preparing for BS 8800 certification, which is a standard for occu-

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pational health and safety. Again, this effort is part of the firm's philosophy of constant up-grading rather than reflecting an acute or imminent pressure from customers.

Skills development involved both in-house and external activities. In-house courses addressed functional illiterates, but also introduced all the necessary issues in total quality management. Regarding external activities, two things happened. First, one of the large firms had its own technical school, operating at secondary level, the Colégio Maximilian Gaidzinski. It opened the school for students from other firms. Second, the local university (UNESC) set up a course in ceramics technology in 1996 and another course in materials engineering in 1998. The course in ceramics technology leads to a certificate, but not to a formal graduation. It has been formulated in close co-operation with the firms, and there is a supervisory council with firm representatives specifically for this course which is tailor-made for the tile industry. The material engineering course leads to graduation, and it caters both to the tile industry and the plastics industry which has a relatively strong base in the region.

Access to natural gas pipeline

When Brazil’s government announced that a pipeline would be built to create access to nat-ural gas from Bolivia, the plan was to connect just the industrial heartland in the state of São Paulo. Due to the lobby effort of industry in SC, and in particular the tile industry, the state government created a public enterprise, SC Gás, to build a pipeline and deliver gas to indus-tries in SC.

The tile firms were connected to the gas supply in 2000. But they are far from satisfied now. They were expecting that they would have to pay about the price their European colleagues are paying. But SC Gás linked its price to the Dollar/Real exchange rate, so that the price more than doubled between January 1999 and September 2001.

Technology centre and product certification

Firms in SC were keen to have their products certified according to ISO 13006, and to create an infrastructure for efficient certification, since they hoped that this might establish a decis-ive competitive advantage vis-à-vis their competitors from Santa Gertrudes. However, things did not quite work out that way, and this for three reasons. First, final customers did not pay that much attention to the certification and rather made their decisions according to design and price.

Second, some of the competitors from Santa Gertrudes also got their products certified. As firms from SC point out, products from Santa Gertrudes just barely stay within the limits es-tablished by the standard, but this detail does not make any difference in terms of competit-iveness. Representatives from some firms in SC are fantasising about stricter standards to keep Santa Gertrudes out of end product certification; this reflects their unwillingness to take

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their competitors seriously rather than it is a viable option, especially since standards such as ISO 13 006 are defined by industry bodies in Europe without any participation from Brazil.

Third, there is the Centre for Ceramics Technology (CTC). It was founded as part of the SENAI system in the mid-1990s. It was modelled after ITC in Castellón and was supposed to offer testing and certification services to firms as well as conduct research projects with firms. However, something went badly wrong when the governance structure for the centre was defined. Apart from SENAI, the Federal University of SC is also involved in governing the centre, and both are so busy fighting each other that there is little time left to deal with the de-mands of the firms. Today, the CTC is an institution which is offering a limited set of testing services to firms, but hardly any development effort beyond this. Most of the professionals are young academics which are paid with grants from research support organisations, and accord-ingly their main preoccupation is to further their academic career, and not the competitiveness of the tile industry.

Upgrading the commercialisation structure

Upgrading in marketing and sales means helping the customer at the point of sales to perceive the value of the product. Every company is investing in the training of the sales force, both in-side the company to improve the commercial relationship with the sales reps and at the point of sale to better advise the end customer. Evidence is the decision to select the best ceramics technicians to work in the sales department, whereas some years ago this people were put in the supervision function in the shop floor. Most of the companies are also investing into the exhibition space (show-rooms), and to some extent into specialised, classy shops. Two of the large firms are setting up exclusive franchising networks. Inside the shops, well-trained salespeople are attending customers, and architects are offering, free of charge, design propos-als, involving combinations of floor- and wall-tiles.

In analysing customer complaints, firms realised that there is little sense in producing high-quality tiles if the tiler is not sufficiently competent to place them. The most radical manner of dealing with this problem is consequent forward integration: producing not only tiles but also making sure that they get set in the correct way. There are three stages through which firms get to this point:

1. Firms start, at their own cost, to train tilers, organising courses both at their home location and elsewhere in the country. In some cases, this includes fitting the tiler with a box of tools.

