The Challenge for Belgium's Chocolate Cluster

Sustaining Competitive Advantage:

The Challenge for Belgium’s

Chocolate Cluster

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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

fiscal policies – social security and welfare account for 37.6% of government expenditure, following

by healthcare at 15.2%. The current government has set an aggressive structural adjustment target

of 0.7% of GDP per year in 2017, and has proposed a reform program aimed at shifting from a

revenue based adjustment to an expenditure based adjustment with significant cuts to public

spending through the tightening of the social welfare criteria. Given anemic unemployment largely

driven by high direct and indirect taxes of close to 55% (versus 48% in France and 31% in the US),

the Belgian government has also proposed the gradual increase in the retirement age to 67 by 2030,

and has also taken steps to cut employers’ social security contribution from 33% to 25% to reduce

the high cost of labor, and increase worker productivity. In order to account for this tax revenue

shortfall, the government will also increase taxes on electricity, diesel fuel, and speculative gains,

shifting revenue from labor to consumptionviii. While ideal in theory, the proposal still faces

numerous challenges – (a) austerity limits the government’s ability to deliver on other aspects of its

policy agenda to increase jobs and promote competitiveness due to reduced public spending in

training and infrastructure. (b) More specifically, the government will likely face complaints from

trade unions and the Wallonia government given the complex political structure, and this disunity

will hurt its agenda. (c) there will likely be higher spending pressures due to increased counter-

terrorism expenditure and from refugee integration efforts.

Budget3Balance3(%3GDP)

0.5

0 !0.5 !1

!1.5

!2

!2.5 !3 !3.5

!4

!4.5 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

Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster 7

As for Belgium’s terms of trade, its current account balance was 0.5% of GDP in 2015ix,

having improved since the financial crisis, as low commodity prices reined in import costs and the

depreciating euro supported exports. As noted the chart below, export growth has rebounded, and

Belgium’s wage moderation program could serve to improve competitiveness moving forward and

stimulate further export growth.

Current2Account2(%2GDP)

9 8

7 6 5 4 3 2 1 0 !1 !2 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

Export2Growth2(%)

10

5

0

!5

!10

!15

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Belgium’s top trading partners are France (at 14% of total trade), Germany (13%),

Netherlands (13%) and the United Kingdom (9%). Outside Europe, the United States is Belgium’s

Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster 8

largest trading partner, following by India (3%) and China (3%)x. In terms of its export portfolio,

Belgium’s largest export consists of oil and gas products at $54 billion, followed by pharmaceuticals

at $49 billion. It is important to note that the majority of products are within the top ten world export

rankings, not only indicating the competitiveness of Belgium’s industries, but also its diversity. It is

also worth noting here that cocoa and cocoa preparation accounts for approximately $3.5 billion of

Belgium, while Food Processing and Manufacturing accounts for $33 billion of total exportsxi.

Belgium's&Export&Potfolio&(2000A2014)

12% Pharmaceuticals-($62b)

10%

Jewelry,-Precious-Metals-($21b) 8%

6%

Food-Processing/- 4% Manufacturing--($33b)

World&Market&Share&(%) Financial-Services-($8.7b)

2%

Oil-and-Gas-($51b) 0%

!2% !14% !12% !10% !8% !6% ! 4% !2% 0% 2% 4% 6% Change&in&World&Market&Share&(%)

Ranking)in) Exported)value) world) 2014)(US$)Bil) exports Oil)and)Gas)Products 53.9 20 Pharmaceutical) 49.8 3 Vehicles) 45.9 11 Machinery 33.2 15 Plastics) 32.3 4 Organic)chemicals 31.5 3 Pearls,)precious)stones 23.3 8 Iron)and)steel 16.7 7 Optical,)photo,)medical)apparatus 14.9 13 Electrical)Equipment 14.8 25 Other)Commodities) 12.5 10 Miscellaneous)chemical)products 8.2 7 Footwear 5.6 5 Paper)Products 5.6 10 Rubber)Products 5.2 12 Apparel 4.8 10 Dairy)Products 4.4 6 Meat)Products 4.2 12 Tanning,)dyeing)extracts 4.1 6 Vegetable,)fruit,)nut 3.9 5 Cereal,)flour,)starch 3.8 6 Soaps,)lubricants 3.7 3 Beverages,)spirits)and)vinegar 3.5 9 Cocoa)and)cocoa)preparations 3.5 4

Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster 9

Belgium Competitiveness / Diamond Analysis

Context for Firm Strategy and Rivalry: Factor Conditions: • Integration with EU: Full adoption of • Multilingual population and openness policies and standards (+) to foreign skilled labor (+) • No tariffs: open borders and open • Large FDI as a source of capital and trade promotes local competition and expertise (+) rivalry (+) • Well developed physical infrastructure • Preferential international trade including ports, rail, roads, and air relations (+) transportation (+) • Favorable investment climate for • Highly skilled work force (+) domestic and foreign investors (+) • High quality of education (+) • Modernization of SOE through partE • High labor productivity per hour (+) privatization program (+) • Limited natural resources (E) • Austerity measures and fiscal • Strong influence ofunions (E) consolidation plans may inhibit growth (E) • Lack of coherent national policy for economic competitiveness (E)

• Fragmented federal structure adds to Demand Conditions: complexity and decreases • Central location in Europe with accountability (E) access to local markets and 500 million customers (+) • Affluent EU consumers with high quality standards (+) Related and Supporting Industries • Belgian consumers enjoy high GDP • Access to wide supplier base per capita and disposable income (+) throughout the EU • Closely linked to neighboring EMEA • Firms that hold products across region (+) multiple clusters able to drive • Domestic demand not a significant improvements in performance driver of growth given country size (E)

According to the New Global Competitiveness Index Report, Belgium is the 14th most

competitive country in 2015. This is determined according to the following metrics: Company

Operations and Strategy (15th), Factor Conditions (18th), Demand Conditions (20th), Supporting and

Related Industries and Clusters (9th), Context for Strategy and Rivalry (17th), Social Infrastructure

and Political Institutions (16th), and Monetary and Fiscal Policy (42nd). This paper will now analyze

the following categories in depth, and argues that Belgium’s competitive positioning essentially 10

explains the composition of its cluster portfolio and performance to date.

Factor Conditions: given Belgium’s location at the heart of Europe and proximity to the

North Sea, it is blessed with a natural advantage, which the government has capitalized on through

significant physical infrastructure investment for multiple modes of transportation. The Belgian road

network has seven international motorways with a combined length of 1763 km, linking seamlessly

with France, Germany, and Netherlandsxii. It also has one of the densest rail networks in the world,

carrying 188 million passengers and over 62 million tons of freight each year, with high speed trains

running up to 10 times a day to Londonxiii. Most famously, Antwerp is home to the second largest port

Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster

in Europe behind Rotterdam, handling 25.7% of total container traffic in Europe versus Rotterdam’s

of 34%xiv. However, Antwerp’s container volume growth has double Rotterdam’s, growing by 9.5%

while Rotterdam trailed with a 3.7% increasexv. Indeed, the important point to note is that Belgium

has been continuous re-investing in its infrastructure, and is currently in talks to invest another $3.7

billion in the Port of Antwerp to increase capacityxvi, explaining why Cushman and Wakefield reports

on European Distribution consisting rank Belgium the first in Europe for its excellent distribution

networkxvii. This may further elucidate why oil and gas products rank top in Belgium’s cluster

portfolio – most of the oil and gas companies that operate in Belgium are mostly in the downstream

sector, focusing on refining oil and purifying gas. Belgium essentially serves as a link between

upstream producers and final end-users of oil and gas, and it is of pivotal importance that a

downstream hub is convenient located close to major sea or rail routes. Belgium’s factor conditions

thus allow it to gain a comparative advantage in this export cluster, which the country has continued

to leverage on.

