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• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP89T00295R000300290002-5
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 32
• Document Creation Date: January 12, 2017
• Document Release Date: May 31, 2011
• Sequence Number: 2
• Publication Date: September 1, 1986
• Content Type: REPORT

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Directorate of
Intelligence
Spain:
Restructuring Industry
Confdontial
EUR 86-10032
September 1986
Copy 318
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Directorate of
Intelligence
Spain:
Restructuring Industry
the Office of Global Issues.
This paper was prepared b
Office of European Analysis. It was coordinated with
Comments and queries are welcome and may be
directed to the Chief, Iberian-Aegean Branch,
EURA
Confidential
EUR 86-10032
September 1986
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Summary
Information available
as of 15 August 1986
was used in this report.
Restructuring Industry 25X1
Spain:
acquiring.
The government of Socialist Prime Minister Felipe Gonzalez is putting into
effect a sweeping economic restructuring program aimed at improving the
health of traditional industries and spurring development of high-technol-
ogy-oriented industries. The short-term costs are high-the program has
led to major layoffs in traditional industries and has significantly cut
industrial employment in the regions that are most heavily dependent on
steel and shipbuilding. Gonzalez and his advisers are convinced that the
long-term costs of a failure to modernize would be far worse and have
developed a public consensus on the need for a restructuring program. The
government is making headway on pruning traditional industries and has
had some success in attracting foreign investment in electronics. The
program also promises benefits for the United States. US companies are
providing-through joint ventures-much of the technology Spain is
After coming to power in 1982, the Socialist government instituted a two-
pronged restructuring plan to pare down traditional industries-such as
steel, shipbuilding, textiles, and footwear-and promote development of an
infant electronics industry:
? Over the past several years, more than 40,000 workers in traditional
industries have been laid off-equivalent to 1.4 percent of total industrial
employment in 1982 and 11 percent of the workers in the affected
firms-and productive capacity has been cut dramatically, particularly
in the mostly state-owned steel and shipbuilding sectors. As a result,
labor productivity and capacity utilization in these industries are
increasing.
? At the same time, Spain's electronics sector is expanding. So far, Madrid
has lined up 28 joint ventures with electronics firms in the United States,
Japan, and Western Europe that will create 16 new plants and research
centers, bring in 10 firms that did not previously have a manufacturing
base in Spain, and expand the operations of existing Spanish subsidiaries.
although Spain will still remain far behind world leaders.
Successes on these two fronts should lighten the burden of supporting
ailing industries and improve Spain's competitive position internationally,
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Restructuring efforts have had a negative impact in the short run on
Spain's number-one economic problem-unemployment. Investment in the
electronics sector probably will not directly create enough new jobs to
offset those cut back by the rationalization of traditional industries in the
near term. Over the longer run, however, the electronics sector should
generate jobs in supplier industries that will help offset losses elsewhere.
Madrid's economic restructuring program should make it easier for firms
to survive in the more open trade environment that prevails now that Spain
has joined the European Community (EC). Under the terms of accession,
Madrid is obliged gradually to eliminate trade barriers on EC imports and
lower tariffs on non-EC imports. Spain's highly protected industries
probably will be buffeted by rising imports, but improvements in productiv-
ity and financial positions of traditional firms should help them withstand
increased competition. The infant electronics industry is among those
sectors that have been shielded from competition by high tariffs, and small
producers of consumer electronics probably will struggle to stay afloat. One
hopeful sign is the establishment of joint ventures with large multinational
electronics firms that have made a commitment to open new plants and
transfer technology that the Spanish do not have.
Despite the costs of the program in terms of higher unemployment,
Gonzalez's political prospects are not likely to be seriously affected. All of
Spain's political parties, with the exception of the far left, agree that Spain
must pursue an industrial restructuring program. Moreover, generous
benefits to laid-off workers have helped to alleviate political pressures in
the regions hardest hit by restructuring. Although the Communists were
able to whip up violent protests during the first two years of the program,
they have not gained an audience beyond a handful of steel and shipyard
centers. Now that Madrid has closed targeted shipping and steel facilities,
worker opposition has died down. Although Gonzalez probably has lost
some support from the left, he has retained the backing of the Socialist
trade union and maintained his lead over the next largest party, the
conservative Popular Alliance, during the last election.
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The restructuring program will provide a number of economic and foreign
policy benefits to the United States. To the extent that Spain succeeds in
increasing the country's technology base, it will provide another market for
US high-tech production equipment. Gonzalez's desire to acquire US
technology also will increase US leverage on Spain to implement stricter
export controls. Madrid imposed an import certification and delivery
verification system on high-tech products because it feared the United
States would block sales of goods that Spain needs for its electronics
program. Madrid also has taken steps to join the Coordinating Committee
for East-West Trade Policy (COCOM), and we believe the importance of
the restructuring program almost certainly will cause Spain to move ahead
with its membership efforts. Madrid's interest in acquiring high technology
has led to participation in European Research Coordinating Agency
(EUREKA) projects, and Gonzalez has not dismissed participation in the
Strategic Defense Initiative (SDI).
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Summary
Easing Social Pressures
9
Closing Unprofitable Plants
12
Budget Financing of Restructuring
13
Foreign Investment and Joint Ventures
13
Outlook for the Program
16
Implications for the United States
18
A. A Sick Steel Industry
B. The Declining Shipbuilding Industry
vii Confidential
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Spain:
Restructuring Industry
Prime Minister Felipe Gonzalez's Socialist govern-
ment is facing up to the formidable challenge of
adapting Spanish industry to the changing domestic
and world economic environments. Global recession
after the oil price shocks in the periods 1973-74 and
1979-80, exploding real labor costs at home, and
competition from newly industrializing countries dealt
Spain's traditional industries a major blow. The So-
cialists are carrying out a restructuring program
designed to put troubled industries on a sounder
footing and expand Spain's limited high-technology
sector. This paper will explore the considerations that
have impelled Madrid to take action, the goals of the
industrial program, progress in implementing the
program to date, the plan's prospects, and the implica-
tions for the United States.
More than one out of five industrial jobs were lost
during the prolonged economic slump. While industri-
al employment also has been falling in other European
countries, the contraction of employment in Spain has
been the most severe (see figure 2). As a result, the
rate of industrial unemployment jumped from 1.6
percent in 1974 to 15.9 percent in 1985, the worst in
Western Europe.
Exploding real labor costs played a key role in Spain's
industrial decline by cutting deeply into firms' profits
and discouraging hiring. Real unit labor costs shot up
50 percent from 1974 to 1979, 10 times as fast as in
West Germany and nearly twice as fast as in France
(see figure 3).' About half of this increase can be
traced to trade union demands for wage hikes once
the fetters of the Franco era were removed. The
remainder was because of a rapid increase in pension
and social security benefits as the new democratic
government sought to bring Spanish benefits closer to
The Spanish industrial boom that began in 1960 came
to an abrupt end in 1975. Industrial production grew
at an average annual rate of only 1 percent during the
period 1975-85, a dramatic fall from the 11-percent
average annual rate of expansion during 1960-74, the
so-called miracle years (see figure 1). Although
Spain's rate of industrial growth outpaced that of the
Organization for Economic Cooperation and Develop-
ment (OECD) during the economic miracle, it was
only half the OECD rate in 1975-85. Largely because
of the industrial slump, average annual real GDP
growth slipped more than 5 percentage points, to 1.7
percent during 1975-85, the sharpest drop in the
OECD (see figure 1). At the same time, real invest-
ment fell by an average annual rate of nearly 2
percent, compared with an average annual rate of
expansion of 10 percent during the boom years.
north European levels.
