The Regional Development Plans for the Southern Economic Corridor in Peru: Linking the Coffee, Alpaca, and Auto-Part Industries with the World 페루-목차 2012.6.21 5:36 PM 페이지2 mac001 PDF-IN 2540DPI 100LPI
The Regional Development Plans for the Southern Economic Corridor in Peru:Linking the Coffee, Alpaca, and Auto-Part Industries with the World
Project Title The Regional Development Plans for the Southern Economic Corridor in Peru: Linking the Coffee, Alpaca, and Auto-Part Industries with the World
Prepared by Market Economy Research Institute (MERI)
Supported by Ministry of Strategy and Finance (MOSF), Republic of Korea Korea Development Institute (KDI)
Prepared for The Government of the Republic of Peru
In co-operation with National Centre for Strategic Planning (CEPLAN: Centro Nacional de Planeamiento Estretegico′ )
Program Directors MoonJoong Tcha, Executive Director, Centre for International Development (CID), KDI Taihee Lee, Director, Division of KSP Consultation, CID, KDI
Program Officer Suji Kim, Research Associate, Research Coordination, MERI Mikang Kwak, Division of KSP Consultation, CID, KDI
Project Manager Jaehoon Lee, Research Fellow, MERI
Project Advisor Hoshik Kim, Former Minister for Maritime Affairs and Fisheries
Authors Chapter 1: Jaehoon Lee, Research Fellow, MERI Chapter 2: Moon-Kyum Kim, Professor, Soongsil University Chapter 3: Sunwoo Kim, Research Fellow, Korea Small Business Institute Chapter 4: Jumi Kim, Research Fellow, Korea Small Business Institute Chang Dae Kim, Professor, Dongseo University Chapter 5: Sungyoun Oh, Research Fellow, P&J
English Editors Annette St. Onge and Joonhyun An
Spanish Translation Pedro Americo' Castillo Aranda Done by
Government Publications Registration Number 11-1051000-000258-01 ISBN 978-89-8063-625-9 94320 978-89-8063-657-0 (set) Copyright 2012 by Ministry of Strategy and Finance, the Republic of Korea 페루-목차 2012.6.21 5:36 PM 페이지3 mac001 PDF-IN 2540DPI 100LPI
Government Publications Registration Number 11-1051000-000258-01
Knowledge Sharing Program
The Regional Development Plans for the Southern Economic Corridor in Peru: Linking the Coffee, Alpaca, and Auto-Part Industries with the World
2012
MINISTRY OF Korea Development STRATEGY Institute AND FINANCE Market Economy Research Institute 페루-목차 2012.6.21 5:36 PM 페이지4 mac001 PDF-IN 2540DPI 100LPI
Preface
The Knowledge Sharing Programme (KSP) was launched in 2004 by Korea’s Ministry of Strategy and Finance (MOSF) and the Korea Development Institute (KDI) in an effort to contribute to the socio-economic development in developing countries by the way of policy studies, consultations and capacity building programmes, which are based on the experiences and knowledge attained by Korea in their development journey. Due to the acceptance and strategic importance of the programme, it has since been expanded to collaborate with 26 partner countries in consideration of their interest, growth potential and needs.
The KSP 2011 represented the second programme in Peru, as the country benefited from a KSP intervention in 2010. The KSP 2011 in Peru has been implemented by the Market Economy Research Institute (MERI). Entitled Enhancing the Competitiveness of SMEs in the Southern Economic Corridor in Peru: Some Pilot Action Programmes, the initiative focused on three regional industries-the alpaca, coffee, and automotive-parts. In addition, the programme also includes research on regional agro-industry co-operative schemes.
The Government of Peru has acknowledged the positive role of SMEs in national development, such as the promotion of regional development, the reduction of poverty, and the like. Hence, the development of the SME sector, especially in the region of sierra in the Southern Economic Corridor, has become an important agenda for the National Centre for Strategic Planning of Peru (CEPLAN), author of the Bicentennial Plan, the overarching national development strategy. In fact, the role of SMEs in the area of fostering national competitiveness and employment was already recognised and emphasised in the Bicentennial Plan. As such, it is highly meaningful that the Peru KSP 2011 sets its programme scheme to share Korea’s policy experiences in the enhancement of the competitiveness of SMEs in the Southern Economic Corridor of Peru. The success of the KSP 2011 in Peru is attributed to the expertise, hard work and commitment of many people. It is my pleasure to recognise their major contributions and to extend my deepest gratitude, to: Mr. Ho Shik Kim, Senior Advisor, who successfully led the delegation for the Final Reporting Workshop and thesenior-level dialogue; Dr. MoonJoong Tcha, 페루-목차 2012.6.21 5:36 PM 페이지5 mac001 PDF-IN 2540DPI 100LPI
the Executive Director of the Center for International Development at KDI, and staff members who patiently helped with all of the details pertaining to the entire process of the project; our Peruvian counterparts in this project-the National Centre for Strategic Planning (CEPLAN), the Ministry of Production (PRODUCE), Sierra Export, and the Centre for Technology Innovation (CITE); the Peru government agencies and their staff members including local researcher; the referees and discussants in the seminars; and last but not least, the dedicated staff members at MERI.
It should be noted that the contents of this report reflect the views of the authors of the respective chapters and that they do not necessarily reflect the official views or policies of MERI.
In-Ho Kim, Chairman Market Economy Research Institute 페루-목차 2012.6.21 5:36 PM 페이지6 mac001 PDF-IN 2540DPI 100LPI
Contents
2011 KSP with Peru 15 Executive Summary 18
Chapter 1 Towards the Bicentenary: The Introduction
Summary 36 1. Background 37 1.1. The vision towards 2021 37 1.2. Regional inequality 41 1.3. The Peruvian government′s efforts to close the regional gap 42 2. SMEs as an Agent to Promote Regional Development 47 2.1. The role of SMEs in developing countries 47 2.2. SMEs in Peru 47 3. Objectives, Scope, and the Rationale of the Study 49 3.1. Objectives and scope of the study 49 4. Organisation of the Study 52
Chapter 2 Regional Strategic Industry Development Plan: Alpaca
2. Unique Characteristics of Textile industry 61 2.1 Structure of textile industry 61 2.2. Textile industry development phase 62 3. Peruvian Alpaca Industry: Status and Issues 63 3.1. Workforce status 64 3.2. Industry profile by types 64 3.3. Employment created by alpaca textile industry 65 3.4. Export of Peruvian alpaca products to Korea 66 4. Korean Organisations and Companies Associated with Alpaca Industry 67 4.1. The Korea Wool Association 67 4.2. Domestic Companies 73 5. Agenda and Policies 74 5.1. Fostering the expert workforce for the alpaca fibre industry 74 5.2. Fostering the expert workforce for the alpaca fibre industry 75 5.3. Development of original brands 76 5.4. Promotion of Inter-stream collaboration projects 77 5.5. Financial support for replacement of over-aged facilities 77
Chapter 3 Regional Specialty Industry Development Strategy: Coffee
Summary 80 1. The World’s Coffee Industry 83 1.1. World coffee market: Price 84 1.2. Market fundamentals 85 1.3. World coffee market: Export 88 1.4. Consumption 90 2. Peruvian Coffee: Making Its Way to the Global Market 91 2.1. Background 91 2.2. Types of Peruvian coffee 92 페루-목차 2012.6.21 5:36 PM 페이지8 mac001 PDF-IN 2540DPI 100LPI
Contents
2.3. Export of the Peruvian coffee 93 3. The Challenges for Peruvian Coffee 96 3.1. Major challenges to a solid and competitive business model 96 3.2. The Alternative Development Plan 97 3.3. The Korean coffee import and Peruvian coffee 98 4. Policy Recommendations 103 4.1. Business Strategy for Economies of Scale 103 4.2. Proactive implementation of advanced marketing 103 4.3. Methods for promotion of regional products and joint brands 104 4.4. Securing diverse sales channels 105
Chapter 4 Regional Specialty Industry Development Strategy:Auto Parts
Summary 108 1. Auto Parts Industry in the Southern Economic Corridor (SEC) 113 1.1. Some Background Information 113 1.2. Why Auto Parts Industry? 113 2. Trends in the Automotive Industry 116 2.1. Global automotive supply and demand 116 2.2. Restructuring of the world automotive industry 119 2.3. Status of the automotive industry in South America 122 2.4. Status of the automotive industry in Peru 124 3. Korea’s Automotive Industry Cluster 131 3.1. Korea’s Automobile Industry Development Stages 131 3.2. Status of Regional Specialisation in the Korean Automobile Parts Industry 132 4. Auto Parts Industry Cluster Model of Peru 135 4.1. Goal and Long-Term Road Map 135 4.2. Main contents of the roadmap 136 4.3. The precondition for the success of Peru Automotive Parts Cluster 142 페루-목차 2012.6.21 5:36 PM 페이지9 mac001 PDF-IN 2540DPI 100LPI
Chapter 5 Regional Strategic Industry Development Plan: Micro, Small, and Medium Enterprise Co-operative and Agro-Industrial Complex
Summary 146 1. Background Information 150 1.1. Growth potential in the South Economic Corridor (SEC) 150 1.2. The challenges to growth in the South Economic Corridor 151 2. Development of Co-operative Programmes: A Private Sector-led Model 152 2.1. Co-operative programmes 153 2.2. Implementing the co-operative programmes 157 2.3. The application of the co-operative model to the region of Puno 163 2.4. The co-operatives in Korea 166 3. Development of the Agro-Industrial Complex: The Public Sector-Led Model 168 3.1 Implication of the agro-industrial complex in Peru 170 3.2. Deciding potential areas for the agro-industrial complex and the development plan for the SEC 174 3.3. Deciding and supporting the tenant firms in the agro-industrial complex in Korea 176 3.4. The role of policy intermediary and the business development services 180 4. Summaries, Conclusions, and Policy Recommendations 181 4.1. Summaries and conclusions 181 4.2. Policy recommendations and further actions needed 182 4.3. Further actions needed 183
Number of Enterprise by Economic Corridor, 2008 44
SMEs in Peru (%) 48
Chapter 2
Inter-Stream Collaboration between Textile Companies 62
Toyne’s model 63
Industry Characteristics by Type and Region 65
Regional Employment Status by Sector 65
Alpaca Fur/FibreExport Volume from Peru to Korea, 2002-2011 66
Peru’s Export of Alpaca Fur to Korea 66
Large Companies and SMEs in Woollen Industry 68
Woollen Companies by Location 68
Worsted Wool Industry Workers 69
WorkerDistribution by Region 69
Spinning Machine and Wool Processing Capacity 70
Change in Number of Spinning Machines in the Period 2000-2010 70
Sales Status 71
FinancialRatios of Worsted Wool Companies 71
Worsted Wool Fiber Market Change 72
Worsted Wool Textile Market Change 72
Carded Wool FibreMarket Change 72
Chapter 3
ICO Indicator and Futures Market Prices of Coffee: 84 Annual Averages for the Period 1994/95-2009/10 페루-목차 2012.6.21 5:36 PM 페이지11 mac001 PDF-IN 2540DPI 100LPI
Production Volume of Top Coffee Exporting Countries 88
Volume of Exports, 2006/07-2009/10 88
Value of Exports, 2006/07-2009/10 89
Top Coffee Consuming Nations, Based on 2008 data 90
Key Export Destinations of Peruvian Coffee Beans 94
Top Peruvian Coffee Bean Exporters 95
Top Peruvian Coffee Exporters (Roasted beans) 95
Korean Coffee Import by Country 99
Korean Coffee Import by Country 100
History of Fair Trade Business of the Beautiful Store 101
Amount of Peruvian coffee imported by Beautiful Store 102
Total Coffee Production in Brazil, 2000/01-2011/12 103
Change in Sales of the Hessare Brand 105
Chapter 4
World Automobile Production and Sales 117
Initiation of Partnership after Crisis 120
The Market Environment before and after the 121 Economic Crisis and Change in the Factors of Competitive Advantage
Number of Cars Sold in South America: Some Selected Countries, 2008-10 122
Number of Cars Exported to South America by Major Car-Producing Countries 122
Status of Ownership of the Automobiles in Peru and the Neighbouring Countries, 2009 123
Car Imports of Peru by the Origin, January-May 2011 125
Car Imports by Brand, January-May 2011 125
Motor Vehicle Production by Type 129
Motor Vehicle Production by Maker & Type 130
Motor Vehicle Production by Type 130
Development Stages in the Korean Automobile Industry 131
Information on Automobile Parts Cluster Infrastructure-related Projects 134
The Conditions and Components of a Cluster 142 페루-목차 2012.6.21 5:36 PM 페이지12 mac001 PDF-IN 2540DPI 100LPI
Contents | LIST OF Tables
Chapter 5
Distribution of MSEs in Peru by Number of Employees, 2009 154
Estimated Number of the Informal MSMEs in Peru 154
Some Examples of the Financial Support Rendered by the Korean Government 159
The Cap of the Policy Loans Set by the Korean Government 160
Number of Co-operative Programmes by Business Type, 1979-2007 162
Number of Co-operative Programmes by Type, 1979-2007 162
Comparison of Business Performances between the Pre-and 162 Post-Co-operative Programme: The Case of Korean SMEs
Comparison of Water Treatmentin a Plating Complex between the 163 Pre- and Post-Co-operative Programme: A Case of Korean SMEs
The Structure of Korea’s SME Co-operatives 168
The Question: What Prompted You to Move in to the Agro-Industrial Complex? 176
Business of the Tenant Firms in the Complex 176
Government Support Rendered to and the Support Desired by the Tenant Firms 177
Chapter 1 Annual GDP Growth, 2002-2010 37 Peru’s Export, 1992-2010 38 Revealed Comparative Advantage, Peru 2010 39 GNI per Capita, 2010 40 GDP by Region, 2008 42 Economic Corridors in Peru and the Infrastructural Axis of the IIRSA 45 Distribution of EAP, 2008 46 GDP by Economic Corridor, 2009 46 Distribution of SMEs by Industry, 2009 48
Chapter 2 Multi-Stream Textile Industry Structure 62 Formality of the Firms inRegional-Knit-Industr 63
Chapter 3 Trend of the Price Change of Coffee, 1994-2010 85 World Production of Coffee, 2006-09 86 World Production of Coffee by Region, 2006/07-2009/10 86 World Production of Coffee by Type, 2006-2009 87 Coffee Production in South America 87 Volume and Value of Exports: Coffee Years 2006/07-2009/10 89 Value of Exports by Type of Coffee 89 World Consumption of Coffee 90 Growth of the Export of thePeruvian Coffee, 2002-08 93 Main Peruvian Export Destinations for Coffee Beans, 2008 94 페루-목차 2012.6.21 5:36 PM 페이지14 mac001 PDF-IN 2540DPI 100LPI
Contents | LIST OF Tables
Chapter 4 The Industries Associated with the automotive industry 114 The Employment Scale of the Related Companies 115 World automobile industry’s change in production exceeds 117 Changes in the Number of Registered Vehicles in Korea 119 Main Business in the Auto Valley 133 Peru Auto Parts Industry Long-Term Roadmap 136 Peru Automotive Industry Business Execution 137 Peru auto parts industry cluster model 138 Main Roles and Functions of thePeru’s Auto Parts Innovation Centre 140 Organisational Structure of Peru’s Auto Parts Innovation Centre 140 Timeline for the Establishment of Infrastructure 141
Chapter 5 Share of the Stock of Alpaca, 2010 150 Organisation and ”Scalisation” of MSMEs 154 Stages of Disbursement of the Policy Loans 161 Co-operatives in Korea 167 Characteristics and Objectives of an Agro-Industrial Complex 173 Estimated timeframe of the Respective Stage of Setting-Up of a Business in the Complex 179 Schematised System of BDS in the SEC 180 페루-목차 2012.6.21 5:36 PM 페이지15 mac001 PDF-IN 2540DPI 100LPI
2011 KSP with Peru
The first Knowledge Sharing Programme (KSP) with Peru started in 2010, and was met with a highly enthusiastic responses from Peru. Encouraged by the successful yields from the KSP Peru 2010 and the solid co-operative relationship that has been quickly forged through the programme, the Ministry of Strategy and Finance of Korea (MOSF) and the Korea Development Institute (KDI) appointed Peru as a strategic partner of the KSP. As a result, the co-operative relationship between the two countries was further strengthened.
In 2011, the Strategic Centre for National Planning (CEPLAN) on behalf of the Government of Peru and the MOSF on behalf of the Government of Korea have agreed to continue the KSP 2011 and to share Korea’s policy experiences in the development of SMEs, tentatively titled Improving Competitiveness and Productivity of SMEs in Peru and preferably in the Southern Economic Corridor in Peru through Developing Regional Strategic Industries.
Subsequently, the MOSF and the KDI appointed the Market Economy Research Institute (MERI) of Seoul, Korea to form a team of experts to conduct the research study with the following specific topics:
In addition to the experts delineated in above, Mr. Ho Shik Kim, ex-Minister for the Maritime Affairs and Fisheries was appointed as Senior Advisor and Dr. Jaehoon Lee, Research Fellow of MERI was assigned as Project Manager for the KSP 2011 with Peru. On the Peruvian side, Sr. Ramon' Perez Prieto, Advisor to the President of CEPLAN, and Sr. Alvaro Velezmoro
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Ormeno~ agreed to assume the role of liaison officers for CEPLAN.
Consultation Topics Korean Researcher Regional Strategic Industry Development Plan: Alpaca Dr. Moon-Kyum Kim Regional Strategic Industry Development Plan: Coffee Dr. Sunwoo Kim Regional Strategic Industry Development Plan: Auto Part Dr. Jumi Kim Dr. Chang Dae Kim Regional Strategic Industry Development Plan: Micro, Small, and Medium Enterprise Co-operative and Agro- Mr. Soungyoun Oh Industrial Complex
From 18 to 28 July 2011, the KSP research team visited Lima, Peru and discussed with CEPLAN the direction of the research study, having objective of the enhancing of the competitiveness and productivity of SMEs in the Southern Economic Corridor in Peru. The team also visited the regional governments of Tacna and Cusco and had extensive discussions with the leaders of the regional governments.
Based on the information garnered and discussions shared with relevant Peruvian institutions thorough this preliminary survey, a Memorandum of Understanding (MOU) was drafted and submitted for the acknowledgement of relevant authorities of both CEPLAN and the MOSF.
As agreed in the MOU, a 10-person Peruvian delegation, comprised of the public officials from the Central/Regional Government and the industry representatives from the Southern Economic Corridor, visited Korea as a part of the capacity building scheme included in the KSP 2011 with Peru. The delegation had extensive discussions with Korean officials from the government agencies they visited and learnt Korea’s developmental policy experiences. The delegation also had opportunities to visit numerous institutions associated with the SME promotion, such as the Korean Federation of Small and Medium Business (K-biz), the Korea Small Business Institute (KOSBI), the Small Business Training Institute (SBTI), etc. The delegation also visited the Daegu Techno Park, the Korea Textile Development Institute, the Korea Research Institute of Fashion Industry, Beantree Ltd., Beautiful House (an NGO), and Jinsung industry that are directly and indirectly related to Peru’s coffee and alpaca industries.
The delegation also had the Intermediate Reporting Workshop at a seminar hall of the Korea Federation of Science and Technology, in which the member of the delegation had enthusiastic exchange of views and opinions with the Korean research team.
As also agreed in the MOU, the high-level Peruvian delegation, led by Sr. Jose Urquizo Maggia, Minister of Production (PRODUCE), visited Korea from 11 to 18 February 2012. The
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high-level delegation also included Sr. Alfonso Velasquez Tuesta, President of Export Sierra and the former Minister of PRODUCE, Sr. Ramon′ Perez Prieto, advisor to the president of CEPLAN, and Sra.Mercedes Ines′ Carazo, Director of the Centre for Technology Innovation (CITE).
The high-level delegation of Peru was welcomed by numerous Korean officials including Mr. Cheol-Kyu Park, President of the Small Business Corporation, Mr. Suk-Woo Hong, Minister of Knowledge Economy, Mr. Jong-Ho Song, Administrator of the Small and Medium Business Administration, and their like. The delegation also paid courtesy visits to Mr. Je-Yoon Shin, Vice-Minister of the MOSF, and Mr. Tae-yong Yoon, Director General of the MOSF as well as Mr. O-Seok Hyun, President of the Korea Development Institute and expressed their gratitude to the Korean government for instituting such invaluable co-operation programme like the KSP.
Sr. Urquizo stated that the one of the objectives of his visit, as a part of the KSP 2011 with Peru, is to seek potential areas of the co-operation between Peru and Korea. He also mentioned that the state visit of Sr. Ollanta Humala, President of Peru, to Korea scheduled in May 2012 signified strengthened co-operative relationship between the two countries.
Although Sr. Urquizo had to leave for Peru earlier, the rest of the delegation went on with scheduled visits to the Centre for Mechatronics Parts at the Keimyung University, Korea Polytechnic University, the Korea Electronics Technology Institute, Beantree, Ltd., etc.
The significance of the visits of the Peruvian high-level delegation is perhaps to have solidified the present co-operative relationship between the two countries and to have pushed it to a higher level.
As the final phase of the KSP Peru 2011, the Korean delegation, from 25 March to 02 April 2012, led by Mr. Ho Shik Kim, visited Lima and Cusco for the Final Reporting Workshop and the Senior Policy Dialogue. An official from the MOSF and a research associate from the KDI also participated to the workshops held both in Lima and Cusco. The workshop in Lima held at the Pacific University auditorium was attended by some 270 participants from public and private sector; some 60 people also from the public and private sector participated in the workshop held in Cusco.
The presentations of the research team were met with great enthusiasm of the audiences, followed by a great number of questions and comments. As such, the KSP 2011 with Peru was completed with significant and noticeable outputs. Suji Kim Program Officer for 2011 KSP with Peru
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Executive Summary
Jaehoon Lee (Market Economy Research Institute)
1. Towards the Bicentenary
Peru’s sail towards the Bicentenary seems to face favourable winds. Successfully muddling through the Global Financial Crisis, the Peruvian economy has rebounded and trails the steady growth path. The manufacturing sector shows vigorous growth and the exports of the traditional products-gold, copper, zinc, etc.-bolsters a strong international reserve position. Interesting development in the nation’s export is the dramatic increase of coffee in terms of quantity and value. Indeed, an analysis of the Revealed Comparative Advantage shows that the Peruvian agricultural products have comparative advantage in the global arena.
Nonetheless, sustainable growth in Peru towards 2021 faces some challenges. Peru’s GNI per capita is still about 60.8% of the Latin America and the Caribbean average and is slightly over a half of the World’s. Then what does inhibit Peru to reach its full potential? It is perhaps inequality that hinders the nation to rapidly moving forward. Regional inequality is also a predicament to the nation’s growth.
In order to ameliorate the regional gap and foster equitable development, social harmony, and socio-political stability, the Government of Peru has adopted the economic corridor model. Yet, the disparity among the corridors is still a developmental challenge. Subsequently, the Government of Peru focuses on SME development, as SMEs are the agent that contributes to promote regional development.
In this backdrop, this study looks into the coffee and the alpaca industry in the South Economic Corridor (SEC). This focus is based on the facts that coffee and alpaca have been the
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livelihood of the indigenous population in the valleys and highlands in the Southern Andes. Hence, the development of these industries will directly benefit the population, which, in turn, is in sync with the vision contained in the Bicentennial Plan.
In addition, this study will also review the potential to”re-industrialise” automotive parts industry in ZOFRATACNA in the region of Tacna, as the business environment for the industry turned favourable in recent years.
Finally, the agenda of associativity of MSMEs in the SEC will be scrutinised as the fragmentation of the MSME sector in Peru poses a challenge to the promotion of competitiveness of the sector.
In each topic, the study will propose action plans that envisage contributing to the enhancement of MSMEs in the SEC, which, in turn, will contribute to the development of the SEC as a whole.
2. Alpaca
The textile industry has a multi-layer production structure ranging from upstream raw material procurement to downstream textile and cloth production. Each industry in the value chain including yarn (weaving/chemical fibre), dye works, consumer product production (garments, other textile products) and distribution (sales) are closely linked.
Industries in Italy, France, and Japan are developing new products with high value-added and thereby strengthening their competitiveness. In most countries, thread is created by chemical specialty companies, spinning is done by large companies and the end products are manufactured by SMEs that specialise in medical supply and fashion products. There is much room for improvement in facilitating a close collaboration among companies involved in this industry.
According to Toyne, textile industry of a nation is developed in six phases of embryo stage, cloth export stage, high quality material and cloth export stage, golden age, peak and decline. Toyne’s six stage development model is not applicable for all nations since industry development path may differ depending on natural environment and other characteristics of each nation.
Native to the high mountains of the Andes, alpaca has long shiny fur with many desirable qualities including smoothness and thermal insulation for human use. Approximately 45% of Alpaca fur is white in colour, while 10% is camel coloured and the remaining 45% is dark
brown, grey and black. Natural coloured alpaca fur commands a higher price than white coloured fur. Fur with a high proportion of black hair is sold at a much lower price than others. Approximately 70% of Alpaca fur produced has the fineness of 26-28μwhile the remainder of the fur has a fineness of 34-36μ. The annual production volume of Alpaca rated at 22-24μis marginal at approximately 50 tons per year.
The Peruvian textile industry is closely linked with the alpaca livestock industry and producers of knit garments, made from natural alpaca fur and chemical fibres.
According to national statistics, the alpaca industry has created 352,762 jobs and textile manufacturing alone is responsible for the creation of 192,789 jobs thanks to significant domestic and overseas demand. The number of people employed in alpaca livestock industry is estimated to be 150,000.
Peru’s alpaca industry challenges for policy and practice are as follows:
The Peruvian alpaca industry is suffering from several problems including aging production facilities and lack of original brands. As a result, the industry is focusing on OEM and processing of raw materials and textiles only. The industry also lacks Research and Development (R&D) capacity for the development of core technologies, thus making it difficult to produce competitive products. The industry network is also weak, making it difficult to cope with the fast-changing business environment. The number of production specialists and expert engineers is also low. This indicates that the industry is in ’Cloth export’ phase of Toyne’s model.
Fostering an expert workforce for the alpaca fibre industry
Although the market for low and middle-priced clothing in developed countries has become saturated, the market for fashion ware is expanding both in diversity and volume. For long-term success, it is necessary to encourage fashion design specialists and support companies that produce original fashionable garments with their own brands. To do this, they must develop an expert workforce in pattern making, marketing, merchandising, and fashion coordination in order to capitalise on this growing fashion market. The following represents a series of proposed actions that would be required to maintain and grow Peru’s position in the marketplace.
(1) The establishment of a research and training centre (RTC)
This would commence with the identification of an academic-industrial research institute, having a well-established capacity for research and education. The knowledge and research
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capacity of the institution would then be augmented to serve as a specialised alpaca industry- related RTC. The RTC would then serve as the platform from which an expert workforce, specialised in alpaca fibre technology development and applications would be developed. Once the RTC becomes fully specialised in the advancement of the industry, it would benefit from ongoing government support as a specialised independent institute. The RTC would also become the hub for an innovation cluster.
(2) Establish collaboration with domestic and overseas research institutes
This will require the planning and implementation of promotional programs to reach domestic and overseas institutes. National competitions for designers and pattern makers would be held on a regular basis to promote expert development and the identification of local talent. This would be followed by the provision of overseas training opportunities (short and long-term) for talented local experts.
(3) Identify and recruit overseas experts
In order to strengthen the competitiveness of Peru’s alpaca fibre industry, it will be important to monitor new trends in the emerging and niche target markets. It is therefore recommend that a campaign to hire retirees from overseas ”imitation” product manufacturers be implemented. Since there are often many barriers to hiring overseas experts who have active careers in the industry, it is more realistic to target retired experts. These experts would provide the knowledge required for product differentiation and quality improvement— the key to maintaining competitiveness of alpaca fibre industry.
(4) Establish buyer networks
The building of a buyer network for each target country is critical. This would require working with the newly-hired overseas workforce to: (a) strengthen technology know-how, technical expertise, and develop the information database of target markets and business networks; (b) build collaborative relationships with the fast-growing fashion industries in the BRIC countries (Brazil, Russia, India and China), and textile manufacturers in South America and Eastern European countries.
(5) Legal framework
It is proposed that the establishment of the necessary legal framework and policies for the hiring of overseas experts be developed and implemented early on.
Fostering the expert workforce for the alpaca fiber industry
An industry cluster refers to an area with a high concentration of inter-related businesses, which generate high economic values through active exchanges of information and resources. Based on the project data analysis, creating an alpaca industry cluster in the Cusco region is therefore recommend for developing a regional economy and strengthening competitiveness by stimulating innovation within the cluster. An effective industry cluster is not formed naturally but planned, established and nurtured with guidance of capable facilitators and funding support. More specifically, the effective creation and facilitation of an industry cluster requires close collaboration and networking of experts including vision providers, system organisers, specialised service and knowledge suppliers and more.
Establishing a strong network among regional government, universities and R&D centres, relocating some of the organisations to a specific physical area if possible, is the first step in creating an alpaca industry cluster. It will then be necessary to establish training centres and training courses in order nurture local talents and make the cluster a place where good jobs for a trained workforce exists. It is also important to implement policies and systems that allow overseas industry expert to join in the cluster as technical advisors for businesses and or trainers. Creating a dedicated alpaca industry research institute with internal capacity to foster the alpaca industry R&D experts should also be considered as a next step. Although government funding would be necessary to create such an institute, it should eventually become an independent institute, albeit with some government support.
An industry cluster does not need to be limited to a geographical region or an industry sector such as fibre production. For example, a collaborated marketing of the fashion industry of Lima and alpaca industry of Cusco could provide significant benefits to each other.
Development of original brands
The development of original brands for individual companies or SME groups is important for sustaining an increase in export volume. It is therefore recommended that:
(1) The selection of promising mid-sized companies be undertaken and that they be fostered as flagship companies with original brands, to promote their growth and increase the overall reputation of Peruvian products. Additionally, it is recommended that a selection of promising small enterprises be made and that plans be implemented to foster their growth to mid-sized companies, to help them benefit from both the scale and copy of the economy.
(2) Strengthen marketing capacity: It is recommended that the establishment of an
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independent local sales network in target overseas markets be undertaken. This is important in order to more effectively market products developed and sold under common brand names. An aggressive marketing strategy for directly approaching overseas consumers is a key to increasing sales.
Promotion of inter-stream collaboration projects
The budgetary allocation of a technology development fund will be extremely important. The fund would support projects designed for promoting the development of new technologies and product differentiation for textile-fashion inter-stream consortiums that collaborate on planning, technology development, production and marketing. A stream is a consortium which consists of entities of three or more different sectors including business, research institutes and universities. (The average funding support by the Korean government per consortium is approximately KRW2 billion over two years)
It is essential to foster the growth of select medium-size companies as flagship companies, having their own brands in order to increase their market value and build the overall reputation of Peruvian products. In addition, set long-term goal of building the reputation of the ’Peru Collection’.
Financial support for the replacement of outdated facilities
It is proposed that financial support should be provided for the replacement of outdated facilities operated by small and medium-size alpaca fibre businesses, as well as the implementation of advanced management systems as there is a significant potential to boost the alpaca industry.
According to the senior experts of the Korea Wool Association, the cost of new facilities, which can produce wool tops and ultimately turn it into yarns, through wool top processing (worsted yarn) and carbonate processing (carded wool) is estimated at 2 million Korean won per one spindle. It should be noted that a typical yarn factory has 7,000 spindles each.
In Korea, financial support for facility renewals is managed through the Small and Medium Business Corporation as the ’New Growth Foundation Fund.’ SMEs must have more than five years of operational history to be eligible for funding. The applicable usage of the fund covers purchases of manufacturing facilities and testing equipment, installation of facilities, assessment of operation stability, improvement of the operation environment and support facilities of workers. The maximum term of a loan is eight years with up to three years grace period on loan principal payments.
Coffee is the second most internationally traded natural product in the world, following crude oil. Brazil and Vietnam are currently the largest producers and exporters of coffee. Colombia, Indonesia, Ethiopia and Mexico accounts for 70% of coffee production in the world, with 50% of coffee produced on the American continent.
The total coffee production in 2010/11 was estimated as 133.6 million bags, a 7.6% increase from 124.2 million bags in 2009/10. Brazil and Vietnam represent the first and second largest exporters. Peru is the ninth largest exporter.
Although world consumption fell slightly in 2009/10 from 131.7 to 130.2 million bags as a result of the world economic crisis, prospects for a return to growth are promising. The buoyancy in world consumption is supported by the increased domestic consumption of exporting countries and the significant growth of consumption in emerging economies.
Coffee is a leading agricultural export product of Peru along with asparagus. Coffee accounts for almost half of Peru’s agricultural export and 5% of Peru’s total export. Therefore, the coffee industry has a strong significance to the Peruvian economy and society. The total annual Peruvian coffee production was 3,315,000 bags in 2009. In the same year, 250,000 bags were consumed domestically.
The Arabica, green in colour and relatively large, is the only type of coffee harvested in Peru. Coffee farms are located in all parts of Peru and qualities vary significantly depending on where it is harvested. The coffee production volume has been increasing steadily and many large and small farms are grouped as one unit, as a result of agricultural reform. Many Arabica species including Otros Suaves, Typica, Bourbon and Catura are farmed. Recently, a growing number of coffee farmers began to grow specialised coffees including organic coffee and ones with stronger aroma and strong sour taste.
Prominent coffee farms are located in mountainous northern and central regions. Piura, Lambayeque, San Martin and Cajamarca are the most prominent coffee harvest areas of the northern region. Huanuco, Junin and Ayacucho are prominent harvest areas in the central region. Harvest from Chanchamayo valley accounts for 40% of total harvest. There are also some well-known coffee harvest areas in the southern part of Peru including Cuzco, Norte and Puno.
Germany and the U.S. are the key markets for Peruvian coffee export. Export to the UK, Italy and Korea also increased significantly between 2009 and 2010. The export proportion of Peruvian is as follows.
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Business Strategy for Economies of Scale
Multiple co-operatives of coffee farmers are operating in a region, fiercely competing to secure buyers by lowering price. Creation of regional business corps of coffee farmers’ co- operatives can reduce loss from overheated competition and increase their price negotiation capacity, leading to more reasonable sale prices for coffee farmers. The role of these co- operatives would be to:
(1) Adjust sales volume and timing; (2) Increase direct sales; (3) Negotiate long-term supply contracting; (4) Develop and implement an integrated order and sales platform; and (5) Allocate production quotas under contract, for better coordination of regional production.
To effectively manage the structure, a board of directors with representation from each co- operative will be required. In a case such as this, the number of directors from each co- operative will be aligned with the level of financial contribution made by each. Prior to becoming operational, policies and procedures pertaining to the allocation of profit and cost sharing of expenses, etc., will be needed. In addition there will be a need to develop and implement advanced business management practices, and to hire professional business managers that will among other duties, will be tasked with operational accountability.
Proactive implementation of advanced marketing
Quality management for product competitiveness will be a major focus. This will involve the hiring of quality inspectors and the implementation of coffee bean sorting practices. For example, a two-tier quality management system could be used by inspectors who would conduct sampling test of all products and tests of all beans in the sorting process. This would be augmented with a performance-based pay scheme to increase and ensure buy-in and effectiveness in quality management practices. Good practice models have established rules on cross-inspection among co-operatives, with penalties for violation of quality management standards. For example, in Korea, a warning is issued to farmers who ship sub-quality produces. Farmers who received more than five warnings are banned from participating in co-operative activities for two years. In a case of a serious consumer claim, the co-operatives responsible for the claim is penalised with reduced sales quota.