2000 2015 2000 2015

Logistical,infrastructure, 14 17 Capital(market(infrastructure( 18 25

Quality*of*port*infrastructure* 7 6 Financing-through-local-equity-market- 33 20

Quality*of*air*transport*infrastructure* 24 15 Venture-capital-availability- 13 23

Quality*of*railroad*infrastructure* 12 16 Ease-of-access-to-loans- 10 29

Quality*of*roads* * 20 Regulation-of-securities-exchanges- 31

Quality*of*electricity*supply* 10 27 Domestic-credit-to-private-sector- 24 31

2000 2015 Soundness-of-banks- 7 46

Communications,infrastructure, 21 21 Doing-Business-,-Getting-Credit-Legal-rights-index-(WB-)- 39 48

Percentage*of*households*with*computer* 20 14 2000 2015

Internet*users*per*100*population* 17 14 Innovation(infrastructure( 9 6

Telephone*lines*per*100*population* 22 15 Quality-of-math-and-science-education- 3 3

Internet*access*in*schools* 24 20 Quality-of-management-schools- 17 3

Mobile*telephone*subscribers*per*100*population* 20 42 University>industry-research-collaboration- 5 5

2000 2015 Quality-of-the-educational-system- ( 5

Administrative,infrastructure, 29 20 Quality-of-scientific-research-institutions- 16 7 (Low)*Number*of*procedures*required*to*start*a*business* 21 6 Utility-patents-per-million-population- 16 16 (Low)*Time*required*to*start*a*business* 49 11 Tertiary-enrollment- 12 20

(Low)*Burden*of*customs*procedures* 24 Availability-of-scientists-and-engineers- 37 21

Doing*Business,*Paying*Taxes*(Low)*Payments*number*(WB)* 20 35

(Low)*Burden*of*government*regulation* 62 45

Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster 11

Since 2000, Belgium has also improved on its human capital, with the quality of management

schools and scientific research institutions jumping up in global rankings – according to the IMD

World Talent Report 2015, Belgium spends the most on education per pupil than any other country

in the world at 39% of GDP per capita, and ranks 7th in the world for quality of science educationxviii.

It also has the 15th most number of R&D researchers per million people in world at 4,003xix,

explaining the strength of Belgium’s R&D and innovation capabilities. It is hence not surprising that

pharmaceuticals ranks second in Belgium’s cluster portfolio – given the emphasis on scientific

education, and its ability to attract R&D researchers, Belgium’s pharmaceutical companies have been

able to attract required talent.

However, there are a few factor trends that are worrying – in particular, there has been a

significant weakening of credit conditions, in large part due to the weakness of the Belgian banking

system after the Euro Crisis. Based on the GCI report above, venture capital availability, access to

loans, domestic credit to the private sector have all declined. According to the National Bank of

Belgium, these changes in credit conditions have played a role ‘in the decline in investment following

the financial crisis’ – given the uncertainty of the interbank market since 2009, domestic banks have

tightened lending criteria, which have affected loans to non-financial corporations and consumer

credit significantlyxx. This reduced access to credit hurts small and medium enterprises the most

given that the lack the credit quality to access funding through debt markets – given that the

chocolate cluster also consists of a large number of small and medium producers, this certainly

creates some cause for concern about long-term sustainability of funding.

Context for Strategy and Rivalry: Belgium benefits from being part of the European Union –

EU competition policy encourages open-markets and private enterprise, and this is further supported

by the European Customs Union that promotes free trade in goods, services, labor, and capital across

the European Union. As noted in the following GCI figures, Belgium continues to remain competitive

in the low tariff rates, and low market dominance by business groups. However, while Belgium has

traditionally been characterized by high foreign direct investment (FDI) at a high of 30% of GDP in

2011, and there has been some improvement in the FDI and technology transfer since 2000, it has

Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster 12

been ‘among the countries most affected by fund transfers of multinational companies’xxi, making FDI

inflows and outflows highly volatile as noted by UNCTAD’s World Investment Report in 2014xxii. Extent+of+cluster+policy+ *+ 2000 2015 Context*for*strategy*and*rivalry* 13 17

(Low)*Tariff*rate* 5 5

(Low)*Extent*of*market*dominance*(by*business*groups)* 4 7 FDI*and*technology*transfer* 13 11

Intensity*of*local*competition* 6 11 GDP$per$hour$worked,$USD

Intellectual*property*protection* 14 13 Luxembourg 82.1 Ireland 71.2 Effectiveness*of*antitrust*policy* 5 13 Belgium 61.8 Efficacy*of*corporate*boards* 22 13 Netherlands 60.2 Prevalence*of*foreign*ownership* 14 France 59.5

Pay*and*productivity* 42 15 Germany 58.3 G7$countries 55.2 (Low)*Distortive*effect*of*taxes*and*subsidies*on*competition* 16 Euro$area 52.9 Strength*of*auditing*and*reporting*standards* 19 OECD$Total 46.7 Regulatory*quality* 20 23

Cooperation*in*laborFemployer*relations* 33 25

Business*impact*of*rules*on*FDI* 26

Prevalence*of*trade*barriers* 16 31

Strength*of*investor*protection* 11 39

(Low)*Impact*of*taxation*on*incentives*to*invest* 52

(Low)*Impact*of*taxation*on*incentives*to*work* 64

There are a couple of worrying signs, such as the impact of taxation on the incentives to

work and invest – the personal income tax is high at around 55%, of which 49% is labor tax, and an

additional VAT of 21%, while the corporate tax rate stands at 33%, not accounting for a further 3%

crisis surcharge, and 5% fairness taxxxiii. While the new tax policies implemented by the government

may help ease this problem, more action needs to be taken to reduce this disincentive. On the other

hand, it is encouraging that pay and productivity has increased from 42 to 15 since 2000 to 2015 – as

the OECD notes, Belgium has the third-highest GDP per hours worked in the Eurozone, and these

productivity gains are certainly welcomedxxiv. One could further argue that the continued

improvements in wage indexation and company social security contributions could have the

additional impact of fueling further productivity increases in the near to medium term.

Demand Conditions: Even though Belgium only has a population of 11 million, its strategic

location as a member of the European Union allows it access to close to 500 million EU residents, and

Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster 13

nearly 725 million total European residents. The majority of its neighbors in Western Europe rank in

the top 10 globally in GDP per capita, implying significant disposable income for Belgium products.

Moreover, given the country’s access to major shipping routes through the North Sea, it is also able to

access markets outside of Western Europe such as North and South America.

Related and Supporting Industries: As highlighted in the cluster map above, Belgium’s food

processing and manufacturing sector constitutes $33billion of total exports, of which $3.5 billion

owes to cocoa manufacturing. Given the close relationship between food processing and R&D, and

the increasing emphasis on healthy products, the importance of the pharmaceutical industry cannot

be overstated. Indeed, it is comforting to note the increased availability of specialized research and

training services as well as availability of latest technologies from 2000 to 2015. Over the past

decade, Flanders has embarked on a VIZ scheme to foster the development of new clusters, while

Wallonia has also instituted Wagralim to promote the development of agribusiness in the region –

these will be covered in greater depth later in the paper. Presence+of+demanding+regulatory+standards+ 19 *& 2000 2015

Supporting*and*related*industries*and*clusters* 14 9

Local+availability+of+specialized+research+and+training+services+ 20 4

Local+supplier+quality+ 9 6

Local+supplier+quantity+ 11 10

Availability+of+latest+technologies+ 19 14

State+of+cluster+development+ 21 20

Local+availability+of+process+machinery+ 22 *&

Extent+of+collaboration+in+clusters+ 23 *&

Company operations and strategy: Given various regional efforts to improve cluster

development and innovation, it is not surprising that the GCI indicates an improvement in firm’s

capacity for innovation. This has been supported by the government’s introduction of R&D tax

incentives, which has encouraged companies to invest in talent and innovation systems. In 2013, the

Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster 14

Belgian government allowed employers to only remit 20% of total withholding tax from qualified

researchers, retaining the remaining 80% of company use, offering an immediate reduction in labor

costs for Belgian companiesxxv. Moreover, the government also allowed for a tax deduction of 14.5%

of the investment value of assets which seek to promote R&D of new products and technologies –

these tax deductions may be carried forward in the event of insufficient profits, further incentivizing

firms to undertake R&D projectsxxvi. However, this policy is not actively promoted, and some

ambiguity over requirements remainxxvii. Moreover, according to the European Union’s 2015

Innovation Scoreboard, Belgium is still classified as an innovation follower, behind leaders like

Denmark, Sweden, Finland, Germanyxxviii - while the increase in performance has been above the EU

average, it lags on small and medium enterprise innovations as noted below. This is again cause for

concern especially in the chocolate manufacturer given the large number of SMEs in the cluster.