The situation began to ease in 1980, when rising
unemployment prompted workers to agree to more
moderate wage settlements in the National Bargain-
ing Agreement. The Gonzalez government continued
this trend by persuading the Socialist trade union
(UGT) to accept real wage cuts during 1984-85 in
return for government-funded training programs.
While industrial production remains stagnant, large
manpower cuts have helped boost worker productivity
and reduce unit labor costs during the last two years.
' Real labor costs are defined as total wage and nonwage payments,
including contributions to social security, deflated by the wholesale
price index. Dividing by an index of productivity yields real unit
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Figure 3
Spain: Labor Costs, 1974-85
Real Unit Labor Costs
Index 1974=100
100 1974 75
a Estimated.
b Defined as the product of the effective exchange rate
index and the ratio of an index of Spanish unit labor
costs to an index of unit labor costs in the industrialized
countries. An increase indicates a loss of competitiveness.
Figure 2
Comparative Industrial Employment
Indexes, 1974-85
Relative Unit Labor Costsb
Index: 1980=100
85a 60 1974 75 76 77 78 79 80 81 82 83 84 85
The wage explosion of the 1970s damaged the ability
of Spanish firms to compete internationally. Calcula-
tions of effective exchange rates, weighted by relative
unit labor costs, indicate that export competitiveness
worsened by 50 percent during 1975-79 vis-a-vis other
OECD countries (see figure 3). Spanish wages in
manufacturing, once well below those of most West
European countries and close to some of those of the
newly industrializing countries (NICs), more than
doubled during 1975-79 (see table 1). Consequently,
Spain lost market shares in the OECD in footwear,
clothing, shipbuilding, and consumer electronics.
Spanish producers also encountered greater competi-
tion from the NICs at home. Imports of manufac-
tured goods from the NICs quadrupled during 1975
to 1983.
The loss of competitiveness in traditional, low- and
intermediate-technology sectors, such as steel, ship-
building, textiles, leather, and footwear, and the
emergence of worldwide surplus capacity in such
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Table 1
Selected Countries: Hourly Compensation
in Manufacturing, Selected Years
Spain
2.60
5.41
5.96
5.62
5.37
4.75
_ Textiles
1.38
3.26
3.46
3.48
3.34
2.79
Shipbuilding
2.19
5.07
5.45
5.41
5.24
4.45
Denmark
6.28
10.05
10.54
9.12
8.68
8.53
Germany
6.19
11.29
12.33
10.54
10.44
10.41
Australia
5.02
6.50
7.37
8.87
9.01
8.45
Italy
4.65
7.14
8.13
7.39
7.36
7.59
Finland
4.59
7.40
8.21
7.94
7.83
7.36
France
4.58
7.85
9.12
8.15
7.86
7.66
Austria
4.06
7.18
7.84
6.89
6.90
6.92
United Kingdom
3.26
5.50
7.28
7.13
6.80
6.48
New Zealand
3.07
4.52
5.11
5.46
5.31
4.79
Japan
3.05
5.49
5.61
6.18
5.70
6.20
Ireland
3.01
4.79
5.81
5.44
5.54
5.48
Greece
Newly industrializing countries
Mexico
Singapore
0.83
1.29
1.47
1.77
1.93
2.17
Hong Kong
0.72
1.25
1.44
1.48
1.55
1.40
Taiwan
0.48
1.01
1.27
1.52
1.57
1.61
products were particularly damaging in a country price shock drove industrialized countries into reces-
overconcentrated in these sectors. Traditional sectors sion. Although production in the shipbuilding, textile,
accounted for 28 percent of Spain's industrial produc- footwear, and clothing sectors recovered in the late
tion in 1972, compared with 14 to 22 percent in the 1970s, another oil price hike in 1980 sent them into a
four major West European countries. Moreover, in a new tailspin. Unlike other West European countries,
colossal miscalculation, the Franco regime in 1974
embarked on a major investment program to further
expand capacity in these sectors just as the first oil
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Figure 4
Spain: Production Trends by Industry, 1974-85
I I Y I I I I I I I I I I I I I 1 I I I I I ~I-i
95 1974 75 80 85 20 1974 75 80 85
~--I I I I I I I
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Spain has continued to increase its steel production-
with the aid of government subsidies-even though
domestic consumption has collapsed (see figure 4 and
appendixes A and B).
Austerity programs put into place during 1977-78 and
1983-85 contributed to the industrial slump to a much
lesser extent. In both cases, deepening current ac-
count deficits and inflationary pressures led to the
introduction of tighter monetary and fiscal policies.
Improvements in Spain's current account and in
consumer price inflation were gained at the cost of
slowing domestic demand and forcing firms to seek
other markets for their goods.
Subsidies required to prop up sick public-sector indus-
tries diverted resources that could have gone toward
productive investment and widened the budget deficit.
As the financial health of state-owned enterprises
deteriorated, budgetary transfers soared to $2.5 bil-
lion in 1983-2 percent of Spain's GDP-compared
with $150 million in 1975. Most of these losses have
occurred at the National Institute of Industry (INI),
which controls firms that in 1983 accounted for 34
percent of Spanish steel production, 82 percent of ship
production, 20 percent of industrial investment, 6.5
percent of the industrial work force, and 6.5 percent
of GDP.
At the same time, Spain's political and economic
isolation, weaknesses in its university system, and its
protectionist policies hindered it from moving into the
high-technology markets where world demand had
grown rapidly. Spanish exports of electronics and
computers in 1984 represented only 3 percent of total
exports, compared with a West European average of
6 percent. Production failed to grow fast enough to
meet even domestic demand and thus covered only a
little more than half of domestic consumption by
1982, down from 88 percent in 1974.
The severity of the structural problems the Socialists
inherited was due in part to the failure of previous
governments to address them seriously. Moderate
governments under the Union of the Democratic
Center (UCD) from 1977 to 1982 delayed action
because of misperceptions about world market
trends, preoccupation with the transition to democra-
cy, and a reluctance to stir up worker opposition.
Even though the UCD drew up a draft restructuring
plan in 1977, it did not introduce a comprehensive
program until 1981.
The UCD believed that the government's role should
be limited to providing financial and legal support
and to monitoring the goals set by the private sector.
