The rapid Romanian disintegration of the planned economy and the economic crises after 1989 imposed the large amounts of activity in the production units; the easiest way of maintain these of units - with no effects - was the subcontracting for the re-exportation system. This system is very important for foreign (commerce: over 75% of Romanian export to the European Union is in subcontracting for re-exportation system. This huge percent is possible because the subcontracting for re-exportation system allows a better management of the production capacities in order to maintain jobs or to create new ones, and in this way the competition producers a more important roll in what cancers the demands of consumers and it attracts foreign investors, also.subcontracting, production capacities, trade

Bugnar Nicoleta

Mester Liana

English

Research Papers in Economics

59 
LOHN PRODUCTION – AN ECONOMIC OR SOCIAL MEASURE? 
Bugnar Nicoleta  
Universitatea din Oradea, Facultatea de Stiinte Economice, Str. Armatei Romane, nr. 5 , tel. 0722474492, e-
mail nbugnar@uoradea.ro 
Me￿ter Liana 
Universitatea din Oradea, Facultatea de Stiinte Economice, Str. Armatei Romane, nr. 5 , tel. 0745419739, e-
mail lmester@uoradea.ro 
 
The rapid Romanian disintegration of the planned economy and the economic crises after 1989 imposed the large 
amounts of activity in the production units; the easiest way of maintain these of units – with no effects – was the 
subcontracting for the re-exportation system. This system is very important for foreign (commerce: over 75% of 
Romanian export to the European Union is in subcontracting for re-exportation system. This huge percent is 
possible because the subcontracting for re-exportation system allows a better management of the production 
capacities in order to maintain jobs or to create new ones, and in this way the competition producers a more 
important roll in what cancers the demands of consumers and it attracts foreign investors, also. 
Key words: subcontracting, production capacities, trade 
 
