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The Challenge for Belgium's Chocolate Cluster

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The Challenge for Belgium's Chocolate Cluster Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster è DAVID CHAN SABINE PRINZ CARLOS RIVERA HELENE SOW HARVARD BUSINESS SCHOOL MICROECONOMICS OF COMPETITIVENESS PROFESSORS LAURA ALFARO, CHRISTIAN KETELS, AND JORGE RAMIREZ-VALLEJO Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster 1 Introduction ‘National competitiveness is created, not inherited. It does not grow out of a country’s natural endowments, its laBor pool, its interest rates, or its currency’s value, as classical economists insists. A nation’s competitive advantage depends on the capacity of its industry to innovate and upgrade. Companies gain advantage against the world’s Best competitors Because of pressure and challenge. They benefit from having strong domestic rivals, aggressive home-based suppliers, and demanding local customers. In a world of increasingly global competition, nations have Become more, not less, important. As the Basis of competition has shifted more and more to the creation and assimilation of knowledge, the role of the nation has grown.’ - Michael Porter, On Competitioni As Michael Porter notes in the above quote, nations have become increasingly more important in an era of gloBal competition. Given that the basis of competition has evolved to the amalgamation of knowledge, nations play a pivotal role in facilitating Both the creation and sharing of knowledge between market participants in an economy. Indeed, such is the genesis for the development of competitive clusters – after all, clusters are ‘geographic concentrations of interconnected companies, specialized suppliers, service provides, firms in related industries, and associated institutions’ii, and cluster knowledge and expertise serve as the interstitial glue that connects the different cluster pieces together to compete effectively. Such has Been the story of Belgium’s chocolate cluster to date – since 1635 when chocolate was first Brought into the country By the ABBot of Baudeloo in Ghent, the development of the Belgian chocolate cluster has Been one of knowledge creation and sharing over generations, which has allowed the country to not only gain a competitive advantage in chocolate manufacturing, But more importantly Become synonymous with chocolate itself. Coupled with a favorable location at the heart of Europe which led to the development of quality ports and transportation infrastructure, strong domestic and regional demand, and favoraBle policies, Belgium has not only Been aBle to estaBlish itself as a market leader, But also prevent new entrants from eroding its competitive position. Its colonial legacy and close relationships with Africa have also proven Beneficial, and continuous restructuring of Belgian chocolate companies have allowed the country to gain a competitive advantage at each step of the value chain unlike its competitors. More importantly, given the Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster 2 commodity-like nature of its primary raw product, Belgium’s chocolate cluster has Benefitted from the rise of institutes for collaBoration on multiple levels – local, regional, and gloBal. However, this paper is worried aBout a few trends – first, the cluster has Been stagnant in recent years, and has Been overly focused on producing only chocolate rather than considering a diversification into other By-products. Moreover, there are questions over the sustainaBility of chocolate production given the availaBility and quality of cocoa Beans, as well as the sustainaBility of domestic and regional demand should Belgium lag expansion into new markets. In addition, given consumers demand for healthier food options, Belgium chocolate manufacturers are facing a fundamental secular challenge to their hitherto manufacturing processes – while these processes have Been handed down and improved on over generations, changing consumer patterns imply that the the company may have to alter their current methods and innovate further. More importantly, Belgium faces a fundamental constitutional question aBout its polity – it has Been held together By an unnatural alliance between Brussels, Wallonia, and Flanders, and questions around the sustainability of this political structure remain unanswered. Indeed, these differences are not only accentuated through the economic performances of these regions, But also in the type of policies each region has implemented – this lack of harmony is disconcerting, and limits the potential of Belgium to enhance its position further. In analyzing Belgium’s economy, the development of the chocolate cluster, and the gloBal chocolate value chain, this paper thus argues that Belgium’s primary challenge moving forward is in sustaining and improving its competitive advantage. It cannot rely purely on its legacy or historical competitive advantage to ensure future competitive advantage, and needs to formulate a concerted cluster policy to address these issues to maintain a clear value proposition. Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster 3 Overview of Belgium Located in Western Europe, Belgium is a federal constitutional monarchy with a parliamentary system of governance, consisting of a Senate and a ChamBer of Representatives. Divided into three separate regions, Brussels, Wallonia, and Flanders, Belgium straddles Germanic and Latin Europe, and is home to two major language groups, the Dutch-Speaking Flemish community in the north, and the French-speaking Wallonia community in the south. It gained its independence from Netherlands in 1830, and during the 20th century occupied a numBer of African colonies, including parts of Rwanda and Burundi, and the modern-day Democratic RepuBlic of Congo. It had also been occupied by Germany in both World Wars, and has played a major role in the post- war reconstruction of Europe, not only as the founding memBer of the Eurozone, European Union, and NATO, But also the headquarters of the latter two organizations in addition to many other international institutionsiii. In terms of geography, Belgium is approximately 30,528 square kilometers large, approximately the size of Maryland. It is located in Between Netherlands and France, and Borders the North Sea, allowing for easy access to major European shipping routes which have led to the Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster 4 development of Antwerp as a major port in the region. It has a population of 11.3 million, with a 0.76% growth rate, a median age of 41.4 years, and a dependency ratio of 54.2%iv. Belgium’s Economy Given its central location, developed transportation network, and diversified consumer and industrial Base, Belgium has managed to achieve solid economic performance over the past thirty years – GDP per capita has increased nearly 4.5 times from $10,491 in 1980 to $44,706 in 2015, and higher than the Eurozone and OECD averages as seen in the chart Belowv. In 2015, Nominal GDP was $494 Billion, and the economy grew By 1.3%. In terms of GDP composition, Belgium also has had a heavy dependence on the financial services sector – since 2000, the share of services as a % of total GDP has increased from 71% to 77%, industry has declined from 27% to 22%, and agriculture as a proportion of GDP has also halved. In the context of chocolate manufacturing, it is also worth noting that manufacturing only accounts for 13.1% of GDP, and employs 13% of the current Belgian workforce. GDP0Per0Capita0(PPP,0USD$) $50,000 $45,000 $40,000 $35,000 $30,000 $25,000 $20,000 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Belgium OECD Eurozone France Netherlands GDP@Composition@ by@Sector 90% 80% 77% 70% 71% 60% 50% 40% 30% 27% 20% 22.30% 10% 1.40% 0.70% 0% Agriculture Industry Services 2000 2015 Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster 5 However, Belgium’s economy has revealed cracks in recent years. As noted in the following chart, Belgium’s nominal GDP growth rate has Been lagging the OECD average. Moreover, unemployment has been persistently high at 8.6% for the past 15 years, suggesting Broader anemic growth and weak job creation. Inflation stands at 0.5% in line with Broader Eurozone deflationary pressures. While the Economic Intelligence Unit suggests that inflation in 2019 could reBound to 1.5% due to enhanced ECB quantitative easing and commodity price normalization, the projections for unemployment remain flat at 8%vi. Inflation 5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 !0.5 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Unemployment4 (%) 12 10 8 6 4 2 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Belgium also faces a Bigger challenge of managing its fiscal Budget – while is has managed to trims its Budget deficit from 3.1% of GDP in 2014 to 2.7% in 2015, allowing it to exit the EU’s excessive deficit procedure (EDP), the current government still faces an uphill task to follow through on its commitment to fiscal consolidationvii. Admittedly, a large part of the overhang over the past Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster 6 few years has Been due to the government’s recapitalization of the Banking sector post-financial crisis and through the Euro crisis in 2010. However, it is clear that the country has unsustainaBle
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