by Hans Verhulst,
Consultant, Centre for Promotion of Imports from Developing Countries (CBI),
The Netherlands.
Introduction
One of
the effects of globalization is the relocation of production from the
technology rich countries towards low labour cost countries. This is a threat
for SME suppliers and manufacturers in technology-rich countries, whose
customers turn their heads to low labour cost countries. On the other side of
the globe, this trend creates opportunities for contract manufacturers and
service industries.
From a
historical and international perspective, we are witnessing a dramatic shift in
the importance of the five main drivers for value adding: technology,
production, marketing, logistics and support. From a historical and
international perspective, technology –in the form of know how and trade secrets-
has emerged as a key factor in this process.
In
technology rich countries, there is a vast pool of know how waiting to be
untapped. In emerging markets, there is an enormous demand for know how,
waiting to be filled. This “trade in technology” could well be one of the
answers to a changing world. But we need to improve the matching process for
this trade i.e. through licensing. When it comes to transfer of know how and
trade secrets which are hardly “patentable” –as is the case with most
industrial know how- both parties, licensor and licensee alike, still seem to
be reluctant to cross bridges. There is a role for institutions and governments
to facilitate this matching process by improving the “climate” of intellectual
property rights, particularly in know how and trade secrets.
The Value Model
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We buy a product because we think the
benefits we derive from the product or service (value) exceed the
sacrifices (cost) connected to the same. These benefits are called
customer (or market) values; sacrifices are known as cost of ownership.
Benefits can be of technical, economic, social, environmental or service
nature. Cost of ownership is composed of price, time and conflict.
Particularly in trade between different cultures, doing business often
creates conflicts as a result of misunderstanding in communication, different
habits and business practices.
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Changes From a Historical Perspective
From a
historical perspective, the importance of technology has increased
dramatically. Since the economic recovery after World War II, we distinguish
four main trends: price, quality, speed and new, unique products.
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• Directly after World War II, the increasing
demand for all kind of products triggered producers to look for capacity.
Increased competition forced them into cost effective production methods as
well. But the quality of products suffered.
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• This
triggered the trend for quality products. All kind of quality assurance
systems, many of them from Japanese origin, left their mark on the way
companies were managed. It culminated into the widespread acceptance of the ISO
9000 quality assurance system, both in multinationals and SME’s alike.
• Again
from Japan came the “no-stock” philosophy, implemented by JIT (just in time
delivery). It was a first warning that separating production sites from
their direct markets required sophisticated logistics, better known as supply
chain management.
• Once
companies had completed the “price, quality, delivery” triple, they used their
last resort in their quest for profits: creating demand for new products.
“Shelf-life” for all kinds of products decreased, “improved” versions of
existing products became the backbone for sales promotion.
Changes From an International Perspective
Other factors have influenced the importance of the five value adding activities. From the two statistics2, which give a relative comparison over the period 1900-2000, it is clear that technology and marketing have taken the role of production and support as main value activities3.
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The
main drivers for their change in importance can be described as follows:
•
Technology: that dramatic increase in importance due to the market demands
we described in the previous paragraph was not the only reason. The relocation
of production to low labour cost countries has confronted technology rich
industries with an additional problem: protection of know how. It is widely
accepted that direct foreign investments from industrial countries to
developing countries have created a diffusion of technology into the recipient
economies. Technology rich industries are mindful of the fact that without the
existence of effective intellectual property system in the recipient countries
the transferred technology may be used to compete against them thus denying
them the opportunity for adequate returns to their investment/technology.
Unfortunately, most potential technology recipient countries do not have strong
intellectual property systems in place and as a result technology rich
industries prefer to keep their R&D departments “close to the chest” and
not move them along with their production units. This prevents the flow of
technology through licensing.