2. Firms not only train but also certify tilers, and offer customers a 5 - 10 year warranty in case they employ the certified tiler to set the tiles using the firm's own argamassa and re -junto. This full package is especially offered by one of the large firms with own shops, so that the customer has only the shop to deal with, paying only one bill.

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3. Firms start to train and employ their own tilers, offering the full package to construction companies. This is not only based on quality considerations but also on the observation that the cost of setting the tiles is higher than the cost of producing them, so that the full package opens up the opportunity to increase the margin.

Looking at the four main lines of activity in the cluster’s upgrading effort, the last one appears most promising. It is the companies’ main focus since they have started to realise that the other efforts to create a competitive advantage vis-à-vis Santa Gertrudes have failed. Whereas in terms of skills development, access to gas and certification of products there was strong local collective action, there is no such thing when it comes to downstream activities; in the companies’ view, the direct rivalry at this stage impedes any joint effort. In this sense, recent occurrences in SC remind of the trends we have observed in Sassuolo: An increasing attention towards the restructuring of the downstream part of the value chain creates obstacles for local-ised collective action inside the cluster.

5.2 Santa Catarina in the global value chain

Brazilian tile firms are integrated into international value chains, but in a completely different way than, say, footwear or garment manufacturers. Whereas the latter rely on foreign firms in the downstream part, i.e. when it comes to commercialising products, the tile firms rely on foreign firms in upstream activities, i.e. capital goods and crucial inputs.

Dependence on foreign suppliers of capital goods is not a particularly unusual feature for an industry in a newly industrialising country. In fact, in the tile industry apparently everybody depends on Italian capital goods manufacturers, including firms in Spain. Firms in Brazil re-port that access to latest vintage equipment is not restricted, though machine producers tend to collaborate with some Italian tile producers during the final phase of machine development. A representative of the machine producers' association confirmed that, to the dismay of Italian tile manufacturers, machinery is sold to whoever is able to pay.

Input manufacturers, especially producers of glazing materials, are the other technology drivers in the tile industry. The second half of the 1990s saw a profound change regarding the structure of the colorifício business in Brazil. Until the early 1990s three TNC affiliates were producing glazing materials in Brazil (from Italy, Germany, and the U.S.). With the strength-ening of the Spanish tile cluster, and the growing competitiveness of producers of glazing ma-terials, Spanish colorifícios founded affiliates in Brazil, mostly in SC. Today, the cluster counts with 7 companies which are actually producing glazes locally; two of them are local firms. There is a total of 28 glaze companies in Brazil, associated in the recently founded na-tional association ABRACOLOR. Competition between them is intense. In order to create a competitive advantage, they changed their behaviour in a profound way. According to tile manufacturers, in the old days a colorifício would come up with a new glazing variety, drop it at the porter's and leave it to the tile manufacturer to figure out what exactly to do with it. During the last three to four years, the colorifícios have set up development and design teams,

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offering a full service to tile manufacturers – the design, the glazing material needed to pro-duce it, and technical assistance in mastering new designs and solving problems in the pro-duction process. We found no indication that Brazilian tile manufacturers are discriminated. It rather seems to be the other way around, i.e. Spanish colorifícios draw on know-how avail-able at headquarters and at Spanish R&D centres if they cannot solve production problems locally.

Taking these observations together, it becomes obvious that Brazilian tile producers benefit from the fierce rivalry among Italian machinery and Spanish glaze producers. As firms from both groups are constantly seeking for ways of widening their customer base and establishing a competitive advantage, the idea that they might withhold up-to-date technology from Brazilian customers is remote. To phrase it differently, the tile sector in SC benefits from the structure of the upstream part of the international value chain of the tile business.

Exporting

Looking at the downstream part of the international value chain, we see that firms in SC have been increasing their exports over the course of the 1990s (Figure 14), even though some ob-servers claim that they were losing money due to the overvaluation of the Brazilian currency. The Brazilian exports is by far dominated by the companies located in the cluster (Figure 15).

Exporting probably became profitable after the devaluation in January 1999. The term "prob-ably" refers to the fact that ever since international shipping companies, on which Brazilian exporters rely, have been increasing the freight-rates, which grew from about US$ 900 per container to US$ 1,400 to 2,000; the precise rate differs according to the overall volume, with volume exporters getting lower rates. Some firms claim that exports to certain regions, espe-cially the Caribbean that used to be an important market, are no longer viable. The main target markets are the U.S., Mercosul, and other parts of Latin America. Less important foreign mar-kets include South Africa and Australia. Europe is no target market; one of the large firms ac-tually closed the sales office it used to have in Brussels.