Participation in the program was voluntary and was
based on agreements between the government, man-
agement, and workers. The overall objective was to
improve Spain's competitiveness in international
markets by cutting surplus capacity and the bloated
workforce, improving firms'financial positions, and
adapting products to changing markets. To support
this effort, the UCD budgeted $2 billion for capital
injections, investment grants, early retirement, and
layoffs; it earmarked another $2 billion for credits
and guarantees during the period 1981-83.
it from closing.
The program, however, suffered from a number of
shortcomings. Most important, the government failed
to cut back on shipbuilding facilities, despite slump-
ing demand and mounting losses. An agreement with
labor unions to slash jobs at shipyards the govern-
ment had rescued was never put into effect. Restruc-
turing in the footwear and textile industries also fell
well behind schedule. Because of bureaucratic red
tape and the large number of small firms in these
industries, only 300 of the targeted 8,800 firms had
received state support for restructuring when the
Socialists assumed office in 1982. Progress was made
toward rationalizing the steel sector-by 1982 inte-
grated steel plants had shed approximately 5,000
laborers. Nonetheless, the UCD government made no
effort to scale down steel capacity and even took over
a large, unprofitable steel plant in Valencia to prevent
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Table 2
Spain: Cutbacks in Industrial Employment a
Employment
at Beginning
of Program b
Planned
Employment
Losses
Through 1986
Percent
Cutback
Actual
Cutback
Through
1984
Percent
of
Program
44,896
43,026
Specialty steel
13,744
5,413
39.4
4,256
78.6
Regular steel
14,408
2,812
19.5
2,112
75.1
Ironworking
1,010
40
4.0
40
100.0
Textiles and clothing
91,140
7,668
8.4
5,114
66.7
Footwear
32,925
3,705
11.3
2,811
75.9
Home appliances
23,491
10,091
43.0
8,256
81.8
Automotive electrical equipment
6,720
1,320
19.6
1,125
85.2
Electrical parts
3,279
135
4.1
135
100.0
Semiprocessed copper
4,281
987
23.1
712
72.1
Telecommunications
18,681
3,181
17.0
692
21.8
Subtotal
297,601
Automobiles d
22,000
4,000
18.2
NA
Paper and pulp
20,400
1,500
7.4
NA
NA
Machine tools
8,300
2,000
24.1
NA
NA
Fertilizers
10,000
1,180
11.8
NA
NA
5,900
39.3
NA
NA
85,895
23.0
NA
NA
a This represents the work force at firms participating in the
restructuring program, rather than total employment in each
sector.
b For integrated steel, employment as of 30 December 1980; for
home appliances, as of mid-1980; for ironworking, as of
31 December 1982 and for all other sectors-except the last four-
as of 31 December 1981; for the last four sectors, which recently
entered into the industrial restructuring program, employment as of
31 December 1983.
c The integrated steel restructuring program is scheduled to end in
1988.
d Automobile restructuring will get under way this year and will
last until 1990. The figures for the beginning of the program
represent employment as of 31 December 1985.
The Socialists' Program
In an effort to redress these economic problems after
coming to power in 1982, the Socialists broadened
restructuring efforts of earlier governments by estab-
lishing in 1984 an ambitious two-pronged industrial
program intended to prune traditional sectors and
propel development of high technology (see inset).
Under the first part, the Gonzalez administration took
harsher measures to lay off surplus labor and close
inefficient plants in "sunset" industries during 1984-
86. Madrid's plan called for eliminating 85,900
jobs-23 percent of the labor force in the affected
firms, equivalent to nearly 3 percent of the total
number currently unemployed (see table 2). The gov-
ernment estimated that 25 percent of these workers
would take early retirement, 39 percent would decide
to participate in a government job-training program,
and 36 percent would decide to take the standard
unemployment compensation.
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To make traditional goods more competitive on the
world market, in 1984 the government also began to
provide subsidies and soft loans to support invest-
ments that improve efficiency and quality. Madrid
estimated the total cost of employment and capacity
cuts and new investments would come to $6.7 billion.
The Socialists have expanded the previous program to
cover any industrial sector-not only traditional in-
dustries-that is in financial difficulty and is willing
to undertake restructuring. As a result, the program
now covers 17 sectors: shipbuilding, integrated steel,
specialty steel, common steel, ironworking, textiles
and clothing, footwear, home appliances, automotive
electrical equipment, electrical parts, semiprocessed
copper, telecommunications, automobiles, paper and
pulp, machine tools, fertilizers, and electrical equip-
ment.
The second part of the program was aimed at reallo-
cating resources to industries with high growth poten-
tial such as electronics, defense goods, automotive
production, and food processing. Madrid has intro-
duced a number of measures-including tax reduc-
tions and accelerated depreciation for capital equip-
ment intended for research and development-to
encourage the private sector to move into new technol-
ogies. The government anticipates these steps will cost
about $1 billion. In addition, Madrid expects to
increase spending by about $2 billion on public-sector
research and investment in high-technology projects
in the period 1984-87 by reducing subsidies to tradi-
tional industries.
Traditional Industries
The main thrust of the Gonzalez administration's
plan is to improve the efficiency of depressed public-
sector industries-particularly state-owned steel
plants and shipyards-by eliminating idle capacity,
investing in more modern equipment, and reducing
overmanning. Approximately $4.7 billion is going to
public enterprises in traditional sectors, primarily the
National Institute of Industry (INI), the state holding
company, in the period 1984-86. Another $2 billion is
going to private-sector firms participating in the
program. Most of the funding, in the form of direct
loans and interest rate subsidies, is intended to pro-
mote rationalization through investment in more effi-
cient production techniques. Only $400 million will go
The job losses will fall unevenly in the three major
integrated plants-state-owned plants in Valencia
and Asturias and a privately controlled mill in the
Basque region:
? The proportionately greatest blow will fall on the
Valencian plant, the smallest of the three. It will
lose half the workers in its labor force of 4,000, and
most of those discharged will be too young to
qualify for early retirement. The government, how-
ever, has pledged to hire more workers in the cold-
rolling mill and is subsidizing investments in new
plants in Valencia that will provide at least as
many new jobs.
? The Asturian plant-the largest of the three-will
lose 6,000 of its 21,000 jobs, but mostly through
early retirement.
? The smallest cutback will take place at the steel
mill in the politically sensitive Basque region,
where job losses will be limited to one-fifth of the
total work force-2,200 jobs out of a total of
10,700 will be eliminated. Here, too, most of the
cutbacks will be made through early retirement.
to job training programs and increased unemployment
payments to cushion the transition for laid-off work-
ers, while $1 billion is intended to cover public-sector
losses.
The Socialists propose to deal with the problems of
the integrated steel industry by pruning employment
and capacity while increasing the sector's efficiency.
They plan to spend $3.6 billion during 1984-88 to
support the elimination of 10,200 jobs at three inte-
grated steel plants and new investment in rolling,
finishing, and continuous casting machinery' (see
inset). The program also calls for cutting costs by
' Continuous casting is a process that eliminates several steps in
conventional steelmaking, increases the yield of semifinished prod-
ucts, lowers energy costs, and reduces the number of man-hours
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integrating production of primary, intermediate, and
finished products; shifting from lower to higher value-
added finished products; scrapping obsolete open-
hearth facilities; and closing the crude-steel-making
plant in Valencia.