Methods for the Promotion of Regional Product Brands
Initially the focus would be on developing original brands for regions, thus strategically
fostering the coffee businesses as drivers of regional economic development. To reach this goal, quality management again will be important. It is critical to maintain the quality of the products sold under the regional brand names as good quality is closely related to strong financial performance. A comprehensive marketing strategy encompassing all areas including CSR management should be created to build regional brands as ’power’ brands.
Furthermore, products need to be tailored for consumer needs. For example, the development of diverse sales packages, various shipping volumes and refinement of packaging design.
Securing diverse sales channels
Provision of a subsidy for international certification of products would be useful for small businesses which already produce high quality products but lack certification, often due to lack of funding and their capacity for the necessary paper work. The subsidy could remove technical barriers for the businesses that have potential to increase export activities. For example, the South Korean government is providing between 40 to 60% funding for up to two certifications per each session, per company. The size of the subsidy is dependent on the type of products and size of export volume, and provision of limitation on government funding.
Strengthening relationships with overseas fair trade organisations is another way to enhance the value of the Peruvian coffee industry. For example, the U.K. is spending 20 million pounds in supporting the fair trade movement. The funding is mostly used for the identification of new fair trade partners (producers) and certification of their products. There are also ’fair trade’ cities and villages which collaborate closely with local government officials responsible for fair trade campaigns and management of local fair trade activities. In the UK, the fair trade campaign has led to the establishment of new institutes such as ’fair trade schools’ and more, leading to creation of jobs. Some citizens are also making money by actively participating in the trade and sales of fair trade products, in addition to campaigning.
To recap, the following measures are recommended to help Peruvian coffee farmers prepare their products go global:
(1) Adjust sales volume and timing; (2) Increase direct sales; (3) Negotiate long-term supply contracting; (4) Develop and implement an integrated order and sales platform; (5) Allocate production quotas under contract, for better co-ordination of regional production; (6) Hire quality inspectors and implement coffee bean sorting practices;
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(7) Extend the government support to renew coffee plantations specifically for the problem of over-farmed plantations; (8) Develop original brands for regions, thus strategically fostering the coffee businesses as drivers of regional economic development; (9) Provide a subsidy for international certification of products micro and small businesses which already produce high quality products but lack certification often due to lack of funding and their capacity for the necessary paper work; (10) Strengthen relationship with overseas fair trade organisations in order to enhance the value of the Peruvian coffee industry; and (11) Provide incentives for the labour employed in the coffee sector so that it can ameliorate the competition for labour with the coca industry.
4. Auto Parts
Reasons for Promoting the Auto Parts Industry
The automotive industry has potential to create employment and provides linkage opportunities for SMEs in Peru. This industry additionally creates transportation, facilitates a high technological impact, and greatly affects the international balance of payments. In this chapter, the data and the subsequent analysis which and the underpinnings of the recommendation to establish and develop the automotive sector in Peru, more specifically, the creation of a regionalised approach in Tacna is provided.
Tacna has a general lack of infrastructure and specialised industry and therefore, it is appropriate to choose a regional specialised industry with a potential to create a strong impact on associated industries. In the manufacturing process, automobiles are built with a wide range of products. In the distribution phase, it becomes dependent on a vast range of products and services, such as financing programmes, insurance, car dealerships, the advertising media, and used car sales. In the usage phase consumers require ongoing automobile maintenance, gas and more. The construction and transportation industries are also included in the consumer category. Noteworthy is the fact that the automobile manufacturers’ external partsprocurement rate for various components generally affects the price of the finished product by 50 to 70%. Thus the automobile industry is affected greatly by the auto parts industry.
The second merit of the automobile industry is that the economies of scale by mass production are extremely high. Mass production is a crucial component in industry expansion and these systems, above all, are suitable for SMEs.
Third, the automotive industry promotes high employment rates, has a strong technological impact, and greatly affects the international balance of payments. By comparison of the 2009 standards, the Korean automotive industry directly and indirectly employed 1.7 million people, taking up 7.2% of all employment in Korea. A single industry with this level of ability to create employment is appropriate for areas like Tacna.
Lastly, the advantage of the auto part industry in Peru is appropriate for internal and exterior circumstances. Demands of auto parts in Peru are very high due to the fact that the country has many used cars and most of the vehicles use gasoline or inexpensive leaded gasoline, leading to frequent break downs and serious environmental damage. Global big motor companies assemble cars in near countries, such as Venezuela, Columbia, Chile, and Brazil. This provides a broad trading area in which Peru could sell auto part products. Tacna has both a geographical position and an infrastructure which is positive for the automotive parts industry. In terms of the Tacna infrastructure, the area is located in a coastal region and can offer industrial infrastructure such as ZOFRATACNA, ports, airports and a logistics infrastructure which is partially equipped. In terms of geography, accessibility is good to Brazil and Bolivia through the Inter-oceanic Highway. It is also located on the border of Chile.
Trends in the Automotive Industry
The world’s automotive industry is suffering from challenges associated with an oversupply. To address these challenges, the industry is attempting to lower the costs and increase productivity. By 2009, the industry reached an oversupply of 20 million cars, and the world automotive industry overshot the demand by about 15 million cars by producing 62.4 million cars over the demand of 47.2 million, inspite of decreased manufacturing of 9 million (12.6%) cars.
A review of sales activity in the main South American countries revealed that there was a decrease in 2009 compared to 2008. However there was an increase of 19.1% compared to 2009 in 2010, selling 5,047 vehicles. In 2009 1,376 out of 4,237 cars sold were imported models. The vehicle ownership status in the main South American countries, Middle and South America in total is approximately 55.8 million vehicles, thus a car for every 8.4 people. Of particular interest is the western South American countries including Peru (Peru, Bolivia, Chile, Ecuador, etc.), where there is a car for every 17.74 people, providing a good base for speculation that there will be an increase for demand followed by future economic development. Main South American countries attract global auto companies and products. In Argentina, the 10 big companies, such as Ford, GM, and, VW, Toyota produced 716 thousands cars and Brazil produces, 3.5 million cars on average per year.
By August 2011, Peru’s automobile sales were on the rise however, the country lacks
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manufacturing capacity. Major motor vehicle sales by type & maker are Toyota/Nissan of Japan and Hyundai/Kia of Korea. The Peruvian auto parts market is competitively supplied by the US, Japan, Brazil, China, and Germany. Peru is one of the countries in Central and South America that allows importing of used cars, and most of those cars were used as taxis. As previously mentioned, the demand for auto parts in Peru is very high. This demand includes tires and other imports such as batteries, filters, brakes, clutches, etc., and H.S 8708 products (cushions, safety belts, brake systems, gear boxes, drive axles, airbags, and other internals(radiators, mufflers, etc.).
Korea’s Automotive Industry Cluster
The Korean automotive industry after the Knock-Down production-assembly and localisation stage in 1960’s and 1970’s, production and exporting stage in the 1980’s, and Korea’s own vehicle development stage in 1990, is now at a primary stage of cars approaching the level of advanced countries. However, as Korea went through a currency crisis, they also experienced an immense structural change. The automobile industry’s restructuring emphasised a restructuring of the parts industry. The parts companies’ competition heightened because companies that went through M&A centralised the parts procurement system. And because the companies acquired by foreign companies under the parent companies had their component manufacturing divisions incorporated to their global parts procurement network, Korea faced with global competition.
Representing the Korean automotive parts industry is Auto Valley in Ulsan. The Auto Valley industry is comprised of an automotive parts warehouse complex, a modularity complex, an auto parts innovation centre, an institute of e-Vehicle studies, Auto Valley roads and an Auto Plaza. In addition, there are several automotive part clusters such as Incheon Automobile Parts Industry Cluster and Daegu/Kyungbuk Automobile Parts Industry Cluster, etc.
The Auto Parts Industry Cluster Model of Peru
The auto parts industry is a crucial component in country’s future global competition. Especially in the long run, Peru needs to expand the auto parts industry in Tacna as the core strategic industry to create a global cluster.
Goal : International auto parts base station and components cluster establishment in the Tacna auto parts industrial city, ultimately establishing a complete automobile company
The long term roadmap consists mainly of three stages: (1) laying the foundation, (2) empowerment, and (3) internationalisation.
Several strategies to implement this model for Peru are as follows:
(1) An industrial cluster foundation: The first action is to lay the industrial cluster foundation which is a configuration of hardware. There needs to be enabling of integration by building a parts complex which would make it possible to have medium-sized parts suppliers move in by building modulation complexes. (2) The empowerment of technology development: In the long run, the competitiveness of Peru’s auto parts industry will be possible through R&D. There needs to be an effort in R&D for the establishment of research facilities for auto parts. A good practice is showcased in the Auto Parts Research Center in Korea and related facilities for making domestic auto parts. (3) Knowledge transfer: Technology comes from people. The fastest way to develop human resources is to invite expert to establish a field of study in a university related to automotive to develop the future workforce that will lead the automotive industry. (4) The establishment of business support systems: This requires endless support from government for the companies within the components and modulation complexes, once established; thus enabling them to lead the business in the Tacna area. There needs to be an establishment of automotive technology centre or automotive parts innovation centre that can link them in, network, tech support, and other related activities. (5) An enabling academic partnership: In a cluster the important aspect is the synergy between these clusters. There needs to be information exchange through networks of homogeneous or heterogeneous forums sorted by components. (6) Promoting internationalisation: Currently the auto parts cluster needs to be settled through exchange incurred with foreign automotive specialists and organisations. Additionally, in the future, there needs to be a domestic PR organisation to advertise and market the domestic products internationally to acquire international prestige.
The model above needs to fit the following conditions to be carried out successfully:
(1) Firstly, several factors, attributes of clusters (close proximity between the related companies and research facilities, companies within the supply chain need to increase mutual reliability through co-operation, and so on), must be met; (2) Secondly, this business must be preceded by, and agreement of, technological alliance/co-operation and delivery method with complete automobile manufacturers; (3) Thirdly, there needs to be a master plan before undertaking this project; (4) Fourthly, the stakeholders or principal agents in this project need to be fully committed to their role; and (5) Lastly, this business must be led by the Peruvian central government.
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5. MSME Co-operative and Agro-Industrial Complex
This chapter starts with a question why growth in the SEC is lagging behind vis-`a-vis other economic regions in spite of the fact that it possesses a large potential for growth. It was also noted that dominating type of the businesses in the SEC, MSMEs, in large part are fragmented thus lagging competitiveness. To remedy this, the Government of Peru has initiated a number of support programmes, especially encouraging them to organise and pool their resources together. By doing so, they would be able to attain ”scale merit.”
To this extent, it has elaborated the ”associativity” and ”collectivity” of MSMEs as the tools to account for the innate size-disadvantages of MSMEs. Perhaps the Korean experiences in this field may serve as good reference points. And the establishment of smaller-sized industrial clusters consisting of local industries implicated by regional specialties, e.g. coffee, alpaca, was also proposed.
The model of enhancing MSME competitiveness through associativity is largely private- sector driven. However, it does not mean that the government intervention is not necessary. To implement and enroot these programmes successfully, it was also pointed out that a policy intermediary was needed. The role of the intermediary is impeccable. It, on behalf of the government, carries out the government support policies and facilitates the programmes that aim to foster the competitiveness of MSMEs.
As the public-sector driven model that enhances the competitiveness of MSMEs, the development of agro-industrial complex is proposed. The model accounts for the rapid urbanisation and introduces industrialisation in the rural areas that lag behind other areas. The complex, as a part of agglomeration of MSMEs, would also render an opportunity to rural population to have ”sideline income sources” so that it would contribute to increase the income level. This would, in turn, not only contribute to poverty reduction, but also ameliorate the migration of rural population to the urban areas.
Especially, the linkage of an agro-industrial complex and the Science Parks that the Government of Peru plans to establish in the rural areas increases the probability of success of the agro-industrial complex. As such, the likelihood of success of the agro-industrial complex would increase when it is linked with other development-related policies and plans, as they also, often times, target the same areas aiming identical, or similar, objectives.
To warrant the success of the complex, it is necessary to design and implement congenial and effective support measures that facilitate the needs of MSMEs in the SEC; they also have to be implemented continuously without lacks until the complex could operate on its own. Hence, the selection of the tenant firms is highly important, as it would consume scarce
government resources. To this end, the role of the policy intermediary, as an expert, is again stressed. Therefore, it can be concluded that it would be the congenial and effective institutions that could warrant the probability of success of the MSME support programmes, and further, the growth of the SEC as a whole.
Policy Recommendations
Based on the discussions brought forth in this chapter, the following policies and actions are recommended:
(1) Design co-operative programmes congenial to MSMEs in the SEC to organise and pool their resources together so that they could attain the ”scale merit”; (1.1) In this vein, induce the informal MSMEs to the formal sector; (1.2) Devise a strategy to organise MSMEs to larger scaled business units; (1.3) Organise MSMEs in the identical or similar trades to co-operatives. (2) Devise the plans to establish, as a public-sector driven associativity programme to organise MSMEs in the SEC, an agro-industrial complex implicated by regional specialties, e.g. coffee and alpaca, in order to foster regional development; (3) Establish a MSME support policy intermediary, given that the government itself is uncongenial to assume the micro-level tasks ; (3.1) In this vein, the policy intermediary should be mandated to implement MSME support policies set by the government; (3.2) In Peru’s setting, to re-organise and strengthen Centro de Innovacion′ Technologica′ (CITE) can be thought as an alternative to a new policy intermediary; (4) The government may consider to extend a low interest loan programme to build a alpaca fibre processing plant in Puno, as it does not require the government to commit continued infusion of funds; (5) In order to increase the competitiveness of regional specialty producers, e.g. coffee, alpaca, etc., the development of common brands need to be considered, as they bring forth the produces a bargaining power; (6) In the similar vein, the design for the Government Procurement Schedule for the regional specialties is recommended to open a market channel for the producers in the SEC; (7) Overall competitiveness of the regional speciality producers need to be designed; specifically, technical capacity building is an urgent task to be shed light; (7.1) To this end, the producers can be linked to Korea’s ”Dispatch Programme of Retired Engineers”; (8) When extending the support to the MSMEs in the complex, devise an index system to evaluate proposed sites for a complex as well as the qualification of individual MSME; (9) The plan to establish an agro-industrial complex needs to be linked with other
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development-related policies and plans, such as plans for the development of the growth-lagging areas, poverty reduction plans, environment improvement plans, etc.; (10) In order to ensure the sustained growth of the complex, it is necessary to share innovative capacity by enhancing the industry-academia-research linkage with ”anchor firms,” universities, and/or national industrial complexes located in adjacent areas; (11) It is necessary to plan to enlarge the complex to a larger Extended Regional Agro- industrial Complex by linking it to adjacent larger departments/ provinces. Cusco or Puno has potential for this scheme as it can agglomerate specific products. As such, to establish an Extended Regional Agro-Industrial Complex needs to be considered by appointing and agglomerating smaller regions;
Further Areas of the Study
In order to increase the likelihood of success of the regional development in the SEC, the tasks that follow need to be dealt with in detail. Because of the limitation of time and resources, however, these topics have not been studied in details in spite of their importance; thus, they should be dealt with in another study.
(1) The re-organisation of the legal foundation in association with MSME’a associativity
To increase the probability of success of the co-operative programme, the establishment of the main actor of the programme, co-operatives, is essential. And to this end, the legal foundation is necessary. So it is recommended to promulgate the Act of MSME Co-operatives (tentative). In this act, the following factors constitute the essential parts:
- Definition of profit-oriented co-operatives - Qualification of the members of a co-operative that accounts for the informal MSMEs - A ”collective private contract system” that warrants the stable production and sales activities of regionally produced goods
(2) Amendment of the Law on the Promotion and Formalisation of Micro and Small Industry (Ley de Promocion′ y Formalizacion′ de la Micro y Peque~na Empresa) and/or the promulgation of the SME Promotion Act (tentative)
In order to extend the government support to the tenant firms, or would-be tenants, in the agro-industrial complex, the preceding acts are essential. The laws are recommended to include:
- Re-define MSME; - Establishment of funds to augment the MSME’s financial access;
- Establishment of a policy intermediary in order to manage and execute the funds; - Define the business scope of the policy intermediary; - Establish a new policy intermediary or re-assign existing institutions, e.g. CITE, PROMPYME, etc.
(3) Promulgation or amendment of the laws to bolster the agro-industrial complex
The gist of the success of the agro-industrial complex programme resides with the government support measures. Therefore, the programme may overlap with existing laws and institutions in a few areas. Thus, a comprehensive legal analysis is necessary. Nonetheless, the laws that follow are perhaps fundamental to the realisation of the complex; hence, they need a closer legal analysis. For example,
- The Act on Agro-Industry Complex; - The Act on Public Procurement; and - The Act on Exemption and Reduction of Taxes
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The Regional Development Plans for the Southern Economic Corridor in Peru:Linking the Coffee, Alpaca, and Auto-Part Industries with the World Chapter 1
Towards the Bicentenary: The Introduction
Summary 1. Background 2. SMEs as an Agent to Promote Regional Development 3. Objectives, Scope, and the Rationale of the Study 4. Organisation of the Study 페루영문 2012.6.21 5:44 PM 페이지36 mac001 PDF-IN 2540DPI 100LPI
Towards the Bicentenary: The Introduction
Jaehoon Lee (Market Economy Research Institute)
Summary
Peru’s sail towards the Bicentenary seems to face favourable winds. Successfully muddling through the Global Financial Crisis, the Peruvian economy has rebounded and trails the steady growth path. The manufacturing sector shows vigorous growth and the exports of the traditional products--gold, copper, zinc, etc.--bolsters a strong international reserve position. Interesting development in the nation’s export is the dramatic increase of coffee in terms of quantity and value. Indeed, an analysis of the Revealed Comparative Advantage shows that the Peruvian agricultural products have comparative advantage in the global arena.
Nonetheless, sustainable growth in Peru towards 2021 faces some challenges. Peru’s GNI per capita is still about 60.8% of the Latin America and the Caribbean average and is slightly over a half of the World’s. Then what does inhibit Peru to reach its full potential? It is perhaps inequality that hinders the nation to rapidly moving forward. Regional inequality is also a predicament to the nation’s growth.
In order to ameliorate the regional gap and foster equitable development, social harmony, and socio-political stability, the Government of Peru has adopted the economic corridor model. Yet, the disparity among the corridors is still a developmental challenge. Subsequently, the Government of Peru focuses on SME development, as SMEs are the agent that contributes to promote regional development.
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In this backdrop, this study looks into the coffee and the alpaca industry in the South Economic Corridor (SEC). This focus is based on the facts that coffee and alpaca have been the livelihood of the indigenous population in the valleys and highlands in the Southern Andes. Hence, the development of these industries will directly benefit the population, which, in turn, is in sync with the vision contained in the Bicentennial Plan.
In addition, this study will also review the potential to ”re-industrialise” automotive parts industry in ZOFRATACNA in the region of Tacna, as the business environment for the industry turned favourable in recent years.
Finally, the agenda of associativity of MSMEs in the SEC will be scrutinised as the fragmentation of the MSME sector in Peru poses a challenge to the promotion of competitiveness of the sector.
In each topic, the study will propose action plans that envisage contributing to the enhancement of MSMEs in the SEC, which, in turn, will contribute to the development of the SEC as a whole.
1. Background 1.1. The vision towards 2021
Successfully muddling through the Global Financial Crisis, the Peruvian economy has rebounded and trails the steady growth path (Figure 1-1).The average growth of the period 2002-10 was about 6.33%, thus showing relatively strong growth. This was attributable to the vigorous manufacturing sector which posted about 13.6% of growth in 2010 while agriculture, industry, and service grew by 3.16%,
Annual GDP Growth, 2002-10
Source: World Bank (2011)
Chapter 1 _ Towards the Bicentenary: The Introduction 37 페루영문 2012.6.21 5:44 PM 페이지38 mac001 PDF-IN 2540DPI 100LPI
11.1%, 8.05% respectively.1)
Export activities were also exuberant, bouncing backto PEN38 billion2)(at constant 1994 price) in 2010-about 5.4% of growth compared to 2009 (Figure 1-2). The growth in export was also rebounded from a trough in 2009, minus 3.95%, about PEN36 billion.3) As Peru is known as the country of abundant mineral resources, the export of gold, copper, petroleum oil, zinc, and other minerals led the nation’s export in 2010 (Table 1-1). An interesting development in the array of export commodities is a dramatic increase of the export of the Peruvian coffee. In fact the export of coffee increased by about US$303.9 million, 52%, to US$888.3 million in 2010 from US$584.4 million in 2009. Although the export value is not comparable to that of the minerals combined, it demonstrated potential of the export of the Peruvian agricultural products in the global market place. Indeed, the Peruvian agricultural products, such as fresh foods as well as processed food stuffs, have comparative advantages in the global arena, as revealed by an analysis of the Peruvian export commodities based on 2-digit Harmonised Code (Figure 1-3).
Peru’s Export, 1992-2010
Source: INEI (2011)
1) World Bank, The (2011) World Development Indicators 2011, http://www.worldbank.org/ (Access date: 20 November 2011). 2) PEN: Peruvian nuevo sol (also described as ”s./”) 3) Instituto Nacional de Estad'lstica y Informatica,' INEI (2011) ”Exportaciones,” http://www.inei. gob.pe (Access date: 20 November 2011)
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Peru’s Top-10 Export Commodities, 2008-09 Value (US$ million) 4-digit heading of Harmonised System 2007 HS 2008 2009 2010 Code All Commodities 31,288.2 26,738.3 35,073.2 7108 Gold (including gold plated with platinum 5,553.5 6,752.0 7,715.4 2603 Copper ores and concentrates 4,897.5 3,920.9 6,153.9 7403 Refined copper and copper alloys unwrought 2,688.5 1,861.5 2,527.1 2710 Petroleum oils, other than crude 2,253.6 1,561.0 2,300.7 2301 Flours, meals and pellets of meat or meat offal l 1428.2 1,440.4 1,622.3 2608 Zinc ores and concentrates 1,294.0 1,123.1 1,473.3 2607 Lead ores and concentrates 801.3 895.1 1,277.3 0901 Coffee, whether or not roasted or decaffeinated 645.1 584.4 888.3 2613 Molybdenum ores and concentrates 1,079.4 276.0 492.4 2709 Petroleum oils and oils obtained from bituminous 587.5 353.2 505.1 minerals, crude
Source: UN Comtrade (2011) ”Peru,” http://data.un/org/ (Access date: 20 November 2011)
As shown in Figure 1-3, the Revealed Comparative Advantage (RCA) discloses that fresh food, processed food, clothing, and the mineral sector have comparative advantage vis-`a-vis other economies in the global arena. In contrast, such sectors as textile, chemical, leather, manufacture, electronics, transportation etc., revealed comparative disadvantage.
Revealed Comparative Advantage, Peru 2010 4)
Source: Computed the UN Comtrade 2010 data
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Other economic indicators in general were favourable: Inflation, that once almost destroyed Peru’s economy, was well managed at the 2.9% level in 2009 and the 1.5 in 2010 in spite of the financial crisis. International reserve increased to approximately 33% to US$44 billion in 2010 from US$33 billion in 2009.5)
However, unemployment hovered at 6.8% in 2008; especially, the unemployment among the highly educated workforce, as measured by unemployment with tertiary education, seemed to concern the national planners; it grew to some 38% of the total unemployment in 2007 from 27.4 in 2006. Nonetheless, poverty was down to 12.7% of the population in 2010 from 14.0 in 2009.6)
All in all, Peru’s sail into the Bicentenary in 2021 seems to face favourable winds. Yet, it seems to be a quite long voyage to reach. For example, Peru’s GNI per capita in 2010 is thus far about 60.8% of the Latin America and the Caribbean average and is slightly over a half of the World’s (Figure 1-4).
GNI per Capita, 2010
Notes: Unit in Atlas method (current US$); LA&C: Latin America and the Caribbean; LDS: Least Developed Countries: UN classification; Source: World Bank (2011)
4) The revealed comparative advantage (RCA) is an index that purports to evaluate the relative advantage or disadvantage of a certain country in a certain class of goods or services disclosed by trade flows, which is based on the Ricardian comparative advantage concept. In 1965, Bela' Balassa introduced the concept based on the following equation:
RCA = (Eij Eit) / (Enj Ent)
where, E refers to exports and i country index and n set of countries. And j commodity index and t a set of commodities. It posits that a comparative advantage is“ revealed”if RCA>1. And if RCA is less than 1, the country is said to have a comparative disadvantage in the commodity or industry. 5) At current US$ including gold; World Bank (2011) 6) Poverty headcount ratio at $2 a day (PPP); World Bank (2011)
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This raises the question as to what would be the factors that hinder Peru’s economy to reach its full potential. Perhaps inequality is one of the most vexing problems that impede the economy to rapidly moving forward. Indeed, the annual average of the GINI coefficient between the period 1986-2010 is 0.502 (Table 1-2). The backwash yielded by inequalityis harmful to national development. In general, income in equality leads to politico-economic instability, thus inflicting ultimately negative impact to national growth. Hence, the nexus of inequality-growth has to be ameliorated if a nation wished to sustain growth.7)
GINI Coefficient, 1986-2010 1986 1994-99 2000-07 2008 2009 2010 45.72 44.87 52.46 48.95 49.05 48.14 Source: World Bank (2011)
1.2. Regional inequality
Disequilibrating growth, thus disparity, among the regions in Peru is nothing new thus posing as one of the developmental predicaments that has afflicted national planners for decades. As Bayer once asserted, the disparity among regions in a national economy perhaps is not uncommon, as the regions ”do not normally have an equal capacity for economic growth and development.”8) However, the challenge is that the disparity often triggers a downward spiral of the poverty chain, thus becoming a chronic problem to the national development.
As shown in Figure 1-5, there is a great variation in regional outputs. Arequipa, for example, contributed about 5.78% to the national GDP in 2008 while Madre de Dios about 0.39. Compared with the region of Lima, which yielded more than 55% of the national GDP, the growth gap between the largest producing region, Lima, and the lowest in the nation, Madre de Dios, would go up as much as nearly 55%.
Sustainable growth is also a challenge. The growth in the departments like Amazonas, Loreto, and Tacna was steady as shown in the period 2002-08, whereas it was quite volatile, for example, in Cajamarca, Cusco, Ancash, and Tumbes (Table 1-3).
7) See, for instance, Yi Feng (1997) “Democracy, Political Stability, and Economic Growth.” British Journal of Political Science, Volume 27, No. 3, pp. 391-418. 8) John C. Beyer (1969) “Regional Inequalities and Economic Growth in Malaysia,” Yorkshire Bulletin of Economic & Social Research, May1969, Vol. 21 (Issue 1), p1.
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GDP by Region, 2008
Note: GDP for Lima is excluded; Source: Consejo Nacional para el Desarrollo de la Micro y Peque~na Empresa, CODEMYPE (2011)”Plan Nacional para la Productividad y Competitividad de las MYPE 2011-21: Propuesta,” Internal document, 2011.
1.3. The Peruvian government’s efforts to close the regional gap
Recognising the gravity of the challenges caused by the regional disparity, the Government of Peru placed its efforts to close the regional gap in order to foster equitable development, social harmony, and socio-political stability in the nation. Such efforts were documented, for example, in the Bicentennial Plan 2010-21 devised by the National Centre for Strategic Planning (CEPLAN),9) in which it proposes to
9) The Bicentennial Plan is a strategic guideline that documents Peru′s social, political, and economic developmental goals. As signified by its title, the plan is the manifestation of the Peru′s visions for the future--specifically what it wants to be by 2021, the 200th anniversary of the country′s independence.
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GDP by Department, 2002-08 Departments 2002 2003 2004 2005 2006 2007 2008 σ* Amazonas 4.90% 5.30% 5.10% 7.00% 6.90% 7.60% 7.60% 0.0120 Ancash 17.30% 2.10% 2.80% 3.20% 2.40% 6.90% 8.80% 0.0551 Apur'imac 5.70% 5.00% 5.60% 7.40% 9.00% 2.80% 2.90% 0.0224 Arequipa 8.50% 3.50% 5.50% 6.90% 6.00% 15.60% 8.70% 0.0387 Ayacucho 6.00% 5.30% -0.70% 9.10% 9.30% 12.30% 9.20% 0.0419 Cajamarca 10.40% 8.70% 1.40% 7.30% -1.00% -7.40% 8.70% 0.0655 Cuzco -4.10% 6.20% 17.90% 8.80% 11.80% 9.60% 7.20% 0.0665 Huancavelica -1.60% 2.90% 1.40% 7.20% 6.10% -2.80% 2.80% 0.0368 Huanuco′ 2.10% 9.30% 2.80% 2.30% 2.40% 2.40% 6.60% 0.0283 Ica 6.60% 3.40% 8.80% 13.30% 8.40% 9.30% 22.00% 0.0597 Jun'in 3.00% 2.10% 6.20% 0.20% 10.90% 6.40% 8.30% 0.0374 La Libertad 6.50% 6.60% -0.70% 9.90% 15.60% 10.20% 7.60% 0.0494 Lambayeque 4.90% 4.00% -4.50% 8.10% 5.40% 10.60% 8.40% 0.0489 Lima 3.80% 3.60% 5.10% 6.90% 9.00% 10.60% 10.90% 0.0310 Loreto 4.90% 2.20% 3.60% 4.40% 5.20% 4.50% 5.00% 0.0105 Madre de Dios 9.70% -0.10% 10.10% 10.10% 3.90% 10.90% 7.70% 0.0410 Moquegua 16.50% 7.20% 7.50% 4.40% 0.50% -0.30% 5.50% 0.0558 Pasco 9.10% -0.40% 3.80% 1.10% 8.40% 11.70% 1.20% 0.0472 Piura 2.90% 3.40% 8.20% 5.70% 9.80% 9.90% 6.90% 0.0284 Puno 7.40% 1.10% 2.70% 5.20% 5.00% 7.30% 5.30% 0.0229 San Mart'in 3.50% 3.40% 8.40% 9.00% 5.20% 9.00% 9.80% 0.0277 Tacna 4.00% 6.40% 5.90% 3.80% 4.20% 6.10% 4.20% 0.0113 Tumbes 4.10% 4.50% 7.10% 14.20% -3.40% 8.60% 6.70% 0.0532 Ucayali 4.90% 3.60% 8.40% 6.90% 6.50% 4.20% 5.80% 0.0167 Notes: *The standarddeviation (σ) for the period 2002-08 reported in the last column was computed from the GDP growth rate for the same period; however, a caveat should be noted as the sample period was too short to have any statistical significance; Source: CODEMYPE (2011).
promote integrated regional development by incorporatingregional economies along the Inter-Oceanic Route to economic corridors.
Economic Corridors in Peru Department
North Corridor Amazonas, Cajamarca, La Libertad, Lambayeque, Loreta, Piura, San Mart'in, Tumbes Central Corridor Ancash, Callao, Hua'nuco, Jun'in, Lima, Pasco, Ucayali ' South Corridor Apurimac, Arequipa, Ayacucho, Cuzco, Ica, Huancavelica, Madre de Dios, Moquegua, Puno, Tacna
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By definition, an economic corridor is an integrated unit that pursues a common economic interest of development of infra-structure within an area smaller than, but beyond the nation. The corridor is connected by road, railways or canals.10) Therefore an economic corridor normally develops its area beyond the nation by the transportation or distribution network. The Southern Economic Corridor (SEC) also goes beyond the Peruvian border, stretching to neighbouring countries that share the common economic interests (See Figure 1-6). Combined with the scheme of economic growth and co-operationset by the plan of, for example, the ”Initiative for the Integration of Regional Infrastructure in South America (IIRSA)” would broaden the opportunity for the SEC, as the IIRSAalso envisions the shared growth bylinking Peru with its neighbouring economies, such as Brazil, Bolivia, Chile, etc. (Figure 1-6).11)
Yet, there are gaps, the economic and otherwise, that presently exist among the corridors. The number of enterprises in the central corridor, for example, exceeds nearly three times more than other corridors. The number of individual businesses and micro enterprises as well as of SMEs in the SEC is the least among economic corridors in Peru.
Number of Enterprise by Economic Corridor, 2008 Individual and Micro Enterprise Incorporated SME Total North Corridor 189,708 27,210 216,918 433,836 Central Corridor 536,566 156,476 693,042 1,386,084 South Corridor 184,544 24,750 209,294 418,588 Total 910,818 208,436 1,119,254 2,238,508 Source: CODEPYME (2011)
The resource shortfall in the SEC is also conspicuous on human capital side. For example, the economically active population (EAP) in SEC accounts for only 23.2% ofthe total EAP, whereas EAP in CEC is 47.4% and NEC 27.3. At the department level, Cajamarca has the largest pool of EAP, about 6.16% of the total EAP, while Madre de Dios has the least available EAP, 0.42% (Figure 1-7).
Subsequently, the opportunities for development are also unequal as there is disparity in the available and mobilisable resources. This phenomenon is translated into varying outputs among the corridors, as shown in Figure 1-8. Again the SEC is
10) Asia Development Bank (2011) ”The Economic Corridor Approach,” http://www.adb.org/GMS/ Economic-Corridors/approach.asp(Access date: 15 June 2011) 11) Initiative for the Integration of Regional Infrastructure in South America,IIRSA (2011) ”What is IIRSA?” http://www.iirsa.org/ (Access date: 15 June 2011)
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the least producing region, which, in 2009, contributed only about 18.39% to the national GDP. In contrast, the CEC accounted for approximately 62.77%, which depicts how large the regional gapspresently are.
Economic Corridors in Peru and the Infrastructural Axis of the IIRSA
EJES LLRSA-PERU AMAZONAS NORTE AMAZONAS CENTRO PERU - BRASIL- BOLIVIA ANDINO
LONGITUDINAL DE LA COSTA LONGITUDINAL DE LA SIERRA LONGITUDINAL DE LA SELVA
Source: CEPLAN (2010)
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Distribution of EAP, 2008
Note: Lima is excluded; Source: CODEMYPE (2011)
GDP by Economic Corridor, 2009
Source: Computed from the data available at Superintendencia Nacional de Administraci'on Tributaria, SUNAT (2011) http://www.sunat.gob.pe/(Access date: 20 November 2011)
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2. SMEs as an Agent to Promote Regional Development 2.1. The role of SMEs in developing countries
In general, SMEs are often referred to as the ”backbone” of an economy. It is not entirely an overstated claim, given the role that SMEs carry out in a national economy. In 2009, there were approximately 3 million SMEs in Korea which represented 99.9% of the total number of firms; 98% of businesses in Turkey are SMEs; in the U.S., SMEs have a share of 99% of all employer firms. SMEs contribute to economic development by creating employment opportunities for growing the labour force, not only in urban areas but also in rural communities. Subsequently, SMEs contribute to the mitigation of thepopulation migration to and concentration on urban areas. By doing so, SMEs contribute to balanced development between regions, which ultimately contributes to ameliorate regional inequality.