Firms are organising exports in different ways:

The most frequent pattern is the employment of representatives in key markets.

The second option is collaboration with trading firms in the target markets.

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One of the large firms has a wholly owned subsidiary in the U.S. which is taking the role of a trading firm.

Exports have been growing recently, after fluctuating in the years before. The decrease in 1990/91 reflected the chaotic economic situation in Brazil, the decrease after 1994 the effect of the appreciation of the Brazilian currency. In any case, exports represent no more than 10% of total production, far behind the Italian (69% in 1998) and Spanish (about 50% in 1998) ex-port share. Companies in the SC cluster are working hard to increase their export share, the most successful firm achieving an export share of more than 30 %.

Export medium target prices are about US$ 4 per square meter. This gives a good indication of the position of Brazilian firms in the global tiles value chain. They are positioned at the lower end, selling mostly standard products of consistently good quality. # competing with Spanish?

Regarding support for exports, there is a governmental export promotion program (EXIM), but access to export credits is difficult due to the arrears mentioned above. ANFACER has re-

Figure 14

Figure 15

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cently approved an export promotion program with the federal export agency APEX, aiming at the promotion of the Brazilian product at target markets and the joint presence in important international fairs. It is, however, unlikely that Brazilian producers will anytime soon create something similar to the “Tiles of Italy” label. In the markets abroad they are perceived as re-liable producers of high-quality, low-price tiles of good quality. There is nothing fancy about Brazilian tiles, and therefore they are competing with other low-price producers, such as Tur-key. The single largest risk for the Brazilian export effort would be a strong export thrust of Chinese producers.

6 Conclusions

6.1 The 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 evol-ution 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 in-novation. 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:

Machinery producers do not only come up with new machines to do the same things bet-ter. 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 pro-ducer even creates a captive market for subsequent services.

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 (Figure16). They are the tile manufacturers in Sassuolo, the tile manufacturers in Castellón, the ma-chinery 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.

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.

Formal and informal co-operation between groups. This does not just happen locally but also, as indicated by the diagonal arrows, between clusters.

Rivalry between the machinery producers and the glaze producers. The machinery produ-cers prefer to develop innovation which reduces the relevance of glazes for a differenti-ated 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 under-mine 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. There-fore 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 pro-ductive rent-seeking logic applies to capital goods and glaze manufacturers.

Figure 16: Key Actors and Interaction in the Tile Industry

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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 per-spective, 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 compet-itive 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 fea-tures 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

1 This relates to the concept of reflexivity as formulated by Giddens (1984, 3): “... it is useful to speak of reflexivity as grounded in the continuous monitoring of action which human beings display and expect oth-ers to display”.

Figure 17: Changes in the Value Chain

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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 posi-tion.

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 ma-chinery 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.

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 net-works). We have argued above that tile producers in Brazil can exploit the rivalry among

Figure 18: The power game in the global tile industry

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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 Figure18; 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 subcontract-ing, 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:

“Process upgrading: firms can upgrade processes - transforming inputs into outputs more efficiently by re-organising the production system or introducing superior technology.

Product upgrading: firms can upgrade by moving into more sophisticated product lines (which can be defined in terms of increased unit values).

Functional upgrading: firms can acquire new functions in the chain such as design or mar-keting.

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 upgrad-ing. 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 require-ments expected by customers. In order to differentiate their product, and thus achieve a tem-porary 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 ma-chinery and of glaze played an increasingly important role in this respect. Functional upgrad-ing has very visible with respect to glaze producers since the 1980s, which took over tile

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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.

6.2 The relevance of location

Does the importance of a complex game along the value chain, involving various actors in different countries, mean that location becomes irrelevant? We would argue for the opposite. There can be no doubt that currently location is highly important in the tile industry; the de-gree of geographical concentration is extremely high, not only for tile manufacturing but also for the production of machinery and glazes. Behind this is the constant interaction between suppliers of machinery, suppliers of glazes and tile producers; more than anything else, this is the reason why clustering is a prominent feature of the tile industry. In the case of Sassuolo, the cluster advantages are predominantly passive, whereas in Castellón we observed various active advantages of clustering being created by deliberate collective action and very effective associations.