2000 2015

Reliance,on,professional,management, 20 10

Production,process,sophistication, 14 11

Extent,of,staff,training, 12 11

Company,spending,on,R&D, 12 12

Willingness,to,delegate,authority, 16 12

Nature,of,competitive,advantage, 11 14

Capacity,for,innovation, 18 14

Control,of,international,distribution, 31 16

Extent,of,marketing, 25 17

Value,chain,breadth, 18 20

Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster 15

Social Infrastructure and Political Institutions / Monetary and Fiscal Policy: As noted above,

Belgium has unparalleled primary education system, and also spends a significant amount of its

budget on quality healthcare services. It has a strong rule of law, and accountable political and

judicial systems.

(Low)-Wastefulness-of-government-spending- 15 28 2000 2015 2000 2015

Social*Infrastructure*and*Political*Institutions*(SIPI)* 16 16 Rule-of-law- 19 17

(Low-occurrence-of)-Diversion-of-public-funds- 12 Basic*Health*and*Education* 6 3 Ethical-behavior-of-firms- 12 Quality*of*healthcare*services* 1 Efficiency-of-legal-framework-to-challenges-regulations- 14 Secondary*enrollment* 1 1 Judicial-independence- 16 15 Quality*of*primary*education* 6 2 Imports-and-exports- 24 17 Health*expenditure* 15 6 Public-utilities- 18 17 Accessibility*of*healthcare*services* 7 Awarding-of-public-contracts-and-licenses- 14 17 (Low)*Gender*inequality* 9 7 Control-of-Corruption-(WB)- 17 17 Primary*enrollment* 14 15 Tax-payments- 20 18 (Low)*Infant*mortality* 15 20 Obtaining-favorable-judicial-decisions- 22 18 (Low)*Tuberculosis*incidence* 20 22 Rule-of-Law-(WB)- 19 19 Life*expectancy* 20 24 Reliability-of-police-services- 16 20 2000 2015 Safety' 22 22 Political*institutions* 22 16 Property-rights- 22 Freedom*of*the*press* 7 Efficiency-of-legal-framework-to-settle-disputes- 23 Public*trust*of*politicians* 11 (Low-impact-of)-Organized-crime- 24 24 Voice*and*Accountability*(WB)* 12 11 2000 2015

(Low)*Favoritism*in*decisions*of*government*officials* 22 12 Monetary-and-Fiscal-Policy-(MFP)- 42 42

Effectiveness*of*law@making*bodies* 20 Inflation- 1 1

Transparency*of*government*policymaking* 26 Government-surplus/deficit- 1 48

(Low)*Wastefulness*of*government*spending* 15 28 Government-debt- 65 61

Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster 16

However, Belgium can certainly improve on the transparency of its government policy-making – this

is due to the complex political system which makes it hard to coordinate policies across the three

different regions. On monetary policy, while European Central Bank’s prudency has provided

appropriate conditions for growth, some argue that more can be done to stimulate business activity.

More worrying, there has been a sharp decline in its government deficit and noted previously and in

the wastefulness of government spending which the current government is trying to address through

its austerity efforts.

Overview of Global Chocolate Value Chain

In order to analyze Belgium’s chocolate cluster, it is important to gain a deeper

understanding of the global chocolate value chain – indeed, this paper argues that Belgium has a

competitive advantage at each stage of the value chain. A simplified version of the cocoa/chocolate

value chain is described below, with a description of how value is created through each of the main

stepsxxix.

Cocoa Production: Cocoa is a cash crop grown exclusively in countries around the tropical

belt in Africa, Asia, and Latin America. According to the World Cocoa Foundation, total production in

2013 was 4.8 million tons, with more than 70% of the Cocoa beans being produced in Africa with

Ivory Coast and Ghana being the largest producers. In the Americas, Brazil, Ecuador and Columbia

Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster 17

are the main producers, while Asia accounts for the remaining 17% of the production concentrated

mainly in Indonesia, Malaysia and Papua New Guineaxxx. In 2014, the top importers of cocoa, in

growing order, were Germany, the USA, Netherlands, France, the UK, and Belgium, with more than

50% of the production processed by five leading companies (Cargill, Barry Callebaut, ADM, Petra

Foods and Blommer) amounting to a total of 2.19 million tons of cocoa in 2014xxxi.

Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster 18

However, there are some concerns over the long-term sustainability of cocoa production as

it is estimated that the demand for raw cocoa will continue to accelerate to meet the consumer

demand. First, 80% to 90% of cocoa comes from small family run farms with an average size of less

than 5 hectares – these farms suffer from low productivity, over-aged stocks, and are highly

susceptible to the spread of disease and pest infestation which can deplete the quantity and quality of

cocoa beans produced. In addition, consumers are increasingly demanding that chocolate producers

respect the environment, and overtly promote more sustainable practices while increasing product

quality and price for the small farmers. There have been concerns over exploitative child and slave

labor in the cocoa growing countries, generating the attention of global industry watchdogs which

have been increasing their scrutiny over social and environmental sustainability of the beans

products. In response, the industry has invested in new schemes such as Fair Trade certified

chocolate (guaranteeing minimum wages to producers and an additional bonus) and the Rainforest

Alliance (ensuring the protection of ecosystem and fair price). In 2009, 3% of the global market of

cocoa was certified, but this new market offers opportunity for innovation and increased products

diversification in the coming years.xxxii This paper believes that Belgium’s colonial relationship with

Africa, and active participation in industry groups have allowed it to gain an advantage in shaping the

contours of cocoa production.

Export and processing of the cocoa beans: According to the FAO supply chain analysis, after

the cocoa beans are shipped, they are stored in a number of ports – in Western Europe, Amsterdam is

the primary port for storage, followed by Antwerp, Hamburg, Le Havre and Bremenxxxiii, which speaks

to the importance of Belgium in the global chocolate supply chain. The beans are then grounded to

produce cocoa liquor as part of the conversion process. It is worth noting that the conversion

industry is highly concentrated, with five companies operating 50% of the worldwide yearly grinding

volume – namely ADM, Cargill, Barry Callebaut, Petra Foods, and Blommer. However, it is worth

noting that these converters do not manufacture the chocolate end-product, and see themselves

primarily as trading companiesxxxiv.

Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster 18

Chocolate production: After the beans are harvested, dried, and grinded, they are

transformed into powder, butter and liquor. These ingredients are then mixed with milk, sugar, and

other products (nuts, fruits), to become the manufactured chocolate. Other types of chocolate

include industrial chocolate (couverture), as well niche products. The great majority of the chocolate

producers purchase butter and powder from the major producers, intervening only on the

confectionary markets. It is worth noting that smaller companies are primarily concentrating on the

end phase of the chocolate production and packaging process.

In order to analyze the potential of the chocolate industry, one needs to evaluate its

performance to date. The global chocolate market grew by 2.9% between 2010 and 2014 to reach a

global value of $87,503.6m in 2014 – assuming a CAGR of 2.8% will thus lead to a market value of

$100.514.4m in 2019. Exports in 2014 amounted to $27,746.3m with Germany leading the exports

with $4.9m followed by Belgium with an exports value of $2.9mxxxv.

Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster 19

Four multinationals (Mondelez International Inc., Mars Inc, Nestle S.A, the Hershey

Company) currently produce 57.4% of the total value of the market in 2014. These leading

companies have manufacturing and processing facilities in all geographical regions and produce

other confectionary products in addition to chocolate, differentiating their products through a

combination of product specialization and aggressive marketing. As of 2014, Europe accounts for

49.9% of the global chocolate confectionary production, followed by Americas at 31.9%, Asia-Pacific

16.6% and 1.6% for Middle-East and Africa respectively. While growth in Europe is expected to

remain stable at a CAGR of 2.4%, MarketLine surveys estimate that most of the growth will happen in

Asia Pacific with a CAGR of 4.5% from 2016-2020. At present, distribution channels are dominated

by supermarkets / hypermarkets which channel 32.5% of the total market's value while independent

retailers capture 28.1% of the market, followed by convenient stores (18.3%), and specialist retailers

(5.1%).xxxvi

Consumers: According to EuroMonitor, worldwide consumption of chocolate is

approximately 7,255 million kilograms in 2014. The top chocolate consuming countries in Europe

with a respective consumption per capita are as follows – Germany (12.2 kg/year), UK (8.7kg, year),

Switzerland (8.9 kg/year), Austria (8.8 kg/year), and Belgium (7.5 kg/year) – given Belgium’s

proximity to these markets, one can understand why the cluster has managed to grow over the years.

