Emerging countries -not so much companies- compete in international markets, always on price. To escape from this negative price spiral, you have to be damn good as a company.
This is why "ValueMagics, a road map from cost to value" was made.
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Around the world in 20 years
In 1998, when I started my first project in Brazil for the CBI - an agency of the Dutch Ministry of Foreign Affairs - I entered a completely new world.
Once familiar with the sector, I start receiving assignments from other international organizations in Europe and the Western Hemisphere. It was an interesting journey -see "Countries & More"
During my work in more than 25 countries, I have met many professional entrepreneurs. Entrepreneurs who -in addition to their daily work- have the drive to help their country move forward. One of them is Vinod Sharma, a successful businessman and owner of Deki Electronics in New Delhi.
We become business partners and good friends. In 2000, I started CEDIS -Centre for Competitiveness- and together we build a network of consultants in Asia, Africa and Latin America. Ultimately, we work with six consultants from India, Kenya, Uganda, Honduras and Colombia in more than 25 countries. We call ourselves "The Global Value Chain" - www.cedis.nl
Vinod Sharma bungy jumping in Uganda at the source of the Nile
A CEDIS pitch on the Global Trade Development Week in Dubai
Beatrice Mwasi and Phoebe Owuor during a ceremony in The Nederlands
MoU with SAT engineering in Iran
Global supply chains
We go back in time: 1990. These are the heydays of globalization. For less than a thousand dollars you ship a container halfway around the world. An example from my time at Holland Chemicals International in Venezuela:
We buy raw materials from Finland to convert them into semi-finished products in Venezuela. These are supplied to LG Chemicals in South Korea for the production of LDPE used for insoles made in Indonesia, which are assembled in Bangladesh for well-known brands, finally ending up in Finland in retail outlets.
Value chains
Around the turn of the century, the concept of global supply chains takes on a new meaning due to massive outsourcing and the relocation of production to low-wage countries. A good example of such a chain is Apple's iPhone:
Value chain iPhone
It is clear where the biggest profits are made: from all the activities that create value, technology and marketing are the biggest and those lie with Apple: design and brand.
Countries, not companies
At the end of the twentieth century, production starts behaving like water, it always flows to the lowest point. So countries - not companies - become competitors of each other. This competition takes place in all sorts of ways, from almost illegal tax benefits for the automotive sector in South Africa to a separate queue for "buyers" at immigration at Dhaka airport in Bangladesh.
BMW plant in Rosslyn, South Africa
Mercedes, BMW, Toyota and Ford set up screwdriver factories in South Africa to assemble smaller models with a mix of local parts and CKD kits imported from Germany, Japan and UK. The car manufacturers don't want to produce luxury models there so they have to be imported, albeit with a 150% import tax.
If BMW South Africa exports locally made parts - like leather for BMW seats, body panels or catalytic converters - BMW earns credits that can be used to reduce import taxes on the BMW 7-series.
Other countries object to the WTO against this Automotive Incentive Scheme and WTO rules in their favor. South Africa must adjust its incentives and exports plummet.
"Ready-made garments" in Honduras
Clothing made in Vietnam is shipped to Honduras, where a "Made in Honduras" label is sewn into it.
Under the Caribbean Basin Initiative - introduced by Ronald Reagan for political reasons - clothing from Honduras is then imported into the USA without import duties.
When the rules for minimum added value are tightened to counter these practices, exports to the USA collapse.
Anti-dumping in Colombia
During a Saturday trip through the bay of Cartagena, Colombia, the owner of one of the companies we advise - a producer of metal pipes for the US market - receives a call from Washington. All cost price calculations must be submitted before next Monday morning, otherwise an anti-dumping case* will be submitted to the WTO.
The American metal lobby managed to get George Bush Jr. restrict imports from China and other countries. An import tax of 50% is levied on shipments of the Colombian company. It results in a temporary halt on exports to the USA.