It is notable that also in our latecomer case tile production is geographically concentrated in few places, basically for the same reasons. The same seems to hold true for other countries (for instance Turkey). It is very likely that both location and global value chains will remain key categories to create and understand competitive advantage in the tile industry. The ex-pectation that location remains important does not mean that each single location remains im-portant; one might rather expect that tile production in the Sassuolo cluster will start to de-cline in the near future. But it is unlikely that there will be a proliferation of attractive loca-tions anytime soon; greenfield sites are not particularly attractive for tile producers. Restruc-turing of value chains, and increasing competitive pressure within them, will lead to an in-crease in locational requirements of tile producers. Apart from transport and communications infrastructure, this will in particular apply to education and training. The point is not only the development of new glazes, machinery and tiles which depends on the skills of designers and engineers. Moreover, efficient production with a yield of first-rate output that is as close to 100 % as possible depends on the skills of all the employees along the production process. Also, it is likely that forward integration will lead to increasing requirements in terms of formalised training of sales staff.

Increased formal training will not remove the importance of informal communication, which currently appears as a key element of locational advantage. On the contrary, it is likely that training in institutions which are located inside the cluster will strengthen inter-personal net-works which are the basis of informal exchange, thus reinforcing the importance of location.

6.3 Conclusions for cluster research and cluster promotion

There are two conclusions we want to draw from our case study for cluster research as such, as well as for cluster promotion. First, we argued in section 2 that linking a cluster perspective

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with a value chain perspective creates important insights which we miss if we use only one of the two concepts. Investigating the tile industry from a cluster perspective would have been very plausible, and it would have rendered results which would have appeared plausible as well. However, we would have missed important aspects which shape, and to an large extent limit, collective action for upgrading inside the clusters.

The second conclusion is more specifically related to the impact of value chain restructuring on upgrading in a cluster. What we observed in the case of the Italian tile industry is some-thing which is probably not unique. The effort of large firms and groups in terms of forward integration, and specifically the struggle around the take-over of distribution channels, in-volves a variation of Battle of the Sexes Game. There is no compromise solution, as the num-ber of Italian tile groups which can afford this is larger than the number of sales chains which appear as attractive targets for take-over, and more than group acting jointly to take over a sales chain would defeat the whole exercise which is about furthering the consolidation pro-cess. There may also be early mover advantages, either with respect to take-overs or to the possible alternative of creating an own sales chain. And it is not only that there is no option of a joint solution. Moreover, in this kind of setting, each of the players will tend to be secretive, as the leaking of information on plans for forward integration might cause pre-emptive action by competitors. This, in turn, creates a setting where firms will tend to avoid communication, including communication about issues not directly related to forward integration.

This leads us to the relevance of our findings for policy, specifically cluster promotion. As a matter of fact, the interaction of clusters and the value chain creates a policy dilemma. The consultants working with the Castellón cluster argued that forward integration is an important next step in upgrading. However, as the Italian case shows, forward integration would make joint action more difficult.

What about the possibility of government playing a role in overcoming obstacles to collective action? In fact, in each of the cases it would be difficult to conceive how government might play a strategic role. In the past, in each country government has made important contribu-tions to upgrading, and sometimes actually played the crucial role in creating an internation-ally competitive industry. More recently, however, government has not even fulfilled its basic functions in Italy and Brazil:

In Sassuolo, the infrastructure is derelict, the training institutions are not at all comparable with their competitors in Castellón, and the business promotion operation appears to be better at presenting itself in international conferences than delivering services to firms in a way that makes a difference.

In Santa Catarina, the investment of Spanish glazing producers occurred at a time when foreign investors elsewhere were receiving massive tax breaks and other incentives, whereas the Spanish firms received no benefit or support at all. In general, local and pro-vincial government have made next to no contribution to the competitiveness of the tile industry. Central government has created unfavourable macroeconomic conditions, it un-

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derinvested in the infrastructure, and it is responsible for the anti-export bias of the eco-nomy.