While consumption growth seems to have reached a plateau in Europe, European consumers are

turning to higher quality and more premium products. Consumption levels are also rising in the

emerging markets such Brazil, Russia, India and China (BRIC) and Mexico, Indonesia, Nigeria and

Turkey (MINT) – for instance, Russia is the only non OECD market to feature in the top 20 consuming

nations on a per capita basis, but Turkey and India are expected to stand increase its share of global

chocolate consumption in the short future. Indeed, it is expected that the value of the Asia Pacific

confectionary chocolate market will grow from $12.6 billion in 2014 to $16.3 billion in 2018xxxvii.

Indicative Cost breakdown of a typical milk chocolate: This paper believes that an understanding of a

chocolate bar’s cost breakdown gives us an insight into Belgium’s competitive advantage. Based on

an FAO study of the chocolate supply chainxxxviii, one notes that the main costs are processing and

Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster 19

retail costs at 34% and 24% of total costs respectively – as this paper will show subsequently,

Belgium’s infrastructure and proximity to market allows it to reduce retail costs of distribution, while

its restructuring of business operations in the 1970s has allowed it to reduce processing costs.

Indicative*Cost*Breakdown*2 Milk*Chocolate

Processors,Profit Tax 9% 15% Advertising, 6%

Retail,Costs,and,Margin 24% Processing,Costs 34%

Producer,Price, 5% Intermediation, Other,Ingredients Freight Costs,at,Origin, 5% 1% 3%

Finally, while prices of the cocoa beans have shown volatility in recent years, largely due to shortages

in production, it only accounts for 3.5% of the total value of the final chocolate product – a

percentage that has stayed relatively constant since 2004. The cocoa beans are traded on future

markets in London on the Euronext-LIFFE market and New York Board of Trade (NYBOT) – the

graph below shows the spot cocoa prices since 2010 to 2014 based on data from the International

Cocoa Organization.

Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster 20

While large manufacturers can purchase futures contracts to hedge against market volatility and

reduce the likelihood of price shocks, they are largely price takers and concentrate their efforts on

maximizing value creation of the by-products, and increasing their competitive position at the

processing and distribution step of the value chain.

Belgian Chocolate Cluster: History

The Belgian Chocolate Cluster remains one of the oldest, still thriving, clusters today. The

very first trace of chocolate in Belgium dates back to 1635 when the Abbot of Baudeloo brought some

cocoa back to Ghent – at this time Belgium was still part of the Dutch empire (until its independence

in 1830), and it had access to many of the best cocoa producing regions of the world through Dutch

colonies in Africa and eventually its own. The first sign of a formal chocolate industry taking root in

Belgium comes in the late 17th century when Emmanuel Soares de Rinero was issued the first license

to produce chocolate. The 18th century saw the rise of the chocolate manufacturing sector with a

variety of companies and specializations appearing as chocolate became a part of the day to day lives

of Belgian citizens. The output of the Belgian chocolate industry rose dramatically in the 19th century

with the industrial revolution. By the 20th century, competition within the cluster was producing key

innovations that would set the Belgian chocolate cluster apart from its competitors. Jean Neuhaus’

creation of the praline coverture in 1912 would further catapult Belgium chocolate production but

increasing demand for Belgian chocolate by tenfold – mass quantities of coverture would be created

for export to many competitors to be used as the main ingredient in making their own unique

finished products. By positioning itself as the center for raw goods and coverture distribution

Belgium has continued to strengthen its position in the global chocolate market. More significantly,

Belgian chocolate manufacturers benefitted from industry restructuring after World War II – from

the 1960s and through the 1970s, there was a period of consolidation and professionalization from

which the first multi-national chocolate businesses would rise. The proliferation of mergers of

smaller chocolate manufacturers would create greater operating efficiencies and fuel a desire to not

only grow exports, but also to increase their footprint internationally.xxxix

Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster 21

Belgian Chocolate Cluster: Portfolio

Although Belgium has slipped slightly from its early 20th century market dominance, it still

ranks as a market leader, particularly in relation to its population size. Currently Belgium ranks as

the # 4 in Cocoa bean importer worldwide (after the Netherlands, USA, and Malaysia) and # 2 World

Chocolate Exporter (10% of world exports value). In 2015 confectionary chocolate, sales grew by

1% to 58,500 tonnes in 2015, while total value grew by 2% to $749m, driven by single size portion

and seasonal chocolate. Mondelez Belgium BVBA leads the confectionary chocolate

category with a 34.6% share of value in sales, followed by Mars Belgium (11,7%), Ferrero

Ardennes, and Nestle Belgilux (10.6%).xl

Exported) Ranking)in) value) world) 2014)(US$)Bil) exports Chocolate)and)other)food)preparations)containing)cocoa 2.953 2 Cocoa)beans,)whole)or)broken,)raw)or)roasted 0.435 7 Cocoa)paste,)whether)or)not)defatted 0.058 10 Cocoa)butter,)fat)and)oil 0.011 26 Cocoa)powder,)without)added)sugar 0.009 22 Cocoa)shells,)husks,)skins)and)other)cocoa)waste 0.001 11

Total&Volume&Growth&(%) 2014/2015 201082015&CAGR 201082015&Total Bagged&Selflines/Softlines 2.8 3.5 18.7 Boxed&Assortments 0.9 0.1 0.6 8&Standard&Boxed&Assortments 1 0.1 0.6 8&Twist&Wrapped&Miniatures 0.1 0.8 4.1 Chocolate&with&Toys 1 0.3 1.7 Countlines 0.4 0.2 1.2 Seasonal&Chocolate 2.9 3.2 16.8 Tablets 1.2 0.2 0.9 Chocolate&Confectionery 1.1 0.6 3

A deeper analysis on the cluster composition reveals that Belgium sits at the top of the world

export rankings in chocolate, cocoa beans, and cocoa paste. While these rankings are impressive,

there are concerns regarding the growth. The most recent industry data shows that growth has

stagnated in the last 5 years, and has also indicated that there are several parts of the chocolate

Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster 22

production chain that are underrepresented such as cocoa past, cocoa powder and cocoa butterxli

which needs to be addressed.

Belgium's&Cocoa&Export&Potfolio&(2010C2014)

14%

12%

10%

8%

6%

World&Market&Share&(%) 4%

2%

0%

!2% !10% !5% 0% Change&in&World&Market&Share&(%)5% 10% 15% 20%

Belgium Chocolate Cluster: Import/Export Dynamics

While the supply chain has been covered earlier, it is important to realize that Belgium’s

strongest niche is in the coverture export. The cluster have wisely chosen to focus on this product as

it acts as an intermediary product for a large amount of chocolate manufacturers. In addition, it is a

product that requires a sophisticated production method to produce at large scale, giving the Belgian

producers a higher barrier to entry for competitors from other countries.

This growth in “industrial chocolate” accounts for a majority of Belgian Exports, with Barry

Calebut alone accounting for about 30% of all industrial chocolate produced worldwide. The

company has benefited from the trend towards modularity by other large global competitors. Barry

Calebut provides a key ingredient for many of their competitors. For this reason Barry Calebut calls

itself, “the heart and engine of the chocolate industry”. xlii

Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster 23

Belgian Chocolate Cluster: Companies

While the rise of large multi-national companies concentrated the export production of the

cluster into less than 10 countries, the vast majority of companies in the Belgian Chocolate Cluster

are SMEs, employing less than 10 workers. As of 2014, of the 261 Belgium chocolate companies, 173

companies employed less than 10 employees, and 70% of these employed less than 5 workers. 90%

of Belgian chocolate companies employ less than 50 employees. Many of these are small shops that

benefit from the long tradition of handmade chocolates and cater to the unique tastes of their

communities. Given a healthy domestic market (Belgium ranks 4th in terms of domestic consumption

per capita), these small shops are able to thrive. The disparity between the large and small players in

the cluster has created some tensions with regards to regulations that will be discussed later in this

paper. xliii

Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster 24

Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster 25

Chocolate Cluster: Companies Performance

It is hard to deny that the Belgian chocolate companies have done well, but parsing out

whether they have ridden the wave of global chocolate consumption, or developed significant

operating advantages over their competitors is more difficult. The total number of workers employed

by Belgian chocolate companies remained consistent between 1965 and 1990, with just over 6,500

workers in 1965 and over 6,200 workers in 1990. As a result, during this period the average

production per worker increased from 11.1 tons per worker to 44.2 tons per worker. From 1995-

2007 the chocolate sector along with the vegetable fruit and potatoes sector are the only sectors to

grow in number of companies and employees. However, this growth in companies and employees

has not increased at the same rate of production.xliv As a reference, in 1965 Belgium produced 70,650

tons of chocolate, by 1990 Belgium produced 268,068 tons of chocolate and by 2013 Belgian

production had increased to 545,200 tons.xlv

Average Annual Growth Rates of Export of Belgian Chocolate Volumes and Values (1950-2013)

Belgian Chocolate Cluster: Competitive Advantage

The cluster’s main competitive advantages are location and production methods. These take

advantage of the two main cost inputs into chocolate; transportation and production. The Belgian

government has worked to systematically reduce the taxes and any trade barriers that could affect

the import of raw goods. As noted in our country analysis, Belgium has spent heavily on the Port of

Antwerp and its logistics to help the country act as a central distributor of Industrial chocolate.