To raise profitability and productivity in the privately
controlled specialty steel sector, most of the invest-
ment under the government's program is going toward
the installation of continuous casting machinery.
Some funding will also go to new quality control
systems, finishing facilities, and electric arc furnaces
intended to save energy and improve the quality of
production. Numerous obsolete furnaces are being
scrapped.
Further cutbacks in steel capacity and jobs are in the
offing because of Spain's accession to the European
Community (EC) and the weak world market. Ac-
cording to US diplomats, Madrid agreed to reduce
production capacity of hot laminated steel products by
3 million metric tons during the first three transition
years of its membership in the EC. Press reports
indicate that this reduction in capacity, together with
increased competition from EC producers, the appre-
ciation of the peseta against the dollar, the loss of
export subsidies, and expectations of slow sales, has
prompted Spanish steel firms to draw up a plan to cut
another 10,000 to 20,000 jobs in the integrated-,
specialty-, and common-steel sectors.
The depth of the shipbuilding sector's troubles have
prompted the Socialists to introduce an even more
draconian program for it that envisions slashing the
labor force by 42 percent-18,873 workers-and clos-
ing idle yards. INI has already mothballed two of its
five shipyards, a supertanker yard in Galicia, and an
obsolete facility in the Basque city of Bilbao. Madrid
also proposes to merge some of the existing 35 small
and medium-sized yards, most of which are privately
owned, and to weed out the most inefficient, leaving
only 16 to 20 firms.
Madrid's overall goal for the shipbuilding industry is
to move it away from constructing large tankers and
toward building small, specialized cargo vessels with
computerized navigation and engine equipment. To
accomplish this goal, Madrid has promised to provide
direct subsidies for up to 25 percent of the cost of
construction, research and development, and invest-
ment in high technology. In addition, firms can obtain
loans at subsidized interest rates for the remaining
shipbuilding costs and for specialized construction
equipment.
In the labor-intensive textile and clothing sector-
which accounts for 30 percent of jobs in the sectors to
be restructured-the program's aims are to keep job
losses down to 8 percent, to assist firms to enhance
product quality and productivity, and to improve
design, marketing, and advertising. Madrid is hoping
this support will boost textile production and spur the
creation of new jobs in supplier firms.
In the footwear sector, Madrid has set up programs to
improve design and to enable small companies to
purchase or renovate equipment. Despite an earlier
reconversion plan, the footwear industry still suffers
from poor equipment, and productivity is estimated to
be 40 percent lower than the European average. In
addition to subsidizing loans to promote investment,
the Socialists are exempting footwear firms from
social security contributions during seasonal periods
of reduced production and have established an early
retirement program to correct overstaffing.
Investing in New Industries
The most far-reaching part of the Socialists' program
is the National Electronics Plan,' which is aimed at
correcting Spain's technological backwardness. The
Gonzalez administration hopes to more than double
production of electronics products and more than
quadruple the volume of electronics exports. Madrid
hopes to satisfy more than three-fourths of domestic
demand with domestic production by 1987, thereby
narrowing the trade deficit in electronics products.
Eight sectors fall under the program: microelectronics, consumer
electronics, electronic components, telecommunications, informat-
ics, defense electronics, medical electronics, and industrial electron-
ics. A new plan to expand the use of robotics-the Advanced
Industrial Automation Plan-forms part of the electronics plan's
efforts to develop industrial electronics. Madrid also intends to spur
development of a number of other new areas, including agro-food
industries, genetic engineering, immunology, defense weaponry,
solar energy, aeronautics, and materials science. In the agro-food
industry Madrid proposes to integrate state and private firms to
achieve economies of scale to facilitate research and development,
marketing networks, and advertising.
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Consumer electronics and computers are to become
the most important sector under the Socialists' ambi-
tious plans-to be transformed from the smallest
electronics export sector to the largest. Real exports of
consumer electronics expanded at an average annual
rate of 93 percent during 1982-84, and this pace is
expected to continue (exports doubling annually)
through 1987. In 1987, Madrid projects consumer
electronics will account for 20 percent of total elec-
tronics exports, compared with 2 percent in 1982. The
Spanish also intend to increase computer production
dramatically and to cover more than 80 percent of
domestic demand by 1987.
Madrid has recently defined subsectoral plans for
millimetric waves, optoelectronics, and informatics
and has extended the program to 1989. These plans
include designing systems for the use of millimetric
waves, spurring the establishment of software and
engineering companies, stimulating new informatics
applications, and developing the technology needed
for optoelectronics applications in defense, industry,
and telecommunications. The new electronics plan
also intends to correct two areas of weakness-
technical education and venture capital-by giving
scholarships, devising courses, providing tax breaks,
and developing a secondary market on the stock
exchange. Press reports indicate that measures to
carry out the plan will be included in the budget for
the 1987 fiscal year, which will be introduced this fall.
Madrid realizes that its technological base is insuffi-
cient to support this effort and that it will be forced to
seek technology, investment, and marketing assistance
from the United States, Japan, and the West Europe-
an countries. A $200 million joint venture with AT&T
to produce custom microchips, for example, will give
Spain a foothold in integrated circuits-as well as the
first microchip plant of this type in Western Europe-
and meet most of the government's targets for micro-
electronics production and exports. Madrid has also
sold a controlling share of a major state-owned elec-
tronics firm to Fujitsu, the second-largest data pro-
cessing firm in the world, and a minority share in
another state-owned computer manufacturer to a
French firm in the hope of drawing on foreign
expertise to improve the quality of hardware and
software produced by the Spanish firms and to expand
their line of products. In addition, Spanish firms are
hoping to gain access to technology through joint
ventures under the EUREKA umbrella (see inset).
Madrid has earmarked $1 billion, so far, to go mainly
to subsidized investment loans and export financing in
order to stimulate electronics development and over-
seas sales. The government is also providing grants to
assist firms in computerizing their operations. To lure
multinationals to Spain, Madrid is offering direct
subsidies, tax rebates of 90 percent of reinvested
profits, low interest loans for up to 75 percent of the
value of imported technology, and potential sales to
Spain's growing market. As a new member of the EC,
Spain is also counting on its attractiveness as a
springboard for exporting to the rest of the Communi-
The government drew up assistance programs in 1984
for seven "zones of urgent reindustrialization"
(ZURs) and a preferential industrialization zone to
cushion the blow of layoffs.' These zones are located
within regions where total labor cutbacks were equal
to as much as 12 percent of industrial employment in
1984 and 3 percent of the total labor force (see map
and table 3). The number of workers forced to seek
new jobs is smaller once retirements are taken into
account-particularly in Asturias, where anticipated
retirements are equivalent to two-thirds of the job
losses. Nevertheless, layoffs threaten to raise already
high unemployment rates. To create new jobs, Madrid
is providing companies in the zones special regional
incentives, which include access to official credit,
compensation for relocation costs, assistance in land
purchases, tax allowances, and special accelerated
depreciation laws.
