Trading down
By: Peter Gibbon, Senior Researcher (Economic Sociology), the Danish Institute for International Studies, Copenhagen, and former researcher at the Nordic Africa Institute.
In July 2005 a monograph entitled Trading Down was published*,
summing up the results of a research programme on Africa’s changing
relations to the global economy. The programme ran between 1999 and
2003, was based at three Danish institutions (principally Centre for
Development Research, now part of the Danish Institute for International
Studies) and was funded by the Danish research councils SSF (Social
Science Research Council) and RUF (Council for Development Research).
It consisted of six 'value chain' studies, of coffee, cocoa,
cotton, citrus, fresh vegetables and clothing.
The main aim of the programme was to follow the linkages between African
producing countries and the global economy and to trace how these had changed
during the 1990s. Long periods of fieldwork were carried out in Tanzania, Uganda,
Kenya, Ghana, South Africa, Zimbabwe and Mauritius, as well as in several European
end-markets. In Europe, the main focus was on the 'lead firms' in
the chains for these products and their changing strategies. A second focus
in Europe was on the roles of European importers/leading suppliers to these
chains. In Africa the focus was on producers and exporters of the commodities
in question, the market segments they sold into, the market channels they used,
and their changing business conditions and strategies. Particular attention
was given to how market liberalisation in Africa had changed the conditions
under which export production occurred, and how changes in trade regulation
were influencing African market access.
Value chain approach
Africa's increasing economic marginalisation is well known and has been
widely commented upon. But its dimensions have been discussed mainly in aggregate
terms, for example in relation to import shares in Northern markets. A value
chain approach allowed insights into the processes that marginalisation has
been based on, as well as highlighting exceptions to it. The central finding
of the programme is that Africa has lost out because the vast majority of its
enterprises lack the new competitive advantages emerged as a consequence of
greater functional differentiation across a wide range of value chains. With
this trend have come escalating performance requirements for suppliers worldwide,
if they are to stay in the game. African enterprises generally cannot match
these requirements, either because they are too small and unspecialised, insufficiently
vertically integrated or financially weak. In chains such as coffee, cocoa,
cotton and citrus market liberalisation has replaced entities (national export
monopolies) that had these characteristics – even though they functioned
inefficiently and often corruptly – with a mass of small players, making
trade disintegration particularly marked in these sectors.
To understand why size, specialisation, vertical integration
and financial strength are today more important for enterprises to
remain in the mainstream global economy it is necessary to understand
recent developments in the political economies of Northern countries.
Here, at least for the chains considered in the programme, markets
are saturated and growth of consumption correspondingly low. At the
same time, demands concerning firms’ financial performance
are being ratcheted up by the new stock market convention of 'shareholder
value'. This is associated with intensified mergers and acquisitions
and, in consumer markets, a re-emergence of what Schumpeter called ‘oligopolistic
competition’. Leading firms in the sectors considered are devoting
more resources to nurturing and managing demand, by investing more
in branding and marketing as well as sometimes in research and design,
and in some cases in financing consumption.
A corollary is that these same firms have withdrawn, by and
large, from integrating their own supply chains. Instead they rely
for this on a handful of 'first-tier suppliers', specialising
in a particular product or narrow group of products and organising
the upstream supply chain on behalf of ‘lead firms’.
These first-tier suppliers compete amongst themselves for this status
on the basis of the range of services that they provide to lead firms,
and on price. And in order to be competitive themselves on these
factors, they select strategically amongst ‘second-tier’ suppliers
on price, provision of a more limited range of services and conformity
with an increasingly demanding set of performance requirements in
respect of a few basic functions.
The re are exceptions to this overall picture. These trends are most
pronounced in the US and UK, although they are also becoming more evident in
continental Europe. They are more pronounced in chains for consumer products,
as opposed to industrial ones such as cotton or oilseeds. And a handful of
firms (e.g. Gap and Hennes & Mauritz in clothing, Ikea in furniture), even
in chains for consumer goods, continue to mostly do their sourcing direct rather
than through a layer of first-tier suppliers. But there is still a clear trend
for most chains in most Northern regions to move toward such structures.