SMEs also tend to employ labour-intensive production processes, thus providing employment opportunities. Therefore, they expand income generation opportunities, which lead to the alleviation of poverty.
In addition, SMEs are a catalyst of innovation. Indeed, SMEs have to be innovative, as they have to compete in niche markets with limited resources. In this process, they also develop and utilise local resources, thereby contributing to regional development.
2.2. SMEs in Peru
The significance of SMEs is not an exception in Peru. According to the Centro de Promocion de la Pequena~ y Micro Empresa (Micro and Small Business Promotion Centre), or PROMPYME, the number of small enterprises in Peru is about 1.1 million. Small and micro enterprises account for about 98.6% of the total enterprises; micro enterprises account for some 91.7% and small businesses 6.9% (Table 1-4).
SMEs contribute some 40% to the national GDP; about 1.4% is accounted for by medium-sized enterprises and nearly 60% of GDP is accounted for by large enterprises.
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SMEs in Peru (%) Industrial Employment Contribution to GDP unit* Micro Enterprises 91.7 53.0 42.1 Small Enterprises 6.9 24.0 Over Medium-SizedEnterprises 1.4 23.0 57.9 Total 100.0 100.0 100.0 Note: * Industrial unit is the percentage of the total enterprises; Source: PROMPYME(2010)
Most SMEs in Peru are engaged in the industries that require little or no technology. For example, the largest proportion of SMEs, about 48%, operates in thevehicle repairtrade, followed by real estate and leasing services (Figure 1-9). Approximately 10.4% of SMEs are engaged in manufacturing. Not surprising as it is, SMEs in Peru contribute merely 2% to the nation’s export.12)
Acknowledging the frailty of SMEs, the Government of Peru has been focusing on the enhancement of capacity and competitiveness of SMEs, as they areultimately associated with the regional development and poverty reduction.
Distribution of SMEs by Industry, 2009
Source: CODEMYPE (2011) Plan Nacional para la Productividad y Competitividad de las MYPE 2011-21
12) PROMPYME (2010)
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3. Objectives, Scope, and the Rationale of the Study 3.1. Objectives and scope of the study
The main theme of this study is to contribute to the promotion of the competitiveness of SMEs in the Southern Economic Corridor in Peru.
(1) Specifically, this study tries to indentify a few regional strategic industries in the corridor in which micro, small and medium businesses (MSMEs) are engaged; (2) And it will devise action plans, whereby the measures to implement the strategies that will help SMEs in SEC foster competitiveness.
To this extent, regional strategic industries such as the coffee and alpaca industry in light of export potential to the markets in Korea, and further, in Asia, will be explored. In addition, the potential to promote the automotive parts industry for the ZOFRATACNA (the Tacna Free Zone) will also be sought.
And, in light of the MSME development in the corridor, the study will also focus on the fostering of the MSMEs’ competitiveness. Specifically, it will explore the approaches for MSMEs to co-operate, so that they could ameliorate the frailty caused by the ”fragmentation.” To this extend, it will examine such models as co-operative programmes and agro-industrial complex, which, in Korea, have yielded significant results.
In summary, the scope of this study is to focus on the fostering competitiveness, including the export potential, of:
(1) the coffee industry; (2) the alpaca industry; and (3) automobile parts in the ZOFRATACNA.
It will also look into:
(4) MSME co-operative programmes andagro-industrial complexapplicable to the SEC.
The Government of Peru sees the enhancement of competitiveness of MSMEs as the key to achieve the goals set by the Bicentennial Plan. And it also acknowledges that clusters and associativeness of MSMEs as one of the driving forces that fosters the competitiveness of MSMEs. The government especially sees that the promotion of export capability of MSMEs is the matter of urgency. The rationale is two-fold: one,
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the government envisions increasing the market access for MSMEs beyond the domestic market for strategic and specialised products of regions. To this end, the government desires regional MSMEs to capture overseas market opportunities offered by broadened free trade agreements.
Indeed, Peru is already a member of numerous free trade agreements/custom unions. For example, Perusigned the Peru-U.S. Trade Promotion Agreement (TPA) in 2006; it has been a member ofthe Comunidad Andina (CAN, the Andean Community of Nations) since 1969. It has now concluded a bilateral trade agreement with the European Union (EU). In addition, Peru signed major bilateral trade agreements with China and Japan and is looking into entering to free trade agreements with other Asian nations, such as Thailand. In 2011, Peru signed an FTA with Korea, expanding its ties with Asian countries.
As such, market opportunities are rapidly opening up; however, the frailty of MSMEs impedes them to capture the overseas market opportunities in spite of their significant role in the Peruvian economy.
As mentioned elsewhere in this document, MSMEs contribute about 42% to the national GDP in Peru. However, their contribution to export (measured by total value of export) is merely 2%.
3.2.1. On coffee and alpaca
Then why does this study focus on such products as coffee and alpaca? Coffee, along with yucca, coca, and various fruits, is grown in the lower zone of valleys in Southern Andes by mainly indigenous population where poverty is widespread.13) Among the bio-diversity in the lower zone, coffee is perhaps an internationally traded cash crop that could improve the livelihood of farmers in these areas (See also ”Table 1-1: Peru’s Top-10 Export Commodities, 2008-09” in the previous section). Given that the Bicentennial Plan is projected to reduce poverty by 2021 from 34.8 to 10%, the potential for the market access for the coffee growers in the SEC needs to be closely explored. Especially, the Peruvian ”organic” coffee may offer the coffee growers in these regions new market opportunities offered by recent bilateral trade agreements with Asian countries, including Korea.
By the same token, alpaca has been the livelihood of people in the highlands of Southern Andes for hundreds of years, if not thousand. Wools and meats offered by alpaca have been the source for alpaca herders and their family to barter with other
13) See, for example, International Institute for Environment and Development, IIED (Year Unknown) ”Traditional Resource Rights and Indigenous People in the Andes,”http://pubs.iied. org/pdfs/14504IIED.pdf (Access date: 20 November 2011).
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daily staples since the time of the Incan Empire.14) They are sui generis products that are available to the indigenous population in the harsh conditions in the highlands of Andes, which are the only areas in the natural setting that alpaca is herded. Hence, the enhancement of competitiveness of the alpaca industry, including expanding the opportunities for market access, would obviously in sync with the Peruvian government’s effort to promote regional development.
3.2.2. On automotive parts in the Tacna region
Presently, there is not a single automobile manufacturer in Peru. Since 2002 when Volvo’s truck division closed its Ate-Vitarteplant, Peru has no automobile manufacturers in the country. One of the reasons that is attributable to the non- existence of the manufacturers was the influx of used cars to the country in the absence of the importation barriers to such used vehicles.15) Until recently, the Centro de Exportacion,′ Transformacion,' Industria, Comercializacion' y Servicios (CETICOS) at Ilo and Martarani repair and re-condition used cars. The similar trade was also undertaken in ZOFRATACNA.
However, the business environment has changed: imports of used cars were stopped by the Government of Peru at the end of 2010. Thus, the demand for the parts is expected for the existing used car fleet, which is estimated to be about 1.3 million.16) In addition, the number of fleets in adjacent countries--Chile, Venezuela, Colombia, Ecuador, Bolivia, Argentina, etc.--are increasing. In other words, the market condition is created in a favourable direction.
Indeed, automotive parts imports will grow by 20% in 2012, as predicted by La Asociacion′ Automotriz del Peru′ (AAP,Automotive Association of Peru). In 2011, imports of automobile parts reached US$1,100 million, representing the highest level in the last years.17) Domestically Peru produces US$250-300 million auto parts in addition to imports, some of which are exported.
As the Regional Government of Tacna envisages to transform the experiences of used car repair and re-condition accumulated through the operation of ZOFRATACNA into an automotive related cluster, it is worthwhile to review and weigh the potential of the development of the auto parts industry.
14) See Jakob Kronik and Dorte Verner (2010) Indigenous Peoples andClimate Change in LatinAmerica and the Caribbean, Washington, D.C.: The World Bank. 15) Marco Kamiya and Cesar Ramirez (2004)“The automotive industry, developments in China and implications for Latin America,”Cuadernos de Difusion , Vol. 17, December 2004, pp. 5-20. 16) Ibid. 17) TodoAutos (2011) ”Importacion' de autopartes y suministros llega a los $1,100 milliones,” http://www.todoautos.com.pe/ (Access date: 20 February 2012)
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3.2.3. On MSME co-operative programmes
MSMEs by definition are small businesses. They are small in terms of resources that they can mobilise, in spite of significant contributions they bring to a national economy. Consequently, they have to bear intrinsic disadvantages in terms of economies of scale. In fact, associativity is one of the most plausible alternatives by which MSMEs could account for the intrinsic disadvantage of MSMEs. Indeed, MSMEs could pool their resources to attain economies of scale, so that they could compete in the market place more effectively. And yet, the fragmentation of MSMEs in Peru is still a challenge.
Based on this backdrop, this study will also shed light on the policy experiences of the SME support agencies and institutions in Korea in the areas of the promotion of co-operation among MSMEs and the regional development.
4. Organisation of the Study
As stated in the preceding section, this study will deal with (1) the coffee industry; (2) the alpaca industry; and (3) automobile parts in the ZOFRATACNA; and (4) MSME co-operative programmes and agro-industrial complex applicable to the SEC.
Accordingly, Chapter 2 will discuss the coffee industry in general and the sui generis factors of the Peruvian coffee. Furthermore it will present action plans to enhance the competitiveness of coffee growers in the SEC. Chapter 3 will deal with the alpaca industry in the same manner as the coffee industry. Chapter 4 will review and propose the ”re-industrialisation” of automobile parts industry in Peru, utilising especially the Tacna Free Trade Zone; Chapter 5 will focus on the agro-industrial complex and other programmes that could help foster co-operation among the Peruvian MSMEs. Chapter 6 will epitomise the findings and conclude the study. In Chapter 6, the action plans proposed in each chapter will be aggregated.
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The Regional Development Plans for the Southern Economic Corridor in Peru:Linking the Coffee, Alpaca, and Auto-Part Industries with the World Chapter 2
Regional Strategic Industry Development Plan: Alpaca
Summary 1. Overview of Alpaca 2. Unique Characteristics of Textile industry 3. Peruvian Alpaca Industry: Status and Issues 4. Korean Organisations and Companies Associated with Alpaca Industry 5. Agenda and Policies 페루영문 2012.6.21 5:44 PM 페이지54 mac001 PDF-IN 2540DPI 100LPI
Regional Strategic Industry Development Plan: Alpaca
Moon-Kyum Kim (Soongsil University)
Summary
The textile industry has a multi-layer production structure ranging from upstream raw material procurement to downstream textile and cloth production. Each industry in the value chain including yarn (weaving/chemical fibre), dye works, consumer product production (garments, other textile products) and distribution (sales) are closely linked.
Industries in Italy, France, and Japan are developing new products with high value-added and thereby strengthening their competitiveness. In most countries, thread is created by chemical specialty companies, spinning is done by large companies and the end products are manufactured by SMEs that specialise in medical supply and fashion products. There is much room for improvement in facilitating a close collaboration among companies involved in this industry.
According to Toyne, the textile industry of a nation is developed in six phases: embryo stage, cloth export stage, high quality material and cloth export stage, golden age, peak and decline. Toyne’s six stage development model is not applicable for all nations since industry development path may differ depending on natural environment and other characteristics of each nation.
Native to the high mountains of the Andes, alpaca has long shiny fur with many desirable qualities including smoothness and thermal insulation for human use.
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Approximately 45% of alpaca fur is white in colour, while 10% is camel coloured and the remaining 45% is dark brown, grey and black. Natural coloured alpaca fur commands a higher price than white coloured fur. Fur with a high proportion of black hair is sold at a much lower price than others. Approximately 70% of Alpaca fur produced has the fineness of 26-28μwhile the remainder of the fur has a fineness of 34-36μ. The annual production volume of Alpaca rated at 22-24μis marginal at approximately 50 tonnes per year.
The Peruvian textile industry is closely linked with the alpaca livestock industry and producers of knit garments, made from natural alpaca fur and chemical fibres.
According to national statistics, the alpaca industry has created 352,762 jobs and textile manufacturing alone is responsible for the creation of 192,789 jobs thanks to significant domestic and overseas demand. The number of people employed in alpaca livestock industry is estimated to be 150,000.
Peru’s alpaca industry challenges for policy and practice are as follows:
The Peruvian alpaca industry is suffering from several problems including aging production facilities and lack of original brands. As a result, the industry is focusing on OEM and processing of raw materials and textiles only. The industry also lacks Research and Development (R&D) capacity for the development of core technologies, thus making it difficult to produce competitive products. The industry network is also weak, making it difficult to cope with the fast-changing business environment. The number of production specialists and expert engineers is also low. This indicates that the industry is in the ‘Cloth export’ phase of Toyne’s model.
Fostering an expert workforce for the alpaca fibre industry
Although the market for low and middle-priced clothing in developed countries has become saturated, the market for fashion ware is expanding both in diversity and volume. For long-term success, it is necessary to encourage fashion design specialists and support companies that produce original fashionable garments with their own brands. To do this, they must develop an expert workforce in pattern making, marketing, merchandising, and fashion coordination in order to capitalise on this growing fashion market. The following represents a series of proposed actions that would be required to maintain and grow Peru’s position in the marketplace.
(1) The establishment of a research and training centre (RTC)
This would commence with the identification of an academic-industrial research institute, having a well-established capacity for research and education. The
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knowledge and research capacity of the institution would then be augmented to serve as a specialised alpaca industry-related RTC. The RTC would then serve as the platform from which an expert workforce, specialised in alpaca fibre technology development and applications would be developed. Once the RTC becomes fully specialised in the advancement of the industry, it would benefit from ongoing government support as a specialised independent institute. The RTC would also become the hub for an innovation cluster.
(2) Establish collaboration with domestic and overseas research institutes
This will require the planning and implementation of promotional programs to reach domestic and overseas institutes. National competitions for designers and pattern makers would be held on a regular basis to promote expert development and the identification of local talent. This would be followed by the provision of overseas training opportunities (short and long-term) for talented local experts.
(3) Identify and recruit overseas experts
In order to strengthen the competitiveness of Peru’s alpaca fibre industry, it will be important to monitor new trends in the emerging and niche target markets. It is therefore recommend that a campaign to hire retirees from overseas ”imitation” product manufacturers be implemented. Since there are often many barriers to hiring overseas experts who have active careers in the industry, it is more realistic to target retired experts. These experts would provide the knowledge required for product differentiation and quality improvement--the key to maintaining competitiveness of alpaca fibre industry.
(4) Establish buyer networks
The building of a buyer network for each target country is critical. This would require working with the newly-hired overseas workforce to: (a) strengthen technology know-how, technical expertise, and develop the information database of target markets and business networks; (b) build collaborative relationships with the fast-growing fashion industries in the BRIC countries (Brazil, Russia, India and China), and textile manufacturers in South America and Eastern European countries.
(5) Legal framework
It is proposed that the establishment of the necessary legal framework and policies for the hiring of overseas experts be developed and implemented early on.
Fostering the expert workforce for the alpaca fiber industry
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An industry cluster refers to an area with a high concentration of inter-related businesses, which generate high economic values through active exchanges of information and resources. Based on the project data analysis, creating an alpaca industry cluster in the Cusco region is therefore recommend for developing a regional economy and strengthening competitiveness by stimulating innovation within the cluster. An effective industry cluster is not formed naturally but planned, established and nurtured with guidance of capable facilitators and funding support. More specifically, the effective creation and facilitation of an industry cluster requires close collaboration and networking of experts including vision providers, system organisers, specialised service and knowledge suppliers and more.
Establishing a strong network among regional government, universities and R&D centres, relocating some of the organisations to a specific physical area if possible, is the first step in creating an alpaca industry cluster. It will then be necessary to establish training centres and training courses in order nurture local talents and make the cluster a place where good jobs for a trained workforce exists. It is also important to implement policies and systems that allow overseas industry expert to join in the cluster as technical advisors for businesses and or trainers. Creating a dedicated alpaca industry research institute with internal capacity to foster the alpaca industry R&D experts should also be considered as a next step. Although government funding would be necessary to create such an institute, it should eventually become an independent institute, albeit with some government support.
An industry cluster does not need to be limited to a geographical region or an industry sector such as fibre production. For example, a collaborated marketing of the fashion industry of Lima and alpaca industry of Cusco could provide significant benefits to each other.
Development of original brands
The development of original brands for individual companies or SME groups is important for sustaining an increase in export volume. It is therefore recommended that:
(1) The selection of promising mid-sized companies be undertaken and that they be fostered as flagship companies with original brands, to promote their growth and increase the overall reputation of Peruvian products. Additionally, it is recommended that a selection of promising small enterprises be made and that plans be implemented to foster their growth to mid-sized companies, to help them benefit from both the scale and copy of the economy.
(2) Strengthen marketing capacity: It is recommended that the establishment of
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an independent local sales network in target overseas markets be undertaken. This is important in order to more effectively market products developed and sold under common brand names. An aggressive marketing strategy for directly approaching overseas consumers is a key to increasing sales.
Promotion of inter-stream collaboration projects
The budgetary allocation of a technology development fund will be extremely important. The fund would support projects designed for promoting the development of new technologies and product differentiation for textile-fashion inter-stream consortiums that collaborate on planning, technology development, production and marketing. A stream is a consortium which consists of entities of three or more different sectors including business, research institutes and universities. (The average funding support by the Korean government per consortium is approximately KRW2 billion over two years)
It is essential to foster the growth of select medium-size companies as flagship companies, having their own brands in order to increase their market value and build the overall reputation of Peruvian products. In addition, set long-term goal of building the reputation of the ’Peru Collection’.
Financial support for the replacement of outdated facilities
It is proposed that financial support should be provided for the replacement of outdated facilities operated by small and medium-size alpaca fibre businesses, as well as the implementation of advanced management systems as there is a significant potential to boost the alpaca industry.
According to the senior experts of the Korea Wool Association, the cost of new facilities, which can produce wool tops and ultimately turn it into yarns, through wool top processing (worsted yarn) and carbonate processing (carded wool) is estimated at 2 million Korean won per one spindle. It should be noted that a typical yarn factory has 7,000 spindles each.
In Korea, financial support for facility renewals is managed through the Small and Medium Business Corporation as the ’New Growth Foundation Fund.’ SMEs must have more than five years of operational history to be eligible for funding. The applicable usage of the fund covers purchases of manufacturing facilities and testing equipment, installation of facilities, assessment of operation stability, improvement of the operation environment and support facilities of workers. The maximum term of a loan is eight years with up to three years grace period on loan principal payments.
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1. Overview of Alpaca 1.1 Alpaca
The alpaca is a member of the South American camelid family which includes the guanaco, the vicu~na, the llama, and the paco-vicu~na, a mixed breed between the male vicu~na and female alpaca. The ancestor of the camelid family actually originated in the North American southwest approximately 50 million years ago and then migrated to South America, Asia and Northern Africa.
Use of the alpaca’s fur began in ancient Peru as early as 400 BC. Alpaca was raised by the Inca Empire in large volumes during the 11th and 12th centuries. The Alpaca textile industry, which relied on traditional production methods grew quickly as advanced production technology from the United Kingdom (UK) was introduced. Peru has the world’s leading alpaca industry with unique textile technologies that allow the production of textiles that possess the qualities of the raw material. Alpaca textiles have been used by leading fashion designers for high-end fashion products since the 1970s. Today, alpaca fur is used in the production of various sorts of products including plain textiles, knits and so on. Alpaca textiles are versatile and can be used for both the production of summer and winter apparel.
Native to the high mountains of the Andes, alpaca has long shiny fur with many desirable qualities including smoothness and thermal insulation for human use. Approximately 45% of Alpaca fur is white in colour, while 10% is camel coloured and the remaining 45% is dark brown, grey and black. Natural coloured alpaca fur commands a higher price than white coloured fur. Fur with a high proportion of black hair is sold at a much lower price than others. Approximately 70% of Alpaca fur produced has the fineness of 26-28μwhile the remainder of the fur has a fineness of 34-36μ. The annual production volume of Alpaca rated at 22-24μis marginal at approximately 50 tonnes per year.
There are two types of Alpaca species, the Suri and Hucay. The Suri has straight and flexible fur with a natural shine, which is unlike the Huacay which has spongy like qualities. As a result, Suri is traded at a higher price point than Huacay. The annual production volume of Alpaca fur is approximately 4,000 tonnes. The fur harvested from young alpacas at their first shaving is the finest in quality and thus traded at a very high price, and used for high quality knit wear garments.
1.2 Guanaco
Guanaco is a type of camel which is native to Peru. By comparison, it is smaller
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than the llama but larger than the alpaca. Wild guanaco herds can be found in Peru and Argentina, and as far south as Tierra Del Fuego.
The guanco’s fur can be as long as 250mm with fineness between 15 and 24μ. Its fur is suitable for textile production, however it tends to be short in length, and thus used for the production of carded wools. Much smoother and shinier than wool, the colour of guanco fur is reddish brown on the back part and white on the stomach.
1.3 Vicuna~
Vicu~na is also a type of camel that lives on the high plateaus of South America. It is sometimes found in the same herds with alpaca and llama. The Vicu~na’s fur is the finest, yet the domestication of vicu~na is extremely difficult. Thus, wild vicu~nas are captured alive for harvesting fur. Its population is very small and thus they are protected by law.
There is an international import ban on vicu~na fur which is produced in extremely small volumes of approximately 3,000kg. It is then auctioned off once a year and made into textiles within Peru for export. A consortium which consists of one Peruvian company, Condor Tips and two Italian firms, Loropiana and Agnona, is leading on textile production using this fur. Textile products are traded at exceptionally high prices for its supreme quality and rarity.
The vicu~na is 80 centimetres tall and weighs between 35 and 46 kilograms. An adult vicu~na has the finest fur of 10-12μwith hair length between 20 to 50mm. The average fur harvest from a vicu~na is between 170 and 230 grams each. Its fur is similar to cashmere but vicu~na fur is finer and lighter and thus used for production of top quality textiles and knits.
Some male vicu~na will sometime breed with domesticated alpaca females during grazing. The half alpaca half vicu~na offspring is referred to as paco vicu~na.
1.4 Llama
Llama is the largest member of the alpaca species, which can be up to 135 centimetres tall and weigh 110 kilograms. It was originally used for transporting freight, and today is still used for the same purpose. It was also once popular for its meat.
It’s fur consists of wool, hair and some kemp. Approximately 35% of the fur has
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fineness of lower than 30μand 40% of the fur has fineness between 30-50μ. The proportion of fur with fineness lower than 30μaccounts for 60% in younger llama’s.
Although brown is the most common colour found in llama fur, black, pure white and other colours can also be found. Most of the llama fur is used for production of cloth for domestic consumers. However, it is also used to make sacks and ropes. The UK is the largest importer of llama hair, which is used in the production of men’s overcoats.
1.5 Paco-vicuna~
Paco-vicu~na is a mixed breed between the male vicu~na and a female alpaca. It has brown fur with fineness of approximately 22μ, which is similar to the fineness of baby alpaca. Its fur is not as fine as that of vicu~na but finer than that of the adult alpaca.
The shape of scale and overall appearance of paco-vicu~na fur is similar to that of alpaca and it feels very similar to fine alpaca. The average hair length after carding is 57-65 millimetre. It has superior strength and elongation compared to wool and unlike vicu~na furs, can be traded internationally.
2. Unique Characteristics of Textile industry 2.1 Structure of textile industry
As illustrated in Figure 2-1, the textile industry has a multi-layer production structure ranging from upstream raw material procurement to downstream textile and cloth production. Each industry in the value chain including yarn (weaving/chemical fibre), dye works, consumer product production (garments, other textile products) and distribution (sales) are closely linked.
Industries in Italy, France, and Japan are developing new products with high value-added and thereby strengthening their competitiveness. In most countries, thread is created by chemical specialty companies, spinning is done by large companies and the end products are manufactured by SMEs that specialise in medical supply and fashion products. There is much room for improvement in facilitating a close collaboration among companies involved in this industry.
Collaboration in the textile industry can be classified into two categories, one driven by the producers and the other driven by buyers. The characteristics of collaborative activities are summarised in Table 2-1.
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Inter-Stream Collaboration between Textile Companies Producer-Driven Value Chain Buyer-Driven Value Chain High technology textile industry Industry with high dependency on Clothes, shoes, toys and other characteristics capital and technology, high consumable products tech aviation industry Leading industry Producers Large retailers, marketers Increase market dominance of Highly competitiveness Competition/entry leading companies environment barrier High entry barrier Low entry barrier Non-price competition structure Price competition structure Value chain Value chain dominated by Marketers, merchandisers dominator producer
Source: Ryu, Gunwoo (2009)
Multi-Stream Textile Industry Structure
2.2. Textile industry development phase
According to Toyne, textile industry of a nation is developed in six phases: embryo stage, cloth export stage, high quality material and cloth export stage, golden age, peak and decline. Toyne’s six stage development model is not applicable for all nations since industry development path may differ depending on natural environment and other characteristics of each nation.
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Toyne’s model High quality Phase Embryo Cloth exportmaterial, cloth Golden age Peak Decline export Key Hand-made, Labor Creation of Quality Job shrinkage, Sharp decline characteristics domestically- intensive domestic improvement, productivity in jobs and consumed, production, material expansion of improvement, companies, high-quality export-driven, industry, multi production production of increase in products low quality product volume, high value imports, imported manufacture, product added specialisation, clustering diversification, products, overseas overseas capital- production investment intensive production Nations in African Nepal, Sri ASEAN China, TaiwanHongKong,UK, France, respective phase Lanka, Bangladeshi countries Italy, Japan US, Germany
3. Peruvian Alpaca Industry: Status and Issues
The Peruvian alpaca industry is suffering from several problems including aging production facilities and lack of original brands. As a result, the industry is focusing on OEM and processing of raw materials and textiles only. The industry also lacks Research and Development (R&D) capacity for the development of core technologies, thus making it difficult to produce competitive products. The industry network is also weak, making it difficult to cope with the fast-changing business environment. The number of production specialists and expert engineers is also low. This indicates that the industry is in the ”cloth export phase” of Toyne’s model.
Formality of the Firms in Regional Knit Industry
Source: Comitede′ MYPES Textiles Productoras de Chompas del Peru' (July 2011)
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3.1. Workforce status
The Peruvian textile industry is closely linked with the alpaca livestock industry and producers of knit garments made from natural alpaca fur and chemical fibres.
3.2. Industry profile by types
3.2.1. Single family hand-made production
Many families are engaged in alpaca production, working hard to purchase machinery that is required to expand their businesses. Fathers often lead with the textile production while mothers place the finishing touch to the products and sell them in marketplace. There are many family alpaca businesses registered in the Puno region.
3.2.2. Cottage industry-scale production
The cottage industry-scale production is usually operated by multiple families who earn their living by producing textiles, from manually operated machines. Some of the workers are compensated with weekly wages. The father assumes the leadership role and is in charge of operations and salary payment. Some of these companies produce basic products for large company clients.
3.2.3. Organised manual production
The type of companies has shares in domestic markets operated by the Gamara federation or the alpaca export market. Both manual and electrically driven machines are employed in the production process with a strong reliance on weavers. The strength of the companies is in textile making and also placing the necessary finishing touches on the products. The companies are quite profitable as they deal directly with clients in the international market.
3.2.4. Organised automated industry
This segment of the sector specialises in the mass production of low cost textiles, using machines operated by daily-paid workers. With automated machines more than 30 years old, the businesses specialise in low cost acrylic textiles. Such businesses are important actors in the advancement of the textile industry; however many are unregistered thus making it difficult to work with the government.
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Industry Characteristics by Type and Region Single-family Cottage-industry Organised manual Organised automated Total hand-made scale production production network production Arequipa 2 21 25 20 68 Chiclayo 8 4 2 4 18 Cuzco 1 4 11 3 19 Jun'ln (Hu'ancayo) 8 26 33 86 153 Lima 12 12 36 40 100 Puno 34 3 39 30 106 Trujillo 0 1 2 3 6 Total 63 71 148 186 468
3.3. Employment created by alpaca textile industry
According to national statistics, the alpaca industry has created 352,762 jobs, and textile manufacturing alone is responsible for the creation of 192,789 jobs. This is thanks to the significant domestic and overseas demand. The number of people employed in the alpaca livestock industry is estimated to be 150,000.
For an unknown reason, the textile industry in the Punto region is not supported through the national economic development plan, although the industry is asking for support.
Regional Employment Status by Sector Employment in Employment in Total Direct Total Indirect Formal MSEs Informal MSEs Employment Employment Arequipa 476 1,904 2,380 19,040 Chiclayo 126 504 630 5,040 Cuzco 133 887 1,020 8,157 Jun'ln (Hu'ancayo) 1,071 7,140 8,211 65,688 Lima 700 2,800 3,500 28,000 Puno 742 7,420 8,162 65,296 Trujillo 42 168 210 1,680 Total 3,276 20,823 24,099 192,789
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3.4. Export of Peruvian alpaca products to Korea
The volume of export of alpaca fur and fibre from Peru to Korea has fluctuated to a high magnitude.
Alpaca Fur/Fibre Export Volume from Peru to Korea, 2002-11
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4. Korean Organisations and Companies Associated with Alpaca Industry 4.1. The Korea Wool Association
4.1.1. Overview
Korean worsted yarn companies are competing against Italians in the high- end product market, and the Chinese in middle and low priced product markets. The Korean companies are shifting away from low and middle priced products and concentrating on the development of high value added products. In order to maintain competitiveness, companies are also focusing on quality improvements, design, production time etc, versus the lowering of production costs.
The production of worsted yarns showed little change between 2009 and 2010 although the production volume of worsted fabric increased. Worsted product exports decreased in total weight due to the increase in raw material prices. The import of worsted products has decreased significantly for several years up to 2009. However, import of worsted yarn increased in 2010 both in monetary value and mass. In 2010, the production of woollen yarn increased thanks to increase in demand for clothes that came as a result of the economic recovery. However, the sales from woollen yarn only increased domestically while exports continued to decline.
4.1.2. Industry status
4.1.2.1 Company status
Textile makers including Cheil Industries, Kyung Nam Wool Textile Co., Ltd., AZTECH WB, Taekwang Industrial, and spinning companies such as Saewool, Hansinwool, Shinhan Spinning are the most prominent players in the Korean worsted yarn industry. There are also a significant number of converters, which do not have large scale manufacturing facilities. As of the end of 2010, the Korean worsted yarn industry consisted of 13 spinning companies and 10 textile producers. There are 28 carded wool textile companies operating in Korea including the Busan Textile, the Hansung Textile and the Dae Kwang.
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Large Companies and SMEs in Woollen Industry Large companies SMEs Total Worsted wool 2 21 23 Carded wool - 28 28 Total 2 49 51 Note: unit in number of companies; Source: Korea Wool Association
All 13 worsted wool processing companies are SMEs, while two of the 10 carded wool processing companies are large companies. The 28 carded wool processing companies including carded woollen yarn and textile makers are SMEs, and 11 of them are registered as individual businesses.
Woollen Companies by Location Worsted wool companies Carded wool Total Spinningmill Textile Sub-total companies Gyeonggi, Chung Cheong 4 4 8 2 10 Busan, Kyungnam 4 4 8 24 32 Daegu, Kyungpook 5 2 7 2 9 Total 13 10 23 28 51 Note: unit in number of companies; Source: Korea Wool Association
Worsted wool companies are concentrated in three regions. There are eight companies located in the Busan and Yangsan (Kyungnam) areas. There are seven companies in Daegu/Kyungpook regions with many companies located in the Gumi area. Gyeonggi/Chung Cheong region has eight companies in the area with a heavy concentration in Chungju city. None of the companies are operating in Geonnam, Geonbuk and Gangwon areas. The carded wool processing companies are heavily concentrated in the Busan/Kyungnam areas. There are also two companies operating in Gyeonggi/Chung Cheong region and two companies operating in Daegu/ Kyungpook region.
4.1.2.2. Workforce status
The Korea worsted wool industry is currently employing 2,223 workers. The workforce consists of 1,209 males and 1,014 females. By region, 1,106, 742, 375 members of the workforce are stationed in Gyeonggi/Chung Cheong, Busan/Kyungnam and Daegu/Kyungpook regions respectively.
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Carded wool processing industry is employing 738 people. The workforce consists of 241 males and 497 female workers. A total of 1,485 people are employed by textile industries. The textile industry workforce consists of 968 males and 517 females. Most of worsted wool companies have both spinning mill and textile making facilities. Average number of employees per company is 57 for spinning mills and 148 for textile manufacturers.
Worsted wool workforce is heavily concentrated in Busan/Kyungnam regions. There are 977, 102, 35 worsted wool workers in Gyeonggi/Chung Cheong, Daegu/Kyungpook and Busan/Kyungnam respectively.
Worsted Wool Industry Workers Spinning mill Textile Total Male 241 968 1,209 Female 497 517 1,014 Total 738 1,485 2,223 Note: unit in persons; Source: Korea Wool Association
Worker Distribution by Region Worsted wool companies Carded wool Total Spinningmill Textile Sub-total companies Gyeonggi, Chung Cheong 378 728 1,106 102 1,208 Busan, Kyungnam 189 553 742 977 1,719 Daegu, Kyungpook 171 204 375 35 410 Total 738 1,485 2,223 1,114 3,337 Note: unit in number of companies; Source: Korea Wool Association
4.1.2.3. Manufacturing facilities
The number of spinning machines in the worsted wool industry has steadily decreased since the 1990s. As of 2010, the capacity was 214,328 spindles, 37.3% less than at the end of 2000. Regional distribution of spinning machines was 102,536 (47.8%), 60,240 (28.1%), 51,552 (24.1%) spindles in Gyeonggi/Chung Cheong, Busan/ Kyungnam and Daegu/Kyungbuk, respectively.
Many companies had more than a 10,000 spinning machine capacity in the past. Some companies had as many as 30,000 spindles in operation at once. However, most
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companies now have approximately 10,000 spindles each, for maximum efficiency. The average capacity per company has decreased from 18,233 in 2000, to 10,716 in 2010, which is a decrease by 41.2%.
Due to a global decrease in the consumption of woollen products and a decrease in exports and domestic demand, more than 87% of the spinning machines used by worsted yarn companies are more than 15 years old, with many having been in operation for more than 30 years. Some investments are still made in spinning machines, but it is limited to maintenance work and parts replacement, and machinery including combers and winders. Some companies are considering expanding their spinning machine capacity. However, they are planning on reworking their existing machines which are currently not being used.
The production capacity of worsted wool by region is 12.50 million yards, 14.50 million yards, and 5.00 million yards in Gyeonggi/Chung Cheong, Busan/Kyungnam and Daegu/Kyungbuk, respectively. The total spinning machine capacity of the domestic carded wool industry is 87,486. The capacity is heavily concentrated in the Busan/Kyungnam area with as many as 75,332 spindles. The spinning machine capacity of Gyeonggi/Chung Cheong and Daegu/Kyungbuk is 9,654 and 2,300 each. The spinning machines used in the carded wool industry is equally high, with more than 85% of machines more than 15 years old.