'The zones are the shipping centers of El Ferrol, Vigo, Cadiz, and
Bilbao; the steel towns in Asturias and Valencia; Barcelona; and
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Spanish firms are taking part in 13 joint ventures:
? Advanced mobile robots. Third-generation robots
for public safety applications, such as national
disasters and antiterrorism.
? BD 11. Development of a data base for distribute
expert systems on low-level computers, using the
Pick operating system and "C" language.
? Chrome tanning salts substitutes. Development of
techniques to treat leather, replacing chrome with
aluminum.
? Computerized engineering. Development of a com-
puterized engineering system.
? Diane. Automatic integrated system for nonde-
structive use of neutron beams in the quality con-
trol of large, complicated components manufac-
tured for new materials.
? Electron beam welding. Development of a cost-
effective method to weld steel up to 100 millimeters
thick at atmospheric pressure.
? Eurocim. A flexible automated factory for electron-
ic cards, preparation of circuits, and quality control
of cards.
? European software factory. Design and creation of a
data base with programing modules available to
software firms.
? Europolis. Intelligent control system for traffic and
metropolitan control and information.
? Fishing vessels. Development of technology for de-
sign, construction, and use of fishing boats.
? Galena 2000. Development of automatic medical
diagnostic equipment.
? Oxodipina. Pharmacological and clinical develop-
ment of oxidipene, a calcium antagonist.
? Sunflower seeds. Production of new varieties of
sunflower seeds.
The Spanish have expressed interest in another six
projects:
? Carmat 2000. Car structures, using new materials.
? Diesel engines. Development of new, efficient fibre-
reinforced ceramics for diesel engines for commer-
cial vehicles.
? Euromar. Development and application of new tech-
nologies to ecological problems.
? Gas turbines. Measurement of performance im-
provements from introducing ceramics into gas
turbines.
? Light materials for transport systems. Development
of technology for welding aluminum alloys by
electron and laser beams and development of multi-
layer composite materials.
? Pan (N5). Manufacture of equipment to produce
high-pressure subsea pipes.
Generous benefits to laid-off workers have helped
limit the political impact and alleviate social pres-
sures. Madrid has given workers the choice of either
taking severance pay and receiving standard unem-
ployment benefits for a maximum period of 18
months or contributing their severance pay to the
Employment Promotion Fund and getting further
unemployment benefits equal to 80 percent of their
salary for three years. The fund retrains workers,
offers wage and social security subsidies to firms to
encourage hiring, and provides incentives to attract
new industries to hard-hit areas. The program has
thus fostered the creation of alternative jobs, soften-
ing the effect of layoffs. It has also held worker
opposition down. According to a poll taken in 1984,
88 percent of industrial workers and 85 percent of
steelworkers were willing to go along with an industri-
al restructuring program if the government made a
commitment to promote new jobs. In addition, it
helped to keep the General Workers Union (UGT) in
line on continuing layoffs by offering something in
return and helped the union rebuff the Communists'
criticism that it is a mere "transmission belt" of
government policy.
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Figure 5
Zones of Urgent Reindustrialization
El Ferrol
del Caudillo
Galicia
;,Vigo
Portugal
NORTH
ATLANTIC
OCEAN
Canary Islands
La Palma Lanzarote
(~
v Tenerll
O c
U Gran
0 -0 200 Canaria
mete s
Madrid is well on the way to accomplishing most of
its plans to streamline ailing industries and has made
a good start on spurring development of electronics.
The steps Madrid has taken to scale down idle
capacity, upgrade facilities, and reduce surplus labor
are already raising labor productivity and lowering
losses in state-owned enterprises. At the same time,
the government's electronics plan is yielding a surge
in joint ventures with foreign firms that will move
Spain into the production of new goods and services
that are now in demand on the world market.
-w ao
Basque
Country_
Zone of urgent
reindustrialization (ZUR)
Region boundary
0 100 Kilometers
0 100 Miles
Trimming Surplus Labor
Excluding the steel and shipbuilding sectors, tradi-
tional industries carried out 71.4 percent of the
proposed cutbacks by the end of 1984. Additional
layoffs were made in 1985, and a recent government
report states that 80 percent of the intended layoffs
have been carried out. Layoffs in the steel and
shipbuilding sectors-roughly half of the total
planned cutbacks in industrial employment-were
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Table 3
Cutbacks in Industrial Employment
by R6gion
Percent
Planned
Cutbacks as a
Share of
Industrial
Employment,
March 1984
Planned
Cutbacks
as a Share
of Labor
Force,
March
1984
Unem-
ployment
Rate,
March
1984
Galicia a
4.0
0.6
11.2
Navarre
3.7
1.1
15.7
Madrid a
3.4
0.7
19.7
Andalucia a
2.4
0.3
28.5
Balearic Islands
2.2
0.4
17.0
2.0
0.5
19.0
1.3
0.4
22.6
0.7
0.1
14.7
Canary Islands
0.5
0
21.0
Castile-La Mancha
0.4
0
16.3
Castile-Leon
0.2
0
15.5
Rioja
0.1
0
12.8
Extremadura
0
0
26.0
held up by violent demonstrations staged by the
Communist-dominated Workers' Commissions and a
radical Galician trade union, but the government
refused to back down. Worker resistance has now
petered out and Madrid has cut back almost all of the
shipbuilding jobs it originally proposed to eliminate,
according to the Embassy. Madrid has torn down the
blast furnaces at a major plant in Valencia, eliminat-
ing 2,000 jobs, and pared another 1,250 jobs at a
plant in Asturias.
Production in most traditional industries has in-
creased only slightly, but trimming surplus labor has
boosted productivity. For example, output per worker
in the specialty steel sector rose 54 percent in 1984
Table 4
Progress in Steel Restructuring
Integrated
Steel
Specialty
Steel
Output per worker (metric tons)
Goala
231
129
1980
153
70
1984
169
108
Goal a
7,000
1,200
1980
8,600
1,600
1984
6,800
1,380
Capacity utilization (percent)
Goal a
1980
77
60
1984
84
76
a The goals for integrated steel and specialty steel are 1988 and
1986, respectively.
compared with 1980, largely because of the elimina-
tion of over 4,250 jobs (see table 4). In the integrated
steel sector, where layoffs have lagged somewhat,
output per worker rose only 10 percent from 1980 to
1984.
Closing Unprofitable Plants
Madrid's progress in closing idle and unprofitable
plants has increased capacity utilization in most sec-
tors. The greatest improvement occurred in the spe-
cialty steel sector. Specialty steel producers cut capac-
ity by 220,000 tons in the period 1980-84 and boosted
production by 100,000 tons, thus improving the ca-
pacity utilization rate about 16 percentage points to
76 percent. The Socialists also have made progress in
the integrated steel sector. Tearing down the blast
furnaces in Valencia has reduced integrated steel
capacity by 1.6 million tons and has eliminated a
bottleneck in steel production (see appendix A). As a
result, capacity utilization in 1984 was only slightly
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below Madrid's 1988 goal of 86 percent. Madrid has
carried out all of the cuts in capacity in the shipbuild-
ing sector that it originally planned, but slack demand
is keeping orders and capacity utilization down. F_
Budget Financing of Restructuring
The cost of the restructuring program is easing
somewhat. Industrial restructuring outlays more than
doubled from 1984 to 1985 to $1.5 billion-equivalent
to 2.4 percent of budgetary expenditures and 0.9
percent of GDP. We estimate that, with expenses
dropping in 1986 to $900 million, the cost of the
program probably will amount to about 2 percent of
total government spending.