•
Production: at the
dawn of industrialization, basic industries required huge investments in land,
buildings, machines and labour. It is therefore logical that producers and
manufacturers would receive the bulk of the total value added in the supply
chain. But the increasing prosperity had its effect on labour costs, which
constituted in most sectors between 50-70 % of the cost of production. Combined
with the open border/trade liberalization policies of most developing countries
this resulted in a wave of relocation of production activities towards low
labour cost countries. This was most of all noticeable in the garments and
-later on- in the electronics industry. Production as a value adding activity
had deflated to a low level and –since it behaves like water- will continue to
flow to the lowest point.
•
Marketing: “You can buy a T-Ford in any colour you
want, as long as it is black;. Henry
Ford’s famous quote illustrates the role of marketing in the 20’s. It was a
seller’s market and people would buy whatever industries would produce, such
was the demand for new products. After some decades, producers
started to understand the need for marketing as a value adding activity.
Companies realized the importance of trademarks and industrial designs in
marketing strategy e.g. General Motors would position similar cars (Buick,
Chevrolet, Pontiac or Oldsmobile) for different market segments and command a
different price for each of these brands. It is difficult to explain exactly
why we are prepared to pay a premium for Nike4 sneakers over other less “marketed”
sport shoes. Is it because of superior quality (production), design
(technology) or the name/logo (marketing)? Is that same marketing the reason
why we pay more for a PC with “Intel inside”? The fact is that the “marketing
factor” plays a dominant role in the purchasing process, more than ever before.
Seller’s markets have turned into buyer’s markets, competition is global and
the battle for markets is influenced more than ever by advertising budgets.
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• Logistics: production in the early part of the previous century would
typically take place close to markets or close to the availability of raw
materials. This reduced the need for sophisticated logistics. Globalization
and consequent relocation of production have triggered transport of raw
materials, intermediates and finished products. Plastic bags for a supermarket
in Germany are made in Bangladesh with materials produced in Korea, which in
turn are based on intermediates from South America. Those intermediates are
produced with European plasticizers and solvents, based on Russian crude oil.
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Technology or Marketing?
Obviously,
all industries now search for new added value in the technology and marketing
“boxes”. The big money seems to be there. For manufacturers in developing
countries, the choices are less obvious. Huge profits upwards in the supply
chain -close to consumers and end- users are luring. But adding value through
marketing means substantial investments in time and money. Investments in
market research, market information, distribution channels, advertising,
publicity and/or brand building. Another obstacle -certainly in B2B- is the
customer himself. He is close to the end user markets or consumers and
certainly does not want his supplier –the contract manufacturer- to compete
with him on that same market.
From
these perspectives it seems that both parties, - industries with technology and
contract manufacturers alike- should opt for the technology route. For contract
manufacturers it is the surest way to increase their added value and stay away
from the downward spiral that affects all production activities. For technology
rich industries, it could be a solution to the ever increasing problems around
outsourcing and off-shoring. Cost advantage was and is the main driver for
outsourcing, but both parties are having second thoughts about the benefits of
outsourcing, particularly in manufacturing. Lack of understanding of the
technological needs to manufacture a product in a correct and cost effective
way is the main culprit. Furthermore, limited use of intellectual property in
facilitating technology transfer and in marketing strategy can be said to
contribute to the reluctance of the two sides in “crossing bridges”.
Obstacles to Licensing
Transfer
of know how and trade secrets is not restricted to “technical” know how. Know
how in each of the value adding activities is “fit for transfer”. Production
and logistical know how are the first choices when it comes to contract
manufacturing.
Companies
that want to increase their share in emerging markets may opt to transfer their
marketing secrets and support know how to local companies in those markets in
return for a royalty on sales volumes.
Unfortunately,
the licensing instrument is underutilized by SMEs. For the bigger part, this is
because licensors are afraid of uncertainties about the protection of their
intellectual property, including trade secrets.. On the other hand, licensees
are reluctant to accept the often severe restrictions that come with license
agreements. These in turn are the result of licensors being overcautious to
protect their interests. The vicious circle is completed.
Transfer
of technology can be a remedy against the problems that proliferation of
production and trade has brought along. But then again, a lot of work has to be
done to make the licensing of know how and trade secrets more accessible for
those who need it most.
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