Most first-tier suppliers are also Northern-based. Many were
earlier large manufacturing companies, others were international
trading companies. Besides procuring from others, they generally
have some in-house production of their own. On behalf of lead firms
they provide quality assurance, they identify and negotiate with
suppliers, they manage inventory and they deliver into lead firms’ distribution
centres on a just-in-time basis. Their own competitive advantage
has become either strategic supply base management or supply market
domination, or both. 'Strategic supply base management' usually
entails concentrating their own orders on a narrowing range of specialists,
in order to save on sourcing costs.
The emergence of a system of first-tier suppliers, together with the
new challenges confronting lead firms in the chains concerned, has led to a
serious price squeeze on second-tier suppliers. Even for those products not
subject to global over-supply, such as clothing, fresh vegetables and citrus,
prices to second-tier suppliers have been falling year-on-year. At the same
time, payment terms are becoming longer and supplier credit mechanisms such
as letters of credit are disappearing. Furthermore, demands for greater reliability
of supply, shorter lead times, upward flexibility in volumes and better quality
consistency and control are more common. Therefore second-tier suppliers shorten
or even internalise their own supply-chains, produce to more technically demanding
specifications and offer more client-dedicated services than previously.
Second-tier supply of a wide range of products is, as a result
of these processes, becoming concentrated geographically and industrially.
In a handful of cases, such as cocoa, Africa has benefited from geographical
supply concentration, but in most it has not. Apart from a few highly
isolated exceptions its producers have suffered badly as a result
of industrial supply concentration too. Smallholder or, in the case
of citrus, small commercial farmer-based agricultural systems have
lost out to estate and plantation production, where volumes and consistency
of quality can be guaranteed, and where owners are financially equipped
to time their sales more remuneratively. Smaller-scale, generalist,
producers of clothing have lost out to larger ones better able to
withstand falling prices as a result of their higher volumes and
greater economies of scale. Smallholder systems have remained competitive
only where there has been a substantial level of joint public-private
coordination, as in Zimbabwean cotton prior to 2001, or where they
are linked to large-scale exporters via contract farming, as in the
case of fresh vegetables in Kenya – although even in these
two cases poorer smallholders have benefited less or have been excluded
in the process.
African success stories exist, but are few in number. In clothing,
a few Mauritian suppliers have stayed abreast of developments mainly
by regionalising their presence, enabling them to arbitrage trade
preferences and wage differentials. Otherwise, here and in southern
Africa, successful suppliers tend to be confined to the ranks of
Far Eastern investors. In citrus, a number of South African producers
have stayed in the market on the basis of physical expansion and
vertical integration. In fresh vegetables the story has been similar
except that one Kenyan-owned enterprise (Flamingo Holdings/Homegrown)
has been so successful in following this strategy that it has acquired
European as well as Latin American production capacity, purchased
an import firm and become a first-tier supplier.
Conclusions
How is Africa to mitigate these developments? Apart from encouraging greater
foreign direct investment – especially of more large-scale and financially-resourceful
operators – impacts of these trends can be offset in two ways. The
first is costly and will entail donor assistance, at least in the short-term.
This is to restore key public services to agro-based export sectors, such
as quality control, better production and transport infrastructure and crop
finance, which may help re-level the playing field between smallholder and
estate production. The other costs very little, but requires political commitment.
This is to deepen regional integration, so that markets can be created facilitating
greater economies of scale, and thereby in the long run enterprises which
are more competitive on global markets.
The title 'Trading Down' sums up these themes. It points
to the downgrading of Africa’s role in the global economy, but also to
how this might be stabilised or reversed – by aiming at the more inclusive ‘low
road’ of scale economies and specialisation, rather than the more glamorous
but demanding ‘high road’ of so-called niche/high-value production,
favoured by influential voices in the multilateral
institutions.
Selected reading
Daviron, B. and S. Ponte, The coffee
paradox: commodity trade and the elusive promise of development.
London: Zed Press, 2005.
Gereffi, G. and M. Korzeniewicz (eds.), Commodity chains and global capitalism.
Westport CT: Praeger, 1994.
IDS Bulletin, vol. 32, no. 3 (2001). Special edition on ‘The value of
value chains’.
Journal of Agrarian Change, vol. 2, no. 2 (2002). Special edition on ‘Global
commodity chains and African export agriculture’.
Kaplinksky, R., Globalisation, poverty and inequality: between a rock and a
hard place. Cambridge: Polity Press, 2005.