Foreign Investment and Joint Ventures
Madrid has had some success in securing foreign
investment and joint ventures with foreign multina-
tionals. So far, Madrid has lined up 28 agreements,
primarily with US, Japanese, and West European
multinationals (see table 5). Sixteen new plants and
research centers are planned; 10 of these projects will
be carried out by firms that were not previously
operating in Spain. The remaining projects will be
undertaken by firms that plan to expand existing lines
of production in their Spanish subsidiaries. Two new
plants opened last year; at least three more are under
construction. We cannot assess the progress on the
other 11 new projects because we do not have infor-
mation on them. Two other deals were signed in 1984,
but we believe they have a somewhat uncertain
future.
Madrid has made advances in obtaining foreign com-
mitments in consumer electronics, microelectronics,
and informatics. Six firms intend to produce VCRs,
televisions, and microcomputers; one (AT&T) will
produce semiconductor chips; and six firms plan to
boost their production of computers. The Gonzalez
government has also settled on four joint ventures in
electronic components that will go almost halfway
toward meeting its production target in this subsector.
Progress has been slow in other areas. Thus far,
Madrid has struck only two deals in industrial elec-
tronics, one with Hewlett-Packard and one with Syss-
can, and one in electromedicine with General Electric,
partly because of delays in approving a law that will
govern coordinated purchases of electronic equipment
by public-sector companies. Only two domestic re-
search and development centers are in the works. In
addition, investments by small, private firms have
been less than expected across the board.
An assessment of how well the Spanish have done in
terms of spurring investment, exports, and production
is somewhat difficult because data are fragmentary
and, for the most part, available only through the end
of 1984-the first year the program was put in place.
According to press reports, electronics production is
growing but is still not keeping pace with consump-
tion. Because Spain has started from such a small
base, export growth has been quite striking as new
products have come on line. For example, a 280-
percent increase in real informatics exports in 1984,
compared with 1983, was almost entirely because of a
new line of medium-sized computers produced by
IBM. Although electronics exports are rising, the
sector still accounted for only 3 percent of total
exports in 1984.
Madrid has made a start toward expanding the use of
robots in the manufacturing sector, but Spain is still
well behind other industrialized countries. By the end
of 1984, the number of Spanish robots had increased
by one-fourth compared with the previous year. In
order to encourage robotics in industries outside the
automobile sector-which owns more than 80 percent
of the robots-the government has also signed agree-
ments with 16 firms for preferential credits and
special subsidies to finance the purchase and installa-
tion of robot units. By international standards, howev-
er, the number of Spanish robots remains rather
small. In 1983, Spain had 416 robots-less than one-
fourth as many robots as the United Kingdom and
less than one-tenth as many as West Germany. The
efforts made to date almost certainly fall short of
closing the gap.
The government's success in developing other sectors
in which it has expressed an interest-such as bio-
technology, genetic engineering, immunology, and
materials science, where Spain has a handful of firms
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Table 5
Spain: Electronics Investments
Firm Project
AT&T/CTNE New plant to produce 1.75 micron complemen-
tary metal oxide semiconductor chips; construc-
tion began April 1986; new jobs: 674
Ferranti/Piher Addition of 5 micron custom chips to present line
Semiconductores b of production
Sony/Sony Espana Addition of VCRs to present line of production
and increased output of color Televisions; new
plant opened February 1985; new jobs: 420
Sanyo/Aznarez Industrial Addition of VCRs to present line of production
and increased output of color television
Grundig/Intergrundig Addition of VCRs to present line of production
Panasonic/ Panasonic Espana Addition of VCRs to present line of production
Sharp/Sharp Espana New factory to produce televisions; new jobs: 281
32K and 64K personal microcomputers; bought
out plant owned by Dragon Data
Thomson CSF/Componentes S.A. New factory to produce tantalum condensors;
New jobs: 150
Philips/Miniwat Expansion of plant producing television tubes
NCR/NCR Espana Additional factory to repair
electronic modules
Digital Equipment Corporation/ Additional factory to produce computer
Digital Espana components
ITT/Standard Addition of system 12 telephone centrals and
Electrica a peripherals to present line of production; new
jobs: 2,250
Ericsson/Intelsa/CTNE Addition of PBXS and office automation to pre-
sent line of production; new jobs: 150
Siemens/Siemens Espana New research and development center and diver-
sification of present products to include hardware
and software design and manufacture; new jobs:
420
Philips/Cables de Comunicacion Addition of mobile radio equipment to present
line of production; new jobs: 200
Corning Glass/CTNE A new plant to produce optical fibers scheduled to
begin operation in 1988; new R&D center; new
jobs: 80
Messerschmitt-Boelkow- New plant for electronic security systems; new
Blohm/CTNE jobs: 70
Constant 1982 Mi
(excep
llion US $
t as noted)
Investment
1984-87
Planned
Production
in 1987
Planned
Exports
in 1987
200
220 a
176 a
NA
2 million
chips
NA
6
82
21
4
71
35
NA
71
24
6 c
200,000
units d
80,000
units d
NA
300,000
units
200,000
units
2
106
27
6
24
15
6
65
24
NA
35
31
NA
47
42
35
559
159
NA
106
27
60
94
47
NA
NA
NA
14
85,000
km r
25,500
km
3
18
NA
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Table 5 (continued)
Firm Project
Expansion of present plant producing peripherals
and addition of a line of medium-sized computers;
new jobs: 880
Nixdorf/Nixdorf Espana Additional plant to produce minicomputers; new
jobs: 130-300
Intertechnique/Fujitsu Espana Expansion of Fujitsu Espana's present line of
minicomputers
Olivetti/Hispano Olivetti Expansion of present line of personal computers;
new jobs: 300
Expansion of present line of minicomputers. Bull
has acquired 40 percent of Telesincro, a
state-owned company
New plant for the design, development, manufac-
ture, and repair of equipment for processing
eletronic data; software: Fujitsu bought 60 per-
cent of the shares of Secoinsa, a state enterprise
that produces computers and designs software.