Spinning Machine and Wool Processing Capacity Spinning machine capacity Total amount of wool processed Worsted wool Carded wool (in million yards) Gyeonggi, Chung Cheong 102,536 (86%) 9,654 12.5 Busan, Kyungnam 60,240 (94%) 75,332 14.5 Daegu, Kyungpook 51,552 (80%) 2,300 5.0 Total 214,328 (87%) 87,486 32.0 Note: Rate of spinning mills more than 15 years old; Source : Korea Wool Association
Change in Number of Spinning Machines in the Period 2000-10 2000 2002 2004 2006 2008 2010 341,700 276,648 249,188 243,548 242,100 214,328 (△65,052) (△27,460) (△5,640) (△1,448) (△27,772) Note: Unit in number of spindles; Source: Korea Wool Association
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4.1.2.4. Financial status of spinning/textile companies
In terms of sales, the industry leaders are Cheil Industries, AZTECH WB, Jayoung, King Tex in the ranking of highest sales in 2010. The total sales of the 23 companies surveyed was KRW412.7 billion (roughly US$412 million). Sales for spinning companies were KRW109.0 billion while sales for textile companies were KRW303.7 billion. Sales per employee averaged at KRW150 million and KRW210 million for spinning and textile companies respectively.
Although most texturised yarn and textile companies are in good financial health (lower than 100% debt to asset ratio), there are some firms in filament yarns, texturised yarns and the textile industries that are experiencing some financial difficulties and as a result under receivership.
Busan Textile, Hansung Textile, Dae Kwang are the leading companies in the carded wool industry in terms of sales. The total sales of the 28 carded wool companies are KRW215.6 billion.
Sales Status Worsted wool companies Carded wool Total Spinningmill Textile Sub-total companies Gyeonggi, Chung Cheong 357 1,000 1,357 Busan, Kyungnam 148 1,175 1,323 Daegu, Kyungpook 585 862 1,447 Total 1,090 3,037 4,127 2,156 6,283 Notes: Unit in KRW billion; Twenty three worsted wool companies were surveyed (excluding sales from non- fiber/textile businesses); Twenty eight carded wool companies were surveyed.
Financial Ratios of Worsted Wool Companies Industry TypeDebt ratio Operating profit ratio Net profit ratio Filament yarn 149.6% 5.4% 7.6% Texturised yarn 63.9% 5.7% 6.0% Textile industries 53.8% 9.1% 3.8% Note: The ratios are calculated by taking average of three leading companies in each industry sector
4.2.1.5. Market status
The production volume of worsted wool fibre in 2010 was on a par with the
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production level in 2009. However, the total shipment of products for sale in 2010 had decreased by 3.9% compared to 2009. This was largely due to the rise in prices resulting from the rise in raw material costs.
In 2010, the production volume of worsted wool textiles was increased by 12.1%. However the total volume of shipments was decreased by 2.8% year on year due to the decrease in domestic demand and export, resulting from the increase in prices.
Worsted Wool Fiber Market Change 2008 2009 2010 Production 12,328 12,527 12,500 Domestic 6,074 6,525 6,898 Shipment Export 1,037 1,599 907 Total 7,111 8,124 7,805 Inventory 2,273 1,740 1,758 Note: Unit in metric tonnes
Worsted Wool Textile Market Change 2008 2009 2010 Production 29,657 23,803 26,681 Domestic 25,241 23,216 22,710 Shipment Export 5,202 3,670 3,424 Total 30,443 26,886 26,134 Inventory 7,065 4,710 6,318 Note: Unit in metric tonnes
Total export of carded wool fibre decreased in 2010 year on year. However, overall shipment of carded wool fibre was increased by 11.2% due to increase in domestic sales. Production volume was also increased by 8.7%.
Carded Wool Fibre Market Change 2008 2009 2010 Production 6,816 6,827 7,420 Domestic 4,866 4,825 5,500 Shipment Export 695 659 597 Total 5,561 5,484 6,097 Inventory 473 495 623 Note: Unit in metric tonnes
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4.2. Domestic Companies
4.2.1. Gisae Mulsan
Gisae Mulsan was the first company to introduce Alpaca 111 to the Korean market in 1999. The workforce of Gisae Mulsan consists of experienced staffs having a background in production for leading fashion companies such as GUCCI, Marks&Spencer’s, etc. The INCA Group owns 40% of the company while employees have a 60% share of ownership. As a joint venture with a strong partnership with the INCA Group, Gisae Mulsan has a competitive edge in terms of supplying products at a competitive price. Gisae Mulsan also has a very strong relationship with textile suppliers in South Africa and China, enabling them to secure and supply products of highest quality in a timely manner.
4.2.2. Youngone Corporation
Established in June 1974, Youngone Corporation specialise in production of outdoor and sports products for overseas market. Youngone has a high reputation for its propriety Construction Without Sewing technology. It has five production bases in Chittagong, Dhaka, Qingdao, Namdinh and San Salvadore and 9 overseas offices including Seattle design studio/logistics office, New Hampshire office on American continent, Shanghai, Hong Kong, Bangkok, Hanoi and Chennai office on Asian continent, Bern office and Vicenza office in Europe are in operation. As of December 2007, number of employees in Korean headquarter is 395 and total number of overseas employees are 52,630.
Established in June 1974, Youngone Corporation specialises in the production of outdoor and sports products for the overseas market. Youngone has a high reputation for its propriety ”Construction Without Sewing” (CWS) technology. It has five production bases: Chittagong, Dhaka, Qingdao, Namdinh and San Salvadore. In addition, there are nine overseas offices: Seattle design studio/logistics office; New Hampshire, USA; Shanghai; Hong Kong; Bangkok; Hanoi; the Chennai office on the Asian continent,; and European offices in Bern and Vicenza. As of December 2007, the number of employees in the Korean headquarters was 395 and the total number of overseas employees was 52,630.
Youngone’s brand philosophy is enhancing the outdoor life of their customers through the provision of top quality outdoor products at reasonable price. Its brand slogan is ’Good Life, Good Feeling and Everlasting Challenge’. It produces a wide range of products made with various specialty fabrics such as Gore-Tex, and uses the CWS technology. The products made with the CWS Heat Welding method do not have sewing needle holes through which wind and water can penetrate. Products
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made using CWS Heat Welding method are also lighter because they do not require separate water resistant material layers. Youngone also has another propriety technology called CWS Dura Welding method, which improves the abrasion resistance by penetrating adhesive in fibres, leading to superb durability compared to products that are produced using conventional coating method.
Youngone’s products include Alpine & Extreme (winter trekking, Himalaya, Antarctic and other extreme regions) wear, Mountain Sports (high mountain climbing, intermediate mountain trekking wear with moisture absorption and fast drying characteristics), casual trekking (day trekking wears with moisture absorption, fast drying and free stretch qualities).
5. Agenda and Policies 5.1. Fostering the expert workforce for the alpaca fibre industry
Although the market for low and middle-priced clothing in developed countries has become saturated, the market for fashion ware is expanding both in diversity and volume. For long-term success, it is necessary to encourage fashion design specialists and support companies that produce original fashionable garments with their own brands. To do this, they must develop an expert workforce in pattern making, marketing, merchandising, and fashion coordination in order to capitalise on this growing fashion market. The following represents a series of proposed actions that would be required to maintain and grow Peru’s position in the marketplace.
(1) The establishment of a research and training centre (RTC)
This would commence with the identification of an academic-industrial research institute, having a well-established capacity for research and education. The knowledge and research capacity of the institution would then be augmented to serve as a specialised alpaca industry-related RTC. The RTC would then serve as the platform from which an expert workforce, specialised in alpaca fibre technology development and applications would be developed. Once the RTC becomes fully specialised in the advancement of the industry, it would benefit from ongoing government support as a specialised independent institute. The RTC would also become the hub for an innovation cluster.
(2) Establish collaboration with domestic and overseas research institutes
This will require the planning and implementation of promotional programs to
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reach domestic and overseas institutes. National competitions for designers and pattern makers would be held on a regular basis to promote expert development and the identification of local talent. This would be followed by the provision of overseas training opportunities (short and long-term) for talented local experts.
(3) Identify and recruit overseas experts
In order to strengthen the competitiveness of Peru’s alpaca fibre industry, it will be important to monitor new trends in the emerging and niche target markets. It is therefore recommend that a campaign to hire retirees from overseas ”imitation” product manufacturers be implemented. Since there are often many barriers to hiring overseas experts who have active careers in the industry, it is more realistic to target retired experts. These experts would provide the knowledge required for product differentiation and quality improvement--the key to maintaining competitiveness of alpaca fibre industry.
(4) Establish buyer networks
The building of a buyer network for each target country is critical. This would require working with the newly-hired overseas workforce to: (a) strengthen technology know-how, technical expertise, and develop the information database of target markets and business networks; (b) build collaborative relationships with the fast-growing fashion industries in the BRIC countries (Brazil, Russia, India and China), and textile manufacturers in South America and Eastern European countries.
(5) Legal framework
It is proposed that the establishment of the necessary legal framework and policies for the hiring of overseas experts be developed and implemented early on.
5.2. Fostering the expert workforce for the alpaca fibre industry
An industry cluster refers to an area with a high concentration of inter-related businesses, which generate high economic values through active exchanges of information and resources. Based on the project data analysis, creating an alpaca industry cluster in the Cusco region is therefore recommend for developing a regional economy and strengthening competitiveness by stimulating innovation within the cluster. An effective industry cluster is not formed naturally but planned, established and nurtured with guidance of capable facilitators and
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funding support. More specifically, the effective creation and facilitation of an industry cluster requires close collaboration and networking of experts including vision providers, system organisers, specialised service and knowledge suppliers and more.
Establishing a strong network among regional government, universities and R&D centres, relocating some of the organisations to a specific physical area if possible, is the first step in creating an alpaca industry cluster. It will then be necessary to establish training centres and training courses in order nurture local talents and make the cluster a place where good jobs for a trained workforce exists. It is also important to implement policies and systems that allow overseas industry expert to join in the cluster as technical advisors for businesses and or trainers. Creating a dedicated alpaca industry research institute with internal capacity to foster the alpaca industry R&D experts should also be considered as a next step. Although government funding would be necessary to create such an institute, it should eventually become an independent institute, albeit with some government support.
An industry cluster does not need to be limited to a geographical region or an industry sector such as fibre production. For example, a collaborated marketing of the fashion industry of Lima and alpaca industry of Cusco could provide significant benefits to each other.
5.3. Development of original brands
The development of original brands for individual companies or SME groups is important for sustaining an increase in export volume. It is therefore recommended that:
(1) The selection of promising mid-sized companies be undertaken and that they be fostered as flagship companies with original brands, to promote their growth and increase the overall reputation of Peruvian products. Additionally, it is recommended that a selection of promising small enterprises be made and that plans be implemented to foster their growth to mid-sized companies, to help them benefit from both the scale and copy of the economy; and (2) Strengthen marketing capacity: It is recommended that the establishment of an independent local sales network in target overseas markets be undertaken. This is important in order to more effectively market products developed and sold under common brand names. An aggressive marketing strategy for directly approaching overseas consumers is a key to increasing sales.
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5.4. Promotion of Inter-stream collaboration projects
The budgetary allocation of a technology development fund will be extremely important. The fund would support projects designed for promoting the development of new technologies and product differentiation for textile-fashion inter-stream consortiums that collaborate on planning, technology development, production and marketing. A stream is a consortium which consists of entities of three or more different sectors including business, research institutes and universities (The average funding support by the Korean government per consortium is approximately KRW2 billion over two years).
It is essential to foster the growth of select medium-size companies as flagship companies, having their own brands in order to increase their market value and build the overall reputation of Peruvian products. In addition, set long-term goal of building the reputation of the ”Peru Collection.”
5.5. Financial support for replacement of over-aged facilities
It is proposed that financial support should be provided for the replacement of outdated facilities operated by small and medium-size alpaca fibre businesses, as well as the implementation of advanced management systems as there is a significant potential to boost the alpaca industry.
According to the senior experts of the Korea Wool Association, the cost of new facilities, which can produce wool tops and ultimately turn it into yarns, through wool top processing (worsted yarn) and carbonate processing (carded wool) is estimated at KRW2 million per one spindle. It should be noted that a typical yarn factory has 7,000 spindles each.
In Korea, financial support for facility renewals is managed through the Small and Medium Business Corporation as the ”New Growth Foundation Fund.” SMEs must have more than five years of operational history to be eligible for funding. The applicable usage of the fund covers purchases of manufacturing facilities and testing equipment, installation of facilities, assessment of operation stability, improvement of the operation environment and support facilities of workers. The maximum term of a loan is eight years with up to three years grace period on loan principal payments.
The Regional Development Plans for the Southern Economic Corridor in Peru:Linking the Coffee, Alpaca, and Auto-Part Industries with the World Chapter 3
Regional Specialty Industry Development Strategy: Coffee
Summary 1. The World’s Coffee Industry 2. Peruvian Coffee: Making Its Way to the Global Market 3. The Challenges for Peruvian Coffee 4. Policy Recommendations 페루영문 2012.6.21 5:44 PM 페이지80 mac001 PDF-IN 2540DPI 100LPI
Regional Specialty Industry Development Strategy: Coffee
Sunwoo Kim (Korea Small Business Institute)
Summary
Coffee is the second most internationally traded natural product in the world, following crude oil. Brazil and Vietnam are currently the largest producers and exporters of coffee. Colombia, Indonesia, Ethiopia and Mexico accounts for 70% of coffee production in the world, with 50% of coffee produced on the American continent.
The total coffee production in 2010/11 was estimated as 133.6 million bags, a 7.6% increase from 124.2 million bags in 2009/10. Brazil and Vietnam represent the first and second largest exporters. Peru is the ninth largest exporter.
Although world consumption fell slightly in 2009/10 from 131.7 to 130.2 million bags as a result of the world economic crisis, prospects for a return to growth are promising. The buoyancy in world consumption is supported by the increased domestic consumption of exporting countries and the significant growth of consumption in emerging economies.
Coffee is a leading agricultural export product of Peru along with asparagus. Coffee accounts for almost half of Peru’s agricultural export and 5% of Peru’s total export. Therefore, the coffee industry has a strong significance to the Peruvian economy and society. The total annual Peruvian coffee production was 3,315,000 bags in 2009. In the same year, 250,000 bags were consumed
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domestically.
The Arabica, green in colour and relatively large, is the only type of coffee harvested in Peru. Coffee farms are located in all parts of Peru and qualities vary significantly depending on where it is harvested. The coffee production volume has been increasing steadily and many large and small farms are grouped as one unit, as a result of agricultural reform. Many Arabica species including Otros Suaves, Typica, Bourbon and Catura are farmed. Recently, a growing number of coffee farmers began to grow specialised coffees including organic coffee and ones with stronger aroma and strong sour taste.
Prominent coffee farms are located in mountainous northern and central regions. Piura, Lambayeque, San Martin and Cajamarca are the most prominent coffee harvest areas of the northern region. Huanuco, Junin and Ayacucho are prominent harvest areas in the central region. Harvest from Chanchamayo valley accounts for 40% of total harvest. There are also some well-known coffee harvest areas in the southern part of Peru including Cuzco, Norte and Puno.
Germany and the U.S. are the key markets for Peruvian coffee export. Export to the UK, Italy and Korea also increased significantly between 2009 and 2010. The export proportion of Peruvian is as follows.
Business Strategy for Economies of Scale
Multiple co-operatives of coffee farmers are operating in a region, fiercely competing to secure buyers by lowering price. Creation of regional business corps of coffee farmers’ co-operatives can reduce loss from overheated competition and increase their price negotiation capacity, leading to more reasonable sale prices for coffee farmers. The role of these co-operatives would be to:
(1) Adjust sales volume and timing; (2) Increase direct sales; (3) Negotiate long-term supply contracting; (4) Develop and implement an integrated order and sales platform; and (5) Allocate production quotas under contract, for better coordination of regional production.
To effectively manage the structure, a board of directors with representation from each co-operative will be required. In a case such as this, the number of directors from each co-operative will be aligned with the level of financial contribution made by each. Prior to becoming operational, policies and procedures pertaining to the allocation of profit and cost sharing of expenses, etc., will be needed. In addition
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there will be a need to develop and implement advanced business management practices, and to hire professional business managers that will among other duties, will be tasked with operational accountability.
Proactive implementation of advanced marketing
Quality management for product competitiveness will be a major focus. This will involve the hiring of quality inspectors and the implementation of coffee bean sorting practices. For example, a two-tier quality management system could be used by inspectors who would conduct sampling test of all products and tests of all beans in the sorting process. This would be augmented with a performance-based pay scheme to increase and ensure buy-in and effectiveness in quality management practices. Good practice models have established rules on cross-inspection among co-operatives, with penalties for violation of quality management standards. For example, in Korea, a warning is issued to farmers who ship sub-quality produces. Farmers who received more than five warnings are banned from participating in co-operative activities for two years. In a case of a serious consumer claim, the co-operatives responsible for the claim is penalised with reduced sales quota.
Methods for the Promotion of Regional Product Brands
Initially the focus would be on developing original brands for regions, thus strategically fostering the coffee businesses as drivers of regional economic development. To reach this goal, quality management again will be important. It is critical to maintain the quality of the products sold under the regional brand names as good quality is closely related to strong financial performance. A comprehensive marketing strategy encompassing all areas including CSR management should be created to build regional brands as‘ power’brands.
Furthermore, products need to be tailored for consumer needs. For example, the development of diverse sales packages, various shipping volumes and refinement of packaging design.
Securing diverse sales channels
Provision of a subsidy for international certification of products would be useful for small businesses which already produce high quality products but lack certification, often due to lack of funding and their capacity for the necessary paper work. The subsidy could remove technical barriers for the businesses that have potential to increase export activities. For example, the South Korean government is providing between 40 to 60% funding for up to two certifications per each session,
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per company. The size of the subsidy is dependent on the type of products and size of export volume, and provision of limitation on government funding.
Strengthening relationships with overseas fair trade organisations is another way to enhance the value of the Peruvian coffee industry. For example, the U.K. is spending 20 million pounds in supporting the fair trade movement. The funding is mostly used for the identification of new fair trade partners (producers) and certification of their products. There are also‘ fair trade’cities and villages which collaborate closely with local government officials responsible for fair trade campaigns and management of local fair trade activities. In the UK, the fair trade campaign has led to the establishment of new institutes such as‘ fair trade schools’ and more, leading to creation of jobs. Some citizens are also making money by actively participating in the trade and sales of fair trade products, in addition to campaigning.
To recap, the following measures are recommended to help Peruvian coffee farmers prepare their products go global:
(1) Adjust sales volume and timing; (2) Increase direct sales; (3) Negotiate long-term supply contracting; (4) Develop and implement an integrated order and sales platform; (5) Allocate production quotas under contract, for better co-ordination of regional production; (6) Hire quality inspectors and implement coffee bean sorting practices; (7) Extend the government support to renew coffee plantations specifically for the problem of over-farmed plantations; (8) Develop original brands for regions, thus strategically fostering the coffee businesses as drivers of regional economic development; (9) Provide a subsidy for international certification of products micro and small businesses which already produce high quality products but lack certification often due to lack of funding and their capacity for the necessary paper work; (10) Strengthen relationship with overseas fair trade organisations in order to enhance the value of the Peruvian coffee industry; and (11) Provide incentives for the labour employed in the coffee sector so that it can ameliorate the competition for labour with the coca industry.
1. The World’s Coffee Industry
Coffee is the second most internationally traded natural product in the world, following crude oil. Brazil and Vietnam are currently the largest producers and
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exporters of coffee. Colombia, Indonesia, Ethiopia and Mexico account for 70% of the coffee production in the world. Approximately 50% of coffee is produced on the American continent.18)
1.1. World coffee market: Price
In 2009/10 coffee prices, particularly in the case of Arabicas, rose sharply, with the annual average of the International Coffee Organisation (ICO) Composite Indicator Price at US￠134.41 per pound in comparison with US￠111.80 per pound in 2008/09, representing an increase of 20.2% despite the fall in Robusta prices (Table 3-1). This average for 2009/10 is the highest recorded since the crop year 1994/95, when it was US ￠152.19 per pound. The rise in prices was driven by concerns regarding supplies of Arabica from a number of exporting countries, that were affected by lower production.
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Figure 3-1 captures the price change of four types of coffee during the period 1994-2010 presented in Table 3-1 above. As seen in the figure, the price of coffee has rebounded from the year 2002/03 and has been in the increasing trend, except Robustas.
Trend of the Price Change of Coffee, 1994-2010
Note: 1994/95-2009/10 average price; Source: ICO Annual Review 2009/10
1.2. Market fundamentals
Improved market fundamentals in 2009 and 2010 contributed significantly to maintaining the international coffee prices. The world supply situation has been affected by a number of difficulties, including the low level of world stocks, lower production in some Central American countries and Colombia, and climatic problems in several countries. In addition, high costs of fertilisers and other production factors have contributed to a decline in the use of these inputs in several producing countries. They have not only affected the application of good farming practices but also resulted in the resistance of coffee trees to certain diseases. During this period, the buoyancy of world consumption continued to support high prices.
Production in crop year 2009/10 fell by 6.5%, totalling 119.8 million bags compared to 128.2 million bags in the previous crop year (Table 3-1; Figure 3-2). Production was lower not only in Brazil, where crop year 2009/10 was a low production year in the biennial cycle of Arabica production, but also in a number of other countries, particularly in Africa, Mexico and Central America, and in Colombia. Colombian production has not managed to recover its normal levels since the fall
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recorded in 2008/09 mainly on account of climatic problems and the outbreak of disease in several production areas. Total Arabica production has fallen by 10.6% and Robusta production is virtually unchanged, contributing to the tight supply situation in coffee year 2009/10, given that levels of opening stocks in producing countries are also low.
World Production of Coffee, 2006-09
Source: ICO Annual Review 2009/10
World Production of Coffee by Region, 2006/07-2009/10
Note: Crop year 2006-09; Source: ICO Annual Review 2009/10
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World Production of Coffee by Type, 2006-2009
Note: Crop year 2006-2009; Source: ICO Annual Review 2009/10
As shown in Figure 3-5, total coffee production in South America was down by 11.3% from 60.3 million bags in 2008/09 to 53.5 million bags in 2009/10. This sharp fall is attributable to a further reduction in Colombian production during crop year 2009/10 and to the biennial cycle of low Arabica production in Brazil. The region’s share of world production fell to 44.7% compared to 47.1% in 2008/09.
Total coffee production in 2010/11 is estimated as 133.6 million bags, a 7.6% increase from 124.2 million bags in 2009/10. Brazil is the largest exporter of coffee, following only by Vietnam. Peru is the ninth largest exporter.
Coffee Production in South America
Source: ICO Annual Review 2009/10
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Production Volume of Top Coffee Exporting Countries 2007 2008 2009 2010 Total World 119,974 128,592 124,232 133,631 Africa 15,939 15,950 15,828 17,407 Ethiopia 5,967 4,949 6,931 7,450 Asia&Oceania 31,254 35,025 38,049 35,295 Vietnam 16,467 18,500 18,200 18,500 Mexico & Central America 18,331 17,308 16,855 17,954 Honduras 3,842 3,450 3,575 4,290 Mexico 4,150 4,651 4,200 4,100 South America 54,423 60,309 53,500 62,975 Brazil 36,064 45,992 39,470 48,095 Peru 3,063 3,872 3,286 3,979 Notes: Unit in thousand bags; Source: Monthly Coffee Market Report, September 2011, ICO
1.3. World coffee market: Export
The slight increases in exports by the Other Milds (+3.1%) and the Brazilian Naturals (+0.6%) groups were offset by a sharp drop in exports by the Colombian Milds which fell 18% from 10 million bags in 2008/09 to 8.2 million bags in 2009/10 (Table 3-3). Robustas exports fell 7.7% from 35.2 million bags in 2008/09 to 32.5 million bags in 2009/10.
Despite the fall in the volume of exports in coffee year 2009/10 to 94 million bags from 97.6 million bags in 2008/09, the total value for coffee year 2009/10 is estimated at US$14.3 billion compared with US$13.6 billion in 2008/09, an increase of just under 5% (Table 3-4).
Volume of Exports, 2006/07-2009/10 % change from 2006/07 2007/08 2008/09 2009/10 2008/09 to 2009/10 Colombian Milds 12.51 12.71 10.02 8.22 -18.0 Other Milds 21.46 22.16 21.38 22.05 3.1 Brazilian Naturals 29.80 27.26 31.03 31.22 0.6 Robustas 33.94 33.62 35.21 32.50 -7.7 Total 97.72 95.75 97.63 94.00 -3.7 Arabicas 63.78 62.13 62.43 61.50 -1.5 Robustas 33.94 33.62 35.21 32.50 -7.7 Total 97.72 95.75 97.63 94.00 -3.7 Note: Unit in million bags, Coffee year 2006/07-2009/10; Source: ICO Annual Review 2009/10
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Value of Exports, 2006/07-2009/10 % change from 2006/07 2007/08 2008/09 2009/10 2008/09 to 2009/10 Colombian Milds 2.02 2.43 2.00 2.16 8.1 Other Milds 3.20 3.91 3.61 3.96 9.8 Brazilian Naturals 4.03 4.44 4.51 5.13 13.6 Robustas 3.25 4.20 3.52 3.05 -13.4 Total 12.49 14.98 13.64 14.30 4.8 Arabicas 9.24 10.78 10.12 11.25 11.2 Robustas 3.25 4.20 3.52 3.05 -13.4 Total 12.49 14.98 13.64 14.30 4.8 Note: Unit in US$ billion bags, Coffee year 2006/07-2009/10; Source: ICO Annual Review 2009/10
Volume and Value of Exports: Coffee Years 2006/07-2009/10
Note: Coffee year 2006/07-2009/1; Source: ICO Annual Review 2009/10
Value of Exports by Type of Coffee
Note: Coffee year 2006/07-2009/10; Source: ICO Annual Review 2009/10
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1.4. Consumption
Although world consumption fell slightly in 2009/10 from 131.7 to 130.2 million bags as a result of the world economic crisis, prospects for a return to growth are promising. The buoyancy in world consumption is supported by the increased domestic consumption of exporting countries and the significant growth of consumption in emerging economies.
World Consumption of Coffee
Note: Coffee year 2006/07-2009/10; Source: ICO Annual Review 2009/10
Top Coffee Consuming Nations, Based on 2008 data Consumption(kg) Consumption(kg) Rank Country per person Rank Country per person 1 Finland 12.0 8 Belgium 6.8 2 Norway 9.9 8 Luxembourg 6.8 3 Iceland 9.0 8 Aruba 6.8 4 Denmark 8.7 9 Canada 6.5 5 Netherlands 8.4 10 Germany 6.4 6 Sweden 8.2 …… … 7 Swiss 7.9 57 South Korea 1.8 Source: Arranged from the data presented at http://thecoffeea.blog.me/50138661996 (Access date: November 20, 2011)
Although Korea ranks about 57th in terms of the coffee consumption, the recent increase in coffee consumption is rather astounding. Further details about the Korean coffee market will be discussed in the alter section.
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2. Peruvian Coffee: Making Its Way to the Global Market 2.1. Background
Coffee is a leading agricultural export product of Peru along with Aspargus. Coffee accounts for almost half of Peru’s agricultural export and 5% of total exports. As such, the coffee industry has a strong significance to the Peruvian economy and society. The total annual Peruvian coffee production was 3,315,000 bags in 2009. In that same year, 250,000 bags were consumed domestically.
Coffee was first introduced to Lima in 1791. The exporting of Peruvian coffee to countries including Germany, Chile and the U.K. from Chanchamayo, Moyobamba, Ja′e, Hu′auco and Cusco, began as early as the mid 18th century. Since 1850, European immigrants introduced many new species including erythroxylum coca, tobacco, cacao, sugarcane and coffee to Chanchamayo valley areas. Investment from the U.K. led to development of large coffee farms in the Chanchamayo valley areas. Peruvian organic coffee has earned a strong international reputation since the late 20th century as a result of continuous improvement of quality. For example, the Peruvian coffee was recognised as a high quality coffee by the recent 35th Global Coffee Awards.
Most Peruvian coffee is harvested in deep valleys and in the eastern part of the Andes. It is harvested in 388 farms located in Peruvian jungles. Over 150,000 people are employed in the farms having a total area of 330,000 hectares. Peru is the top exporter of organic coffee and is the sixth largest exporter of coffee. Coffee accounts for 24% of agricultural export which accounts for 7% of VBP, which makes it the top fourth in the agricultural industry.19)
Prominent coffee farms are located in mountainous northern region and the central region. Piura, Lambayaque, San Martin and Cajamarca are the most prominent coffee harvest areas of the northern region. Huanuco, Junin and Ayacucho are prominent harvest areas in central region. Harvest from Chanchamayo valley accounts for 40% of the total harvest. There are also some well-known coffee harvest areas in the southern part of Peru including Cuzco, Norte and Puno.
Organic coffee farming is increasing in Peru with certification of the California Crop Improvement Association (CCIA) and also because it can be sold at a price 10 to 20% higher than non-organic produce. High quality coffee is produced on
19) VBP, Gross Value of Production (GVP) in English, is an acronym for valor bruto de la produccion.′
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higher altitude areas of more than 1,000 meters. Peru is employing two international standards on coffee classification, the NTP 209.027-2001 and NTP 209.311-200.20) The new harvest is classified using moisture content, size, purity and taste. However, the Peruvian Standard NTP is employed voluntarily by Peruvian exporters and no national agency would control or verify the compliance of the products to this standard.
2.2. Types of Peruvian coffee
Peruvian coffee is harvested in the high land of 800-1,500 meter altitude having a 700-1,500 annual rain fall, and average temperatures of 18-26 degrees. The Arabica, green in colour and relatively large, is the only type of coffee harvested in Peru. Coffee farms are located in all parts of Peru and qualities vary significantly depending on where it is harvested. Coffee production volume has been increasing steadily and many large farms and small farms are grouped as one unit, as a result of agricultural reform. Many Arabica species including Otros Suaves, Typica, Bourbon and Catura are farmed. Recently, a growing number of coffee farmers began to grow specialised coffees including organic coffee and ones with stronger aroma and strong sour taste.
Such specialised coffee is harvested at a higher altitude (between 1,400 and 1,800 meters). Piura, Cajamarca regions, Junin, Pasco, Huanuco, Ucayali areas in the Amazon are prominent coffee cultivation areas of he northern region where 43% of Peruvian coffee is produced. Apurimac, Acacucho, Cusco and Puno are key coffee cultivation regions in southern Peru, where 23% of coffee is produced. The total coffee cultivation area spans over approximately 330,000 hectares and 85% of coffee is produced on farms smaller than five hectares. Peruvian coffee is exported through Callao, Mollendo and Matarani ports between May and October.
20) NTP, PTS (Peruvian Technical Standard) in English, is an abbreviation of Norma Tecnica' Nacional. The technical standards define the moisture content, size, purity and taste of coffee, etc. For example, the Peruvian standards for coffee are as follows: High Grown: Coffee grown above 1,200 meters; Low Grown: Coffee grown below 1,200 meters; Grade 1: 15 defects max; 10-12% moisture; minimum 50% above screen 15maximum 5% bellow screen 14, cup which is free from all faults and taints with a distinguished cup profile; Grade 2: 23 defects max; 10-12.5% moisture; minimum 50% above screen 15: Maximum 5% bellow screen 14, Cup which is free from all faults and taints with a good Cup profile. Grade 3: 30 defects max; 10-12.5% moisture; minimum 50% above screen 15: maximum 5% bellow screen 14, Cup which is free from all faults with an average Cup profile. Grade 4: 35 defects max; 13% moisture; minimum 50% above screen 15: maximum 5% bellow screen 14, Cup which is free from all faults. Grade 5: 40 defects max; 13% moisture; no screen size limits. Export Bag Size: 69 net kilogrammes
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2.3. Export of the Peruvian coffee
Specialty coffee is traded at a higher price in the overseas market. Despite relatively low national GDP per capita, there is a significant demand for high quality coffee in Peru.
This is positive for people like Luis Navarro of Camara Peruana del Cafe,′ owner of a local coffee chain, because the existence of demand for high quality coffee presents opportunities for expansion. This is why ”Starbucks has 25 stores in Lima, this means we are selling more specialty coffees in Lima compared to Santiago and Bogota”21) and emphasised existence of demand and thus opportunity to expand.
Castillo of JNC also emphasised that there are 12 to 15 specialty coffee chains in Peru because of Peruvians’ appetite for specialty coffees. Some of the local chains already have global branches as well. The Altomayo is a more recently established domestic coffee shop chain. And traditional coffee shops including Central de Cooperativas Agrarias Cafetaleras de La Convencion′ y Lares are preparing to launch in Miraflores. Moreover, there are at least fifteen types of specialty coffee brands sold in large super markets.
Growth of the Export of the Peruvian Coffee, 2002-08
Source: Peru’s Exportable Goods, Principal Non-Traditional Products with Potential in the Swiss Market
2.3.1. Non-decaffeinated raw coffee beans
Germany and the U.S. are the key export markets for Peruvian raw coffee beans.
21) Luis Navarro (2011) Personal interview, Camara Peruana del Cafe,′ 15 July 2011.
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Export to the U.K., Italy and Korea also increased significantly between 2009 and 2010. The export distribution of Peruvian is as follows: about 16% are exported to Belgium; 4% to Sweden; and 3% respectively to Korea and Italy (Figure 3-13). As presented in Table 3-5, the Peruvian export of coffee beans increased to some 89% in 2010 compared to the previous year.
Main Peruvian Export Destinations for Coffee Beans, 2008
Source: Peru’s Exportable Goods, Principal Non-Traditional Products with Potential in the Swiss Market
Key Export Destinations of Peruvian Coffee Beans %Var %Part. FOB 2010 2010-09 2010 (US$ million) Germany 60 35 314,035.31 US 49 21 190,313.53 Belgium 28 11 96,685.85 Sweden 62 4 37,874.04 Rep. of Korea 89 4 35,444.68 Colombia -16 4 32,581.56 Canada 122 3 29,335.86 Italy 92 3 26,502.14 UK 103 2 21,067.20 Others (40) - 12 102,755.90 Source: Peru’s Exportable Goods, Principal Non-Traditional Products with Potential in the Swiss Market
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Perales Huancaruna, S.A.C. was the top exporter of Peruvian coffee beans and accounted for 23% of export, followed by Comercio & CIA (13%) and Compania Internacional del Cafe′ (10%) respectively, as presented in Table 3-6.
Top Peruvian Coffee Bean Exporters %Var %Part. Name of Company 2010-2009 2010 Perales Huancaruna, S.A.C. 1 23 Comerico &CIA, S.A.C. 10 13 Compania Internacional del Cafe210′ Outspan Peru, S.A.C. -18 6 Central de Cooperativas COCLA Ltd. -35 5 Cafetalera Amazonica, S.A.C. -27 3 Loius Dreyfus Peru, S.A.C. -43 3 Corporacion de Productores Cafe′ Peru,′ S.A.C. -9 3 Cooperativa Agraria Ceferalera la Florid 101 3 Other firms (99) - 22 Source: Peru’s Exportable Goods, Principal Non-Traditional Products with Potential in the Swiss Market
2.3.2. Non-decaffeinated roasted coffee beans
There were only two coffee exporters in 2009 as far as roasted beans are concerned. However, they increased to eight companies in 2010. Cafe′ Inca del Peru,′ S.A.C. is the largest exporter of roasted non-decaffeinated coffee beans, which accounted for 67% of exports.