Having the central distribution and centralized production of the key intermediate products has led

to a mutually re-enforcing model. This strategic restructuring of many Belgian chocolate companies

has led to significant improvements in ownership and management and has created the conditions

for the international expansion that has been a part of the last two decades.

Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster 26

Belgium Chocolate Cluster Map

What is particularly interesting when analyzing the cluster map of such an old cluster is how

well developed each of the participants are in the cluster. The cluster has managed to survive many

of its growing pains and now has a network that not only supports the largest players, but also re-

enforces the smaller players. As a sign of the maturity of the cluster Educational and Research

Institutions are robust elements of the cluster - this advanced level of cooperation between public

and private sectors has been made possible by the government prioritizing the agri-food and

chocolate industry through the development of the Ghent University’s Cacaolabxlvi in partnership

with the Flanders Institute for Biotechnology. The Belgian government has invested into the

infrastructure, research, and financing base over decades, that has pivotally supported the rise of the

industry – these will be discussed further in our regional analysis.

Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster 27

Belgian Chocolate Cluster: Diamond Analysis

The elements of the Belgian Chocolate Cluster Diamond are particularly strong, with only a

few areas of weakness.

Context for Firm Strategy and Rivalry: • EU%membership%allows%for%free% access%to%largest%market • Well%developed%internal%market% driving%competition%and% innovation

Related8and8Supporting8Industries Demand Conditions: • Intermediate%product%( couverture)% • Centralized%access%to%EU% produced%at%a%global%scale%in% Market% Belgium • Top%Five%– domestic%demand%of% • Nearly%all%raw%materials%are% chocolate%per%capita% imported • Questions%over%sustainability%of% demand%– lack%EM%growth

Factor Conditions: • Good%infrastructure • Good%location%within%the%EU • Abundant%skilled%labor • Cluster%supporting%elements% from%the%private%and%government% organizations%

Factor Conditions: The large investment in infrastructure has benefited the entire cluster

and has enabled efficiencies within the country and has enabled the rise of a large export capability.

Belgium’s location is also an important factor that has enable its rise as a chocolate powerhouse. Not

only is Belgium located in Europe, it is also benefits from having a deep water port making it a

natural central point for distribution. The strong historical ties to the cocoa producing regions of

Africa have given it the advantage of securing long term contracts through deep relationships with

growers in the region. Belgium has a highly educated workforce and has the benefit of a long history

of chocolate production that provides Belgian companies with a highly capable and skilled workforce

capable of helping companies innovate at a faster rate than if the workforce was unskilled. Further

strengthening the factor conditions are the cluster supporting elements from both private and

government organizations. The cluster has also developed institutions specifically geared towards

research and development. This has benefited the cluster by institutionalizing learnings from across

Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster 28

the companies and elevating the competitiveness of all the Belgian firms in comparison to their

international competition.

Demand Conditions: The global demand growth for chocolate over the last two decades has greatly

benefited the Belgian chocolate cluster. Particularly, the growth in demand from the EU has been

helpful to the cluster as the growth Belgium has struggled to capitalize on the growth in the

American market with the rise from competitors such as Mexico. However, as noted in our analysis of

the global chocolate industry, demand in these markets is stable and unlikely to accelerate. Belgium

needs to look into other emerging markets like China and India to expand consumer demand.

Belgium has also benefitted from domestic demand – it currently ranks 5th in the world in terms of

consumption per capita. This internal demand is particularly helpful in supporting the small to

medium businesses that make up a majority of the cluster in Belgium. However, a major weakness is

Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster 29

in the sustainability of this demand – it still lags behind other European markets, and there is more

that the cluster can do to promote further domestic consumption.

CONSUMPTION*OF*CHOCOLATE*PER*EU* RESIDENT*(KG)

Poland 2.74 Portugal 2.87 Spain 3.42 Italy 3.93 Lithuania 5.66 Ireland 5.84 France 6.69 Finland 7.23 Belgium 7.54 Denmark 7.58 Austria 8.8

United7Kingdom 8.86 Germany 12.22 0 2 4 6 8 10 12 14

Context for Firm Strategy and Rivalry: EU membership has certainly been helped in providing an

access point to the strongest market. Strong internal demand has produced a strong internal

competitive landscape that continues to fuel innovation. While labor cost is high as compared to

some competitors, technological advances have kept strong margins, particularly for the large scale

producers. Meanwhile, the boutique shops, have generations of knowledge and skills that are difficult

to replicate in newer markets.

Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster 30

Related and Supporting Industries: The strongest performing part of the sector is the production of

industrial chocolate or coverture – as previously mentioned, this intermediate product is produced at

a global scale. However, a clear risk to this part of the cluster diamond, is that nearly all the raw

materials necessary for this product are imported, and as noted in our chocolate industry analysis

above, there are questions over the sustainability of supply. Other supporting institutions include the

Port of Antwerp which acts as a central logistics hub for several different chocolate markets,

including competitors, as well as public and private agencies that help lobby for the industry inside of

Belgium as well as the EU – such as Flanders Food and Choprabisco which will be described in

greater depth later in the paper.

Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster 31

Belgian Chocolate Cluster: Government Policies and Institutes for Collaboration

The government involvement with the Belgian Chocolate Cluster has been quite extensive,

and what is unique about the chocolate cluster is that it has institutes for collaboration on three

different but intersecting levels: Local, Country, and EU. An analysis of the government involvement

reveals some tensions inside the cluster that are not otherwise apparent – there are two points of

contention for the cluster, primarily over origin and definition.

First, it is worth noting that there is a distinct definition for what constitutes Belgian

Chocolate which has effectively solidified Belgium’s competitive position – this serves as a high

barrier to entry, and gives Belgian manufacturer’s a monopoly position. This Belgian chocolate code

was created by Choprabisco, the Royal Belgian Association of the Biscuit, Chocolate, Pralines and

Confectionary – this private/public organization counts 180 members, ranging from the small

company to the multinationals companies. A vast majority of members are small local companies,

and therefore the Belgian Chocolate Code is written to address the concerns of SMEs. Specifically, the

requirements around defining place of origin have been contested as the larger Belgian chocolate

companies have started to produce a portion of their final products outside of Belgium. The

requirements imposed by the Belgian Chocolate Code are in many ways more onerous than those of

the EU regulations around origin. xlvii Nonetheless, this combination of local and regional policy

around origin has served to enhance the cluster’s value proposition by increasing consumer

willingness to pay.

The second area of contention was what was known as the 30 year “Chocolate War”. This

battle played out at the EU level and pitted the traditional strongholds of chocolate production,

Belgium, France, Switzerland and Germany against the United Kingdom and the Nordic countries.

The battle centered around the definition of chocolate, and traditional actors, led by Belgium argued

that anything defined as “chocolate” should not be allowed to include vegetable oil of any percentage

and should strictly use milk. This battle lasted for 30 years and was finally resolved by a European

Court of Justice ruling and by the European Directive 2000/36 which mandated that vegetable oil

Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster 32

substitute could still be used to produce chocolate up to a maximum of 5%. This was seen as a clear

levelling of the quality standards for chocolate products in general because most Belgian companies

pride themselves in only using 100% cocoa butter. Consequently, this is still being considered by

many Belgian manufacturers as a potential threat of reduced quality standards for chocolate, and to

the Belgian code has became stricter in response to these regulation. The Ministry of Economic

Affairs instituted the Ambao certification program to tighten the definition of Belgian chocolate,

which has further frustrated the larger Belgian chocolate corporations. xlviii

Indeed, it is important to note that the commodity-like nature of chocolate creates significant

opportunity for collaboration on multiple levels – apart from Choprabisco on the local level, the

Belgian chocolate cluster is also involved with Caobisco on the regional level, and the International

Cocoa Organization on the global level. The important point is that the Belgian cluster is a pivotal

member of these respective institutions – they are at the forefront of shaping regulation and

guidelines, and also provides an opportunity for knowledge sharing between different partners in the

supply chain across three dimensions. This sharing of knowledge enhances the existing knowledge

sharing on the cluster level, and further strengthens Belgium’s positioning.