CTNE controls the remaining 40 percent of
Secoinsa's shares; new jobs: 2,670
Hewlett-Packard/ New plant for computer-aided design (CAD) Plot-
Hewlett-Packard Espana ters; started operating August 1985;
new jobs: 800-900
Sysscan/CTNE
Medical electronics
General Electric/ Expanded production of X-ray machines
General Electrica
Electromedicina
Informatique Internationale/ New firm to produce software systems for aero-
Centro de Calculo de Sabadell space and military projects
Pacific Telesis/CTNE New research and design center, groundbreaking
ceremony May 1986; construction to be complet-
ed 1989; also have an agreement on management
cooperation and marketing of CTNE packets-
witching technology
a In 1989.
b Piher Semiconductores is now going through insolvency proceed-
ings, and the government reportedly is negotiating a joint venture
with the British Ferranti company to keep the firm alive.
c1986-90.
New artificial intelligence research center in ad-
dition to Sperry's current subsidiary that imports
and distributes computers; will be located in same
building as AT&T and will be operational in 1987
Investment
1984-87
Planned
Production
in 1987
Planned
Exports
in 1987
NA
6
3
8
82
31
16
35
26
59
353
177
NA
300
240
3
37
18
NA
NA
NA
39 s
NA
NA
d In 1990.
We are somewhat skeptical about the future of this project both
because of the System 12's poor track record and because of ITT's
sale of its overseas subsidiaries to the French CGE.
rIn 1988.
s 1986-88.
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and few research and development capabilities-
hinges to a large extent on its ability to obtain
technical cooperation and funding from more techno-
logically advanced countries. Spanish officials have
decided to postpone investment by INI in new areas
while the mammoth state firm is restructuring its
holdings in ailing sectors. As a result, most of the
impetus to develop other high-technology sectors was
to come from joint ventures in EUREKA. Many of
these projects may have to be scaled back because of
French Prime Minister Chirac's lack of enthusiasm
for the European Research Coordinating Agency
(EUREKA).
We believe the government had little choice but to
introduce a vigorous restructuring program to cure
some of Spain's economic woes. Confronted with
declining industries and burdensome costs of propping
up state-owned firms, the Socialists have had to
choose among the following options: (1) pursuing the
same course as previous governments by pouring
resources into the rescue of sick firms and accepting
escalating costs and shrinking export markets; (2)
cutting off state support and allowing market forces to
drive inefficient firms into bankruptcy with no guar-
antee that Spanish industry would move toward high-
technology fields in the absence of domestic know-
how; or (3) scaling down ailing firms and using the
freed-up resources to intervene in the market to
promote development of new industries. While the
Gonzalez government chose the last option, restruc-
turing is not enough to cure Spain's economic ills. In
our judgment, Madrid's continuing efforts to hold
down real unit labor costs by persuading trade unions
to accept real wage cuts are critical to the recovery of
investment and economic growth over the longer term.
Additional measures also need to be introduced to
bring prices into line with costs in such major money-
losing state enterprises as the national railway and
airline and reduce drains on the government budget.
Although Madrid is making headway in restructuring
sunset industries, the adjustment effort is not yet over.
According to press reports, Madrid believes that
further steps will be needed to ensure the long-term
viability of traditional industries, and intends to spend
another $1 billion during 1987-88 to support invest-
ments in equipment, restructure debts owed by steel
and shipbuilding firms to state credit institutions, and
lay off additional workers. Most of this aid probably is
destined for steel firms and shipyards that are reeling
from the blows of worldwide surplus capacity, slack
demand, stiff competition, and limits on Spanish steel
exports.
Over the long run, the strides Madrid is making
toward restructuring industry should improve Spain's
international competitiveness and reduce the need to
pour money into unviable enterprises. In traditional
sectors, rising output per worker and better product
quality, resulting from investments in new equipment
and designs, should make Spanish goods more com-
petitive. This will help move Spanish exports out of
the market for low-quality goods, where they are
overpriced, and into the market for fashionable,
higher quality goods, where they would not face as
much competition from the NICs. Restructuring ef-
forts also should improve traditional industries' ability
to withstand the increased competition that will result
from Spain's obligation to phase out trade barriers on
EC imports and lower tariffs on non-EC countries,
now that it has joined the Community. The press
reports that losses in state-owned steel and shipbuild-
ing sectors are shrinking, and recent projections indi-
cate that, by the end of 1986, they should be half the
1983 level.
The benefits of Madrid's efforts to spur high technol-
ogy are likely to be felt mainly over the long run. On
the basis of past experience, we believe gains in
productivity are likely in the banking and manufac-
turing industries. Industrial and office automation
probably will contribute to changing demands for job
skills and educational programs. According to Embas-
sy reporting, computer use is becoming more wide-
spread and is giving rise to new journals and the sale
of game and hobby software. As new plants come on
stream, Spain stands a better chance of diversifying
its exports and raising electronics' share of GDP.
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Table 6
Selected Countries: Electronics Production and
Consumption, 1982
Production/GDP
(Percent)
Consumption/GDP
(Percent)
Per Capita Consumption
(US S)
United Kingdom
3.18
3.80
322.4
Switzerland
3.03
2.77
418.6
West Germany
3.01
2.88
309.5
While making inroads on the market is a challenging
goal, given the increasing number of competitors,
Spain can take advantage of the reputations of estab-
lished foreign firms with which it is collaborating. It
also can count on recent improvements in relative unit
labor costs. Spain, nevertheless, almost certainly will
remain a relatively small producer and competitor on
the world scene-the shares of electronics production
and consumption in GDP were far below other Euro-
pean countries in 1982, and this distance is not likely
to be greatly shortened in the foreseeable future (see
table 6).
Because of the leadtime before new plants start up,
the effects of restructuring on unemployment proba-
bly will be negative in the short run. New projects
approved so far in the ZURs will generate fewer than
10,000 jobs, a fraction of the workers laid off. Even at
full production, the electronics projects-most of
which will be smaller than the joint venture of the
Spanish state telephone company (CTNE) with Fu-
jitsu employing 3,000 workers-will create fewer jobs
than the roughly 86,000 jobs lost in other industries.
Over the longer term, however, jobs created at suppli-
er firms will help offset losses elsewhere. As an
example of this multiplier effect, IBM's Spanish
subsidiary has generated 4,000 jobs at other firms,
according to the US Embassy.
Industrial restructuring is likely to have little effect
on Gonzalez's political prospects. Surveys indicate
most voters regard industrial restructuring as a rela-
tively unimportant issue. Moreover, the public has
perceived it as a problem that was inherited from the
previous government and has had low expectations
about Madrid's ability to cure the industrial crisis.
Generous state programs have softened the social and
economic impact of industrial restructuring, in our
view, and probably have helped to minimize the
political backlash. Although the Communists were
able to stir up violent protests in the shipbuilding and
steel sectors earlier, they never gained a wider audi-
ence than workers in Galicia and Valencia. At the
same time, the Gonzalez administration has lost some
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support on the left because it did not consult thor-
oughly with the UGT before announcing tougher
measures. The UGT, however, remained solidly be-
hind the Socialists during a trade union congress this
spring. The UGT probably will press Gonzalez to
deliver on promises of job creation in return for past
sacrifices, but we doubt that it will desert the Social-
ists. Because all of Spain's political parties-with the
exception of the far left-agree that Spain must
pursue an industrial restructuring program, we con-
sider it unlikely that Gonzalez's opponents can capi-
talize on it.