Top Peruvian Coffee Exporters (Roasted beans) %Var %Part. Name of Company 2010-2009 2010 Cafe′ Inca del Peru,′ S.A.C. - 67 Cafe′ Britt Peru,′ S.A.C. 51 23 Empresa Socio Sostenible Comercialisador - 4 Viva Latin, S.A.C. - 3 Cafe′ Risso Peru, S.A.C. -56 2 Cooperativa Agraria Cafetalera Pangoalt - 1 Sasil Export, S.A.C - 0 Hyayta Castro Shirley - 0 Machu Picchu Trading, S.A.C - 0 Others - 0 Source: Peru’s Exportable Goods, Principal Non-Traditional Products with Potential in the Swiss Market
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Most of roasted non-decaffeinated coffee was exported to Chile, where there is a growing demand. For example, the demand has increased by 262% between 2009 and 2010, while demand for same type of coffee bean has decreased by 73% in the U.S.
3. The Challenges for Peruvian Coffee 3.1. Major challenges to a solid and competitive business model
Harvested in the ideal environment of Peru, some place Peruvian coffee above Brazilian and Columbian coffee in terms of taste. Despite this fact, Peruvian coffee does not have a high visibility nor the reputation it deserves. This can be attributed to the lack of branding and marketing effort.
There seem to be other obstacles that Peruvian coffee farmers must overcome in order to establish a solid and competitive business model. Old coffee farms are one of the key issues. According to the head of Cooperativa Agraria Cafetalera Calle Rio Apurimac, there are many coffee farms that are as old as 30 to 40 years and produce low quality coffee beans. Most coffee farms only operate for up to 20 years in order to maintain quality. The Ministry of Agriculture provided a subsidy of 15 million soles to farmers to support the maintenance and renovation of their farms. The farmers hope to receive the subsidy again this year. According to Castillo, this is likely to happen, although no decision has been made on the continuance of this experimental policy as yet.
Competition for labour between the coca industry and the coffee industry is another important issue that the coffee industry must resolve. Currently, members of coffee farming co-operatives are paid 20 soles (approximately US$8.00) per day while members of coca farming co-operatives are paid 50 soles (US$18.00) per day.
As such, it can be summarised that the major challenges that the coffee plantations, as well as the coffee industry as a whole, face are:
Peruvian coffee does not have a high visibility nor the reputation in the global market in spite of the fact that the quality is often accepted above that of Brazilian or Colombian. This can be attributable to the lack of branding and marketing effort; Over-farmed coffee plantations; and Competition for labour with the coca industry.
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3.2. The Alternative Development Plan
The coffee industry is currently regarded as an important part of a national initiative titled the ”Alternative Development Plan” for fighting the narcotics industry. Coffee farms are located in rural parts of jungles and high mountainous areas of the Upper Andes, which overlap with coca farms. It also should be noted that Peruvian coffee farms are located in ecologically sensitive areas, some of which have an ideal climate for the cultivation of high quality coffee beans. There are many development initiatives led by both the Peruvian government and international NGOs in tropical regions of Peru.
In the 20th century, many small scale co-operatives launched a labour movement to increase wages for coffee farm workers, which led to collaboration with alternative trade organisations and organic farming organisations. The co-operatives began to evolve quickly as they began to work with organisations including Twin Trading and Equal Exchange. Peru is soon to become one of the leading organic coffee producing nations, the second largest following Mexico and a key player in alternative trade partners.
The boom of the organic coffee industry brought many benefits to Peruvian coffee farmers. For instance, it became possible to improve profitability by selling their product at specialty markets. This led to the strengthening of co-operatives and trust of its members, leading to the formation of their own alternative trade organisation for more direct trading. The co-operatives also conducted training programs for improving quality, paperwork for international trading and organic farming certification and other social development projects, using the funds raised by their members.
Such a positive experience has instilled a sense of empowerment in coffee farmers. Sense of ownership and community was also increased through the experience, thereby strengthening collaborative action and movement of the co- operatives.
The farmer’s co-operative movement began in the 1960s with agricultural land reform. Before the movement, third party traders took an extremely high percentage of profit from coffee farming through trust management practices, leading to very low wages for the farmers. The farmers launched seven co-operatives in order to protect their profits from price manipulation by coffee traders at the La Convencion' y Lares and began to develop independent trade routes. On 26th July, 1976, the first coffee farmer’s co-operative, La Convenci'on y Lares, Ltd. #218, was formally launched. The co-operative was renamed as Coffee Co-operative, Ltd #218 on the 3rd September 1993. It is commonly referred as COCLA.
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In its early days, the co-operative provided services mainly for housing, raw coffee bean processing, insurance and so on. The scope of its service was expanded to coffee bean sales, financial services, business management training, farm expansion, co-operative development support and so on. Today, COCLA is leading changes in the Peruvian coffee industry and co-operative movement, with growing influence on society, economics and technologies. As of 2008, over 8,500 small coffee farms and 23 regional organisations of Ayachucho, Puno and Cajamarca are collaborating as members and partners of COCLA. The COCLA headquarter is located in Quillabamba, which is located on the east of ancient Inca city, the Machu Picchu.
3.3. The Korean coffee import and Peruvian coffee
Korea is not a coffee producing country. Although there are small plantations in the mountainous area in Gangwon Province, they are rather experimental and inconsequential. As such, the coffee industry in Korea relies on the imports for green beans and roasted beans. The coffee market in Korea has been showing a significant growth in the last 10 years. The quantity of imports of coffee was approximately 79,526 M/T in 2001 and it increased by about 160% to 123,029 M/T in 2011 (Table 3-8). The increase of the dollar value of the imports in the same period was significant as it was US$79,748,000 in 2001 and US$123,029,000 in 2011, an increase of approximately 738% (Table 3-9). This significant increase in the quantity of coffee imported is largely attributable to the increase in the number of coffee chain stores as well as the augmented consumer demand for processed coffee (e.g. instant coffee, vending machines, etc.).22)
Coffee was mainly imported from Vietnam (38%), Brazil (15%), Colombia (11%) and the imports from these three countries accounted for some 64% of the total import. In the period 2001-2011, Korea imported some 60,387 M/T of coffee from Peru, which accounted for 5.8% of the total quantity imported; value-wise, it was US$177,731,000, accounting for some 6.5% of the total value of the imports.
22) KFDA (2012)
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2008 2009 2010 2011 Grand Total Total 321,572 301,583 396,385 668,336 2,625,773 (100) Brazil 103,197 64,255 53,680 88,745 512,835 (19.5) Vietnam 49,558 47,819 69,132 133,632 452,601 (17.2) Colombia 50,383 69,565 98,077 391,594 391,594 (14.9) Honduras 28,420 40,629 63,286 248,780 248,780 (9.5) USA 21,272 26,629 32,748 186,210 186,210 (7.1) Peru 17,729 34,522 62,700 177,731 177,731 (6.8) Indonesia 9,704 10,772 8,421 67,616 67,616 (2.6) Italy 8,569 10,103 14,366 58,943 58,943 (2.2) Japan 14,560 6,958 7,109 54,791 54,791 (2.1) Swiss 6,949 9,977 24,010 50,270 50,270 (1.9) Source: Korea Food and Drug Administration, KFDA (2012) ”Report Bulletin,” Department of Food Safety, 16 March 2012.
The type of beans that Korea imports are largely raw beans, accounting for some 88% of the total import and the rest as roasted beans and processed coffee (e.g. instant coffee). Coffee beans are mostly imported from Latin America and Southeast Asia; whereas the roasted beans and processed coffee are generally imported from non-coffee producing nations such as the U.S., Italy, etc.23
Analyses of the data presented in Table 3-8 and 3-9 revealed some interesting traits with regard to the Korean coffee market; the average price of the Peruvian coffee per metric tonnes imported by Korea in the period 2001-2011 was by far higher than that of Southeast Asia’s, while it was somewhat lower than that of
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Brazilian or Colombian coffee. Although many variables such as the quality and type of coffee, whether it was Arabica, Robusta, or other kinds, has to be taken into consideration, one can conclude, based on the analysis of the average price of imports of coffee, that Peruvian coffee is perceived as good as the Brazilian and Colombian in the Korean market in terms of quality. This gives a significant and important implication as to the positioning of Peruvian coffee in the Korean market when it attempts to increase the visibility through, for instance, a brand promotion.
3.3.1. The Case of Arumdaun (Beautiful) Store
Arumdaun (Beautiful) coffee is a fair trade coffee brand of ”Beautiful Store,” a non-profit organisation that specialise in sales of donated goods and fair trade products. Key fair trade coffee products include ”Gift of Himalaya (Vietnam),” ”Gift of Andes (Peru)” and ”Gift of Kilimanjaro (Ethiopia).” The Beautiful Store also offers a black tea product named“ Kanchenjunga black tea (Nepal).”
History of Fair Trade Business of the Beautiful Store 2002 Import and sales of handcrafted goods, for poverty alleviation 2006 Launched environmentally friendly, fair trade coffee 2007 Launched‘ Developing country producer support program’ Opened the first‘ Beautiful Cafe′’, for creating jobs for 2008 under-privileged citizens
Source: Beautiful Coffee (2011)
The Beautiful Store observes the following fair trade principles:
Set purchasing minimum price floor for raw coffee beans which is observed regardless of the fluctuation in coffee bean price; Establish direct trading relationships in order to protect producers from unfair trade practice by middle players; Provide coffee product secured through fair trade at a fair price to Korean consumers; Ensure all coffee sold is produced using environmentally friendly organic farming methods, without use of pesticide and chemical fertilisers; and Provide marketing support to improve quality of product and create a market based on sustainable consumption.
Cooperative Agraria indistrial Naranjillo Ltda produces and supplies coffee and cocoa to the Beautiful Store, which is sold as ”Gift of Andes.” The Naranjillo co-
23) Ibid.
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operative was established in 1964 with the support of local farmers, the UNDP, and Jeru Co-operative Bank. It has built the capacity of its members and became an advanced organisation that produces organic coffee and cacao for export markets. Its members are located in the central Peru jungle areas of Huanuco, San Martin and Ucayali at altitudes between 1,200 and 1,800 meters. The Beautiful Store began purchasing produce from the co-operative in 2009.
Amount of Peruvian coffee imported by Beautiful Store Seller 2006 2007 2008 2009 2010 Total Raw Coffee COCLA 0 8 19 19 12 58 Bean Naranjillo 0 0 0 0 2 2 Source: Beautiful Coffee
Cooperativa Agraria Indistrial Naranjillo Ltda was established on 20th December 1964 by thirty two founding members who wanted to sell their produce at a fair price, bypassing traders who were undercutting prices. Since 1974, members of the co-operatives began work to establish processing plants to increase the value of their products, which became materialised in 1985. Currently, the co-operative has over 4,000 members operating in Huanuco, San Martin and Ucayali including 91 staffs who work at the co-operative office. The main products are cacao (raw bean, peel, mass, powder, butter, Couverture) and coffee beans. It currently has two cacao and coffee processing plants in Tingo Maria. The Beautiful Coffee signed a contract with the co-operative on July 2009 and made its first import in November 2009. Main import items are 55% and 75% courverture, cacao powder and coffee beans. The coffee bean is washed Arabica Grade 1 rated with organic and FLO certification. Most of the produce is cultivated on farms located on 1,200-1,800 meter altitude and harvested between March and May each year. The annual harvest of coffee bean is 2,000M/T and 9,000M/T of cacao bean is harvested. The Beautiful Store is also importing cacao and sugar, with organic and FLO certification. The harvested coffee bean is delivered to Korea between May and July, which is processed and sold as ”Gift of Andes.”
Durae Consumer Co-operative in Korea is also importing Peruvian coffee. It is also importing sugar and olive oil through direct trading with local co- operatives. The COCLA organisations of Quilabamba, Cusco has 23 co-operatives made up of 8,500 coffee farmers. It is deemed as one of the most successful co- operatives with internal capacity to process and sell coffee beans. The coffee beans supplied to APNet is produced by sub-co-operatives of Jose Olaya and Aquilayo.
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4. Policy Recommendations 4.1. Business Strategy for Economies of Scale
Multiple co-operatives of coffee farmers are operating in a region, fiercely competing to secure buyers by lowering price. Creation of regional business corps of coffee farmers’ co-operatives can reduce loss from overheated competition and increase their price negotiation capacity, leading to more reasonable sale prices for coffee farmers. The role of these co-operatives would be to:
Adjust sales volume and timing; Increase direct sales, Negotiate long-term supply contracting Develop and implement an integrated order and sales platform; Allocate production quotas under contract, for better coordination of regional production.
To effectively manage the structure, a board of directors with representation from each co-operative will be required. In a case such as this, the number of directors from each co-operative will be aligned with the level of financial contribution made by each. Prior to becoming operational, policies and procedures pertaining to the allocation of profit and cost sharing of expenses, etc., will be needed. In addition there will be a need to develop and implement advanced business management practices, and to hire professional business managers that will among other duties, will be tasked with operational accountability.
As for the adjustment of sales volume and timing, Peruvian coffee farmers, especially with their Arabica, may be able to capture an opportunity when Brazilian Arabica experiences a trough of production in every two years (see also Table 3-12 below). Given that Arabica has a higher price point, Peruvian coffee farmers may adjust their plating and harvest of Arabia to be acyclical to the Brazilian.
Total Coffee Production in Brazil, 2000/01-2011/12 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 31,310 31,365 48,480 28,820 39,272 32,944 42,512 36,070 45,992 39,970 48,095 43,484 Note: unit in thousand (’000) bags; Source: ICO (2012)
4.2. Proactive implementation of advanced marketing
Quality management for product competitiveness will be a major focus. This will
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involve the hiring of quality inspectors and the implementation of coffee bean sorting practices. For example, a two-tier quality management system would be used by inspectors who would conduct sampling test of all products and tests of all beans in the sorting process. This would be augmented with a performance-based pay scheme to increase and ensure buy-in and effectiveness in quality management practices.
Good practice models have established rules on cross-inspection among co- operatives, with penalties for violation of quality management standards. For example, in Korea, a warning is issued to farmers who ship sub-quality produces. Farmers who received more than five warnings are banned from participating in co- operative activities for two years. In a case of a serious consumer claim, the co- operatives responsible for the claim is penalised with reduced sales quota.
4.3. Methods for promotion of regional products and joint brands
It is widely known around the world that Peruvian coffee is excellent in terms of quality; however, the Peruvian coffee band recognition is not comparable to its quality recognition. In other word, the Peruvian coffee seems to lack a global branding strategy. Hence, it is necessary to enhance the brand recognition across the global markets. To this end, the strategic focus would be set on developing original brands for regions, thus strategically fostering the coffee businesses as drivers of regional economic development.
To reach this goal, quality management again would be an important task. It is important to maintain the quality of the products sold under the regional brand names as good quality is closely related to strong financial performance. A comprehensive marketing strategy encompassing all areas including corporate social responsibility (CSR) management should be created to build regional joint brands as ”power brands.”
4.3.1. The Case of the Hessare Brand: A Joint-Brand
Hessare is one of Korea’s leading joint-brands that has risen in the Korean markets as one of the ”power brands.” It is the brand representingsix agricultural co- operatives in the Gyeonggi Province region, e.g. the Janghowon, Gamgok, Saenggeuk, Samsung District as well as the Eastern Gyeonggi Province Fruit Producers’ Co-operatives and the Eumseong-gun Province Co-operative. The Hessare Association, a joint-branded production and marketing union, is a parent company specialised in the production and sale of Korean peaches. Hessare, as of 2011, is a union of six agricultural co-operatives and is operatingfour agricultural products
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processing centres (APCs). The membership has now expanded to as many as 2,357 farmers from 111 peach-growing farms.
Unlike competing brands from other co-operatives and unions, the Hessare Association only markets under the ”Hessare” brand name, thus providing consistency. It has resulted in improved brand recognition and has built the brand image among consumers. This strong brand recognition has added to the bargaining power of the association. In addition to direct sales, the association has also employed various sales and promotional events as marketing tools to reach its target markets. As a result, the Hessare brand has risen to a power brand within a relatively short period of time, only four years since its introduction to the market. In 2007, the association posted KRW40 billion in annual sales. A rise in unit price of peaches as a result of brand recognition associated with quality has certainly translated into increased farmers’ income.
As such, the joint-branding strategy has resulted in a concomitant increase in both sales quantity and price. About 84.1% of consumers now recognise the Hessare brand according to a survey conducted in 2007. The price of Hessare peaches is on average KRW1,291 (approximately US$1.20) higher per a 4.5 kg box than that of the competitors. The amount of the direct sales to large distributors and retailers, such as supermarkets, department stores, etc., has grown by approximately 110% in the period 2001-06 (Table 3-14).
Change in Sales of the Hessare Brand 2002 2003 2004 2005 2006 2007 2008 2009 Q’ty 7,422 8,972 9,398 11,576 10,968 13,906 14,668 17,449 Sales 24,993 28,360 32,137 33,324 39,407 40,487 52,275 54,339 Note: Units in metric tonnes and million Korean won (KRW); Source: www.heassare.com
4.4. Securing diverse sales channels
Provision of a subsidy for international certification of products would be useful for small businesses which already produce high quality products but lack certification often due to lack of funding and their capacity for the necessary paper work. The subsidy could remove technical barriers for the businesses that have potential to increase export activities. For example, the South Korean government is providing between 40 to 60% of funding for up to two certifications per each session, per company. The size of subsidy is dependent on the type of products and size of export volume, and provision of limitation on government funding.
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Strengthening relationship with overseas fair trade organisations is another way to enhance the value of the Peruvian coffee industry. For example, the UK is spending 20 million pounds in supporting the fair trade movement. The funding is mostly used for the identification of new fair trade partners (producers) and certification of their products. There are also ”fair trade” cities and villages which collaborate closely with local government officials responsible for fair trade campaigns and management of local fair trade activities. In the UK, the fair trade campaign has led to the establishment of new institutes such as ’fair trade schools’ and more, leading to creation of jobs. Some citizens are also making money by actively participating in the trade and sales of fair trade products, in addition to campaigning.
To recap, the following measures are recommended to help coffee farmers prepare their products go global:
(1) Adjust sales volume and timing; (2) Increase direct sales; (3) Negotiate long-term supply contracting; (4) Develop and implement an integrated order and sales platform; (5) Allocate production quotas under contract, for better co-ordination of regional production; (6) Hire quality inspectors and implement coffee bean sorting practices; (7) Extend the government support to renew coffee plantations specifically for the problem of over-farmed plantations; (8) Develop original brands for regions, thus strategically fostering the coffee businesses as drivers of regional economic development; (9) Provide a subsidy for international certification of products micro and small businesses which already produce high quality products but lack certification often due to lack of funding and their capacity for the necessary paper work; (10) Strengthen relationship with overseas fair trade organisations in order to enhance the value of the Peruvian coffee industry; and (11) Provide incentives for the labour employed in the coffee sector so that it can ameliorate the competition for labour with the coca industry.
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The Regional Development Plans for the Southern Economic Corridor in Peru:Linking the Coffee, Alpaca, and Auto-Part Industries with the World Chapter 4
Regional Specialty Industry Development Strategy: Auto Parts
Summary 1. Auto Parts Industry in the Southern Economic Corridor (SEC) 2. Trends in the Automotive Industry 3. Korea’s Automotive Industry Cluster 4. Auto Parts Industry Cluster Model of Peru 페루영문 2012.6.21 5:44 PM 페이지108 mac001 PDF-IN 2540DPI 100LPI
Regional Specialty Industry Development Strategy: Auto Parts
Jumi Kim (Korea Small Business Institute) Chang Dae Kim (Dongseo University)
Summary
In the narrow sense, the auto industry assembles complete automobiles and in the broader sense it includes manufacturing engines and bodies. The auto parts industry represents industrial activities which includes the production of for the engines and bodies.
Reasons for Promoting the Auto Parts Industry
The automotive industry has potential to create employment and provides linkage opportunities for SMEs in Peru. This industry additionally creates transportation, facilitates a high technological impact, and greatly affects the international balance of payments. In this chapter, the data and the subsequent analysis which and the underpinnings of the recommendation to establish and develop the automotive sector in Peru, more specifically, the creation of a regionalised approach in Tacna is provided.
Tacna has a general lack of infrastructure and specialised industry and therefore, it is appropriate to choose a regional specialised industry with a potential to create a strong impact on associated industries. In the manufacturing process, automobiles are built with a wide range of products. In the distribution phase, it becomes dependent on a vast range of products and services, such as financing programmes, insurance, car dealerships, the advertising media, and used car sales. In the usage phase consumers require ongoing automobile maintenance, gas and more. The
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construction and transportation industries are also included in the consumer category. Noteworthy is the fact that the automobile manufacturers’ external parts procurement rate for various components generally affects the price of the finished product by 50 to 70%. Thus the automobile industry is affected greatly by the auto parts industry.
The second merit of the automobile industry is that the economies of scale by mass production are extremely high. Mass production is a crucial component in industry expansion and these systems, above all, are suitable for SMEs.
Third, the automotive industry promotes high employment rates, has a strong technological impact, and greatly affects the international balance of payments. By comparison of the 2009 standards, the Korean automotive industry directly and indirectly employed 1.7 million people, taking up 7.2% of all employment in Korea. A single industry with this level of ability to create employment is appropriate for areas like Tacna.
Lastly, the advantage of the auto part industry in Peru is appropriate for internal and exterior circumstances. Demands of auto parts in Peru are very high due to the fact that the country has many used cars and most of the vehicles use gasoline or inexpensive leaded gasoline, leading to frequent break-downs and serious environmental damage. Global big motor companies assemble cars in near countries, such as Venezuela, Columbia, Chile, and Brazil. This provides a broad trading area in which Peru could sell auto part products. Tacna has both a geographical position and an infrastructure which is positive for the automotive parts industry. In terms of the Tacna infrastructure, the area is located in a coastal region and can offer industrial infrastructure such as ZOFRATACNA, ports, airports and a logistics infrastructure which is partially equipped. In terms of geography, accessibility is good to Brazil and Bolivia through the Inter-oceanic Highway. It is also located on the border of Chile.
Trends in the Automotive Industry
The world’s automotive industry is suffering from challenges associated with an oversupply. To address these challenges, the industry is attempting to lower the costs and increase productivity. By 2009, the industry reached an oversupply of 20 million cars, and the world automotive industry overshot the demand by about 15 million cars by producing 62.4 million cars over the demand of 47.2 million, inspite of decreased manufacturing of 9 million (12.6%) cars.
A review of sales activity in the main South American countries revealed that there was a decrease in 2009 compared to 2008. However there was an increase
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of 19.1% compared to 2009 in 2010, selling 5,047 vehicles. In 2009 1,376 out of 4,237 cars sold were imported models. The vehicle ownership status in the main South American countries, Middle and South America in total is approximately 55.8 million vehicles, thus a car for every 8.4 people. Of particular interest is the western South American countries including Peru (Peru, Bolivia, Chile, Ecuador, etc.), where there is a car for every 17.74 people, providing a good base for speculation that there will be an increase for demand followed by future economic development. Main South American countries attract global auto companies and products. In Argentina, the 10 big companies, such as Ford, GM, and, VW, Toyota produced 716 thousands cars and Brazil produces, 3.5 million cars on average per year.
By August 2011, Peru’s automobile sales were on the rise however, the country lacks manufacturing capacity. Major motor vehicle sales by type and maker are Toyota/Nissan of Japan and Hyundai/Kia of Korea. The Peruvian auto parts market is competitively supplied by the US, Japan, Brazil, China, and Germany. Peru is one of the countries in Central and South America that allows importing of used cars, and most of those cars were used as taxis. As previously mentioned, the demand for auto parts in Peru is very high. This demand includes tires and other imports such as batteries, filters, brakes, clutches, etc., and H.S 8708 products (cushions, safety belts, brake systems, gear boxes, drive axles, airbags, and other internals (radiators, mufflers, etc.).
Korea’s Automotive Industry Cluster
The Korean automotive industry after the knock-down production-assembly and localisation stage in 1960’s and 1970’s, production and exporting stage in the 1980’s, and Korea’s own vehicle development stage in 1990, is now at a primary stage of cars approaching the level of advanced countries. However, as Korea went through a currency crisis, they also experienced an immense structural change. The automobile industry’s restructuring emphasised a restructuring of the parts industry. The parts companies’ competition heightened because companies that went through M&A centralised the parts procurement system. And because the companies acquired by foreign companies under the parent companies had their component manufacturing divisions incorporated to their global parts procurement network, Korea faced with global competition.
Representing the Korean automotive parts industry is Auto Valley in Ulsan. The Auto Valley industry is comprised of an automotive parts warehouse complex, a modularity complex, an auto parts innovation centre, an institute of e-Vehicle studies, Auto Valley roads and an Auto Plaza. In addition, there are several automotive part clusters such as Incheon Automobile Parts Industry Cluster and
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Daegu/Kyungbook Automobile Parts Industry Cluster, etc.
The Auto Parts Industry Cluster Model of Peru
The auto parts industry is a crucial component in country’s future global competition. Especially in the long run, Peru needs to expand the auto parts industry in Tacna as the core strategic industry to create a global cluster.
Goal: International auto parts base station and components cluster establishment in the Tacna auto parts industrial city, ultimately establishing a complete automobile company
The long term roadmap consists mainly of three stages: (1) laying the foundation, (2) empowerment, and (3) internationalisation.
Several strategies for this model are as follows:
(1) An industrial cluster foundation: The first action is to lay the industrial cluster foundation which is a configuration of hardware. There needs to be enabling of integration by building a parts complex which would make it possible to have medium-sized parts suppliers move in by building modulation complexes. (2) The empowerment of technology development: In the long run, the competitiveness of Peru’s auto parts industry will be possible through R&D. There needs to be an effort in R&D for the establishment of research facilities for auto parts. A good practice is showcased in the Auto Parts Research Center in Korea and related facilities for making domestic auto parts. (3) Knowledge transfer: Technology comes from people. The fastest way to develop human resources is to invite expert to establish a field of study in a university related to automotive to develop the future workforce that will lead the automotive industry. (4) The establishment of business support systems: This requires endless support from government for the companies within the components and modulation complexes, once established; thus enabling them to lead the business in the Tacna area. There needs to be an establishment of automotive technology centre or automotive parts innovation centre that can link them in, network, tech support, and other related activities. (5) An enabling academic partnership: In a cluster the important aspect is the synergy between these clusters. There needs to be information exchange through networks of homogeneous or heterogeneous forums sorted by components. (6) Promoting internationalisation: Currently the auto parts cluster needs to be settled through exchange incurred with foreign automotive specialists and
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organisations. Additionally, in the future, there needs to be a domestic PR organisation to advertise and market the domestic products internationally to acquire international prestige.
The model above needs to fit the following conditions to be carried out successfully:
(1) Firstly, several factors, attributes of clusters (close proximity between the related companies and research facilities, companies within the supply chain need to increase mutual reliability through co-operation, and so on), must be met; (2) Secondly, this business must be preceded by and agreement of technological alliance/co-operation and delivery method with complete automobile manufacturers; (3) Thirdly, there needs to be a master plan before undertaking this project; (4) Fourthly, the stakeholders or principal agents in this project need to be fully committed to their role; and (5) Lastly, this business must be led by the Peruvian central government.
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1. Auto Parts Industry in the Southern Economic Corridor (SEC) 1.1. Some Background Information
The SEC of Peru is comprised of various main industries, which are based according to the regions that includes coastal, inland, jungle and mountainous (the Andes) areas. The appropriate development course of action will focus on the classification of main businesses and products according to a regional division of industrial clusters. As previously mentioned in this research document, Peru’s regional specialised industries are deemed suitable for small urban areas creating opportunities to lead local economies. For example, Tacna, which is a coastal region with an established industrial structure, is the starting point of an inter- oceanic highway towards the southern Americas by which easy access to Bolivia, Brazil and the bordering country of Chile is provided. In addition, the area is partially equipped with seaports, airports and logistics infrastructure thereby presenting a high possibility for future development. This report suggests several regional special industries: a short term regional special industry in Cusco for coffee and alpaca, and in terms of a long term national business project, auto parts manufacturing in Tacna.
In this chapter, while drawing from the good practices implemented in South Korea, we provide the rationale for recommending the automotive parts industry in Tacna.
1.2. Why Auto Parts Industry?
In general the automotive industry creates transportation, promotes solid linkages, a substantial technological impact, creates employment, and greatly affects the international balance of payments. Recently the energy industry and the IT industry are conjoining because there is an expansion of various convenient devices utilizing IT skills and eco-friendly cars. As a result, the auto parts industry is considered to be a core industry in advanced nations, bringing opportunities to underdeveloped countries to increase their nation’s competitiveness.
The first element of strength for the industry is that it provides excellent forward and backward linkage effects (See Figure 4-1).
An automobile is a product comprised of 20 to 30 thousand parts. These parts are made of steel, rubber, synthetic resin products, petro chemicals, asbestos, press and precision equipment, electrical parts, and plastic. Thus it requires various types of
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manufacturing machinery and tools such as metallurgical equipment, electrical equipment and more. A large proportion of related industries (50%) that provide products and services, such as the manufacturing of springs, suppliers of aluminium, die-casters of light alloy castings, and rubber are required by the automotive industry. Therefore in the manufacturing process, automobiles are built with a wide range of products. In fact, an automobile manufacturers’ external parts procurement rate for various outsourced components, generally affects the price of the finished product by 50 to 70%. Therefore, the automobile industry is greatly affected by the auto parts industry.
In addition, during the automobile distribution phase, a vast range of economic activity occurs; these range from financing, insurance, advertising, the construction and operation of car dealerships and used car sales facilities. The consumer (individuals and businesses) augments related economic activity through the purchase of products and services, such as maintenance, and fuel.
The Industries Associated with the automotive industry Real Industry Pro Industry
Steel Engine parts, body frame crankshaft, axle
Non-ferrous Electronics, battery, altruistic radiator, metals engine parts, paint Sales Mainten- Car sales, maintenance, Lighting Equipment, starter motor, wire, ance parts sales Electricity fiber-optic, DC motor
Electron Electronic components, air conditioning parts, audio products Use Car rental and leasing, Division parking, passenger and freight Petroche Paint, Oil, bumpers, crash pad, steering mical wheel Automotive Industry Production equipment, pumps, Machinery machine parts Fuel Oil refineries and Sector gas stations Rubber Dust proof, rubber belting, tires
Textile, Interior, seats, safety belts, air cleaner, paper oil filter Financial Insurance, installment Sector financing Energy Fuel, heat treatment
Glass Windows, mirrors, headlights
Wood Truck Charger
Source: Korea Automobile Manufacturers Association (2010)
As such, based on the perspective that there is a general lack of infrastructure and specialised industry to support the automobile parts industry, it is advisable to choose a regional specialised industry whereby there will be a good impact on the industries associated.
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The second merit of the automobile industry is that the economies of scale resulting from mass production are extremely high. Mass production is a crucial component in the industry expansion and these systems, above all, are suitable for small and medium-sized enterprises (SMEs).
Third, the automotive industry promotes high employment rates, has great technological impact, and greatly affects the international balance of payments. For example, by 2009 standards, the Korean automotive industry directly and indirectly employed 1.7 million people, taking up 7.2% of all employment in Korea. A single industry with such ability to create employment is necessary in areas like Tacna.
The Employment Scale of the Related Companies
Steel : 9,672 people, Chemicals/Plastics : 34,659 people Metal Products : 5,962 people, Machinery : 11,063 people Electricity/Electron : 37,092 people, Glassware : 2,108 people Production Rubber products : 11,002 people, Other : 11,532 people materials 122.2 thousand people Auto Sales Car Sales 60,671 People Maintenance Selling auto parts and accessories 43,149 people Division Automotive repair 126,711 people Automobile manufacturing 230.5 thousand Sector 267.2 thousand people people
CBU Automobile manufacturing Refining disposal 2,151 people 109,344 people Distributors Gas stations 68,084 people Auto Parts 157,882 people related sectors Lubricants Manufacturing 536 people 271.8 thousand Driving schools 9,587 people people Financial/ad 11,467 people Road construction and maintenance 128,501 people Use and Insurance 31,450 people Transportation Others 10,290 people Division Passenger transportation 434,792 people 809.5 thousand Toll roads operations 13,523 people people Freight transport 239,419 people Parking 17,126 people Undertaking land cargo 14,364 people Automobile leasing/salvage 21,062 people Direct and indirect employment : Rectification 3,017 people 1.701 million people ('09) Cargo agency 66,221 people 7.2% of total employment (23.506 million people)
Source: Korea Automobile Manufacturers Association (2010)
Lastly, the advantage of the auto part industry in Peru is appropriate for internal and exterior circumstances as the need for auto parts is higher than compared to the other South American countries. This is attributed to two reasons: (1) cars in Peru are driven on average about 14 years; (2) most of the vehicles use regular gasoline or inexpensive leaded gasoline, leading to frequent break-downs. For this reason, the demand for auto parts in Peru is very high.
Major automobile manufacturers currently assemble cars in the adjacent countries, such as Venezuela, Columbia, Chile, and Brazil, which indicates that Peru in a good position to export auto parts to these countries. Ten large
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companies, such as Ford, GM, and VW produced 716,000 cars last year in Argentina. In Brazil, 3.5 million cars are produced on average per year. Tacna has the geographical position and infrastructure desirable for the for automotive parts industry. In terms of infrastructure, Tacna is a coastal region and can provide the industrial infrastructure such as ZOFRATACNA. Furthermore, the infrastructure pertaining to ports, airports and logistics is partially equipped and there is accessibility to Brazil and Bolivia through the Inter-oceanic Highway and the country is located in the border area with Chile.
2. Trends in the Automotive Industry24) 2.1. Global automotive supply and demand
The world automotive industry is challenged by an oversupply of product in the market. To address this they are trying to lower cost and increase productivity. However in 2009, because every year there had been an oversupply of 20 million cars, the world automotive industry overshot the demand by about 15 million cars. Production accounted for 62.4 million cars over the demand of 47.2 million, even though they decreased the manufacturing by 9 million (12.6%) cars that year.
The world automotive industry showed an average decrease of 0.6% a year over the last five years, showing a sequential decrease from 2008 to 2009. The decrease rate in 2009 was 12%.25) A continuous rate of increase from 2000 to 2007, reached its peak in 2007 with 49.5 million cars. However, after the peak was the downfall with a rate of decrease from 2008 to 47.2 million cars in 2009, which is was a small recovery
An analysis of the oversupply trend revealed that the decade average rate of sales stayed around 69.2% of what was manufactured. The average sales over production for nine years excluding 2009 were 68.5%. In 2009 the impact of the economic downturn decreased production, increasing the sales over production rates to 75.6%. However the interpretation of these phenomena should be limited.