Federalism and Chocolate Cluster Performance By Region

Institutionally, Belgium is divided into four language areas (the Dutch-speaking, the bilingual

Dutch/French, the French-speaking and the German-speaking), and is composed of three

Communities (the Flemish, the French and the German-speaking) and three Regions (Flemish,

Brussels Capital and Walloon). Consequently, policy-making within the country is prepared and

executed by various authorities, based on three distinct pillars, each with their own range of

competencies: a federal, a community, and a regional pillarxlix. Consequently, the Belgian form of

federalism is unique, because each region has exclusive powers and competencies in a number of

areas – there are no shared competencies between the regions, so that each entity has its own

separately elected parliament, government, administration, legislation, and advisory bodies. No

hierarchy exists between the different entities regarding their competencies so that no overruling is

possible. In 1980, the regional authorities were establishedl – the Flemish authorities decided to

Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster 33

merge the existing institutions of the Flemish Community and the Flemish Region. Since then, a single

Flemish Parliament, Flemish Government, and administration, with consultative or advisory bodies,

have managed and overseen both community and regional competencies in the various policy

domains. The Flemish Parliament debates and legitimates all official legal decisions pertaining to

both community and regional competence. Likewise, the Government of Flanders is charged with the

execution and implementation of policy decisions of both the community and the regional

competencies. This decision making process differs in the French-speaking part of the country, where

the French Community and the Walloon Region are separate institutional entities with different

parliaments, governments and public authoritiesli.

Based on Oxfam’s analysis of the Belgium Chocolate Clusterlii, one notes that there are

significant differences in performance by region. As noted in the graph above, Flanders is responsible

for nearly 75% of total employment, turnover and number of companies in the chocolate, cocoa, and

sugar confectionary industry in Belgium. This indicates the following: (a) the chocolate cluster is

disproportionately concentrated in the North of the country arguably due to greater access to the

North Sea, (b) As a result, Flanders has benefitted from increased employment in the chocolate

Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster 34

cluster, and it also has a more robust knowledge base given the historic presence of most companies

in the region – this has also allowed it to develop a strong cluster around food manufacturing over

the years.

Comparison of Regions

In order to understand this difference in performance, and evaluate future prospects for the

Belgium chocolate cluster, one needs to understand what each region’s strengths and weaknesses

are, and how current processes can be improved.

Flanders – Flander’s population accounts for about 58% of Belgium's total population,

whilst its surface area covers about 44% of the country. The majority of the companies and the

working population of Belgium are located in its northern region, which also has a higher

employment rate. As a result, the economy of Flanders represents about 58% of the Belgian economy

(as measured in GDP). It is also a very open economy: according to the EU definition, exports from

Flanders are worth almost 125% (2014) of its GDP (partly due to the trade of goods arriving in the

harbor of Antwerp). On the other hand, the relative wealth of Flanders - as measured in GDP per

capita- is about 20% higher than the EU-28 average but slightly lower than the Belgian average. The

main reason for the latter is the “capital city” effect of the small Brussels Capital region, with its

strong presence of company headquarters and public administrations. If the wealth generated by the

daily commuters from Flanders into the Brussels Capital Region were attributed to their residence in

the Flemish Region, the Flemish GDP per capita would rise above the Belgian value. Total

expenditure on R&D (GERD) in Flanders, which reaches 5.8 billion euro, equates to over 64% of the

Belgium total (2013) and the Flemish R&D intensity exceeds the national value for Belgiumliii.

Strong Institutions for Collaboration: The backbone of the Flanders’ knowledge base is

shaped by the 5 university associations, 5 strategic research centers, and a number of other

knowledge institutes in specific domains such as marine sciences, tropical health, agriculture

research, and various collective research institutes active in specific fields – institutions such as

Ghent University, the Flanders Institute of Biotechnology and the Agency for Innovation by Science

Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster 35

and Technology have played a key role in fostering the development of the food manufacturing sector

in Belgium overall and in Flanders specifically. Several of these knowledge actors in Flanders are

recognized as centers of excellence in their field of activity and conduct research integrated in

renowned international networks and with partners throughout the world. Some of these, such as KU

Leuven or Ugent have established subsidiary activities abroad (US, Asia) by often involving local

counterparts or partners. The European Research Ranking, which is based on the publicly available

data from CORDIS on European research projects funded by the European Commission during the

past years, contains three institutes from Flanders in the top-100: KU Leuven, iMinds and VUB.

Indeed, ‘the winning combination of Flander’s dense population of companies, SMEs, large

enterprises, local companies, and their traditional willingness to cooperate in order to extend

themselves, has provided a hotbed for the development of various knowledge clusters’liv – which

provide a critical backdrop for the formation of specialized clusters. This economic specialization

pattern (based on the relative export shares) of Flanders reflects the pattern of a mature economy as

well as that of a highly diversified economy. In most sectors the Flemish economy has maintained a

critical mass to remain competitive. The food and beverages sector is the largest industrial sector in

terms of employment with a wide set of specializations in pork meat, frozen vegetables and potatoes,

beer and chocolateslv.

Policies: The Government of Flanders has supported several innovative networks, involving

various knowledge actors and industries, usually including companies from a specific sector. The

main policy instrument is the “VIS-scheme” which provides a legal structure for various types of

networks/projects that offer innovative solutions to a specific problem or a demand-driven

opportunity relating to a collective of companies, resulting in a clear economic added value for a

broad target grouplvi. Since 2002, the VIS-scheme has supported the emergence of excellence centers

or innovation platforms – these organizations coordinate between different actors such as industrial

partners, universities, professional organizations of a specific industry, by providing relevant

research and innovation potential and diffuse knowledge in the Flanders region. As the OECD notes

in its report on innovation policy, the ‘VIS scheme is targeted to intermediary network organization

that actively support technological innovation in companies’, and critically helps to increase

Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster 36

awareness and improve access to technology and knowledge transfer for enterpriseslvii. Flanders

Food is one of the initiatives supported by VISlviii – consisting of 181 member companies and 25

knowledge institutes, it serves as a consolidated knowledge center that brings together food

companies dedicated to innovationlix, specifically in the West Flanders region due to a combination of

geographical proximity to the ports, as well as unique climatological conditions that allow West

Flanders to use two-thirds of its surface for agriculture and horticulturelx.

In 2015, the Flemish Government also approved a Concept Note on Cluster Policy that

describes the framework of a more general Flemish cluster policy. It includes initiatives that

reshuffle the existing landscape, among other by adapting funding criteria, and direct future

innovative cooperation among companies’ networks into two types of clusters: spearhead clusters

and innovative enterprise networks. Spearhead clusters will be complementary to the strategic

domains, large scale, limited in number, and strictly selected. It will be supported for a 10-year

period with a 50% public support part, and require a triple helix model. In contrast, the innovative

enterprise networks will be shaped on a smaller scale, through a bottom-up approach, and focus on

future potential by concentrating on emerging markets or the bundling of various small initiatives.

During a 3-year period, a 50% public support part will be available, and the simplification and

streamlining of the large number of intermediaries, structures, and innovation actors are the leading

goals of this new policy slated to be implemented in 2016 or 2017 intended to foster the

development of a more focused demand-driven approach. Indeed, the aim of this on-going policy

process is to unlock unused economic potential and to increase the competitiveness among Flemish

companies through an active and continuous cooperation of actors, to contribute to a solution for

societal challenges with an economic added value for companies. Indeed, according to Jan Larosse at

the Flanders Department of Economy, Science and Innovation, a key challenge moving forward is

dealing with the innovation paradox in Flanders – primarily the translation of innovation projects to

monetization, which the 2014-2019 governing agreement has established as the core focuslxi.

