International Business - H&M
H&M is ranked as one of the world’s largest clothing companies and is based in Stockholm, Sweden. As a clothing industry, the company has to ensure it captures the latest fashion trend in order to match the market demand for clothing industry. This is crucial because today’s customers tend to be trendy in terms of the type of clothes they wear. Given the changing dynamic of the fashion culture, the industry has to be cost effective in terms of their production to keep up with the customer’s demand. H&M is large clothing industry, which means it has curved its own market curve (Taplin, 1997, p.89). The industry cuts down production costs through specializing on the production of the urgent fashion in the market and sending the less urgent productions to its Asian branches. According to the case study, clothing industries have to be effective in terms of their production because of the fashion dynamics which is contrary to the past where industries relied solely on labor.
The clothing industry has now shifted to East Asia because of trade barriers among different nations around the globe, especially in the European Union countries. H&M has also branched out to East Asia for lower production costs in that there is ready and cheap labor in East Asia Countries. For example, H&M has enacted production plants in Romania, which is one of the poor nations in the global community (Taplin, 1997, p.92). Given the low living standards, the company pays them cheaply for their labor that is used as part of productivity. This shows that globalization has moved industries such as H&M to other nations, which contributed to job employment in the host country. This form of direct portfolio investment has reduced production costs for the company because labor is cheaply available in Romania. However, the industry has been criticized greatly for exploiting labor in the developing countries. As a result of this criticism, the industry has lost most of its sales around the globe because of exploiting its workers. In addition, the industry is in a competitive market business where it has to manufacture cheap and sophisticated products to continue dominating the fashion market.
Given that China and Asia have a comparative advantage in fashion production, retailers should have the freedom to import clothing from the industry that resonates well in terms of pricing. This will enhance competition among the industries in the market, which will ensure that one industry does not exploit the retail market. It is crucial to note that cheap and available products can easily be purchased by a vast number of people unlike when retailers price goods at a high price because of the high prices in the fashion manufacturers. The retailers will likely import from the manufacturing industry that has comparative advantage in producing the clothes because of efficiency. This means that both the manufacturing industries and the retail market benefit in the long run in that low costs are used in production, and goods are sold at an affordable price.
Outward Processing Trades (OPT) contracts should be not rescinded because it enhance efficient among laborers through specialization. This means that large companies such H&M can distribute their work evenly among its branches to create efficiency (Anton, 1996, p.98). In addition, OPT contracts ensure productivity is effective, which makes industries deliver their order to retailers in time for people to buy trendy clothes. Given that OPT makes production cost-efficient, H&M can continue dominating the fashion market because of its cheap and sophisticated clothing that are marked as trendy. OPT not only benefits the retailers but also the laborers. The case study notes that in “Romania’s textile exports increased by 80% and that job employment grew in the country (Moore, 2011, p.28).” This illustrates that OPT contracts are beneficial to both the industry and the host country.
The apparel industry has created job employment in the industry, which favors the government and the people. Foreign direct investments from apparel industries have also improve the overall economy of the county because employment facilitates consumption, which contributes to government revenue. One of the ways the Romanian government can maintain foreign investments is through ensuring political stability in the region (Anton, 1996, p.102). This means that the investors can trust their business to flourish. In addition, low-cost advantage in terms of labor attracts foreign direct investments into the country. This financial incentive favors the businesses because they can be cost-efficient in their industries because of the availability of labor. FDI favors the host country because jobs are created and the government receives its revenue through taxation from these industries thus, the government should attract FDI (Taplin, 1997, p.67). In addition, the country can also benefit from technological innovations where the industries bring in new technology that improve the productivity and can be shared across the country. The government should ensure that inflation is low in the country to attract more FDI in the country. In addition, the government can create financial incentives where the country charges low taxes to attract more foreign direct investments in the country (Taplin, 1997, p.67). Investors are also keen in studying the stability of the financial market in the country in terms of inflation or deflation. Thus, Romania has an advantage in terms of its currency because it uses the European Euro, which is standard and stable.
ZARA, which is an apparel industry based in South America, poses a threat to H&M in that Zara has moved into Europe where fashion is dominant. ZARA’s fast fashion sales aid the industry to dominating the market. Thus, H&M has to develop a few tactics to compete with ZARA in the apparel industry before it loses its market niche in Europe (Dishman, 2011). Thus, H&M have responded to ZARA’s competition by aggressively opening more stores in East Asia and Europe. According to statistics, H&M has increased their net profits by 22% through the aggressive opening of more stores and pursuing fast fashion sales, H&M has kept up with ZARA. In addition, H&M has opened up more stores in East Asia to sell their merchandise to the greater public (Dishman, 2011). Branding has also become an efficient thing in the apparel industry in that H&M rips more profits in the saturated markets by distributing clothes that are less disposable. H&M can survive in the apparel industry by expanding its up market brands and keeping up with the fast fashion sales, which will increase its gross margin.
Anton, I. (1996). Foreign direct investment in Romania. Birmingham: EUNIP.
Dishman, L. (2011, August 31). H&M and Zara Duke It Out for U.S. Online Sales While Urban Outfitters Moves on Facebook. Forbes. Retrieved February 18, 2014, from http://www.forbes.com/sites/lydiadishman/2011/08/31/hm-and-zara-duke-it-out-for-u-s-online-sales-while-urban-outfitters-moves-on-facebook/
MOORE, A. B. (2003, January 29). Sweden's H&M beats expectation with 4Q earnings, says sales broke even in United States. AP Worldstream, pp. 25-32.
Taplin, I. M. (1997). Rethinking global production: a comparative analysis of restructuring in the clothing industry.. Aldershot: Ashgate.