These observations are in line with the somewhat sobering findings Enright (2000) presents on the role of government in cluster upgrading. It is thus conceivable that the case of Cas-tellón shows what an adequate role of government in supporting a cluster looks like. First, it provides the basic functions of local economic promotion, namely making industrial estate available and creating a good infrastructure. Second, it is providing a structure of specialised, sophisticated training institutions. Third, it has created a forum for research and reflection on the evolution of the industry. Government is not the strategic promoter of competitive advant-age, but at least it is creating a favourable setting for the private sector to upgrade.

6.4 Conclusions for value chain research

In the section on the conceptual framework, we pointed out that value chain research so far suffers from a number of deficits, in particular a too narrow focus, a bias for buyer-driven chains and a shallow theoretical foundation. In the research which led to this paper we have pursued a relatively broad focus, trying to map the various supporting industries and services connected to tile production. Some of them turned out not to be strategically important for the sector, such as mining of clay and independent design companies. Others are crucial for an understanding of the industry, namely manufacturing of capital goods and of glazing materi-als. This perspective went beyond the focus which was often applied in earlier value chain re-search, i.e. addressing the interaction between the producers of final products and buyers. Thus, our research underlines the importance of applying the value chain concept in the way suggested by Kaplinsky and Morris (undated, 4): “The value chain describes the full range of activities which are required to bring a product or service from conception, through the differ-ent phases of production (involving a combination of physical transformation and the input of various producer services), delivery to final consumers, and final disposal after use.”

The bias for buyer-driven chains in earlier research was related to Gereffi’s distinction between buyer- and supplier-driven chains, which again was related to the extensive research he and other U.S. researchers had done on the apparel trade between East Asia and the U.S. Our research indicates that this simple distinction does not give justice to a complex reality. Buyer-driven chains are those which feed into highly concentrated segments of the retail trade, in particular food & drink, garments & footwear and furniture, where barriers to entry to production are low. Supplier-driven chains involve industries such as cars and computers, where barriers to entry further up the chain are high (even though concentration of retail trade may be high as well, such as in the case of computers). But what about cases such as tiles? Is it too early to say whether it is a buyer- or a supplier-driven chain, or do chains such as this one establish a type of its own? We want to argue that neither is the case, and that we should refrain from such attempts of constructing overly simple typologies. Value chain research so far has only to a small extent been connected to cluster research, and it has been unconnected to industrial economics. This is even more surprising as issues such as concentration and bar-

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riers to entry play a key role in value chain research, since they are usually referred to when it comes to locate power in value chains.

Our suggestion for value chain research is to do two things. First, go for more deduction and less induction, in particular by looking at what is happening in neighbouring disciplines, for instance industrial economics and management science. It is likely that we will come across concepts and theories there which will permit us to reassess the empirical findings which are already available. Second, continue and deepen value chain research by using network gov-ernance concepts. In our case study, we tried to do this but only succeeded to a limited extent, in particular in the cases of Sassuolo and Castellón, where we were newcomers and local act-ors were hesitant to share the kind of information we would have needed to profoundly under-stand the power games involved in the clusters and in the value chain. How can we deal with this kind of problem? One option is to become an industry specialist, conducting repeated re-search projects on the industry and in this course creating trust among industry actors and es-tablishing contacts which render true inside information. But this option has shortcomings, in particular as it tends to limit the cognitive capacity of the researcher. Another option is to turn cluster and value chain research more practical. We find it probable that the number of re-searchers in the field of industry-related research is increasing, so that the competition among researchers for the scarce time of industry insiders is increasing, and is getting even more in-tensive as firms and industries are consolidating and the number of relevant sources in the in-dustry may decrease. How then does the researcher establish a competitive advantage, some-thing that persuades industry insiders to share time with him or her? Our suggestion would be that the most convincing argument is that not only the researcher but also the industry source gets something out of the interview. In other words, the researcher needs to be prepared not just to listen to the industry source but to get involved in a topical discussion which is useful for the “interviewee”. This, in turn, means that industry research, and in particular value chain research, needs to become more practical and action-oriented so that researchers really have something to offer to industry insiders. So this would be our suggestion for a next step in the evolution of value chain research: not only to use it in university courses, so that students get a better understanding of what is going on in the real world, but to turn it practical so that it is useful to industry insiders.

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