Wallonia – Concentrated in the Southern region of Belgium, it covers 55% of the total land

area but only makes up 33% of the total country population. While it covers the majority of the

Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster 37

country, GDP only accounts for 23% of Belgium’s totallxii. As highlighted above, Wallonia has its own

separate competencies with respect to how it functions as a region within the overall Belgian federal

framework – it is thus responsible for its economic policies and is allowed to pursue its own external

trade policies, including the signing of treaties. This autonomy may be part of the reason why

Institutions for Collaboration (IFCs) only exist at the regional and not the national level. Despite the

fact that the population of Wallonia is highly educated, overall labor market data in Wallonia

highlight crucial economic problems. With an employment rate of 57.2%, Wallonia is doing worse

than Belgium and the EU-27 on average. This, coupled with an unemployment rate of 9.6%, also

higher than Belgian and EU-27 averages, raises some concerns about the region. One potential

explanation for these severe underutilization indicators is the recent de-industrialization processes

that Wallonia has experienced over the second half of the 20th century.

Policies: In August 2005, the Government of Wallonia decided to implement the “Priority

Action Plan”, or also “Marshall Plan” which aimed at supporting Wallonia’s economy and giving it a

qualitative jump. Spearheaded by AMEX, the Wallonia Export and Investment Agency, this new

industrial policy mainly focused on the development of industrial networking through two policies

which are linked very closely to each other: (a) The Competitiveness Poles policy: The main objective

of this policy is to develop some key growth sectors on the basis of strong partnerships projects

between enterprises, research and training centers. It aims to implement leading industrial and

technological projects within the 5 sectors considered essential for the regional economy: life

sciences and health (Biowin), the agrifood industry (Wagralim), the Aeronautics and space industry

(Skywin), mechanical engineering (Mecatech), transport & logistics (Logistics in Wallonia). (b) The

Clustering policy: The objective of this policy is to develop business networks in specific domains,

and eventually with research operators, and, to develop a cooperation framework and a stronger

economic structure within the sectorlxiii. Given this paper’s focus on the chocolate cluster, we look at

Wagralim, the agri-food cluster, which was created as part of the ‘Marshall Plan’ to shore up the

competitiveness of companies and to boost business and jobs in the sector. The regional government

has set aside close to € 55.3 million for projects, with € 38.3 million of which from the public purse

Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster 38

(funding by the Walloon Region). The Cluster’s partners mainly include companies, scientists from

universities, research centers, and training institutes. At present, there are 40 industrial partners

(including 19 SME) as well as 31 scientific players are project members, and entities such as industry

federations like Fevia Wallonia aid in the development of the cluster.

However, the problem is that only one chocolate factory, Ferrero in Arlonlxiv, is currently

based in Wallonia – as noted above, the majority of companies are still concentrated in Flanders, and

there are questions over the success of the above initiatives. As noted by Florence Hennart, from

Wallonia’s Economic Policy Department, Wallonia’s ranking in agriculture production across the EU

stands at 72, and more needs to be done to improve its performancelxv.

Brussels – While Brussels only accounts for 3% of overall production volume in the food

sector, it plays a pivotal role in the development of the sector in Belgium as a whilelxvi. Through the

Brussels Enterprise Agency, the Brussels has focused its efforts on being the ‘interface that enables

all those doing business in the Brussels region’ to find the necessary information, and provide

selective support to high potential industries which will lead to the growth of a sustainable

Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster 39

ecosystem for innovate enterpriseslxvii. In particular, Brussels has focused on the development of the

biotechnology sector given the relationship between biotechnology, and the development agri-food

specific innovations in additives, nutrients, and even packaginglxviii. This paper argues that the

presence of large multinational corporations like Nestle, Danone, Ferrero, and Unilever in the capital

serves two important functions: (a) given that these companies need to be in Brussels either to lobby

politicians in the European Union or to keep abreast of the latest regulation, there is a natural

community for knowledge sharing that can only benefit the development of Belgium’s own agri-food

cluster. (b) The fact that these corporations have chosen to site their regional headquarters in

Brussels also creates a powerful signaling effect indicating the importance of Belgium at the heart of

Europe. In this sense, Belgium has a powerful competitive advantage not completely due to its

inherent competencies, but also in part due to the fact that it is also the capital of Europe, giving it the

opportunity to leverage on this position to grow its agri-food cluster moving forward.

Sustaining Competitive Advantage and Improving the Value Proposition

In this paper’s analysis, while Belgium certainly has an established comparative advantage in

the chocolate cluster, it needs to continue sustaining and improving on this advantage for it to

continue being a market leader. Indeed, Belgium’s current value proposition is this – it has the

experience and expertise in chocolate manufacturing forged over generations of history and practice,

which has not only allowed it to produce a superior product, but also increase consumer willingness

to price. This superiority has been solidified through a combination of regional and domestic

legislation that has protected the ‘Belgian Chocolate’ label, giving it an essential monopoly over its

production even though the raw materials are almost entirely sourced from outside its borders. In

addition, its central role in linking domestic, regional, and international cocoa organizations gives it

an influential voice in shaping regulation and policies for the industry – it is able to dictate the

contours of industry guidelines moving forward, preventing it from being blind-sided by other

competitors. Moreover, given the improvements it has made to manufacturing processes through the

consolidation of the industry, the cluster has also been able to lower processing costs. Couple with

Belgium’s inherent strength in infrastructure and proximity to major transportation routes, retail

Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster 40

and transportation costs have been significantly reduced. It essentially has a natural advantage at

each step of the value chain, which has allowed to indirectly integrate manufacturing across

vertically. This combination of increased willingness to pay, and lower marginal costs has allowed

the cluster to create and capture value not only for itself but also for the country as a whole, but it

needs to improve on a few areas for it to sustain its value proposition.

Country Recommendation

This paper is believes that a major hindrance for Belgium moving forward is in its political

structure – while the regional federalist structure may have worked for now, it is tenuous, and has

the ability to fracture at a moment’s notice, possibly unraveling generations of investment and

expertise in the chocolate cluster. Moreover, the country’s anemic economic position is concerning,

and it needs to solve its current fiscal position in order to ensure the sustainability of existing policies

and programs. Here are our recommendations in order of importance:

Recommendation 1: Address lingering concerns over the democratic structure and

relationship between the three different regions.

It is incredibly worrying that Belgium did not have an elected government for nearly 589 days in

2010-2011 because opposing Flemish and Walloons were not able to agree on how to form a

governing coalitionlxix. This not only hamstrung the government’s ability to conduct any policy, but

also create a perverse sense of uncertainty about the business and investment community that is

inherently inimical to growth and competitiveness. While this scenario has been solved, there is no

guarantee that it could not happen again, and this paper argues that Belgium needs to settle the

structure of polity soon through a more intense dialogue– continued rumors over the breakup of

Flanders and Wallonia are not helpful, and needs to addressed comprehensively as it dictates the

scale and scope of cluster policy moving forward. The major actors involved in this step are likely to

be the respective regional governments, the European Union, and likely the population through a

referendum. Realistically however, given existing talks of Brexit, it is unlikely that Belgium will

undertake a similar referendum – rather, similar to what it has been doing thus far, it will continue to

Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster 41

punt the issue, leaving a shroud of uncertainty which will cloud the development of successful cluster

policies on both the regional and federal level.

Recommendation 2: Belgium needs to improve on its cluster coordination across all three

regions in order to develop a successful chocolate cluster policy

As noted above, each of the three regions have detailed plans for the development of the agri-food

and manufacturing cluster. However, there is little communication and harmonization across the

three regions apart from some coordination between Flanders and Brussels given their proximity.

The lack of partnership implies that policies may overlap and compete with each other rather than

competing with external competitors. While regional competition is common, as noted in South

Carolina in the United States, there is a sense that competition between Flanders and Wallonia is

tinged with a degree of antagonism due to its acrimonious history and relationship. This is counter-

productive, and limits the oveall potential of Belgium’s chocolate cluster if not adequately addressed.

Given the tense relationship between regional governments which may limit the viability of forming

cross-regional taskforces on the governmental level, companies in each region should organize

specific committees and councils dedicated to the harmonization of strategy. The role of Choprabisco

is key – as domestic institutions overseeing the chocolate cluster, they play a neutral role, and could

be a pivotal force in influencing governmental collaboration.