If in 2007 Romania was still considered to be “the workshop of the EU”, as a consequence of the increase of the 
wages and implicitly of the production costs, the lohn production will no longer be profitable for the foreign 
companies, which at the moment are interested in the country because of its cheap manufacturing costs. Thus we 
can expect economic shocks: with no markets, no brand on these markets, without any competitive spirit and with 
no money, the respective industries are facing the risk of colapse. Thus, the exports of the textile, clothing, leather 
and shoe industries, which are considered nowadays an important element in maintaining the economic balance of 
Romania, will prove to be inexistent, now that the lohn contracts are no longer avalable. 
In spite of all these arguments against engaging in lohn actuvities, Romania has accepted this system even in 
conditions  of  great  economic  crisis.  Against  the  baground  of  the  conflict  situation  in  Jugoslavia,  which  was 
considered “the campion of lohn production”, lohn production providers have redirected their interests towards the 
textile, clothing, leather and shoe industry in Romania also because of the low production costs, and the cheap and 
qualified labour force existing in our country. 
At the moment, due to the low profits which are obtained as a result of these activities in Romania, specialists 
claim that the lohn type of manufacturing looses its lucrativeness in our market, the interest of lohn partners is 
directed towards countries which are cheaper than Romania (The Republic of Moldavia, The Ucraine, etc), that is, 
towards countries whichs have the lowest wages. The interest in the Romanian market is fadding because of the 
fact that unemployment is no longer an accutely and severely widespread phenomenon, but also because of the 
emigration of the specialized labour force in search of better payed jobs.  
Due to the way in which the lohn process opperates, it cannot be considered a solution for the modernization of 
the  economy,  on  the  contrary,  it  is  a  means  of  increasing  the  technological  delay  which  separates  the 
commissioner (the one that provides the materials and raw material, the production documentation – models, 
projects, designs, etc.- accordging to which the manufacturing of the finished product is carried out and sets the 
technical parameters and quality indicators for the fisihed product) and the manufacturer (who commits himself to 
manufacture the finished product according to the technical norms set by the beneficiary by the dates stipulated in 
the lohn contract). The system in which a large part of the textile and shoe industry in Romania opperates, also 
known as lohn system/ OPT (Outward Processing Trade) implies the subcontracting of some orders for producers 
and distrubutors from the developed countries. Thus, we are dealling with a temporary import of materials and 
raw materials, their processing and the re-exportation of the product to a developed country. Usually, this re-
exportation is made under an internetionally well-known brand on the market. In such a developed market, where 
image and brand mean everything, to be the supplier of some well-know companies is an honourable and 
somehow comfortable position. Directly or indirectly, the large companies provide all that is necessary for the 
processing of the order, from the models and materials, to consulting (assistance), quality control and shipping 
means, and often finance the modernization (refurbishment) of the processing factories. 60 
We must mention the fact that, on the one hand, lohn production was the alternative chosen by the transnational 
companies, in the absence of an atractive medium for direct investment, in order to benefit from the cheap labour 
force in Romania, and on the other hand, it was a means of surviving for the Romanian companies during the 
transiton period. Seen as a commercial operation destined mostly to increase the infusion of foreign currency, in 
the last decades lohn processing has constantly had the lead over other products within the Romanian exports. 
This solution is not a favourable one for the Romanian economy, because the increasing of the products exported 
in the lohn system has occurred to the prejudice of the exports of cars, machines electrical appliencies, food 
products, etc, that is, of product which have a high added value. According to the statistics of The Ministry of 
Economy and Trade, if in 1989, lohn production represented 13% of exports, in 1996 it startet to tripple: 31,2% in 
1996, 30,2% in 1997, 34,1% in 1998, 34,6% in 1999, 35,4% in 2002 and 34% in 2005 (the main goods are 
clothing, textiles, footwear and leather goods).
80 
Starting with 1999, Romania has become the most important exporter of clothing (garments) in all this continent 
of lohn production which is represented by Central and Eastern Europe, and, at the same time, the main supplier 
for the EU. Poland, the former regional leader, cannot manage to get back on track mainly because of the wages, 
which are twice as much as in Romania. Other important players on the lohn market are Hungary (with an export 
of 1107 milliom dollars in 2000) and Bulgaria (691 million dollars). The ‚boom age’ came to an end in 2005 when 
the EU completely liberalized the import of this sort of products, openning the door for cheaper exporters like 
China, Bangaldesh, Pakistan and, not the least, Turkey (5860 million dollars in 2000).
81 
The Romanian export, which has risen above 10 million ever since 2000 and rached almost 26 million in 2007, 
presents a few caracteristics: it is highly geographically concentrated (in 2007 78% to the EU respective 76% to 
developed  countries),  is  dominated  by  products  which  require  a  large  number  of  primary  products  and 
manufacturing processes (the clothing and shoe industry holds 35% from the total) and is composed mostly of 
products manufactured in lohn system) (95% of the products of the clothing and shoe industry, 72 % of the total 
exports to the EU). In these terms it can occur for the Romanian export to be confronted with a decrease, because 
the lohn system could disappear, as lohn production represents a combination of circumstances given by the cheap 
working force. 
Besides the explanation given by some people, that lohn production has spread in Central and Eastern Europe, and 
impicitly in Romnia, because of the cheap labour force and a certain inaction on the part of the managers in what 
concerns the need to approach/penetrate foreign markets, there is also a series of economic reasons. The rapid 
extension of lohn production within the West-East relationship is justified by the extremely unbalanced structure 
of the former communist economy, and implicitly, the delay existing between an overproductive and inefficient 
production  system  and  an  almost  unexistent  marketing  and  distribution  system.  Thus,  the  production  on 
comission, whit the commissioner hadling the marketing of the final product, was a means of getting over this 
situation and allowing the Romanian producers to access the foreign markets. Then the precarious technology 
available  in  the  economy  made  it  impossible  for  the  Romanian  producers  to  engage  directly  in  the  external 
markets in conditions of full competition. Lohn production made possible the refurbishment of some companies, 
their adjustment to the new technological and commercial requirements. 
Specialists consider lohn production as a two edged weappon. It has advantages and disadvantages, the balancing 
of which is very important. Which are the advantages and limitations of the lohn system as only 20-25% of the 
exported value remains in the country, and the lohn production factory gets 10% from the selling price of the 
product and the employee gets around 1%? The most obvious advantages of the lohn system from the poin of 
view of the economic and social nature of this phenomenon are: 
•  as a commercial operation, it contributes to the influx of foreign currency into the country; 
•  it employs a significant part of the work force, mostly women; 
•  it improves the quality of the labour force by using the know-how of the foreign partner; 
•  it facilitates the opening towards the external market; 
•  the managers and employees get accustomed to the western standards; 
•   the foreign partners support the modernization of the technology; 
•  the direct contact with the tendences of the development of the external market. 
                                                            
