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We don't still make things in Europe, do we? Benetton does and it is succeeding in style by putting high technology before low labour costs

THE family was hard at work last week in Castrette di Villorba, in the villa-strewn flatlands north of Venice. The father gave his child a cardboard box, mum showed him where it ought to go, and the child rushed off to put it in the right place. Hour after hour they toiled, moving 30,000 boxes every day. Their only reward was the knowledge that somewhere in the world, someone would get the clothes they wanted as a result.

The "family" is what Benetton calls a group of yellow metal gantries and lifts that move back and forth, up and down, from side to side, fetching and inserting cardboard boxes in a vast stacking system that lies at the heart of its distribution centre. The centre is itself part of something more sophisticated yet - a tightly integrated cluster of buildings that together make up one of the most advanced factories in the world.

It is, we are told, a post-industrial age. Strange that, because it implies that no one is making anything physical any more. No one is making cars, food, toys, reinforced steel joints, clothes or anything else. What the expression really means is that the West believes it is no longer capable of competing in the physical manufacturing world. We will produce bits and bytes, and provide services by the gross, but we will leave traditional industry to the low-labour-cost developing world.

This thinking, particularly popular in Britain, has lain behind the abandonment of vast swathes of manufacturing. Sectors in which we were world leaders - cars, motorcycles, washing machines - were deserted in the face of "low- cost" competition. As for clothing, Britain has moved from dominating the world 60 years ago to being a bit player today. The textile industry is still one of the biggest employers in Britain, and some companies make a good living reacting fast to Marks and Spencer's every whim. But most of the UK's textile workers subsist at the bottom of the labour market. The big manufacturers such as Courtaulds and Coats Viyella have all but given up on Britain - to compete, they believe they must manufacture in the Far East, Turkey or Morocco.

Luciano Benetton, the founder and chairman, knew all that in the summer of 1992. He also knew the company he had founded 27 years before was in deeper trouble than it ever had been. Nothing (he thought) to do with his infamous advertisements, but everything to do with the economy.

Ever since his sister Giuliana had knitted a brightly coloured sweater in 1965, Benetton had been an extraordinary story of success. Luciano, Giuliana and their two brothers had created a distinctive look based on primary colours that had swept the world. There were 7,000 Benetton shops in 120 countries, and even if the look was no longer the high point of fashion, it still sold in vast quantities. The group had a turnover of about pounds 1bn, and owned what it claimed was the third best known brand name in the world.

But by 1992 Benetton was being squeezed by a pincer. On one side was a long-lasting recession that was flattening sales; on the other was the Italian government's insistence that the lira must be tied to the mark at an increasingly absurd rate.

Luciano Benetton is a very comfy sort of tycoon. He wears comfy sweaters in his comfy 17th-century villa in Ponzano Veneto, the group's headquarters a few miles from Castrette. With his flowing white hair, gold-rimmed glasses and well-known eccentricity (he once posed nude for an advertisement), he provides a glimpse of what Richard Branson might be like at 60. Despite his famous publicity machine, he is given, if anything, to understatement and explains his dilemma simply: "We had to compete with factories that paid a tenth of our wages. To face this we needed better imagination, research and quality, but we couldn't have much higher prices."

Northern Italy was not by any means a cheap labour area - social costs were among the highest in Europe; so were electricity and telephone bills. If it moved to France, Benetton calculated, it could save 20 per cent on labour costs.

Most companies would have considered the matter for five minutes before shutting shop in the Veneto region and opening up in Ankara, Jakarta or even France. Most companies have outside shareholders who expect profits to be maximised in the short run, and that would be the obvious way forward.

Not Benetton. The family, which controls 70 per cent of the shares, decided to invest L200bn (pounds 80m) over three years on building the most advanced clothing factory in the world. Benetton already had a knitwear factory that could produce finished seamless sweaters in 20 minutes, as well as a computerised distribution centre. But the real volume was in jeans, shirts, T-shirts and the like - these were cut, dyed and packed in Benetton factories scattered across the Veneto, and were assembled by an army of subcontractors.

Clothes assembly would remain out-of-house, the Benettons decided, because it was still impossible to automate it. Everything else - design, cutting, dyeing, packing and dispatching, would be concentrated in a new complex at Castrette. Two huge new factories would be built to cut the cloth and pack the clothes with minimum manpower - both linked tightly to the distribution centre.

The decision to invest was, Luciano says, "both philosophical and practical. I like the idea of keeping a European manufacturing centre, because it keeps the technology going. I see it as an act of faith in the future."

Luciano adds: "It was a calculated risk, but in our view it still makes sense to manufacture in Europe if you use the most advanced technology." A move overseas could just be the start of a nomadic journey in search of cheaper labour. "If you produce somewhere else, maybe in five years' time that is not a good place to manufacture any more," he says. The decision seems to have been justified. "For three years we have kept our price list unchanged because of the increased factory efficiency." At a time when the clothing market remains tough, this reduction in real prices has helped Benetton keep afloat.