Recommendation 3: The government needs to solve Belgium’s current fiscal position which is

not sustainable, as well as address the high tax burden which has decreased the incentives to

work and invest in the country

As noted above in our country analysis, Belgium’s high tax rate has worsened incentives to work and

invest since 2000, and this is inimical to the development of strong clusters given the impact on

productivity, labor force participation, and economic growth. It is comforting to note that the

government has put forward a series of austerity measures, but its impact is still questionable, and

continues to be challenged by the Wallonia government. Indeed, part of this issue lies in the inherent

tension between regions which has limited the ability of the government to formulate acceptable

Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster 42

policies without facing challenges from either side. In any case, the government needs to follow

through on its plans for tax reform, and also offer more clarity on its tax incentives for R&D which

can stimulate further investor interest and involvement in the country.

Recommendation 4: Improve access to credit by strengthening the banking sector

As highlighted above, the weakening of the credit markets has impacted small and medium

enterprises the most, which constitutes a significant portion of the chocolate manufacturing industry.

This also explains why innovation in SMEs is low relative to other European Union economies – given

weak credit conditions, SMEs are less incentivized to invest in R&D given funding constraints,

creating a vicious spiral. The government (Ministry of Economic Affairs, and the Ministry of Finance),

in collaboration with industry associations such as Choprabisco, needs to partner with banks to re-

invigorate lending in Belgium – this in part depends on the lending standards across the Eurozone,

but with the European Central Bank’s easing bias, and continued quantitative easing through asset

purchases and offering cheap financing to banks in the form of long-term financing operations

(LTRO), one can argue that credit conditions will gradually improve over in the coming years and

bolster growth.

Cluster recommendations

This paper believes that Belgium’s chocolate cluster faces three secular headwinds – first,

concerns over the sustainability and supply of cocoa; second, over the stagnation of its global market

share due to an over-reliance of a stable European market; and three, meeting evolving consumer

demands in an increasing crowded space. These are worrying trends that may inhibit the cluster’s

ability to continue sustaining its competitive advantage and value proposition. Here are some

recommendations to address these issues in order of priority:

Recommendation 1: Improve sustainability of the supply of cocoa beans in order to ensure

long term availability and quality of cocoa beans. The cluster should pre-empt the demand for

increased corporate social responsibility, and take more discrete measures to improve its

adherence to global CSR norms

Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster 43

As noted in our analysis, Belgium largely imports all of its raw materials in cocoa production. This

implies that it is not only susceptible to supply shocks, but more importantly, may be vulnerable to

changes in the production process. This could happen in two ways: (a) companies decide to move

their production facilities closer to the raw materials, or (b) exporting countries begin developing

their own chocolate manufacturing capabilities and export end-products on their own. While this

paper does not think these are likely in the near term given Belgium’s value proposition, and control

over the Belgium-chocolate label, it still needs to ensure that it is not vulnerable to supply changes. It

is worth noting that the country has a long term relationship with Ivory Coast, as well as cooperation

programs with most of the African producers of cocoa given its historical links with Africa. The

government should continue building on these relationships through diplomatic efforts either on a

Track 1 basis, or through industry associations like ICCO. Moreover, given this relationship, it is also

well placed to influence these countries to adopt CSR-adherent production best practices. Given

increased consumer demand for socially conscious products, Choprabisco should take a lead in

pushing for increased certification of cocoa beans, and securing long-term supply contracts for these

products to meet demand. In addition, other institutes for collaboration like the Belgium Trade for

Development Center should also improve its marketing of Belgian chocolates by emphasizing

sustainability as a key principle of the cluster.

Recommendation 2: Promote Belgian Chocolate Brand to enhance customer willingness to

pay, especially in the emerging market

The Belgium chocolate cluster should reinforce its position in quality products and the top segment

of the market – while Ambao and Choprabisco have done a commendable job in promoting the

Belgium brand across historical markets in Western Europe and North America, these markets are

experiencing stagnant and stable growth. The cluster thus needs to expand into growing regions in

the emerging market such an India and China, and create greater awareness of Belgium chocolates

through partnerships with local distribution networks, retailers, and domestic suppliers. While the

institutes for collaboration and industry groups play a critical role in this endeavor, the respective

regional governments and trade promotion agencies like Flanders Food can also play a pivotal role

Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster 44

by inviting foreign distributors and retailers to observe production process of Belgium chocolate

manufacturing. Indeed, the key point here is to build on the established Belgium chocolate brand

name – while it is unlikely that its reputation will decline, it still faces competition from other

producers in Switzerland, and the cluster needs to not only retain its customers through product

differentiation from other lower quality options, but also continue growing consumers’ willingness to

pay in order to sustain its competitive advantage. It has certainly helped that the European Union has

clarified the definition of milk chocolate through the European Directive 2000/36, but there can be

further dialogue between industry groups and regulators to ensure the competitive position of

Belgium forward.

Recommendation 3: Maximize value added throughout the supply chain by improving on

current processes, and through innovation.

Belgium chocolate industry players have acquired a leading position in the intermediate products but

should improve on its efficiency to reinforce their position – while restructuring in the 1970s and

1980s has helped to bolster current operational effectiveness, it should continue enhance

improvement efforts. Indeed, Belgium’s competitive advantage across the value chain can be

enhanced through innovation projects either through more energy efficient manufacturing

processes, or by developing new technologies to facilitate increase export volume. This can be led by

a partnership between regional cluster groups such as Wagralim or Flanders Food, with research

institutions like the Agency for Innovation by Science and Technology, and Choprabisco.

Recommendation 4: Stimulate national consumption

As highlighted previously, while the average Belgium citizen consumers 7.5kg of chocolate per year,

it still lags behind Germany, the United Kingdom, and Austria. While its domestic market is small, the

cluster can still promote further consumption – for instance, industry associations like Choprabisco

should capitalize on the recent policy developments which acknowledge the health benefits of

moderate chocolate consumption to increase the share of the chocolate sales in the consumers’

basket. Targeted marketing efforts are needed to nurture further demand for chocolate as a health

Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster 45

product rather than a compulsive purchase. Given the similarity of German and Austrian consumers

with Belgium consumers, industry groups should conduct a cross-border analysis of consumer

patterns to gain a deeper understanding of success factors which can translate into further domestic

sales.

Recommendation 5: It should also address stagnant market share in chocolates by

diversifying into other by-products and developing other niche products

The ITC Trade Map indicates that while Chocolate accounts for the largest share of Belgium’s cocoa

export portfolio, its change in market share is stagnant. In contrast, Cocoa beans and cocoa butter

have been growing at a rate of 15% and 8% respectively since 2000. While a small part of the overall

export portfolio, there is great potential in developing these by-products, and the cluster should look

to diversifying into other products to gain a further advantage over other manufacturing peers.

Similarly, it should increase R&D efforts in promising niche areas such as organic chocolate and low

diet products – this not only address changing consumer demands, but also allows it to create value

by expanding the market. This should be led by a consortium of firms, research institutes, industry

groups, and regional cluster agencies.

Conclusion

‘Whatever the future holds, one thing is certain. As competition continues to evolve, it will be both unsettling and the source of much of our prosperity.’

- Michael Porter, On Competitionlxx

In summary, there is little doubt that Belgium’s chocolate cluster has come a long way, and

has already entrenched itself as a market leader in chocolate manufacturing – its success has

certainly confirmed the notion that cluster knowledge serves as the interstitial glue connected

related industries across the value chain in a particular geography. However, as this paper argues,

the path forward is less clear – given concerns over the sustainability of its raw materials, the

sustainability of the Belgium polity, and the sustainability of chocolate demand in its traditional

Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster 46

markets, Belgium faces a fundamental challenge to the sustainability of its competitive advantage in

chocolate manufacturing.

Indeed, competition is unsettling, but as Michael Porter notes above, it can be the source of

much prosperity. There are certainly numerous challenges in the road ahead, and this paper has

offered a few recommendations on how to solve them – while it may require a degree of effort,

Belgium has the potential to create and capture further value in the industry given its existing

advantage in all parts of the value chain, its brand, and its role in all three levels of IFCs (local,

regional, and global). More importantly, Belgium’s chocolate cluster has shown tremendous

resilience over the years, from its innovation of the couverture in 1912 to the restructuring of

business processes in the 1970s, and this paper is convinced that the cluster will continue to

innovate and improve to enhance its value proposition for generations to come.

Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster

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