* sell below cost price
Social disruption in India
Call centers in India for the US market cause social disruption, because time differences mean that people have to work at night.
A solution is found by moving call centers to Uruguay, where
There is no time difference with the USA
Employees receive first-class language instruction in English
The newspaper "USA Today" is read every day in order to enable small talk with customers
The government of Uruguay offers far-reaching fiscal facilities
Tea auction in Mombasa, Kenya
Two extremes of competing countries:
Kenya - Mombasa is home to the largest tea auction in the world, where international companies buy directly from producers and exporters. The dominant buyer is a guy from Lipton - then Unilever - who everyone at the auction looks at before they (are allowed to) raise their hands.
Neighboring Tanzania - coffee producers must first request permission from the Tanzanian Coffee Board (TCB) to be allowed to export. TCB regulates the market and keeps businesses under control through local governments.
ValueMagics
Competition between countries revolves around price. That is why Cedis focuses on value creation, the only way out of the downward price spiral. Value creation becomes our core business.
At TU/e's Postgraduate School, I am working on a model for low-wage countries. My master thesis eventually becomes a book:"ValueMagics", which I am writing with help from Vinod and is published by McGraw-Hill in 2013.
Sharma V. and H. Verhulst (2014), McGraw-Hill, New Dehli
ValueMagics covers two levels: mesoeconomic/sector level and microeconomic/company level:
ValueNomics - for governments and sector organizations. A model to increase the competitive level of sectors. Sectors eligible for export are selected on the basis of "what sells, not what is made". Subsequently, a choice is made whether product or market diversification is the right path to international markets.
ValueMathics - for SMEs. "A road map from cost to value". A model that pulls companies in emerging countries out of the downward price spiral through value creation and precision marketing.
Magic Pallet
Magic Pallet, the basis of ValueMathics
The starting point of ValueMagics is Magic Pallet. It shows the value space -or room- available to increase the value of a product or service and hence improve its margin. It shows a company how to achieve this and calculates the added value.
We do this by calculating back from the consumer price with deduction of VAT, import duties, distribution costs, margins of the intermediary trade, etc. etc. Based on this, we calculate the realistic margin that can be made in the ValueSpace
Over the past decades, quite some issues have changed in value space:
The five value creating activities of a firm
Production - in the last century, it was the center of gravity in the chain, partly because of large investments involved. Due to automation, relocation to low-cost countries and outsourcing, the added value of this activity has plummeted
Technology was in its infancy at the beginning of the industrial revolution. Due to increased competition, it is the second most important activity -after branding- to distinguish a product or service. It has become more accessible for SME's through software development and artificial intelligence
Logistics was hardly an issue, since factories would be located close to raw materials or primary markets
Marketing - the world was a seller's paradise. "You can buy a Ford Model T in any color, as long as it is black". Now branding is a must, especially for affluent shoppers in those same emerging countries
Service was essential, since products were of mediocre quality and relationship management played a crucial role. Service is now a cost item, which is preferably outsourced
It goes without saying that a clothing workshop in Colombia is not capable of independently designing a piece of clothing or launching a brand on the European market. But it can significantly increase its value within the realistic possibilities of its position in the chain.
The journey
It was a special journey.
In those 20 years, I worked with enthusiastic entrepreneurs eager to do business across borders. It was an incredible experience and taught me a lot about doing business in adverse conditions
Collaborating with governments and private organizations was an entirely different challenge. There were countries where we achieved little or nothing, such as Mozambique, Bangladesh and Honduras, but on the other hand we had solid results in India, Colombia and South Africa.
A special experience was our work in the Dutch Caribbean islands. It implied working with The Hague, where we discovered that speed and political intrigue keep pace with those of governments in developing countries.
I learned much from other cultures and made many friends, but there was no time for tourism: the first time I saw the Taj Mahal was years after I did my last project in India.
I share some of my experiences in more detail in a series of country profiles, see Countries & More.
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