24) Kwangju area automotive parts industry expansion plan following the change in market environment(2010) 25) The general viewpoint is that the American financial crisis in 2009 was the cause. As a leading indicator there was a decline in consumption and it is interpreted that the aftermath of this lead way to reducing the scale of production in 2009
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World Automobile Production and Sales Year 2000 2001 2002 2003 2004 Production (rate of increase) (in thousands,%) 59,089(3.5) 57,005(-3.5) 59,666(4.7) 61,910(3.8) 65,179(5.3) Sales (rate of increase) (in thousands,%) 40,917(2.0) 41,547(1.4) 41,741(0.5) 42,828(2.6) 44,442(3.8) Year 2005 2006 2007 2008 2009 Production (rate of increase) (in thousands,%) 67,258(3.2) 70,467(4.8) 74,484(5.7) 71,433(-4.1) 62,403(-12.6) Sales (rate of increase) 45,613(2.6) 47,538(4.2) 49,574(4.3) 46,575(-6.0) 47,200(1.3) (in thousands,%) Source: Korea Automobile Manufacturers Association (2010)
It has been a state of oversupply since 2001 and these circumstances seem to worsen over time. These circumstances interlocking with the economic downturn only made it seem like there was an improvement in oversupply. Therefore it is reasonable to see that this trend also could be interpreted as the advent of the crisis in the automotive market. The success or the failure of each country’s economic policies will determine if this will go on or be a short term trend.
Figure 4-3 shows the extent of the oversupply per annum in the world, compared to the sales over production. There was an oversupply of approximately 15 million even in the years 2001(72.9%) and 2009 (75.6%), which were the years with high sales over the production ratio. The records also indicate that before 2004, the oversupply was less than 20 million units, and after 2004 there were more than 20 million units, thus revealing a trend of an increase decreasing only after 2009.
World automobile industry’s change in production exceeds
Note: Production exceeds = production - sales; Source: Korea Automobile Manufacturers Association (2010)
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The supply of automobiles relates directly to the national income. Motorisation, (a combination of motor and civilisation) as purchasing power increases with an increased national income, and causes a share increase in the demand for automobiles, arriving at a status of ’one car per family.’ In general, the increases in the demand due to a combination of benefit factors are given by the mobility of the automobiles such as:
(1) The social status demonstrated by car ownership; (2) The economic boom, the enhancement of economic income and purchasing power resulting in relatively cheaper car prices and maintenance costs; (3) The proliferation of leisure culture and the development of cars suitable for leisure sports; (4) The expansion of automotive traffic infrastructure such as expansion of new roads, increase in covered roads, increase of parking spaces, and improvement in traffic signal systems; and (5) The production and sales of diverse and high quality cars and services.
Therefore, it is proven that GDP and the supply of cars have a degree of correlation. For reference, Korea’s history of motorisation is provided.
Korea became the 14th country to achieve ownership of 10 million cars on July 15th 1997. An increase of 1000% from one million automobiles in 1985 resulted in the age of motorisation. The rate of automobile supply also showed incredible changes. In 1961 there were 0.4 cars per 1000 people, and in 1968 the rate increased to one car per 1000 people. Only by 1978 the rate increased to 5 cars per 1000 people. But the effect of the three lows-low oil prices, low interest rates, and low exchange rates-resulted in a 12% increase each year from 1986 to 1989. The Koreans enjoyed economic boom as the rates rapidly increased and it opened way for the age of consumers by the increased middle class. The liberalisation of foreign travels and import liberalisation meant that the Korean people could buy foreign luxury goods and luxury cars, sending Korea on its way to the highway of consumption.
In 1988 the rate increased from 5 cars per 1000 people 10 years ago to 26.6 cars per 1000. The supply of cars was over 200 in 2002 for the first time with 204.4. As the supply of cars became one per family in Korea it became the basis for the undisputed age of ”my car.” The GDP of a Korean person from 1986, when serious motorisation started, to 1990 was $2,701, $3,466, $4,466, $5,430, $6,154.
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Changes in the Number of Registered Vehicles in Korea
Note: Unit in thousand; Source: Ministry of Land, Transportation and Marine Affairs, the Government of Korea
2.2. Restructuring of the world automotive industry
The world automotive industry focused its task in business diversification, providing multiple services, next generation engines, and new model development to counteract the financial crisis started at the end of 1990, the volatile market environment, and the ever changing consumption patterns. Also it prepared for the increased demand in new emerging countries like China and India, expanded distribution channels to take advantage of new market opportunities, and increased local production to adapt to new environments and secure opportunity for growth. (Jongshik Jung, Hyunji Kim, 2009)
The current status of the market is also an important factor in causing the restructuring of the world automotive industry. The high oil prices in early 2008 and the bad news of a financial crisis after September caused a sharp decrease in the automobile demand (Deukgyu Pork, Wonhee Lee, Cheeho Lee, 2009). The steep decline of demand in the automotive industry deepened financial difficulties and the slump in car sales, paving the way for the restructuring of the automotive industry.
As described above, the decrease in demand arrived when there were more than 20 million cars oversupplied each year. The common viewpoint is that the restructuring happened as these situations emerged. Restructuring occurred as the ”Big 3” car brands in the US were bought out.
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Initiation of Partnership after Crisis Partnering Category companies The main purpose of partnership
Volkswagen: Enhancing strategy for India Volkswagen Suzuki: Official entry into the Chinese and Brazilian Suzuki market Strengthening of Fiat Chrysler: Strengthening the strategy for targeting emerging market Chrysler South American small/medium sized cars market. strategy GM Shanghai GM: Expansion of industry infrastructure in India Automotive and official entry into market
Volkswagen Volkswagen: Expansion of the low-cost lineup and Suzuki technology acquirement Complementing the small/low Fiat Chrysler Chrysler: Mini/small cars lineup expansion priced cars lineup GM Shanghai GM: Development of low-cost cars and acquiring Automotive cost reduction know-how
Volkswagen Suzuki: Eco-friendly vehicle technology (clean diesel, Suzuki hybrid) acquirement Acquirement of eco-friendly vehicle PSA Mitsubishi PSA: Fortification of electric car technology (i-MiEV) technology Fiat Chrysler: Introduction of clean diesel, fuel-efficient, Chrysler compact, high-efficiency, and low CO2 cars
Partnership developing after the global financial crisis shows a different character from before in terms of form, purpose, and logic.
The first characteristic can be found in the fully comprehensive partnership between Renault and Nissan. First looking at the shape of the partnership, it shows a partnership based on a fully comprehensive capital alliance rather than mergers and acquisition. It shows patterns of promoting comprehensive co-operation in development, products, manufacturing, sales, and business in general whilst default a signing capital alliance.
The second characteristic is that it focuses on emerging markets, low cost/compact and eco-friendly vehicles. The objectives of the partnerships are targeting emerging markets, strengthening the small vehicles lineup, supplementing the low cost vehicle lineup, acquiring eco-friendly vehicle technology, etc. to quickly adapt to the rapidly changing industrial environment after the crisis. On the other hand, there are
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partnerships with the purpose of acquiring eco-friendly, green car technology. Because the next generation eco-friendly vehicle technology requires immense development costs and time, companies that fell behind the competition of technology are pushing partnerships with companies with related technology to quickly acquire the technology for eco-friendly vehicles.
The third characteristic of partnerships is in the change in logic. The logic of partnership is what is ultimately pursued by the partnership and it is also a motivation for pushing partnerships affected by the industrial environment and the dominant competitive methods. The active deployment of partnerships between companies was after 1990 and M&A was the norm. As the M&A partnerships turned to failure in the 2000’s passive-partial partnerships not involving capital alliances was generalised. However after the crisis fully comprehensive partnerships based on capital alliance vigorously developed.
The Market Environment before and after the Economic Crisis and Change in the Factors of Competitive Advantage Before the crisis After the crisis Advanced market-oriented Leading emerging market growth Change in Medium to large, luxury car Small cars / EV market expansion Environment oriented Serious eco-friendly car market Development of eco-friendly cars growth
Change in the Market: Advanced market Market: emerging markets factors of Products: medium to large, luxury car Products: small cars / cheap cars competitive Technology: high speed, Technology: Eco-friendly car advantage high- technology technology
Source: Sungwook Kwon(2010)
Therefore, the rapid change in the industrial environment rapidly changed the logic surrounding partnerships. First of all, there is a focus on market adaptation rather than market dominance. This is because the change in the automobile industry environment altered the competitive landscape and competitive factors, lowering the predictability of the market. In a stable phase of growth, stable/continuous improvement capability is the key but in an unstable market, speed and flexibility is emphasised. Thus the key to create and maintain competitive advantage are supplementing the weakness following the environmental change and the ability to respond flexibly to the market.
Fully comprehensive partnerships based upon capital alliance are on the rise. The change in the world automotive industry after the financial crisis is an environment
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never before faced by the car companies and the volatility and the uncertainty is huge. Therefore partnerships are generally referred to as a strategy to lower risk and enhance the ability to quickly and flexibly respond to the environment.
2.3. Status of the automotive industry in South America
Seeing the status of sales in the main South American countries, there was a decrease in 2009 compared to 2008. However there was an increase of 19.1% compared to 2009 in 2010, selling 5,047 vehicles. In 2009 1,376 out of the 4,237 cars sold were imported.
Number of Cars Sold in South America: Some Selected Countries, 2008-10 2008 2009 2010 Personal Commercial Total Personal Commercial Total Personal Commercial Total Argentina 453 159 612 373 97 470 524 174 698 Brazil 2,193 633 2,826 2,480 661 3,141 2,645 870 3,515 Chile 240 13 253 131 42 173 289 14 303 Columbia 184 34 218 157 18 175 104 158 262 Venezuela 150 122 272 67 50 117 70 55 125 Etc. 166 189 355 87 74 161 97 47 144 Total 3,386 1,150 4,536 3,295 942 4,237 3,729 1,318 5,047 Note: Unit in thousands
Number of Cars Exported to South America by Major Car-Producing Countries 2008 2009 Personal Commercial Total Personal Commercial Total Japan 396 122 518 191 53 244 Germany 37 3 40 30 1 31 France 426 56 482 378 52 430 Spain 12 8 20 5 2 7 Belgium 4 - 4 3 - 3 United States 49 23 72 24 18 42 Korea 245 46 291 255 29 284 Britain 11 - 11 6 - 6 Italy - 1 1 - 1 1 Brazil 343 106 449 243 61 304 Sweden 91 2 93 4 20 24 Total 1,614 367 1,981 1,139 237 1,376 Note: Unit in thousands
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On the other hand, looking at the vehicle ownership status in the main South American countries, Middle and South America in total have around 55.8 million vehicles, there being a car for every 8.4 people. Especially in western South American countries including Peru (Peru, Bolivia, Chile, Ecuador, etc.), where there is a car for every 17.74 people, provides the basis for speculation that there will be an increase for demand followed by future economic development.
Status of Ownership of the Automobiles in Peru and the Neighbouring Countries, 2009
Personal Commercial Total Capita per car Cars per Population 1000 people (thousands) Peru 429,000 297,000 726,000 40.2 24.9 29,165 Argentina 6,706,101 2,248,774 8,954,875 4.5 222.3 40,276 Bolivia 217,900 307,500 525,400 18.8 53.3 9,863 Brazil 23,612,000 6,031,000 29,643,000 6.5 153.0 193,734 Chile 1,816,143 1,018,496 2,834,639 6.0 167.0 16,970 Columbia 1,018,000 624,000 1,642,000 27.8 36.0 45,660 Venezuela 2,639,105 1,489,100 4,128,205 6.9 144.4 28,583 Ecuador 329,184 440,341 769,525 17.7 56.5 13,625 Uruguay 611,000 122,500 733,500 4.6 218.2 3,361 Central and South 41,091,138 14,723,311 55,814,449 8.4 118.5 470,977 America Note: Unit in thousands
On the other hand, looking at the vehicle ownership status in the main South American countries, Middle and South America in total have around 55.8 million vehicles, there being a car for every 8.4 people. Especially in western South American countries including Peru (Peru, Bolivia, Chile, Ecuador, etc.), where there is a car for every 17.74 people, provides the basis for speculation that there will be an increase for demand followed by future economic development.26)
As already mentioned, main South American countries attract many global auto company and product. In Argentina, 10 big companies, such as Ford, GM, and, VW, Toyota produce 716 thousands cars at. In Brazil, 3.5 million cars are produced at average per year.
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2.4. Status of the automotive industry in Peru
As Peru’s automobile sales were on the rise by August 2011, the AAP calculated that auto sales would reach 150 to 160 thousand. From the number of 128 thousand in 2010, it is would be a 24 to 32% increase.
The AAP stated that when the economy in a country is good, there are an adequate number of car sales compared to the population, but when the economy in a country starts to falter, so does the car sales. Therefore, car sales are key to figuring out the status of a country’s economy and banks providing loans also help in the rise of car sales. Director of imports in Peru for BMW stated that ”providing loans helped the automobile economy development and that low interest rates also helped in car sales.” Another industry insider said that although the time is early to foretell anything, the automotive industry is going to grow and that the companies are using the favourable circumstances to the fullest.
The leading automotive imports are from Toyota. Japan’s ability to produce cars were greatly affected by the earthquake in March, 2011 and Toyota showed a great decrease in supply from 22.8% market share to 14.8%. Even if that’s the case, Toyota is still leading the way in sales with Korea. Hyundai follows right behind. Sales of Nissan had an increase in the first quarter enabling it to only go down from 10.1% to 9.5% in market share, and according to the only importer of Nissan in Peru Maquinarias the sales of Nissan in Peru is quickly reaching its peak. Another high selling Japanese brand Suzuki also had increased sales, maintaining a market share of 5.1% from 5. cent. Mitsubishi also had a drop in market share from 3.2% to 2.8%. Honda, Subaru, and Mazda’s sales and market share decreased. However the Korean brands Kia and Hyundai had an increase in market share. American Chevrolet, German Volkswagen, French Renault, Swedish Volvo, Chinese Chery showed increased sales.
There was a decrease in taxes for cars within the last few years. In 2007 46% of the price of a car was taxes (Tariff 12%, special spending tax 10%, VAT, or IGV, 19% etc.), but now it is 25% (Tariff 6%, VAT 18%), enabling a better environment for sales. There is no inflation in cars in Peru and the decrease in taxes is correcting some unbalances caused by exchange rates and other factors. Also the director of Peru’s Automobile Association said that ”Chatarreo bonds” (issued to new buyers of LPG cars) will change the Peru’s market rate in the near future. Table 4-7 and 4-8 below represents the status of Peru’s import market.
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Car Imports of Peru by the Origin, January-May 2011 Market January February March April May Total share(%) Korea 3,088 2,979 3,510 3,602 3,875 17,054 29.51 China 2,020 1,570 1,766 2,637 2,365 10,358 17.93 Japan 2,691 1,965 2,730 1,520 1,240 10,146 17.56 Thailand 1,317 1,026 553 717 1,369 4,982 8.62 Mexico 686 781 834 592 982 3,875 6.71 Brazil 515 506 747 727 741 3,236 5.6 India 307 387 634 275 387 1,990 3.44 United States 205 345 156 380 253 1,339 2.32 Germany 240 151 234 288 200 1,113 1.93 Other 609 781 846 571 873 3689 6.38 Total 11,687 10,491 12,010 11,309 12,285 57,782 100 Source: Peruvian Auto Association (AAP)
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The Peruvian auto parts market has fierce competition between the US, Japan, Brazil, China, and Germany. Peru is one of the countries in Central and South America that allows the import of used cars, and most of those cars were used as taxis. The amount of imports was so vast that Daewoo’s Tico was once responsible for half of all taxis in Peru. Although after the ban of import used cars in 2002, the auto parts industry winced and lately there is once again a resurrection. From 2005 standards of
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new products, the amount of exports of auto parts from the US, Japan, Brazil, Korea, China, Germany, and other countries summed up to 300 million USD a year. Figures like this sums up to much more considering illegal imports and black markets from Chile, Tacna and other bordering countries. In addition, currently there is a lack of parts manufacturers in Peru. It is not an exaggeration to say that Peru depends on these imports.
The average use of cars in Peru is about 14 years. Thus most of the cars are older cars in high need of auto parts, compared to the other South American countries and most of the vehicles use gasoline or cheap leaded gasoline, leading to frequent break-downs and serious environmental damage.
Looking at the status of used car imports, about 40,000 cars were imported in 2004 (approximately 85%Japanese; 15% Korean). The biggest accessory imports were tires and other imports including batteries, filters, brakes, clutches, etc., and H.S 8708 products (cushions, safety belts, brake systems, gear boxes, drive axles, airbags, and other internals, e.g. radiators, mufflers, etc.) had almost no way of production in Peru.
Although Peru has a rising demand for automobiles, most of the completed vehicles and parts are imported, and domestic production is very minimal. Until the 70’s Peru assembled Toyotas locally, and because there are A/S services for foreign brands nationwide, it is not fair to say that there is no technology or personnel for automotive technology. Peru already signed FTA with the characteristics of regional agreement with close countries like Brazil, Argentina, Uruguay, Paraguay, and Venezuela. Peru also signed FTA with Korea and advanced countries like the USA in August 2011. Thus, Peru needs to consider not only of automobile imports, but of transferring automotive technology to prepare for the growth in the economy and increase of demand for automobiles.
Motor Vehicle Production by Type (Unit: %) Type 2001 2002 2003 2004 2005 2006 2007 2008 Cars 4,430 7,484 1,820 % Chg. -17.1 68.9 -75.7 LCVs 10,473 12,652 4,200 8,882 9,489 4,987 9,000 4,405 % Chg. -24.5 20.8 -66.8 111.5 6.8 -47.4 80.5 -51.1 Total 14,903 20,136 6,020 8,882 9,489 4,987 9,000 4,405 % Chg. -22.5 35.1 -70.1 47.5 6.8 -47.4 80.5 -51.1 Note: End in domestic production by GM factory shut down in July 2008; Source: CORFO, OICA
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Motor Vehicle Production by Maker & Type Maker Type 2002 2003 2004 2005 2006 2007 2008 Franco Chilena Cars 7,484 1,820 General LCVs 12,652 4,200 8,882 9,489 4,987 9,000 4,405 Motors Total 20,136 6,020 8,882 9,489 4,987 9,000 4,405 Note: End in domestic production by GM factory closed in July 2008; Source: CORFO, OICA
Although Peru has a rising demand for automobiles, most of the completed vehicles and parts are imported, and domestic production is very minimal. Until the 70’s Peru assembled Toyotas locally, and because there are A/S services for foreign brands nationwide, it is not fair to say that there is no technology or personnel for automotive technology. Peru already signed FTA with the characteristics of regional agreement with close countries like Brazil, Argentina, Uruguay, Paraguay, and Venezuela. Peru also signed FTA with Korea and advanced countries like the USA in August 2011. Thus Peru needs to think not only of automobile imports, but of transferring automotive technology to prepare for the growth in the economy and increase of demand for automobiles.
Motor Vehicle Production by Type (Unit: %) Cars CVs Total Vehicle Population Persons Persons Cars % Chg.CVs % Chg.Total % Chg. Per Car Per Vehicle 1990 710,000 0.5 250,000 4.0 960,000 1.4 18.0 13.3 1995 930,438 31.0 529,813 111.9 1,460,251 52.1 15.3 9.7 1996 1,017,052 9.3 573,177 8.2 1,590,229 8.9 14.2 9.1 1997 1,175,785 15.6 635,235 10.8 1,811,020 13.9 12.6 8.2 1998 1,236,852 5.2 672,191 5.8 1,909,043 5.4 12.2 7.9 1999 1,326,808 7.3 708,465 5.4 2,035,273 6.6 11.5 7.5 2000 1,320,519 -0.5 733,260 3.5 2,053,779 0.9 11.7 7.5 2001 1,321,500 0.1 745,500 1.7 2,067,000 0.6 11.8 7.5 2002 1,350,000 2.2 750,000 0.6 2,100,000 1.6 11.7 7.5 2003 1,373,121 1.7 749,914 0.0 2,123,035 1.1 11.6 7.5 2004 1,402,766 2.2 753,678 0.5 2,156,444 1.6 11.5 7.5 2005 1,435,637 2.3 768,321 1.9 2,203,958 2.2 11.4 7.4 2006 1,465,100 2.1 770,400 0.3 2,235,500 1.4 11.2 7.4 2007 1,505,000 2.7 776,500 0.8 2,281,500 2.1 11.4 7.4 2008 1,599,152 6.3 984,545 26.8 2,583,697 13.2 10.4 6.4 2009 1,816,143 13.6 1,018,496 3.4 2,834,639 9.7 9.2 5.9 Note: Growth compared to the prior year or the past five years; Source: SMMT, World Motor Vehicle Data
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3. Korea's Automotive Industry Cluster 3.1. Korea's Automobile Industry Development Stages
The Korean automotive industry after the knock-down production-assembly and localisation stage in 1960’s and 1970’s, production and exporting stage in the 1980’s, and Korea’s own vehicle development stage in 1990, is now at a primary stage of cars approaching the level of advanced countries. However, as Korea went through a currency crisis, it also went through an immense structural change. The automobile industry’s restructuring emphasised a restructuring of the parts industry. The parts companies’ competition heightened because companies that went through M&A centralised the parts procurement system. And because the companies acquired by foreign companies under the parent companies had their component manufacturing companies incorporated to these companies’ global parts procurement network, Korea was faced with global competition.
Development Stages in the Korean Automobile Industry
Category National goal Automobile industry Related contents
First five-year plan of Construction of KD assembly stage Automotive industry development launched, economic development infrastructure assembled automobile import ban (’62-’66)
Second five-year plan of Construction of The early stages of Automotive industry basic plan development economic development infrastructure localisation , promote professional integration (’67-’71)
Third five-year plan of Undertaking heavy All-Korean car Development of domestic indigenous cars, economic development industrial development development stage first export, construction of large-scale (’72-’76) general plants
Fourth five-year plan of Advancement of Production system Automotive industry rationalisation economic development industrial structure to preparation stage measures, promotion of export strategy (’77-’81) establish the basis
Fifth five-year plan of economic Establishing a Export infrastructure Establishment of production system, the and social development comparative advantage establishment stage beginning of exporting to the US, (’82-’86) industry international specialisation of production
Sixth five-year plan of economic Build international Mass export stage Liberalisation of all car production, import and social development competitiveness liberalisation, strengthening of emissions (’87-’91) and noise regulations
Seventh five-year plan of Reinforcement of Quantitative growth and Achieving economies of scale, The world’s economic and social economic efficiency proprietary technology top five automobile producers, completing development development stage the development of necessary parts from (’92-’97) proprietary technology
8th Stage Globalisation, Globalisation and Auto industry restructuring, advanced (’98- ) Liberalisation technological overseas maker, entering the domestic advancement stage market, globalisation of production bases
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3.2. Status of Regional Specialisation in the Korean Automobile Parts Industry
3.2.1. Auto Valley in Ulsan
The automotive industry in Ulsan started when Hyundai Motors constructed an assembly plant in 1968. After they launched the Cortina in November the same year, the industry saw dramatic development. The Ulsan region has a booming auto parts industry such as the Hyundai Motors Ulsan plant (1,500,000 cars a year), Hyundai Mobis logistics center (Hyundai and Kia Motors’ domestic and export sales service, parts supply and 1/3 of Hyundai Mobissales), and Daewoo Globis (10,000 cars). The region also has the locational conditions to export to neighboring countries (China 8,000,000, Japan 10,500,000). Above all, they have Hyundai Motors, the leading company with production technology and skilled personnel.
However, the biggest problem in Ulsan is that although one of world’s biggest single automobile production plant is in Ulsan, most of the auto parts companies are situated in Busan, Yangsan, or in Gyeonggi province, making it impossible for the auto parts companies to share technology and actual profit from information acquisition. The Metropolitan city of Ulsan started the suto valley industry in 2002 with the goal of making Ulsan the global supply base for the automobile industry.
The Auto valley industry is a business which through 2002 to 2007 invested around 266 million dollars to make an auto parts industry cluster in a vast area from Yangjeong-dong Buk-gu Ulsan-si to Local Industrial Complex Corporation, Buknongsohyomun Maegok, to Kyungju.
The main contents of the Auto Valley industry is the composition of the automotive parts warehouse complex, building of a modularity complex, establishing the auto parts innovation center, establishing an institute of e-Vehicle studies, Auto Valley road construction, Auto Plaza construction. The formation of the automotive parts warehouse complex is about the formation of the local specialised industrial complex and the auto parts related integration complex; the formation of the modulation complex is about creating a demonstration complex in Hyoam-dong and Hyomun-dong to promote modulation in the area, attracting companies related to each module, and the establishment of a close production system. The establishment of the auto parts innovation centre is to be the base support agency to increase quality and trust, induce technological innovation, and enable establishment in the Ulsan and Yeongnam region, their main task being the development of automobile related technology, testing of parts, and certification support. The formation of the automobile technology centre is to create automobile-related public research institutions, an institute of e-vehicle technology, and such research facilities to
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complement the automobile parts innovation centre. The necessary step to providing supply infrastructure to advanced professional staff that will lead the regional strategic industry in advancement of automobile manufacturing is building research institutions. For this a construction and operation of the Institute of e-Vehicle Technology is necessary. Also something that is very important is constructing numerous roads. The purpose of the Auto Valley road construction is to provide timely supply system between the complete automobile companies and the companies within the Auto Valley by building an industrial roadway from Yul-dong, Book-gu, in the city of Ulsan toYaksu interchange, Jungsan-dong, Book-gu.
The purpose of the Auto Plaza business is to strengthen the image of Ulsan as a city of automobile industry, to improve the insufficient knowledge tourism industry in scarce areas, and to support international marketing and advertisement by building exhibition centres, convention centres, offices to rent out, offices for meetings, accommodation facilities, and leisure facilities within the Auto Valley regional exhibit convention complex.
Main Business in the Auto Valley
Autoparts Innovation Center Automobile Technology Center Component Storage Complex Modulation Complex
Expenses : 71.2 billion KRW Expenses : 11.4 billion KRW Expenses : 83.8 billion KRW 2002~06 Expenses : 67 billion KRW 2002~07 Completion : December 2005 Completion : March 2008 Total of 4 stories 3 above ground, 1 underground Total of 4 stories 3 above ground, 1 underground
Auto Valley Road
3.2.2 Incheon Automobile Parts Industry Cluster
Incheon has the history of having Korea’s first automobile factory in 1934 in Bupyeong, and the ‘International Car Industry manufacturing the very first domestic car. Thereafter the automobile parts industry has grown around the Daewoo
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Bupyeong car factory as the core industry in Incheon. The Incheon automobile parts industry cluster’s main business is as follows:
Information on Automobile Parts Cluster Infrastructure-related Projects Business Section Contents Automobile parts storage complex - Promotion of integrated global knowledge-based industries - Support for related businesses within the complex - Placement of Domestic and foreign manufacturers, research institutes, and related facilities Integration - Review of financial support, tax incentives, and technology Complex development Creating an automotive theme park - Exhibitions, museums, theme stores (specializing in interior and parts), Safety Training Experience Centre, RC car stadiums, etc. Creation of auto parts distribution complex - Specialised parts centre, used parts centre, export assistance centre
Automotive technology centre in Incheon - Automotive parts engineering centre - Review of auto-parts fidelity Installation of - Part authentication support Supporting Facilities - Specialist training (both new and existing business workers) - Processing, measurement, test / evaluation system management / support Automotive performance laboratory - Driving test center and related research facilities
3.2.3. Daegu/Kyungbook automobile parts industry cluster
The automobile parts industry in Daegu and Kyungbook was grown as an infrastructure to complement the indigenous textile industry after the decrease in the textiles industry after 1990. The value of the local automotive industry increased by 560% to KWR23 trillion in 2004 from KRW4 trillion in 1990, showing an increase only lower than the electronics and communications industry (1,430%)
The economic strengthening of the automobile industry and the weakening of the local manufacturers increased the weight of the automobile parts industry. The proportion of employment in the auto parts industry rose from 6.9% in 1993 to 7.9% in 2004 and although the sales decreased, the ordinary margin increased, showing improvement in structure rather than appearance.
The direct international investment from the Daegu and Kyungbook region auto parts industry actively took place against China. The regional auto parts industry
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exports rose rapidly after 2002, the export rate rising to 22%, significantly higher than the national average.
4. Auto Parts Industry Cluster Model of Peru
The auto parts industry is a crucial component in future global competition. Especially in the long run, Peru needs to expand the auto parts industry in Tacna as the core strategic industry to create a global cluster. 4.1. Goal and Long-Term Road Map
While the world automotive market is restructuring based on rationality, the complete vehicles companies are strengthening their global sourcing, and modularizing their parts procurement systems. In the viewpoint of Peru, which does not have a complete vehicle company, these modularisation and global sourcing is a good opportunity for industrialisation. However the important thing is to choose a component to focus on. This report does not select a specific component, rather, this report emphasises that considering Peru’s technology isn’t that advanced, they need to put aside the high tech components and start with simple components. Thus it means that those components cannot be for futuristic cars requiring high technology. The goal and long term industry road map can be defines as such: The main purpose of this business is to build a centre for supporting research and development, components and materials storage complex integration, modulation complex establishment, to establish a network for R&D, manufacturing, showcasing, advertising, and marketing so that Tacna can construct a complete automobile corporation starting by becoming the international auto parts industry base station and components cluster.
Goal: International auto parts base station and components cluster establishment in the Tacna auto parts industrial city, ultimately establishing a complete automobile company.
The long term roadmap consists mainly of three stages: (1) laying the foundation, (2) empowerment, and (3) internationalisation.
Currently Peru does not have the sufficient infrastructure for industrialisation. Therefore, in the stage of laying the foundation (2013-18), there needs to be development of infrastructure for the auto parts cluster such as roads. In the empowerment stage (2019-22), is a stage where, based on the basic infrastructure, the empowerment of R&D happens. It is a stage constantly upgrading from the foundation stage based on the specific plans, especially in terms of network, globally
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empowering the network. The last stage of internationalisation (2023-25), is where the Peru auto industry cluster’s ultimate goal of establishing a complete automobile company and auto parts industry internationalisation takes place.
Peru Auto Parts Industry Long-Term Roadmap
4.2. Main contents of the roadmap
4.2.1. The roadmap in detail
Strategies to make Tacna into and auto parts industrial city in terms of several functional aspects can be expressed as such:
(1) Firstly, the first thing that should be put into action is laying the industrial cluster foundation which is a configuration of hardware. There needs to be enabling of integration by building a parts complex and making it possible to have medium sized parts suppliers move in by building modulation complexes. If there aren’t many module companies locally, many foreign companies will have to move in. Although the start will be through foreign companies, gradually technology will be transferred and much effort will be needed to nationalise; (2) Secondly, there is the empowerment of technology development. In the long run, the competitiveness of Peru’s auto parts industry will be possible through R&D. There needs to be an effort in R&D for the establishment of research facilities for auto parts (There is Auto Parts Research Centre in Korea) and
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related facilities for making domestic auto parts; (3) Third is human resource. Technology comes from people. As stated before, Peru is an international automotive market and many international car companies’ after-service (AS) centres are placed nationwide. Internationals as well as locals work as engineers. The fastest way to develop human resources is to invite these personnel to establish a field of study in a university related to automotive to develop future workforce that will lead the automotive industry. (4) Fourth is the establishment of business support systems. The endless support from government for the companies within the components complex and modulation complex, once established, will enable them to lead the business in the Tacna area. There needs to be an establishment of automotive technology center or automotive parts innovation centre that can link them in, network, tech support, and other related activities; (5) Fifth is enabling academic partnership. This report has noted about placing and attracting companies through building parts complexes and modulation complexes. In addition, it has noted about inviting current specialists in establishing an automotive college. The academic partnerships all exist, where it suggested, in Tacna. In a cluster the important aspect is the synergy between these clusters. There needs to be information exchange through networks of homogeneous or heterogeneous forums sorted by components; and
Peru Automotive Industry Business Execution
Laying the Foundation and Strengthening Building Enabling strengthening technology Worker Business academic Promoting the Industrial development training support partnerships globalization Cluster capacity Systems
Building storage Building Auto Establish Building Auto Establishing Building Auto complex parts research Automotive parts and operating exhibition in Building center University innovation Auto Tacna modulation Establishing Inviting center development Strengthening complex R&D center overseas Strengthen forum international Industrial Corporate professional interagency Operation of marketing infrastructure support for personnel networking sectoral auto Expanding development technology support tech focus overseas development group network
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(6) Sixth is promoting internationalisation. Currently the auto parts cluster needs to be settled through exchange incurred with foreign automotive specialists and organisations. Additionally, in the future, there needs to be a domestic PR organisation to advertise and market the domestic products internationally to acquire international prestige. Especially, efforts should be focused on the opening the market for auto parts. Near countries, such as Venezuela, Brazil, and Chile produce many global cars unlike Peru. Chrysler (9.7%), Ford (21.4%), GM (43.5%), and Toyota (13.5%) produce car in Venezuela. GM (53.55%) and Renault/Toyota (34%) produce car in Columbia. In Argentina 716,450 cars were produced at last year and are produced from 10 big companies such as Toyota, GM, and VW at a similar ratio at this year. In Brazil, 20 global auto companies produce 3.5 million cars at average per year. VW and GM have market share at each 29.3% and 17.9%. Like this global big motor companies assemble the car in near country which means locally good position to sell auto part products.
The contents of promoting auto parts industry in Peru noted above can be shown as two businesses plans like the diagram below. One is building infrastructure such as auto parts storing complex, modulation complex, and auto exhibition hall, the other is, based on that infrastructure, software content such as auto parts innovation centre, auto technology centre, and automotive college and businesses.
Peru auto parts industry cluster model
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Building of auto parts/storage complexes
First one designates an area of Tacna as a local industrial complex, building a complex specialised in components and parts related integration complexes. Through the establishment of the integration complexes, businesses and public institutions can be attracted, and providing rent spaces for integration of supporting organisations, placing various public institutions and research facilities will make R&D projects possible.
Building modulation complexes
In response to the change in auto production process called module production, there is establishment of demonstration complex to promoting modulation, module and related company attraction, and establishing an organic production system.
Performing research and development functions through the Auto Parts Innovation Centre (Proposed)
Auto parts innovation centre is more important than any other businesses, and is the core of R&D capabilities. This is about the construction and operation of auto parts innovation centre for expanding Tacna’s research and development capabilities. The centre is the base agency for technological innovation, quality improvement, enabling entrepreneurship. The main role is automotive related technology development and parts evaluation and certification support, prototype machining and instrumentation support, academic associations mutual development support, technology development and company expansion through business incubation, and preparing institutional framework by establishing organic co-operation systems between parts companies. One can see their role and organisation in more detail as depicted in Figure 4-9.
The operation of the organisation is comprised of 5 parts: (1) business support office, (2) R&D office, (3) test and evaluation office, (4) component development office, and (5) safety testing centre.
The business support office is responsible for business support networks, education/seminars, accounting, and administrative duties. The R&D office is responsible for technical challenges. The component development office is responsible for quality testing, parts processing and exchange. The test and evaluation office takes on durability testing, vibration testing, subject analysis, and reliability testing. Lastly, the safety test centre is responsible for safety tests and certification support.
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Main Roles and Functions of thePeru’s Auto Parts Innovation Centre
Organisational Structure of Peru’s Auto Parts Innovation Centre
Establishment of automotive technology centre and related educational departments
Auto Parts Innovation Center for research support facilities complements the automotive and automotive-related public research institutions, including graduate
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research and education facilities. In addition, for the building of a stable supply base for the advanced professional personnel that will lead the advancement of the industry there will be establishment of automotive technology department in surrounding universities. There will be industry customised training in undergraduate, masters, and doctoral studies outlining automotive design technology, manufacturing technology, and mechatronics.