Spain's electronics development plan probably will
have little effect on the country's overall trade policy.
Although Madrid has expanded its use of export
subsidies to spur foreign sales, Spanish officials have
refrained from implementing other measures original-
ly contained in the National Electronics Plan-such
as import barriers to protect infant industries and
national content and export requirements. They can-
not do so now that Spain is in the EC. Indeed, Madrid
favors a new round of GATT talks that would include
service industries like informatics and will begin
reducing all its trade barriers under the terms of EC
accession.
Implications for the United States
Spain's restructuring program is likely, on balance, to
be of benefit to the economic and foreign policy
interests of the United States. We believe, for exam-
ple, Spain's interest in acquiring US technology will
make Madrid more responsive to US pressure to
introduce export controls. In the wake of hints that
Washington might refuse to grant export licenses for
sensitive products, Madrid already has imposed an
import certification and delivery verification system
on high-technology products and has taken steps to
join COCOM. Spanish officials have indicated to the
US Embassy that they expect to introduce a full
COCOM system by the end of September. The
process of revising export control mechanisms has
been slow, in part, because Spanish officials are still
learning how COCOM functions and because the
translation of COCOM lists has not been completed.
Spain's export control program still exempts public-
sector enterprises and dual-use products worth less
than 1 million pesetas-about $5,700-but Madrid
has given assurances that it will satisfy US require-
ments to avoid being denied products.
Spain's industrial development plans will continue to
provide a larger market for US high-technology ex-
ports and increased opportunities for direct US invest-
ment. The prospects are probably best in the areas
where Spain is furthest behind in meeting targets.
Madrid still needs defense electronic systems and
foreign investments in a number of areas in the
components sector, including metallized resistors, ce-
ramic condensors, and automated component fabrica-
tion technology. Spanish officials have indicated to
the US Embassy that they are particularly impressed
by US technology in the last category. With the
industrial electronics industry still in its infancy,
Madrid will also be seeking foreign investment and
technology in computer-aided design/computer-aided
manufacturing (CAD/CAM) hardware and software,
electronic signaling and controls, security systems,
and robotics. In the telecommunications sector, US
access to the market is likely to remain limited to joint
ventures with CTNE, which enjoys a monopoly in
services.
Madrid's desire to tap foreign expertise in developing
high technology probably will lead Spanish officials to
leave the door open for participation in SDI research
contracts, although for domestic political and eco-
nomic reasons the government is not likely to sign a
formal agreement. According to the US Embassy,
Defense Minister Serra has indicated the Gonzalez
administration may remain concerned about deploy-
ment, but is willing to approve research. While Paris's
change of heart over EUREKA could make SDI more
appealing to Madrid, Spanish participation in SDI
will, in any event, be quite limited because of Spain's
technological weakness.
25X1
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Appendix A
A Sick Steel Industry
A succession of governments made critical misjudg-
ments in the mid-1970s in building up a steelmaking
capacity that vastly exceeded domestic needs. The
Franco regime anticipated a doubling in specialty
steel consumption between 1974 and 1982, and in
1974 launched an investment program to boost steel
capacity to 20 million tons. Contrary to these expecta-
tions, steel demand was 30 percent lower in 1982 than
in 1974. This development reflected the slumping
fortunes of the main steel consumers-shipyards,
construction, domestic appliances, and automobiles-
caused by the 1973-74 and 1979-80 oil price shocks
and global recessions. Unable to reverse some of the
earlier projects, Spanish firms increased production
even as capacity utilization fell. The Union of the
Democratic Center (UCD), which came to power in
1977, made matters worse by putting most new
investment into expanding productive capacity rather
than into improving plant efficiency.
As a result, the Spanish steel industry has lagged
other West European countries both in productivity
and technology. At the start of the program, Spanish
labor productivity was about 20 percent below the
West European average because of sectoral inefficien-
cies, overmanning, and outmoded production meth-
ods. For example, crude steel slabs produced at the
government-owned Valencian plant were shipped else-
where for intermediate processing in a hot-rolling
mill, then returned for finishing in a cold-rolling mill
because the plant had no intermediate facilities. Spain
also fell way behind other European countries that
introduced continuous casting machines (see table 7).
Also, rigid labor laws kept work forces fat-only 13
percent of Spanish steel jobs were eliminated during
1974-82, a period when the EC trimmed about one-
third of its steelworkers:
Table 7
Western Europe:
Continuously Cast Steel, 1984
Percent of Crude
Steel Production
Sweden
79.6
West Germany
76.9
Italy
73.3
Turkey
71.8
Spain
49.0
Portugal
40.5
Belgium
49.5
Steel exports grew at an average annual rate of 23
percent in volume in the period 1974-85 (see figure 6).
But, in order to compete with new Third World rivals,
Spanish exporters shaved their prices to the point
where, according to the Minister of Industry, they
sometimes failed to cover production costs. By 1985,
71 percent of Spain's steel production was exported-
compared with 9 percent in 1974-but slack demand,
protectionist measures, an export push by the NICs,
and low world prices have limited export profits. The
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Figure 6
Spain: Steel Exports, 1974-85
EC has also been an overproducer, which limits its
potential as a market for Spanish surplus production.
Under a bilateral arrangement reached in 1978, Spain
agreed to restrain its exports to the EC. Moreover,
soft demand, competition from the NICs, an orderly
marketing arrangement, and a voluntary restraint
agreement have held down Spanish exports to the
United States. Spain has had more success in export-
ing to the Third World-exports to Middle Eastern
countries rose nearly sixteenfold in value from 1974 to
1984 and sales to other less developed countries
increased more than tenfold.
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Appendix B
The Declining Shipbuilding
Industry
The shipbuilding industry suffered a dramatic
77-percent fall in production in the period 1974-85
(see figure 4). Spain's heavy concentration on produc-
tion of large tankers and bulk carriers was the source
of rapid expansion that propelled Spain from 21st
largest ship producer in the world in 1960 to third
largest in 1970. The demand for these types of ships,
however, evaporated after the first oil price shock and
a worldwide downturn in trade. Moreover, Spanish
shipyards have been unable quickly to reorient pro-
duction facilities toward building the smaller, techno-
logically advanced, and specialized vessels now in
demand.
Underdevelopment of the marine equipment industry
and limited shipbuilding research have also handi-
capped Spanish shipyards. Because of import barriers,
Spanish yards purchase more than 90 percent of the
goods and services they need from the domestic
marine equipment industry-which lags well behind
the technological level of foreign competitors and
exports only 5 percent of its production. Similarly,
Spanish research and development in shipbuilding is
very limited in scope and has attained world standards
in only a few instances.
Madrid has squandered its resources by pumping
funds into increasing capacity and propping up sick
firms instead of improving existing facilities. In a
mistimed decision similar to those that have plagued
the steel industry, the UCD government opened a new
yard for building large bulk carriers in 1979 when
other industrialized countries were cutting back. It
also purchased two private shipbuilding companies in
financial distress to save jobs.
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