80 www.dce.guv.ro 
81 *** - Capital Magasine, no.32, 7th August 2002, pp.18 61 
There are a few limitations hidden behind these advantages, limitations which should not be neglected: 
•  it is condidered to be a national income export: the income of the exporter is smaller than the income 
of the one who is exporting his own production; 
•  it leaves the national creativity unexployted; 
•  it only partially supports the increasing of the international specialization (vertically); 
•  the  unfavourable  circumstances  existing  at  one  point  in  the  external  market  can  determine  the 
importer to give up the lohn sysyem based activity; 
•  the increasing of the prices of the factors used in the production of the finished product generates the 
price risk for the exporter; 
•  the marketing of the product in the exteral market under the name of the commissioning company, 
makes it impossible for the national brands to penetrate the foreign markets; 
•  the profit margin is reduced to less than half and it is calculated only for manufacturing, not for the 
whole product 
•  the accumulation occurrs slowly, the resources available for investment are limited; 
•  it does not allow a medium or long-term production planning. 
With all the limitations of lohn production – the absence of the Romanian manufacturer from the international 
market, him depending on the commissions from the commissioner, the low price due to the increment only on the 
manufacturing, etc – it must not be seen as a mostly negative phenomenon. We must mention that this operation 
made possible the survival of some industries, which otherwise would have been insolvent (unsuccessfull). 
The removal of the custom taxes between Romania and the EU on 1 January 2002 created favourable conditions 
for production. At the moment, products such as hosiery, clothing and footwear are Romanian merchandise which 
is requested for import due to the price-quality ecuation, a ratio which is also determined by the fact that the 
employees producing them have the lowest wages. The most part of the exports is still represented bu the clothing 
and shoe industry. The clothing and footwear exports have reached 35,5 % of the total exports in 2007, dropping 
from 35,7% in the previos year, and after having gained in 2000 30% over the figures reached in 1999 (the lohn 
produced goods represented almost 90% of the expots of the clothing and shoe industry in 1999, about 98% in 
2002 and dropped to only 60% in 2006, the remaining percentage representing exclusively complete exports of 
goods.  
A  large  part  of  these  exports  goes  to  the  Italian  and  German  markets,  which  are  also  the  most  important 
commercial  partners  of  Romania.  If  we  take  into  consideration  the  fact  that  the  clothing  and  shoe  industry 
represents  a  sector  of  activity  in  which  the  export  production  is  conditoned  by  the  import  of  materials,  the 
comedown of the proportion between the export of clothing and the import of textiles, from 10,5 in 1996 to 8,6 in 
2007, illustrates a deterioration of the export capacity of the branch. This means that a part of the imports of 
textile materials was destined for the internal market which has become more attractive for the inland producers. 
To this we add the decreasing of the internal offer of materials and accessories, imports of such goods being 
favourable for inland production, too.
82  
At the moment, Romania is situated on the first place, being the largest clothing exporter for the European Union 
and getting ahead of Poland. But clothing is not the only branch where lohn production was applied. Another 
sector is information technology, where Romanian IT programmers are payed less than the western ones. The 
method of lohn production must not be dismissed or blamed because it represented an important stage in the 
development  of  an  industry,  in  the  process  of  becoming  a  functional  free  market  economy,  being  the  only 
posibility  for  the  development  of  a  sector.  The  large  specialised  clothing  and  shoe  industry  companies  are 
countinuously moving their production units to areas with lower production costs. But we must mention that not 
only prices are taken into cosideration, sometimes the productivity of labour being more important, implicitly the 
quality-prise relation. If a low productivity is combined with an instable economic climate, the investors avoid the 
countries with cheap labour force like Moldavia or The Ucraine. 
The competitivity of the Romanian goods on the markets of the developed countries is also supported by the 
commercial agreements to which Romania has adhered. The first measure undertaken by the EU for the Romanian 
textiles  industry  was  the  reduction  of  custom  taxes,  and  subsequently  beginning  with  1997  their  complete 
removal. At the same time, beginning with 1995 the quantitative limitations for 13 categories of textile products 
                                                            
82 ***- Capital, no.11, 24 March 2005 62 
have been eliminated and, where the quotas were kept, the export rates were increased; the quotas have also been 
removed starting with 1998. At the same time, one also conceeded in other markets: with the signing of a bilaterat 
agreement with the USA in 1995, the quotas for export removed for 114 categories of textile products were, and 
for those remaning, the quotas were significantly increased. 
In  the  present  day  situation,  the  Romanian  manufacturers  should  take  into  consideration  not  only  the  lohn 
production supply (delivery) but also the the inland and external supplies, especially under their own brand. If this 
situation will not change in the future, we will continue to have an economy which allows only a very slow 
accumulation of resources for development. Thus, a country with such an export structure cannot aspire to reach 
prosperity taking into consideration the fact that the years to come are more and more dominated by notions like 
‚integration’ , ‚globalization’, etc. 
That is why the main concern of the companies which operate in lohn system should be to maintain and impove 
their  position  on  the  global  market,  to  create  some  forms  of  cooperation  with  parteners  form  the  developed 
countries,  to  modernize  their  technology  and,  not  the  least,  to  create  their  own  marketing  and  distribution 
networks. 
Bibliography: 
1.  Burnete, Sorin – Comer￿ interna￿ional - teorii, modele, politici,, Ed. Economic￿, Bucharest, 1999 
2.  Dumitriu,  Camelia  –  Management  interna￿ional  ￿i  rela￿ii  economice  interna￿ionale,  Ed.  Polirom, 
Bucuresti, 2000 
3.  Hinkelmann, Edward – Dictionar de comert exterior, Ed. Teora, Bucuresti, 2001; 
4.  *** - Revista Capital, 1998 – 2007 
 
 

LOHN PRODUCTION - AN ECONOMIC OR SOCIAL MEASURE?

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LOHN PRODUCTION - AN ECONOMIC OR SOCIAL MEASURE?

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