Building the Tacna automotive public relations office
This enhances the image of Tacna as an automotive industrial city, and expands information tourism in vulnerable area while building within the regional display convention complex an intelligence building including showcasing area, convention space, meeting spaces, offices to rent out, accommodation, and sports/ leisure system.
4.2.2. Timeline
This report deals with the short term schedule within the 2013-18 establishment of infrastructure stage. It does not however deal with the costs and personnel because it’s different depending on the size of the cluster. In 2013, it needs to focus on the purchasing of required plots. It deals with starting the real estate purchases, site preparation work and finding companies and businesses that will occupy the complexes. After this hardware and software work, Peru can work on establishing departments in education for automotive related studies and related business (please refer to Figure 4-11 as well).
Timeline for the Establishment of Infrastructure
Business Details 2013 2014 2015 2016 2017 2018 Land purchase Building auto parts storage Site preparation Sate/occupancy
Building Land purchase modulation Site preparation complex Sale / occupancy
Building auto Land purchase parts Site preparation innovation Building design center Construction Operation Land purchase Site preparation Building auto Building design tech center Construction Operation Department Automotive selection department Department establishmeat and establishment operation
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4.3. The precondition for the success of Peru Automotive Parts Cluster
The model above needs to fit the conditions below to be carried out successfully.
(1) Firstly, several factors, attributes of clusters, must be met.
The first attribute is that the related companies and research facilities need to be in close proximity. This becomes possible as the Peruvian government and municipalities, through appropriate policies, efficiently provide necessary infrastructure. A cluster needs to include key components such as public agencies, businesses, standards certification agencies, research institutes, vocational training institutions, and various business support agencies.
For prolonged expansion of the cluster, a regional innovation system needs to be established. The companies within the supply chain need to increase mutual reliability through co-operation.
The Conditions and Components of a Cluster Category Content Other Appropriate policy Providing infrastructure such as Basic Circumstances Geographical concentration companies, institutions and infrastructure related industries
Public institutions, companies, Enterprise-specific skills training universities, standards according to demand, certification bodies, research education, information, research Components institutes, vocational training and technical support institutions, business support agencies, etc.
(2) Secondly, this business must be preceded by, and agreement of, technological alliance/co-operation and delivery method with complete automobile manufacturers.
Auto parts industry requires guaranteed demand for the complete automotive company. In other words, the parts industry is very much dependent on carmakers. The supply contract with the carmakers is implemented by the Peruvian government on a national level. Thus, there needs to be technical alliances and joint ventures for making acquiring technology possible. The path to technical co-operation often means a guest engineer participating from the start of development of a new model to the end. Therefore before putting this business under way, there needs to be an
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agreement about the possibility of a supply contract and technology transfer with the carmakers.
(3) Thirdly, there needs to be a master plan before undertaking this project.
Every business has to be preceded by a master plan. The reason for emphasizing such obvious matter is because it is a business nonexistent in Peru. If such precedent businesses don’t exist, one needs to do some benchmarking of foreign cases. Therefore when building a master plan, there is needs to be collaboration with international consultants to build a master plan fit for Tacna.
(4) Fourthly, the stakeholders or principal agents in this project need to perform their role faithfully.
For the success of this auto parts industry model, it needs to planned, facilitated, and developed, and factors such as funds and facilitators are necessary. We now look into the government and subjects’ roles for the success of this model. According to the cluster theory, the main agent is defined by specialised suppliers, system organiser and vision provider, and the working principle of industry clusters is configuration with the principal division of roles between the formation of networks and knowledge creation through interaction. This could vary between clusters but generally the vision provider develops source, provide direction for the development of industry, and becomes the foundation for talent supply, venture, and entrepreneurship. The system organiser commercialises the source and combine/sells components and elemental technology. Lastly the specialised suppliers are defined by a support service company that provide ventures, finances, marketing, and legal service, and SMEs that provide components and elemental technology.27) Currently there is no one to work as the specialised component suppliers. Thus the definition of their role below is based on the Peruvian government and the local government of Tacna.
The Peruvian government
i. Plays the role of the vision provider that suggests directions for the development of the auto parts industry; ii. Selecting Tacna as a demonstrative region, creates international auto parts industry cluster and reviews the plans for using it as a model for future clusters; iii. Makes it possible to develop and create clusters by connecting the support policies that each local government is promoting, while providing long term support so that Tacna can have indigenous development infrastructure; and iv. Placing principal agents that will in the near future act as the specialised
27) Bok, D. G. et al. (2002)
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suppliers who will be in charge of talent supply, college department establishment, and venture / entrepreneurship attraction
Tacna local government
The Tacna local government needs temporarily to perform the role of the vision provider and the system organiser.
i. Through Tacna builds infrastructure on which industry clusters can be formed and reflects the opinions and positions of the corporations, (in the software development phase) who are the main consumers; ii. For the creation and development of clusters, creates general consensus and definition about the roles between each corporation; iii. Needs to provide circumstances and opportunities for collective learning; iv. Needs to create an environment to promote industrial innovation and expansion; v. Need to work on linking to the network of universities, industrial associations, and companies within the ready-formed international automotive industrial clusters; and vi. Need to advertise internationally to attract multinational enterprises.
(5) Lastly, this business must lead by the Peruvian central government,
As stated before, this project is not something that can be achieved by the Tacna local government alone; there are two big reasons why it must be done on a national scale.
(1) First is, because of the characteristics of the auto parts industry, like stated above, contracts and technology transfers with carmakers are only possible by the Peruvian central government. The supply contract with the carmakers is not something possible for the Tacna local government and must be executed by the central government; and (2) The other is that it is a locally specialised industry. It will be a huge investment for the country to host an auto parts industry cluster in Tacna where there isn’t proper infrastructure. By analyzing the feasibility they need to determine the adequate amount of investment and possibilities. Thus whether or not this business succeeds depend mostly on government participation. Therefore the Peruvian central government should support the expansion of the auto parts industry with finance and tax support plus everything the government can do, and should perform the role of the Peruvian government noted above.
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The Regional Development Plans for the Southern Economic Corridor in Peru:Linking the Coffee, Alpaca, and Auto-Part Industries with the World Chapter 5
Regional Strategic Industry Development Plan: Micro, Small, and Medium Enterprise Co- operative and Agro-Industrial Complex
Summary 1. Background Information 2. Development of Co-operative Programmes: A Private Sector-led Model 3. Development of the Agro-Industrial Complex: The Public Sector-Led Model 4. Summaries, Conclusions, and Policy Recommendations
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Regional Strategic Industry Development Plan: Micro, Small, and Medium Enterprise Co-operative and Agro-Industrial Complex
Soungyoun Oh (P&J)
Summary
This chapter starts with the question as to why growth in the Soutern Economic Corridor (SEC) in Peru is lagging behind vis-a-vis' other economic regions, in spite of the fact that it possesses a large potential for growth. It is also noted that the dominating type of businesses in the SEC, MSMEs, in large part are fragmented thus lagging competitiveness. To remedy this, the Government of Peru has initiated a number of support programmes, especially encouraging them to organise and pool their resources. By doing so, they would be able to attain ”scale merit.”
To this extent, the chapter elaborates on the ”associativity” and ”collectivity” of MSMEs as the tools to account for the innate size-disadvantages of MSMEs. Perhaps the Korean experiences in this field may serve as good reference points. And the establishment of smaller-sized industrial clusters consisting of local industries implicated by regional specialties, e.g. coffee, alpaca, is also proposed.
The model of enhancing MSME competitiveness through associativity is largely private-sector driven. However, it does not mean that the government intervention is not necessary. To implement and enroot these programmes successfully, it also points out that a policy intermediary is needed. The role of the intermediary is impeccable, as on behalf of the government, it carries out the government support policies and facilitates the programmes that aim to foster the competitiveness of MSMEs.
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As the public-sector driven model that enhances the competitiveness of MSMEs, the development of an agro-industrial complex is proposed. The model accounts for the rapid urbanisation and introduces industrialisation in the rural areas that lag behind other areas. The complex, as a part of agglomeration of MSMEs, would also render an opportunity to the rural population to have ”sideline income sources” so that it would contribute to increase the income level. This would, in turn, not only contribute to poverty reduction, but also ameliorate the migration of the rural population to the urban areas.
The linkage of an agro-industrial complex and the Science Parks that the Government of Peru plans to establish in the rural areas increases the probability of success of the agro-industrial complex. As such, the likelihood of success of the agro- industrial complex would increase when it is linked with other development-related policies and plans, as they also, at times, target the same areas aiming identical, or similar, objectives.
To warrant the success of the complex, it is necessary to design and implement congenial and effective support measures that facilitate the needs of MSMEs in the SEC; they also have to be implemented continuously without lacks until the complex could operate on its own. Hence, the selection of the tenant firms is highly important, as it would consume scarce government resources. To this end, the role of the policy intermediary, as an expert, is again stressed. Therefore, it can be concluded that it would be the congenial and effective institutions that could warrant the probability of success of the MSME support programmes, and further, the growth of the SEC as a whole.
Policy Recommendations
Based on the discussions brought forth in this chapter, the following policies and actions are recommended:
(1) Design co-operative programmes congenial to MSMEs in the SEC to organise and pool their resources so that they could attain the ”scale merit”; (1.1) In this vein, introduce the informal MSMEs to the formal sector; (1.2) Devise a strategy to organise MSMEs to larger scaled business units; (1.3) Organise MSMEs in the identical or similar trades to co-operatives. (2) Devise the plans to establish, as a public-sector driven associativity programme to organise MSMEs in the SEC, an agro-industrial complex implicated by regional specialties, e.g. coffee and alpaca, in order to foster regional development; (3) Establish a MSME support policy intermediary, given that the government
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itself is uncongenial to assume the micro-level tasks ; (3.1) In this vein, the policy intermediary should be mandated to implement MSME support policies established by the government; (3.2) In Peru’s setting, to re-organise and strengthen Centro de Innovacion' Technologica' (CITE) can be viewed as an alternative to a new policy intermediary; (4) The government may consider extending a low interest loan programme to build an alpaca fibre processing plant in Puno, as it does not require the government to commit continued infusion of funds; (5) In order to increase the competitiveness of regional specialty producers, e.g. coffee, alpaca, etc., the development of common brands need to be considered, as they bring forth the bargaining power of the producers; (6) In the similar vein, the design for the Government Procurement Schedule for the regional specialties is recommended to open a market channel for the producers in the SEC; (7) Overall competitiveness of the regional speciality producers need to be designed; specifically, technical capacity building is an urgent task; (7.1) To this end, the producers can be linked to Korea’s ”Dispatch Programme of Retired Engineers”; (8) When extending the support to the MSMEs in the complex, devise an index system to evaluate proposed sites for a complex as well as the qualification of individual MSME; (9) The plan to establish an agro-industrial complex needs to be linked with other development-related policies and plans, such as plans for the development of the growth-lagging areas, poverty reduction plans, environment improvement plans, etc.; (10) In order to ensure the sustained growth of the complex, it is necessary to share innovative capacity by enhancing the industry-academia-research linkage with ”anchor firms,” universities, and/or national industrial complexes located in adjacent areas; (11) It is necessary to plan to enlarge the complex to a larger Extended Regional Agro-industrial Complex by linking it to adjacent larger departments/ provinces. Cusco or Puno has potential for this scheme as it can agglomerate specific products. As such, to establish an Extended Regional Agro-Industrial Complex needs to be considered by appointing and agglomerating smaller regions;
Further Areas of the Study
In order to increase the likelihood of success of the regional development in the SEC, the tasks that follow need to be dealt with in detail. Because of the limitation of time and resources, however, these topics have not been studied in details in spite of their importance; thus, they should be dealt with in another study.
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(1) The re-organisation of the legal foundation in association with MSME’a associativity
To increase the probability of success of the co-operative programme, the establishment of the main actor of the programme, co-operatives, is essential. And to this end, the legal foundation is necessary. So it is recommended to promulgate the Act of MSME Co-operatives (tentative). In this act, the following factors constitute the essential parts:
- Definition of profit-oriented co-operatives - Qualification of the members of a co-operative that accounts for the informal MSMEs - A ”collective private contract system” that warrants the stable production and sales activities of regionally produced goods
(2) Amendment of the Law on the Promotion and Formalisation of Micro and Small Industry (Ley de Promocion' y Formalizacion' de la Micro y Pequena~ Empresa) and/or the promulgation of the SME Promotion Act (tentative)
In order to extend the government support to the tenant firms, or would-be tenants, in the agro-industrial complex, the preceding acts are essential. The laws are recommended to include:
- Re-define MSME; - Establishment of funds to augment MSMEs’ access to financial services; - Establishment of a policy intermediary in order to manage and execute the funds; - Define the business scope of the policy intermediary; - Establish a new policy intermediary or re-assign existing institutions, e.g. CITE, PROMPYME, etc.
(3) Promulgation or amendment of the laws to bolster the agro-industrial complex
The gist of the success of the agro-industrial complex programme resides with the government support measures. Therefore, the programme may overlap with existing laws and institutions in a few areas. Thus, a comprehensive legal analysis is necessary. Nonetheless, the laws that follow are perhaps fundamental to the realisation of the complex; hence, they need a closer legal analysis. For example,
- The Act on Agro-Industry Complex; - The Act on Public Procurement; and - The Act on Exemption and Reduction of Taxes
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1. Background Information 1.1. Growth potential in the South Economic Corridor (SEC)
As was identified in Chapter 1, the SEC, among the three economic corridors, lags behind other corridors in terms of mobilisable inputs and subsequently outputs (See Table 1-3, Figure 1-7 and 1-8). However, this does not mean that the growth potential of the SEC should go unnoticed. For example, the region of Tacna is known for the exports of such agricultural products are olive, oregano, onions, and variety of fruits. Especially, some 68% of olives grown in Peru are produced in this region. Of the outputs, approximately 98% are exported to Brazil. Tacna is also responsible for 53% of Peru’s oregano production. This oregano is exported to Brazil (54%), Chile (22%), and Ukraine (6%)
Besides the agriculture, fishery is also a major industry in this region. Tacna currently harvests a wide variety of fish and seafood including abalones, anchovies, scallops, and clams to export to Japan. There are about 1,200 employees and 37 organisations, e.g. the National Federation of Fishery Co-operatives, in this industry.
Coffee, one of Peru’s major exports, is grown in the vallies of the Southern Andes and alpaca is herded and produced in the highlands of the Andes Mountains. Although Puno accounts for merely 2.4% of the nation’s total coffee yield, its quality has been regarded as one of the best in the world. In fact, Puno’s organic coffee has won several international awards.
Puno is also known for its alpaca, accounting for some 53.7% of the nation’s alpaca production. And the SEC as a whole retains some 91% of the stock of the nation’s alpacas (Figure 5-1).
Share of the Stock of Alpaca, 2010
Source: CEPLAN (2012)
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Cusco and the adjacent regions have great potential for tourism. These areas are known for their numerous archaeological sites as well as a wide variety of biodiversity. Beyond its natural climate and geography, it is also known worldwide for the historical and cultural heritage ruins, such as Machu Picchu. As a result, a variety of activities including handicrafts, construction, and food services are promoting regional development.
As such, the growth potential of the SEC has always been high. Then crucial questions that can be raised are: why is the SEC lagging behind other corridors? How could the growth in the SEC be fostered?
1.2. The challenges to growth in the South Economic Corridor
In Chapter 1, it was suggested that the fostering of growth and poverty reduction could be attained by the promotion of MSMEs, as they are the agent of regional development. Indeed, the promotion of MSMEs is perhaps one of the most plausible means to promote growth in the South, given that the prevailing type of businesses in the region is micro and small businesses. Furthermore, more than 32% of MSMEs in Puno, for example, are operated as the subsistent-level family businesses (See Table 2-3). This implies that most micro businesses in the region cannot be qualified to be ”enterprises” in the traditional sense; rather they barely make their daily livelihood through the alpaca trade. In fact, the majority of the businesses operating in the alpaca industry are informal (See also Figure 2-2). And because of this reason, official support measures, e.g. support to access to credit, often do not reach them. Hence, the frailty of the industry is left without improvement, which, in turn, leads to the lack of competitiveness and the downturn of the businesses in terms of sales and revenue, obviously triggering the downward spiral of economic hardship of micro and small businesses.
As such, one of the most conspicuous challenges that MSMEs in this region face would be fragmentation of micro and small businesses (MSEs), which has been repeatedly identified throughout the chapters of this document. In fact, the most afflictive problem that is entailed by the fragmentation of MSEs would be, as pointed out in Chapter 1, the lack of competitiveness due to the absence of economies of scale.
To remedy this, the Government of Peru has instituted a number of support programmes. Especially the government sees the associativity as the key to remedy the fragmentation of the MSEs. However, some cultural elements hinder the MSEs to effectively work together towards their common interests. For example due to wide-
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spread individualism of the entrepreneurs, each entrepreneur acts on his/her own, which leads to the lack of any formal institution that acts as an agent for the producers as a whole.28) In addition to the structural problems, e.g. insufficient infra- structure, the access to finance, the access to markets, purchasing, and the shortfall in negotiating skills, the cultural aspect and behavioural problems bloat the challenges even more severe.29)
In this backdrop, this chapter will look into the associativity of MSMEs and the development of agro-industrial complex, which have realised a reasonably high degree of success in Korea to remedy the shortfall of MSMEs’ economies of scale and the regional development.
2. Development of Co-operative Programmes: A Private Sector-led Model
The industrial, and therefore, economic characteristics of each region in Peru’s southern corridor are different. Subsequently, the regional development model has to be different. In the case of coastal areas like Tacna, it is perhaps more appropriate to adopt the urban model in which manufacturing imbued by high technology leads the local economy.
However, in the area where agriculture prevails, e.g. the jungle or highlands regions in the SEC, the rural model, emphasising more on the agro-industrial complexes, animal husbandry, etc. would be more suitable. As these areas generally lack a vigorous business base, strategic support of the central or regional government is absolutely needed to establish the place for active business exchange because the building of the business base in the rural areas is not often economically feasible. Thus, the government intervention becomes necessary.
To reiterate, the process of the setting-up of the business base in the rural area should not be evaluated by the economic logic, but rather by the prism of equitable growth. This means that the logic of the balanced growth among the regions, the amelioration of income inequality, poverty reduction, etc. has to be preceded by economic feasibility. Accordingly, the resources of the central or regional government have to be directed to where sunk costs are high, such as the building of infra- structure of, for example, an agro-industrial complex.
28) The Provincial Government of Tacna (2011) Personal interview, The KSP 2011 Initial Demand Survey, 20 July 2011, Tacna. 29) Ibid.
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In the SEC, the development of MSMEs is perhaps fostered by two policy measures. First, it would be necessary to organise micro-enterprises in the region into a larger-scaled unit, e.g. an MSME co-operative, so that micro enterprises could be benefitted from the size-advantage (economies of scale). And, second, the competitiveness could be attained through smaller-sized industrial clusters consisting of the local industries implicated by regional specialties.
In sum, this chapter suggests the two policy measures in the following for the development of MSMEs, and subsequently the promotion of their competitiveness, in the SEC:
co-operative programmes to foster the ”scale merits” for MSMEs; and agro-industrial complexes implicated by regional specialties, thus to promote regional growth
2.1. Co-operative programmes
2.1.1. Needs for the organising of MSMEs
In general, the productivity of MSMEs is low owing to their inherent attribute. They often lack access to finance and management skills. Thus, they lack the capacity to account for the changing environment. MSMEs are in general afflicted by obsolete machinery and equipment, let alone the newest technologies. All of these elements are inter-related, affecting the downward spiral of MSMEs’ lack of productivity, thus their competitiveness. Hence, it is necessary to bolster MSMEs to overcome these shortcomings. One of such support measures would be to organise MSMEs in a larger scaled unit by pooling, so that they could establish an industrial complex. By doing so, they could effectively account for the changing business environment which could not be possibly done so by each MSME alone. They could collectively operate their businesses so that they could benefit from improved business conditions achievable by an enlarged scale of their businesses.
Those MSMEs pool their resource in a co-operative in the SEC, mainly a non- industrial and mountainous region having a locational and geographic disadvantage, may moved into newly established industrial complexes in a group, so that the environmental problems arising from discharged sewage, air-pollution, noise- pollution, etc. could be resolved. In addition, they could share information on raw materials, required labour, and the market changes, which would obviously render them a competitive edge. All in all, the agglomeration would permit the MSMEs, once in a competitive relationship, to pursue co-operative relationships based on their common interests and the division of labour. By doing so, the participating
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MSMEs in the co-operative could benefit from the sharing of such costs in investment in equipment and facilities and business operation.
Distribution of MSEs in Peru by Number of Employees, 2009 Micro business Small business Total 1-5 6-10 Sub-total 11-20 21-50 51-100 Sub-total (%) 97.0 1.7 98.7 0.8 0.4 0.1 1.3 100.0 Source: SUNAT (2009) ”Single Register of Taxpayers, 2009” http://www.sunat.gob.pe/ (Access date: 20 November 2011)
As shown in Table 5-1, micro businesses employing less than and/or equal to 10 persons constitute a majority, approximately 98.7%, of MSMEsin Peru. In addition, some 66.9% of MSMEs in Peru are, as mentioned elsewhere in this document, informal (Table 5-2).
Estimated Number of the Informal MSMEs in Peru YearTotal MSMEs Formal Informal 2004 2,935,496(100.0%) 648,147(22.1%) 2,287,349(77.9%) 2006 3,092,859(100.0%) 880,983(28.5%) 2,211,876(71.5%) 2008/9 3,383,325(100.0%) 1,119,254(33.1%) 2,264,071(66.9%) Source: Ministerio del Trabajo y Promoci'on del Empleo, MTPE (2009)“ Encuesta Nacional de Hogares (National Household Survey),”and SUNAT (2009)
Thus, it is necessary to induce the informal businesses to the formal sector. In addition, it is needed to organise micro enterprises to small businesses with a considerable size by ”scalising.” By the same token, it is also required to transform small businesses to medium-sized firms.
Organisation and ”Scalisation” of MSMEs
Source: Comitede′ MYPES Textiles Productoras de Chompas del Peru' (July 2011)
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To this extent, it is necessary to devise a strategy that induces MSMEs in the Areas A and B to the Area C (in Figure 5-2) via organising themto larger scaled business units. The current role of the organisations representing MSMEs in Peruis somewhat limited to a la interest group, e.g. an association, just pursuing the common interest of individual members, rather than pursuing public good as a responsible economic actor in the national economy. Thus, it is necessary to organise MSMEs to a co-operative or incorporated status, so that the co- operative (or incorporated), as an economic actor, could contribute systematically to the nation’s economy.
To this end, those MSMEs operating in the identical industries (or producing similar goods) could be grouped in a co-operative in which each MSME participates as a shareholder. By doing so, MSMEs, through the co-operative, could acquire their bargaining power, thus enhancing competitiveness.
In sum, the Government of Peru is recommended to give the policy directions in below under the consideration:
Induce the informal MSMEs to the formal sector; Devise a strategy to organise MSMEs to larger scaled business units; and Organise MSMEs in the identical or similar trades to co-operatives
2.1.2. The rural area co-operative complex: A MSME co-operative programme
For the fostering of the co-operation among MSMEs in the rural area, the establishment of rural area co-operative complex is also worth mentioning. An industrial complex can be established and managed by the local government and can be set up in agricultural or fishery regions in the rural area. The government can set up a small-scale industrial complex in the area adjacent to an urban population centre, housing those MSMEs that mainly operate in the area of regional specialty industries and co-operative businesses. In order to invigorate the business activities in the complex, the local government needs to extend an assistance package to the MSMEs including the legal and institutional support as well as tax incentives. The arguments thus far can be summarised as:
The establishment of rural area industrial complexes needs to be placed under the government’s consideration in order to foster the regional MSME competitiveness.
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2.1.3. The need for an MSME policy intermediary
An important point to the successful implementation of the rural area complex is that a policy intermediary with the mandate of managing the complex is necessary. The policy intermediary needs to assume the role of the operation manager of the complex. In fact, most MSMEs are exposed to an unfavourable business environment and face challenges in their access to finance, market, information, etc. Subsequently, the MSMEs lose competitiveness over time and ultimately wrap up their businesses. This calls for the government intervention.
However, the government in general is uncongenial to assume such micro-level roles asthat of supporting of MSMEs or the operating of the complex. The government should rather focus on more comprehensive plains, such as the macro- level MSME support policy setting, the provision of support strategies, etc. The micro- level works need to be delegated to the ”MSME policy intermediary” as a subsidiary of the responsible government branch.
If there is no such of a policy intermediary in the local or central government in Peru, the establishment of one needs to be placed under the consideration of the government. The reason for this is two-fold: firstly, the government lacks expertise given that officers in charge often change their posts. Thus, the policy consistency may be maintained but the expertise on MSME support may be absent. Secondly, policy distortion may occur if the government were in charge of implementing the policy. All in all, the implementation of MSME policy requires high expertise and consistency on the subject matters, transparency, and business friendliness.
Utilising the intermediary, the central, or local, government channels through such proactive measures as business development services (BDS), business consulting for MSMEs in the field of management and technology, etc., whereby MSMEs could benefit to enhance their competitiveness. Furthermore, the intermediary could institute training programmes to enhance the development of human resource and the MSME capacity building. The intermediary could also be responsible for the execution of the government policy fund.
To reiterate the discussions presented thus far:
It is recommended that the Government of Peru consider the establishment of an MSME support policy intermediary, given that the government itself is uncongenial to assume the micro-level tasks; and The policy intermediary should be mandated to implement MSME support policies set by the government. In Peru’s setting, to re-organise and strengthen Centro de Innovacion′
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Tecnologica′ (CITE, the Technological Innovation Centre) can be thought as an alternative to the setting-up of a new policy intermediary. The CITE can closely work with the vice-ministry of SMEs in the Ministry of Production. The vice- ministry provides the MSME support policy and strategy while the CITE, as the policy intermediary, implements them.
2.2. Implementing the co-operative programmes
2.2.1. Overview of the co-operative programme
The co-operative programme is a jointly-conducted business in which participating MSMEs agglomerate their resources and jointly solve common problems they face. In addition, they pool their resources to build, install and operate common facilities, e.g. production facilities, pollution control facilities, warehouses, exhibition centres, etc. Through the programme, MSMEs could benefit from the advantages derived by the joint-operation of businesses. For example, they could improve productivity and managerial capacity. The co-operative programme also aims to enhance MSMEs’competitiveness by achieving scale economy and exercising bargaining power in purchasing and selling. By co-operating, MSMEs could share the cost of developing new technologies. As such, the co-operate programme encourages and supports MSMEs do all these co-operative activities, thereby permitting MSMEs to gain competitiveness.
This model could be very much applicable to the South Economic Corridor. For example, the MSMEs in the coastal area of the SEC could reduce their operation cost by jointly building a processing plant for their sea catches, e.g. a processing floor to clean fishes with sewer facility, machinery, etc. They could jointly build anti-pollution facilities in addition to other facilities that they could utilise them together as common properties so that they avoid overlaps in investment and attain the scale economy.
This programme could also be applied to valleys and the lower Andes where such cash crops as coffee, oregano, olives, etc. are grown. They could build, for example, a joint processing plant for their crops, so that MSMEs could ameliorate the difficulties that they face. This common facility would of course render them the opportunity to achieve a degree of scale economy.
The viability of the programme can be extended to the alpaca industry in the high Andes as well. Employing the model, small-sized alpaca processors could gain not only the scale economy but also the bargaining power when purchasing raw materials. In addition, they could control the amount of outputs, hence the price.
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They could also attain the mass-production capacity and the quality improvement by investing jointly in a modernised factory. By so doing, the MSMEs in the alpaca industry in the high Andes could improve their credibility on quality and delivery and productivity and reduce the manufacturing costs, thereby maximising the profits.
However, there are some conditions that have to be met in order to establish the co-operative programme. Those are,
(1) There should be a certain number of MSMEs that have an interest in participating inthe programme; (2) A leader with strong leadership skills, who, of course, is committed to the programme, has to be selected by an agreement of the participating MSMEs; and (3) Devise plans that could strengthen the competitiveness of MSMEs in the community.
This co-operative programme may be undertaken by one of the following entities:
(1) Those co-operatives or the corporations incorporated by the participating MSMEs in the co-operative programmes will commit to the specific purposes of the promotion of the co-operative programmes; (2) Those MSME co-operatives established and authorised by law; (3) Those public enterprises established by state agencies, municipalities, or the laws; and (4) Other entities recognised by the central government or the regional governments.
2.2.2. Types of the co-operative programmes
There are some types of co-operative programmes that could foster MSMEs’ competitiveness. The programme can be classified as the collectivisation, common ownership of facilities, and collaboration.
(1) Collectivisation
The first type of the co-operative programme is collectivisation. As is inferred, it is the programme that businesses and the appended facilities in a certain area are collectivised in order to strengthen competitiveness. Examples include the collectivisations of manufacturing firms, laboratories, information technology (IT) businesses, import-export brokerages, etc.
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(2) Common ownership of facilities
The second type is called the common ownership of facilities. MSMEs jointly build and utilise the facilities that require high costs which individual MSME otherwise cannot possibly build alone. Such facilities and equipment as high cost manufacturing facilities and equipment, research and development facilities and equipment, anti-pollution faculties and equipment, a warehouse, an exhibition centre, etc. would be the examples.
(3) Collaboration
The third case of co-operative programme is collaboration. To improve management capacity and practices, the participating MSMEs jointly promote such business activities as technology development, product development, brand development and promotion, sales, purchasing of raw materials, quality management, information access, overseas market development, exports, etc. The establishment of a consortium and the development of common products and common brands, the joint purchase of raw materials, the development of a common website would be good examples of the collaboration of MSMEs.
2.2.3. The government’s policy loans to support the programme
In order to warrant the success, this programme will require active involvement of the government. Especially, the government’s financial support should be extended from the preparation of land for the proposed site for the programme, to construction, to working capital, to the installation of facilities and equipment, and until the programme reaches the full production phase.
The following are examples of financial support extended to the programme by the Korean government (Table 5-3 and 5-4):
Some Examples of the Financial Support Rendered by the Korean Government Description Interest rate Loan period Rate of the support For common facilities: Up to 100% of actual expenses Loan for the Up to 10 years Individual facilities: Facilities and including a 5-year - Land and building: Up to 80% equipment About 2% grace period ofactual expenses lower than on- - Machinery and equipment: Up going market to100% rate Up to 100% of working capital Working Up to 5 years capital including a 2-year Up to 100% of the first round grace period working capital
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The Cap of the Policy Loans Set by the Korean Government Loan Amount to the Programme Loan Amount to the Participating Description Promoting Entity MSME KRW4.5 million (approximately Loan for the US$4.09 million): However, KRW15 KRW4 million (approximately US$3.6 Facilities and million (approximately US$13.6 million) equipment million) will be supported to the collectivisation programme)
KRW4 million (approximately US$3.6 Loan for the KRW3 million (approximately US$2.7 million): However, it will only be collaboration million): However, it will only be KRW3 million, or US$2.7 million, if programme KRW2 million, or US$1.8 million, if no no facilities are involved. facilities are involved.
KRW1 million (approximately 910 Working capital KRW5 million (approximately US$455 thousand) thousand)
2.2.4. Tax incentives
To the successful implementation of the co-operative programme, tax incentives are as equally important as the policy fund (loans). Especially, the support of the programme has to be concentrated on the acquisition of properties on business purpose. In Korea, the government extended a 50% reduction on the acquisition tax, the registration tax, and the property tax for the properties acquired by an entity, which has been authorised to implement certain plans as parts of a co-operative programme, in the purpose of sell, lease, or rent to the participating MSMEs of the co-operative programme.
Furthermore, the government has also supported the programme as to extend a tax exemptionon the acquisition tax and registration tax for the very first property acquired by the management entity or the participating MSMEs of the co-operative programme30) as well as a 50% reduction on the property tax and the integral land tax for five years.
2.2.5. Some measures to implement the co-operative programme
Although there will be some regional differences, the co-operative programme is a co-operative business project promoted by multiple private business entities of the same, or similar, product line. The most difficult challenge is to agglomerate micro and small enterprises into a co-operative entity. There have been number of instances
30) However, the exemption is applicable only to the case in which an entity registers the acquired property to the registrar within two years from the date of the transfer of the ownership.
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in the past in which such wide-spread undesirable factors as conflicts of interest, distrust, uncertainty towards the success, etc. have often derailed the co-operative programme. Therefore, it will be essential for the successful implementation of the programme for the policy intermediary to actively persuade MSMEs paving the ground for trust and a vision for the future.
In order to resolve the issue of distrust among the participating MSMEs, the programme could be initiated by such public entities as local authorities or the policy intermediary as a pilot programme and then could be transferred to the participating firms when the participating MSMEs gained full confidence in the programme.
Figure 5-3 that follows depicts the stages of the disbursement of a policy fund for the co-operative programme. As is shown, the important stages would include: (1) approval request of business plan (2) field survey (3) approval (of the business plan) (4) recommendations (5) request for fund (6) request for lending (7) lend money (8) grant loan request (9) business development service (BDS), the training and information service, etc.
Stages of Disbursement of the Policy Loans
2.2.6. The results of the co-operative programme in Korea
In the period 1979-2007, the Small Business Corporation (SBC) of Korea, an SME policy intermediary, has authorised 789 co-operative programmes in various types. The programmes include 340 programmes in the machinery and metallic businesses, 74 programmes in the electric and electronic businesses, 101 programmes in the
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textile and chemical engineering businesses, and 274 others (See Table 5-5).
Number of Co-operative Programmes by Business Type, 1979-2007 Machinery Textile and and Electric and chemical Others Total Metallurgy electronics engineering Number of 340 74 101 274 789 programmes (43.1) (9.4) (12.8) (34.7) (100.0) (%)
As sorted by the types of co-operative programme, presented in Table 5-6, there are 567 collectivisation programmes that have been thus far approved during the period 1979-2007 in Korea; some 102 joint warehouse programmes, joint waste-water treatment systems, joint exhibition centre programmes have been approved. As for the collaboration projects, there are 120 programmes that have been approved.
Number of Co-operative Programmes by Type, 1979-2007 Collectivisation Common ownership Collaboration Total
Number of 567 102 120 789 programmes (71.9) (12.9) (15.2) (100.0) (%)
As repeatedly discussed, the co-operative programmes render the participating MSMEs a competitive edge that an individual MSME could not otherwise attain. This is not entirely an over-stated claim as witnessed by the results of business performances shown by the SMEs in the co-operative programme. As shown in Table 5-7, an increase in exports, number of employees, sales revenue, and labour productivity is conspicuous in the post co-operative compared to the pre co-operative period. Comparing to the business performance, an SME in the co-operative programme has performed by far greater than an SME in general.