Two twin factories, each employing 320 people, are now operating. One, which produces 20 million skirts and pairs of jeans a year, was opened in 1993; the other, with a planned output of 40 million cotton garments and shirts, started up last July. They were designed by Afra and Tobia Scarpa, who also design the Benetton shops, and were the first factories in the world to be built as suspension structures - which means there are no internal columns. From the outside each factory appears to have a series of suspension bridges perched on top - they feed the strain back to a central reinforced concrete frame.

Entering the factory that makes jackets, skirts and trousers, you find yourself in a lorry park. Trucks of every size are being loaded and unloaded: they belong to the subcontractors who are doing their weekly delivery and pick-up.

One side of the factory is for cutting; the other is for sorting. In both, the climate and lighting is crucial - cloth is sensitive to heat, and it would never do to mix colours by mistake. Everything must also done to save energy. So a special heat-saving device mixes air inside the building with that on the outside, while the lighting comes partly from roof windows and partly from electric lights - they are switched on and off automatically to keep the light level constant.

So to the cutting area, where rolls of cloth are waiting to be fed on to the machines. Much of the cloth comes from Benetton's factory near Florence; some is bought in. But the cloth is just the "hardware" that makes up the clothing. The clever bit is the "software" - the information that tells the machines exactly what to cut.

That information originates from Benetton's 7,000 shops. The shop managers select from new collections twice a year, but then reorder regularly through the season. In the old days they had to guess what they wanted months in advance, and hope they had neither under nor over-ordered. Now they can put in an order and the clothes - made specifically for them - will be dispatched two weeks later.

Their requests are routed to a central computer in Ponzano Veneto. It is linked to a computerised design system that calculates how many, say, shirt pockets need to be cut of which size, and the instructions are transmitted to Castrette.

In a small room in the factory, three machines are receiving these instructions and converting them into drawings on a square of paper: pens zigzag frantically, drawing out unidentifiable shapes that will act as templates for the pieces of cloth.

The cloth, meanwhile, is being laid - perhaps 70 pieces at a time - on a long cutting table. It hovers along on a blanket of air before the flow is reversed and the cloth sucked into a solid wodge an inch or so thick. Now it is as dense as wood, so a jigsaw, receiving instructions directly from Ponzano Veneto, can start cutting the shirt pocket out. A layer of paper - the sheets generated by the busy machines - is pinned on the wodge with an identifying code; from then on, each piece of cloth is assigned to a particular shop.

No humans have been involved since the cloth was first laid on the table; now they take over and pack the cloth in boxes, ready for collection by the subcontractors' lorries.

Benetton's clothes are made up by 250 companies, mostly local. It owns a minority shareholding in a third of them. They are not, the company insists, sweatshops. They typically employ 100 people, and minimum wages are set by law at about L1.5m a month.

Even though Benetton's own manufacturing workforce is tiny, it is responsible for about 20,000 jobs in its subcontractors. So far, no one has been able to automate clothes assembly - the flexibility of cloth means no machine has been able to match a skilled worker with a sewing machine. This could change. "Some industry groups are studying the automation of assembly," Luciano says. "Theoretically, we can expect a further reduction in the labour force."

In the other half of the factory, made-up jackets and skirts are being returned from the subcontractors for sorting. Traditionally, this would be a labour-intensive operation, and the manufacturer would sort only by country or large city. Benetton's system is completely automatic and works like a massively complex shunting yard. The jackets travel along an overhead rail until they come to a short spur that will collect all the clothes for a particular shop. When the shop's complement is assembled, another switch is triggered, and the jackets slide off ready for packing. Here again we briefly meet humans: they load the clothes on to a conveyor belt that takes them down to the distribution centre. where reside the "family".

If the factory is lightly manned, the distribution centre is scarcely inhabited at all. Twenty people - five per shift - oversee the handling of 30,000 boxes a day. The centre has recently been upgraded so that boxes can be sorted by shop. It is a vast honeycomb with 300,000 "cells", each taking one cardboard box.

As a box arrives a laser reads the barcode that tells the central computer its destination. The "family" - mother, father and child - are machines designed both to store boxes in, and extract them from, the honeycomb. The father is a huge fixed tower, which moves the boxes up and down. The mother - a big yellow transporter - carries the child back and forth down the side of the honeycomb. The child is more like a three-dimensional forklift truck: it darts in and out of the storage system, loading boxes in and out of the cells.

For dispatch, the box is loaded into another complex system (this featuring attractive yellow helter-skelters) where it is collected with other boxes destined for a particular shop. They set off, probably by rail, and a few days later will be on display in an identikit shop in Seoul, Southampton or Sarajevo. By then, the shop-owner will already be preparing to start the process all over again.

It is too early to say whether the pounds 80m investment will keep Benetton buoyant. The company has a number of potential problems - the question of succession (and rumours of internal divisions), a diversification programme that has taken it into skis, pagers and supermarkets, and worries about whether the Benetton look is losing its appeal.

But what the factories do show is that clothes can be made competitively and on a huge scale in Europe; and if you can make clothes here you can make anything. It is an object lesson for those who believe the industrial age is dead.