Comparison of Business Performances between the Pre- and Post-Co-operative Programme: The Case of Korean SMEs Average of the participating SMEs Average increase per SME Pre Co-operative Post Co-operative Programme (1983) programme (1987) Participating SMEs SME in general Amount of exports (US$ thousands) 33 270 718.2 63.4 Number of employees 37.6 52.7 40.0 1.9 Sales revenue (KRW million) 309.0 827.3 167.5 45.6 Labour productivity (KRW thousand) 2,605 4,581 75.9 65.5
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Comparison of Water Treatmentin a Plating Complex between the Pre- and Post-Co-operative Programme: A Case of Korean SMEs
Treatment Legal Pre co-operative Post co-operative capacity Description requirement programme programme Cu (copper) 3mg/ℓ 3mg/ℓ 1mg/ℓ Cn (Cyanade) 1mg/ℓ 1mg/ℓ 0.1mg/ℓ 400 M/T per day Bio-chemical oxygen demand (BOD) 150mg/ℓ 100mg/ℓ 30mg/ℓ Zn (Zinc) 5mg/ℓ 5mg/ℓ 0.5mg/ℓ
As shown in the case of an SME in Banwol Plating Co-operative Complex presented in Table 5-8, the discharge of the amount of pollutants in waste water has significantly declined after the co-operative programme.
As demonstrated in the cases, the affirmative impact of the co-operative programme is impeccable. In addition, the programme brings forth other benefits, such as an efficient use of industrial lands. As multiple numbers of firms agglomerate in a complex and use common facilities, the efficiency of the land use is obviously augmented. Furthermore, the operational efficiency is also increased as the firms jointly install a common water-supply and a waste water system as well as a common power supply system. The roads adjacent to the complex can also be built jointly. All in all, the costs and benefits from the agglomeration can commonly be shared, whereby managerial and operational efficiency can be achieved.
2.3. The application of the co-operative model to the region of Puno
As presented with some supporting evidence, the benefits that MSMEs could garner from the co-operative programme are impeccable. A crucial question, then, would be: could we possibly apply this model to the SEC? If so, how?
As introduced in the preceding section, alpaca is the major industry in the region of Puno (See also Figure 5-1). The region of Puno produces approximately 4,000 M/T of alpaca fibre a year and about one million people in the region are working directly and indirectly in the alpaca industry. However, there are no processing plants, e.g. threading and weaving factories, in Puno, thus alpaca fibres are sent to Arequipa for processing. Obviously, this adds the transportation costs, which not only lowers price competitiveness, but also imposes difficulties in the access to new technologies and quality control. As a result, the alpaca produced in Puno seems to be gradually losing overall competitiveness.
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To resolve these regional predicaments, the co-operative programme will be helpful. For example, multiple numbers of alpaca producers in Puno form a co- operative, that then builds a processing factory. In other words, the producers, as legitimate members of the co-operative, contribute a certain sum of money to the co- operative as working capital, thereby forming a business co-operative. Local government (the regional government) extends its support to the co-operative by way of a long-term loan at a lower interest rate. The loan is extended for the preparation of the proposed complex, the building, the purchase of new machinery and equipment, and the initial operation of the processing factory.
To conclude, it can be said:
That an active employment of a alpaca producer’s business co-operative will be able to effectively deal with the low overall competitiveness of the alpaca industry in Puno.
2.3.1. The financial support to the alpaca industry in Puno
As the matter of course, there are numerous financial support measures that can be deployed by policy-makers. The policy support can largely be classified as the support through a policy intermediary, the support through low interest loans by the government, and the support through financial institutions, e.g. commercial banks.
(1) Financial support through a policy intermediary
The central or local government appoints, or newly establishes, a non-profit organisation which has the specialised mandate to support MSMEs. The organisation assists MSMEs with financial and technical support in addition to the execution of the government’s MSME support strategies and policies. Of the measures, this is perhaps the most effective measure as it warrants the efficiency, effectiveness, and expertise as well as transparency in the support process.
However, to establish this measure, the government needs to enter a special budget with the purpose of the supporting of MSMEs, which could bequite large, being burdensome in the national budget structure.
(2) Low interest loan of the government
This measure could warrant policy consistency but the likelihood of policy distortion and bias always exists as the government devises and executes the policy. Indeed, the likelihood of the policy distortion can be high because the government is
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always accountable to the ”constituents.” Furthermore, the government may lack expertise vis-`a-vis the policy intermediary, which is specialised in its mandate. And the issue of transparency when disbursing money may create conflict with the beneficiaries.
(3) Support through financial institutions
The gist of this support measure is to utilise the fund reserved by financial institutions, such as commercial banks, whereby the government may reduce its burden as to mobilise a large sum for the support fund in a relatively short time frame. The government and a commercial bank, for example, enter into a contract and the bank, using its own reserves, authorises and disburses loans to the persons, or MSMEs, designated by the government based on the guidelines/regulations set by the government. The spread between the support fund rate and the on-going market rate will be compensated by the government.
Based on the government’s reimbursement on interest differential, this measure can be ineffective because of the lagging turn-over rate of the bank’s loans to MSMEs (as they are long-term loans). Consequently, continued reimbursement of interest spread until the loans will be paid off may be burdensome to the government’s budget. More importantly, the commercial bank obviously lacks the means to extend non-financial services (e.g. technical support) to MSMEs.
Based on the analyses, it can be concluded:
That the support measures deployed through a policy intermediary is perhaps the most effective method that can be applied to the alpaca industry in Puno.
Nonetheless, the government’s low interest loan programme may also be considered for such a one-time project as the building of an alpaca fibre processing plant in Puno.
2.3.2. The technical support to the alpaca industry in Puno
Other means to strengthen the competitiveness of the alpaca industry in Puno may be the enhancement of technical capacity of the alpaca producers in Puno. And this agenda should be dealt with along with the issue of the construction of the processing factory if the industry competitiveness were to be achieved.
To this end, a ”foreign experts invitation programme” is proposed. In fact, a large amount of budget is necessary to invite foreign experts who can transfer their
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technological expertise. If the alpaca producers utilise Korea’s ”Dispatch Programme of Retired Engineers,” their financial burden may be significantly disposed of. The retirees may be able to assist the alpaca producers in Puno by making consultation on all the manufacturing processes from the factory lay-out to detailed production techniques. And the transferred expertise can then be replicated in other areas as well.
Another means to enhance the alpaca producer’s competitiveness is perhaps to develop and promote a common brand in addition to build the common production facilities. The common brand obviously permits the producers the bargaining power.
To reiterate:
In order to strengthen the competitiveness of the alpaca producers in Puno, the enhancement of technical capacity of the producers is needed; To this end, the producers can be linked to Korea’s ”Dispatch Programme of Retired Engineers”; and The development and promotion of common brand needs to be considered, as it permits the producers a bargaining power.
2.4. The co-operatives in Korea
A co-operative is an entity incorporated by contributions/investments of the economic ”weaks,” e.g. small manufacturers or consumers, with the purpose of improving/enhancing their status in the socio-economic strata by co-operating. Thus, the members own and control the co-operative that they established. A co-operative ultimately aims to improve the members’ socio-economic benefits and well-being. By its nature, a co-operative is prone to focusing on the members’ benefits by co- operating vis-`a-vis yielding profits.
As is well known, a co-operative is different from other commercial business entities in terms of the ownership and management structure. That is, a co-operative is managed and operated based on the principles of mutual support, democracy, and members’ benefits.
Recognising the benefits that co-operative brings forth especially to the rural area, Korea has organised various co-operatives based mainly on the industry. The following are a few examples of the co-operatives in Korea (See also Figure 5-4):
(1) National Agricultural Co-operative Federation
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Established in August 1961, the federation had the main purpose of assisting farmers. It consisted of some 983 regional farmer’s co-operatives and 118 livestock co- operatives. By the product category, the federation also houses some 46 farmer’s co- operatives as members, 24 livestock co-operatives, as well as 12 Ginseng co- operatives. Nationally, the individual members participating in the farmer’s co- operatives countas many as 2.44 million.
(2) National Federation of Fisheries Co-operatives
Established in April 1962, the federation was also born with the similar organisation objectives as the Agricultural Co-operative Federation. It set its purposes of incorporation in the increasing of income in fishermen, the fostering of leaders and next-generation leaders in the fishery industry, the supply of tax-exempted oil for fishing vessels, the joint purchase of machinery and equipment for fishing vessels, joint sales of fishes, etc. The federation has some 70 regional co-operatives, and 20 product co-operatives, and two processing plants. The nation-wide members account for approximately 168,000.
Co-operatives in Korea
(3) Federation of Small Business Co-operatives
The type of small business co-operatives in Korea varies. There are a few national associations and numerous national-level co-operatives and regional co-operatives as well as various business co-operatives that have been incorporated to serve the mutual benefits of SMEs (See Table 5-9). The small business co-operatives have also
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been formed in various industrial areas, such as mining, manufacturing, wholesale and retail, service, etc. The total number of the SME co-operatives nation-wide is about 941 and the number of membership is 66,449 SMEs.
The Structure of Korea’s SME Co-operatives National Regional Business Industry Number of Association Total co-operatives co-operatives co-operatives Co-operative - 3 3 1 7 Mining Membership - 239 32 5 276 Co-operative 18 138 191 160 507 Manufacturing Membership - 12,699 15,290 4,106 32,095 Wholesale Co-operative 5 20 122 105 252 and retail Membership - 1,763 13,956 11,505 27,224 Co-operative - 27 11 13 51 Service Membership - 2,404 979 130 3,513 Others Co-operative 2 19 11 92 124 Membership - 998 336 2,007 3,341 Total Co-operative 25 207 338 371 941 Membership - 18,103 30,593 17,753 66,449
(4) Other co-operatives
Other types of co-operatives include the National Forestry Co-operative, established in 1949, the Community Credit Co-operative, and the Credit Union, financial co-operatives.
3. Development of the Agro-Industrial Complex: The Public Sector-Led Model
Notwithstanding the rapid economic growth since the 1960s, the growth of the agricultural sector in Korea has still been sluggish. The share of the agriculture, forestry, and fishery in GDP was down to 13% in the 1980s from about 37% in the initial stage of the nation’s economic development. In addition, the non-agricultural sector has rapidly expanded by absorbing migrations from the rural areas, while population in the rural areas has fast declined. The demographic structure was also surprising: the rural areas were mostly left with aging population and women. As a result, most of farm lands were deserted. As opposed to what was happening in the rural areas, the urban areas began to suffer from over-population.
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This backwash of the urbanisation is perhaps nothing new to Peru. As described in Chapter 1, population imbalance among the urban and rural regions is conspicuous in Peru as well. And the population, industrial, and commercial concentration in the metropolitan areas, for example, in Lima and Callao, demonstrates that regional imbalance is a structured phenomenon in Peru today.
And this, though partly, will be able to explain why the SEC lags behind other regions; therefore, the industrialisation in the rural areas may contribute to increase income of the rural population, to prevent migrations to the cities by offering employment opportunities, and to ameliorate the socio-economic imbalance between the urban and the rural area.
In the case of Korea, the government, in order to promote export activities, has built large industrial parks adjacent to metropolitan areas and certain rural area since the late 1960s. And this has laid the foundation of industrialisation of Korea. However, there has been an increasing awareness coming mainly from the balanced national development perspective that an institutional framework for the promotion of industrialisation in the rural area needed to be adopted. As a result, the Korean government designated the rural industrial development promotion areas and set up about 26 industrial complexes around the small and medium cities on the rural area. As a matter of course, the government’s expectation resided with the likelihood of amelioration of the rural-urban imbalance through the rural area industrialisation.
As a part of the industrialisation programme, the government in 1968 implemented the policy to establish an industrial complex to provide ”sideline jobs” for farmers in the rural area. This policy intended to utilise idle labour in the farm area, especially during the winter season, so that farmers’ could have another source of income. By doing so, the government expected to close the income gap between the urban and the rural area.
By the same token, the industrialisation of the farm area has also been actively pursued since 1973 as a part of the Saemaul-undong Movement (now famous New Village Movement). As a result, the government policy for the establishment of Saemaul factories in the rural area was carried out. Nonetheless, these rural area development policies in general have not been entirely successful in attaining the desired end due to the locational disadvantages of the factories built in the farm area and the lack of managerial skills. Nonetheless, these policies are highly significant in a sense that they have provided about 1,000 new jobs per city/province in the rural area and that they have continued for nearly 30 years.
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3.1 Implication of the agro-industrial complex in Peru
The impact that the agro-industrial complex policy instituted in Korea’s rural areas certainly deserve a close examination for replication in the SEC in Peru. Indeed, the agro-industrial complex in the SEC may have a special meaning as there is an abundance of labour and lands for industrial complexes in the rural areas of the SEC. An industrial complex will certainly contribute to the regional economy by creating an opportunity for ”sideline income sources,” which will, in turn, contribute to raise the income level in the rural areas. Thus, the creation of service and/or industrial complexes in the rural areas carries a highly special meaning to the development of the SEC, and further, to the balance growth of the nation as a whole.
3.1.1. Basic policy directions of the development of agro-industrial complex
The development of an agro-industrial complex in rural areas is the scheme that aims to foster small- and medium-sized industrial parks to attract manufacturing enterprises (mostly MSMEs) based on the supply of relatively low priced plots for manufacturing facilities and the extension of financial and taxation support as well as simplified administrative procedures for permits and licences. All of this support will be provided by the local or the central government, which certainly differentiates an agro-industrial complex from other complexes. The government intervention and extended support is absolutely necessary as the development scheme is to industrialise, in the first place, locationally disadvantageous rural areas.
Nonetheless, the size of the population and the minimum level of infrastructure are the pre-requisites to an industrial complex. And the complex, to be realistic, would need to induce population from nearby townships or cities; subsequently the complex needs to be established within a commuting area adjacent to a population centre.
Because of the pre-requisites, the population and infrastructural factors, the agro- industrial complexes in the SEC need to be established around the capital cities of respective departments in the initial stage and can be replicated to other parts of the SEC in the later stages. In other words, a few pilot projects can be instituted first and then can be replicated to other areas if evaluated to be successful.
In the replication stages, the following factors may need to be considered:
(1) Those areas that already achieved a considerable level of industrialisation or those areas with a large concentration of population, e.g. the areas already
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appointed administratively as ”cities” and/or those equipped with a high level of infrastructure should not be included in the agro-industrialisation programme. It is because those cities already possess a high potential capacity for industrialisation by themselves, and therefore, do not require the national or departmental level of support. It should be under-scored that this programme is to promote the industrialisation process in lagging rural areas by the infusion of the government support; (2) The size, and the contents, of government support should vary depending on the rate of industrial concentration of a proposed area for the complex. The rate can be computed by the following equation:
The rate of industrial concentration = Total number of employees in the secondary industry (of the proposed area for the complex)/Total population
The Government of Korea differentiated the level of the support based on the rate of industrial concentration as follows:
(1) The general farming or fishery area
- Those rural areas whose the rate of industrial concentration is greater than 0.08; - Those areas adjacent to the metropolitan areas; - Those areas that possess favourable infrastructure, e.g. the access to the transportation system, and/or other conditions for industry-building
(2) The farming or fishery areas that are subject to preferred government support measures
- Those rural areas whose the rate of industrial concentration is less than 0.01; - Those areas that produce the agricultural or fishery products that are subject to foreign competitions (due to free trade agreements, etc.); - Those smaller provinces excluding the provinces adjacent to the larger provinces with a population of more than 100,000; - Those areas that are endowed with unfavourable infrastructure and other conditions for industry-building
(3) The farming or fishery areas that are subject to additional government support measures
- Those farming and fishery areas not classified as the ”general farming and fishery areas” or the ”farming or fishery areas that are subject to preferred government support measures” as classified in the preceding sections;
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- Those rural areas whose the rate of industrial concentration falls between 0.01-0.08.
To reiterate, the following factors need to be observed when implementing the agro-industrial complex in the SEC:
(1) To improve the efficiency of national land use, provincial governors publicly develop agro-industrial complexes and minimise damage to agricultural fields and the natural environment. To streamline cumbersome administration procedures following constructing a factory in rural areas and cut the tenants’ costs of subsidiary facilities (the access to roads, industrial water and electric power, etc.), agro-industrial complexes should be developed as a small- and medium-sized industrial area; (2) When it comes to the companies’ moving into an agro-industrial complex, and taking into the consideration that the complex is for the locationally disadvantageous farming and fishing villages, help them build a foundation and develop through comprehensive support including tax incentives as well as the access to finance, technology and management consulting. Additionally, to prevent those agro-industrial complexes from being left neglected in the long term, analyse the supply-demand aspect of the industrial plots and potential tenants carefully and develop the complexes phase by phase; (3) To focus on preserving the environment, such as pollution problems caused by the consequences of the ”development” of rural areas, set a limit on the potential polluters moving in as tenants, utilise idle manpower in rural areas as much as possible and prevent petty farmers from leaving their farm lands; (4) When evaluating the tenants of the complex, MSMEs should have a preferential treatment because MSMEs usually make a large contribution in generating employment, thus ultimately helping promote regional development; (5) When evaluating the tenants of the complex, those firms that employ mainly the local resources should have a preferential treatment. Needless to say, it is because these firms will contribute to develop local resources that will promote local economy.
Figure 5-5 represents the characteristics and objectives of an agro-industrial complex. As was stated elsewhere in this document, it can be said that the balanced growth among regions begins with the industrialisation of the regions based on the urban-oriented industrial policy. Although there may be regional differences, the development of the regional industry is largely attributable to the development of an agro-industrial complex and collaborative complex. In fact, these complexes promote the development of human resource in the rural area and increase the level of income by creating job opportunities other than farming or fishery. Obviously, this will, in turn, diversify the source of income and improve the industrial structure in the rural area.
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Characteristics and Objectives of an Agro-Industrial Complex
However, a caveat should be noted. That is, the most ideal development model of the complexes is that they should be led by the private sector, and that a collaborative complex of rural MSMEs be built in the agro-industrial complex (See Figure 5-5). By doing so, the duplicate investment in plots and facilities and equipment, as well as the waste of time and efforts to build the complexes, can significantly be prevented.
3.1.2. Support measures extended to the tenants
The difference in growth among regions in a nation’s economic growth path is perhaps attributable to the concentration of natural resource endowments in certain areas as well as the migration of population and/or capital to economically advanced regions. However, the difference is, in large part, arising from national development policies.31) Needless to say, a national development policy is often based on a sectoral development policy that focuses in general on the efficiency for the maximisation of national growth. In this process, equitable growth among regions is largely ignored, thus giving rise to the unequal growth among industrial sectors as well as regions.
31) Hyung Kook Kim (1983) A Study on the Theory of National Land Development (in Korean), p.267.
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Hence, to correct the inequality among regions by reinvigorating the development-lagging rural areas, a relatively longer term and a more comprehensive development policy is needed, one that sufficiently offsets the locational disadvantage of the rural area by the government policy intervention, e.g. support policies. Nonetheless, the support measures, and the concomitant strategies appended to the measures, have to be differentiated by the level of retardancy of respective regions.32)
As such, the support measures for the SEC have to be designed based on the lagging level of growth among the regions. To this end, it is necessary to typify the regions in the SEC based on such factors as the conditions for proposed industrial sites and the present level of industrial development. In other words, conditionally disadvantageous regions are subject to additional support, thus promoting industrialisation in the areas. Then a crucial question is: How do we objectively typify the conditions for proposed industrial sites whether they are advantageous or not? This calls for a system of indices that measures the level of conditions. Normally, the indices include proxies, such as population, industrial structure, the development status of industrial plots, etc. In addition, such secondary indices as population density, roads and traffic conditions, etc. are also used to typify the conditions.
In sum, it is necessary that:
the support measures for the SEC have to be designed based on the lagging level of growth among the regions; it is necessary to typify the regions in the SEC based on such factors as the conditions for proposed industrial sites and the present level of industrial development; and To this end, the development of a system of indices is also needed.
3.2. Deciding potential areas for the agro-industrial complex and the development plan for the SEC
The Government of Peru is now considering the development of Science Parks and is considering Arequipa, Tacna, Moquegua, and Cusco as potential sites to harbour the parks. The details of the development of the parks are:33)
32) Kim, Joing-ki and Hwang Il-cheong (1987) The Characteristics of and the Promotion Policies for Rural Industry (in Korean), Seoul: Korea Development Institute. 33) CEPLAN (2011)“ Consultoria para Identificar Costos y Propuesta de una Estrategia Nacional de Formacion de Parques de Innovacion Tecnologica,”Internal document, June 2011.
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- Average area per park: 20-75 ha (200,000m2-750,000m2) - Expected employment: 500 (target); minimum 100 - Tenants: 100 enterprises (target); 10-40 enterprises - Expected scientists and engineers: 80 - Required investment: US$25-90 million
Thus, it would be highly plausible to link a science park with a proposed agro- industrial complex.
Considering the possibility of the linkage with the Science Parks, the government may need to take the following factors into account in order to promote the agro- industrial complex in the SEC:
(1) The plan to establish an agro-industrial complex needs to be linked with other development-related policies and plans, such as plans for the development of the growth-lagging areas, poverty reduction plans, environment improvement plans, etc. (2) In order to ensure the sustained growth of the complex, it is necessary to share innovative capacity by enhancing the industry-academia-research linkage with ”anchor firms,” universities, and/or national industrial complexes located in adjacent areas; (3) is necessary to plan to enlarge the complex to a larger Extended Regional Agro-industrial Complex by linking it to adjacent larger departments/provinces. Cusco or Puno has potential for this scheme as it can agglomerate specific products. As such, to establish an Extended Regional Agro-Industrial Complex needs to be considered by appointing and agglomerating smaller regions; (4) Employment opportunities in non-farming/non-fishery sectors have to be enlarged; at the same time, the capacity-building for the agricultural or fishery sector has to be initiated in order to foster the competitiveness of the sector; (5) The support policy targeting an increase in income from non-farming/non- fishery sectors for the farmers/fishermen and the structural adjustment/improvement for the farming/fishery industry have to be designed and implemented; (6) The development of common brands and common marketing systems is absolutely necessary. Often times, regional SMEs are vendors under the original equipment manufacturing (OEM) contract with large enterprises. Thus, under the circumstances, the amount of profits that regional MSMEs, as manufacturers, make would be trivial vis-a-vis' the final consumer prices which are usually high. To resolve the problem such as this, it is necessary to develop a marketing channel for the regional MSMEs and the development of the common brands would be one of the highly viable marketing tools. In addition, the support for the development of other marketing tools, such the
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establishment of common product display centres, the development of direct marketing routes. e.g. e-commerce, needs to be considered; and (7) Government purchase of the goods produced by the tenant firms of the agro- industrial complex under, for example, the Government Procurement Schedule can also be established as a support measure.
3.3. Deciding and supporting the tenant firms in the agro-industrial complex in Korea
In Korea, most tenants of the agro-industrial complex are SMEs. Some 56.6% of the firms in the complex are start-ups; 32% are transferred from other places; and about 11.4% are subsidiaries. As such, the complex is proven to be an ideal place for start-ups and SMEs as well as for the relocation/diffusion of industries in the rural areas from congested urban areas. Hence, the key to the success of the complex would be the supply of industrial plots/lands at a lower price. Indeed when questioned why they have moved in to the complex, the tenants have responded mainly that it was the lower costs associated with rent, lease, sale, and management of the plots (Table 5-10).
The Question: What Prompted You to Move in to the Agro-Industrial Complex? Response,% Lower costs associated with rent, lease, sale, and management of the plots 28.7 Locationally advantageous (location, access to transportation, access to labour, etc.) 23.1 High linkage potential with other enterprises or institutions 10.7 Expectation on the high quality government support rendered to the tenants of the complex 14.9 Expectation on the government support tailored to the tenants’ business activities 15.1 Public reputation on the agro-industrial complex 4.5 Others 3.0 Note: Surveyed on 528 tenants of agro-industrial complexes in May 2008
Business of the Tenant Firms in the Complex Number of business,% Business Category Purchase 76 14.4 Sales 346 65.5 Finance 22 4.2 Management, education, consulting services 12 2.3 R&D, technology, business Development service 58 11.0 others 14 2.7 total 528 100
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And the major business area that the tenant firms conduct seems to be sales activities, followed by the purchasing and the R&D, technology, business development service activities.
It seems that the continued support for the start-ups would be one of other success factors of the complex. A caveat is that the government needs to evaluate the feasibility of the businesses of the start-ups carefully before extending support. In contrast, the subsidiaries would not need a closer evaluation than the start-ups because the subsidiaries normally are financially solvent and managerially capable. In fact, the underlying reasons of their moving into the agro-industrial complex are based on such reasons that mother-companies need extension of manufacturing facilities, and that they need warehouses, etc.
In a survey conducted on 528 tenant firms in agro-industrial complexes around the country, it was revealed that government support the firms have received was mainly policy fund, e.g. low interest loans (Table 5-12). And it was the support they desired to receive from the government. Interestingly, they also responded, as shown in Table 5-12, that they anticipated the support be extended to the areas of marketing and R&D. Although these are the experiences garnered from the case in Korea, the results are quite inculcating for the SEC.
Government Support Rendered to and the Support Desired by the Tenant Firms (Unit: %) Support rendered Support desired Technology 2.8 4.3 Policy fund 34.4 29.1 Marketing 6.9 12.6 Market and other information 15.1 16.0 Start-up 4.5 7.6 R&D 6.0 15.6 Management and legal 4.0 - Facilities and equipment 2.8 - Re-structure and reform 0.5 1.1 Education and training 9.5 7.7 Others 13.5 6.0
In the same survey, the firms also responded that the infrastructure, such as roads, transportation system, is the most important government support measures followed by such marketing support as a domestic and/or export market development as well as the linkage with large firms (Table 5-13). It is not surprising as poor infrastructure
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would increase the cost of doing business in the complex. Needless to say, the poor road system would ultimately raise the cost of products delivered to consumers, thus making the goods less competitive. The results of the survey suggest which areas the government need to emphasise in order to effectively design successful support measures.
Importance of Support Measures (Unit: %) Very Not No much Important important important important Physical infrastructure, e.g. roads, transportation system 60.6 36.7 2.3 0.4 Start-up, warehouse 19.9 53.8 25.6 0.8 Education and training 8.0 67.0 24.2 0.8 Establishment of research institutions 9.1 43.0 44.5 3.4 Direct finance 27.4 43.2 28.7 0.8 Professional services, e.g. legal, management 14.0 59.5 24.6 1.9 Transfer of technology 13.3 54.7 29.4 2.7 Marketing, export 30.9 50.6 17.8 0.8 Joint R&D 14.4 54.4 30.6 0.6 Leaning opportunities 8.5 52.5 37.5 1.5 Linkage with large firms 22.3 49.6 26.7 1.3
In Korea, those firms that plan to move into an agro-industrial complex need to file an application to the provincial administration where the complex is located with a ”business plan.” The provincial government then evaluates the plan and decides whether the application is accepted or rejected. The following are examples of the business plan evaluation for the period 1985-88 (Table 5-14):
Business Feasibility Evaluation, 1985-88 Start-up Relocation Subsidiary Total Accepted 581 767 241 1,588 Rejected 780 361 103 1,244 Total (%) 1,361(47.8) 1,128(40.0) 344(12.2) 2,833(100.0)
As shown in Table 5-14, the acceptable business applications were 1,588, or 56% of the total applications. The largest proportion of the applications were filed by start-ups-1,361 or 47.8%-during the period. However, it is interesting to note that 780 applications from the start-ups, or some 57.3%, were rejected. It was the highest rate of rejection among the three major business categories. As stated previously, the
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Korean authorities do not grant those start-ups that cannot prove business feasibility or those potential pollution businesses from moving in to the complex either.
In fact, the feasibility evaluation for the application is done by a policy intermediary that was appointed, or was established, by the government. In the previous sections of this document, the role of a policy intermediary was repeatedly mentioned. This policy intermediary employs such evaluation criteria as the applicant’s (normally CEO’s) managerial capacity, the marketability and business feasibility of the product/s produced by the applicant, the financial solvency and plans, etc. when evaluating business application and makes a final decision whether to grant the application or not.
From the evaluation to the start of the business, it may take anywhere between 8- 18 months based on the operational experiences garnered from Korea’s agro- industrial complex (Figure 5-6).
Estimated timeframe of the Respective Stage of Setting-Up of a Business in the Complex
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3.4. The role of policy intermediary and the business development services
As mentioned, the policy intermediary, on behalf of the government, acts as an expert, supporting and assisting tenant MSMEs in the complex. They not only function as the executor of the government support policies, such as financing, establishing infrastructure etc., but also facilitating comprehensive business development services (BDS). The BDS encompasses business feasibility studies, mentoring, consulting, education and training, and other support activities.
The BDS refers to the activities that enhance the business capacity of the tenant firms, ultimately enhancing the firms’ access to and competitiveness in the marketplaces.34 To this end, the role of the policy intermediary is impeccable. In the SEC, the BDS executed by the policy intermediary can be schematised as Figure 5-7 below:
Schematised System of BDS in the SEC
Source: Comitede′ MYPES Textiles Productoras de Chompas del Peru′(July 2011)
34) World Bank (2001) Business Development Services for Small Enterprises: Guiding Principles for Donor Intervention, Washington, D.C.: SME Department, World Bank Group.
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4. Summaries, Conclusions, and Policy Recommendations 4.1. Summaries and conclusions
This chapter has started with a question why growth in the SEC is lagging behind vis-`a-vis other economic regions in spite of the fact that it possesses a large potential for growth. It was also noted that dominating type of the businesses in the SEC, MSMEs, in the large part are fragmented thus lagging competitiveness. To remedy this, the Government of Peru has initiated a number of support programmes, especially encouraging them to organise and pool their resources. By doing so, they would be able to attain ”scale merit.”
To this extent, it has elaborated the ”associativity” and ”collectivity” of MSMEs as the tools to account for the innate size-disadvantages of MSMEs. Perhaps the Korean experiences in this field may serve as good reference points. And the establishment of smaller-sized industrial clusters consisting of local industries implicated by regional specialties, e.g. coffee, alpaca, was also proposed.
The model of enhancing MSME competitiveness through associativity is largely private-sector driven. However, it does not mean that the government intervention is not necessary. To implement and enroot these programmes successfully, it was also pointed out that a policy intermediary was needed. The role of the intermediary is impeccable. It, on behalf of the government, carries out the government support policies and facilitates the programmes that aim to foster the competitiveness of MSMEs.
As the public-sector driven model that enhances the competitiveness of MSMEs, the development of agro-industrial complex is proposed. The model accounts for the rapid urbanisation and introduces industrialisation in the rural areas that lag behind other areas. The complex, as a part of agglomeration of MSMEs, would also render an opportunity to rural population to have ”sideline income sources” so that it would contribute to increase the income level. This would, in turn, not only contribute to poverty reduction, but also ameliorate the migration of rural population to the urban areas.
Especially, the linkage of an agro-industrial complex and the Science Parks that the Government of Peru plans to establish in the rural areas increases the probability of success of the agro-industrial complex. As such, the likelihood of success of the agro-industrial complex would increase when it is linked with other development- related policies and plans, as they also, often times, target the same areas aiming identical, or similar, objectives.
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To warrant the success of the complex, it is necessary to design and implement congenial and effective support measures that facilitate the needs of MSMEs in the SEC; they also have to be implemented continuously without lacks until the complex could operate on its own. Hence, the selection of the tenant firms is highly important, as it would consume scarce government resources. To this end, the role of the policy intermediary, as an expert, is again stressed. Therefore, it can be concluded that it would be the congenial and effective institutions that could warrant the probability of success of the MSME support programmes, and further, the growth of the SEC as a whole.
4.2. Policy recommendations and further actions needed
Based on the discussions brought forth in this chapter, the following policies and actions are recommended:
(1) Design co-operative programmes congenial to MSMEs in the SEC to organise and pool their resources so that they could attain the ”scale merit”; (1.1) In this vein, induce the informal MSMEs to the formal sector; (1.2) Devise a strategy to organise MSMEs to larger scaled business units; (1.3) Organise MSMEs in the identical or similar trades to co-operatives. (2) Devise the plans to establish, as a public-sector driven associativity programme to organise MSMEs in the SEC, an agro-industrial complex implicated by regional specialties, e.g. coffee and alpaca, in order to foster regional development; (3) Establish a MSME support policy intermediary, given that the government itself is uncongenial to assume the micro-level tasks ; (3.1) In this vein, the policy intermediary should be mandated to implement MSME support policies set by the government; (3.2) In Peru’s setting, to re-organise and strengthen Centro de Innovacion' Tecnologica' (CITE) can be thought as an alternative to a new policy intermediary; (4) The government may consider to extend a low interest loan programme to build a alpaca fibre processing plant in Puno, as it does not require the government to commit continued infusion of funds; (5) In order to increase the competitiveness of regional specialty producers, e.g. coffee, alpaca, etc., the development of common brands need to be considered, as they bring forth the produces a bargaining power; (6) In the similar vein, the design for the Government Procurement Schedule for the regional specialties is recommended to open a market channel for the producers in the SEC;
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(7) Overall competitiveness of the regional speciality producers need to be designed; specifically, technical capacity building is an urgent task to be shed light; (7.1) To this end, the producers can be linked to Korea’s ”Dispatch Programme of Retired Engineers”; (8) When extending the support to the MSMEs in the complex, devise an index system to evaluate proposed sites for a complex as well as the qualification of individual MSME; (9) The plan to establish an agro-industrial complex needs to be linked with other development-related policies and plans, such as plans for the development of the growth-lagging areas, poverty reduction plans, environment improvement plans, etc.; (10) In order to ensure the sustained growth of the complex, it is necessary to share innovative capacity by enhancing the industry-academia-research linkage with ”anchor firms,” universities, and/or national industrial complexes located in adjacent areas; (11) It is necessary to plan to enlarge the complex to a larger Extended Regional Agro-industrial Complex by linking it to adjacent larger departments/ provinces. Cusco or Puno has potential for this scheme as it can agglomerate specific products. As such, to establish an Extended Regional Agro-Industrial Complex needs to be considered by appointing and agglomerating smaller regions;
4.3. Further actions needed
In order to increase the likelihood of success of the regional development in the SEC, the following tasks need to be dealt with:
(1) The re-organisation of the legal foundation in association with MSME’a associativity
To increase the probability of success of the co-operative programme, the establishment of the main actor of the programme, co-operatives, is essential. And to this end, the legal foundation is necessary. So it is recommended to promulgate the Act of MSME Co-operatives (tentative). In this act, the following factors constitute the essential parts:
- Definition of profit-oriented co-operatives - Qualification of the members of a co-operative that accounts for the informal MSMEs - A ”collective private contract system” that warrants the stable production and
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sales activities of regionally produced goods
(2) Amendment of the Law on the Promotion and Formalisation of Micro and Small Industry (Ley de Promocion' y Formalizacion' de la Micro y Peque~na Empresa) and/or the promulgation of the SME Promotion Act (tentative)
In order to extend the government support to the tenant firms, or would-be tenants, in the agro-industrial complex, the preceding acts are essential. The laws are recommended to include:
- Re-define MSME; - Establishment of funds to augment the MSME’s financial access; - Establishment of a policy intermediary in order to manage and execute the funds; - Define the business scope of the policy intermediary; - Establish a new policy intermediary or re-assign existing institutions, e.g. CITE, PROMPYME, etc.
(3) Promulgation or amendment of the laws to bolster the agro-industrial complex
The gist of the success of the agro-industrial complex programme resides with the government support measures. Therefore, the programme may overlap with existing laws and institutions in a few areas. Thus, a comprehensive legal analysis is necessary. Nonetheless, the laws that follow are perhaps fundamental to the realisation of the complex; hence, they need a closer legal analysis. For example,
- The Act on Agro-Industry Complex; - The Act on Public Procurement; and - The Act on Exemption and Reduction of Taxes
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