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| Sunday, 17 October 2004 |
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Business |  |
| News Business Features Editorial
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A new path to economic growth by Lloyd F Yapa. This column has described a number of paths to economic growth. The first is the generation of an income stream by the creation of assets through investment of capital for production of goods and services needed by consumers. The second is improvement of productivity to release resources presently tied up in the production process to generate an additional stream of goods This path is succinctly described as 'more and better from less'. These are the conventional supply side activities for promoting growth depending on the availability of demand for the goods/services concerned. The purpose of this article is to describe a new path to economic growth, which has emerged due to the development of ICT and the emergence of the Internet. It looks as the ideal remedy for the peculiar situation prevailing in Sri Lanka. Rigidity of traditional paths These traditional paths to economic growth invariably involve the ownership of assets by suppliers of inputs, manufacturers of products and distributors. Ownership in turn involves the acquisition of capital, process technologies, knowledge of markets and operational/management skills, normally delivered through Foreign Direct Investments to developing countries. Sri Lanka has not been able to attract such investments due mainly to the political instability, that has prevailed, the small size of the domestic market and the non availability of higher level skills along with the necessary laws/policies, which ensure the safety and security of investments made in the country and so on. The FDI, which has been attracted is therefore of the 'footloose' kind such as that for production of garments. These factories can be easily located elsewhere, if the political climate or the policies change for the worse. Apart from these impediments, the configuration of assets of any production process is hard to change, if the demand for the products concerned takes a dip for various reasons such as the ability of another supplier to be more competitive. This is precisely the fate, that awaits the garments industry, which earns over 50 % of the $5000 million raked in annually by Sri Lankan exports, when quotas are phased out come January 2005.This very rigidity also prevents any experimentation for the purpose of meeting the expectations of the customer more fully. Worse, even if the technology is the latest available, it could be copied soon or improved upon by competitors. These are some of the reasons for the steady loss of competitiveness of enterprises adopting the traditional paths. New Path Thanks to the Internet, it has become possible to mobilize the assets of other firms (without owning all of them ) located anywhere in the world, provided the firm concerned possesses some key asset like a distribution network, superior manufacturing process or a close relationship with segments of customers concerned, which can be offered as incentives to ensure substantial and expanding business for the partners. John Hagel III writing to the Harvard Business Review of October 2002, under the caption "Leveraged Growth" calls such companies 'orchestrators of value'. Li & Fung of Hongkong is reported to be such an orchestrator of the production and export (mainly) of garments. The sales turnover of the company was $5 billion in 2002 (equal to the totality of the annual gross export earnings of our country). The value of its assets was only 5% of its annual revenue. Its main asset is its deep understanding of the needs of its customer base, which enables the firm to satisfy the latter's whims and fancies. For this purpose, it has developed an intimate knowledge of the capabilities of some 7,500 suppliers and manufacturers spread all over the world. The functions of the orchestrator include a) admission of providers of services on the basis of requirements laid down by the company, b) detailing the tasks each provider has to undertake to meet the particular needs of customers, c) indicating gaps between capabilities and the specifications to be met along with suggestions to bridge them, d) obtaining information as to the progress of production of each order from each supplier so that the orchestrator's managers could get the latter to take steps to expedite delivery or divert production to another provider in case a delay is anticipated (something traditional exporters cannot easily accomplish) and e) assuming responsibility for the (quality) specifications laid down by the customers and timely delivery of the completed products. It will be seen, that the main advantages of this process are the elimination of the need on the part of the orchestrator to reconfigure his assets at great expense or spend his capital to create all of them afresh, if there is a change or downturn in demand, the opportunity given to suppliers to innovate to fill 'gaps' in order to meet specifications, marketing under any brand (the orchestrators's, manufacturer's or distrbutor's)and the possibility of earning a premium price by satisfying most of the needs of customers. Its return on equity is reported to be around 30% compared to the thin margins realized by traditional exporters of apparel and related products. Answer to prayer Developing an ability to mobilize the assets owned by other suppliers, manufacturers and distributors appears to be the answer to the prayer of a nation like Sri Lanka, which is unable to attract FDIs possessing the necessary technologies and the knowledge of markets, that domestic investors lack. It also may be the solution to the problems, which may follow the phase out of apparel quotas by the beginning of 2005. Role of Government The government may consider offering incentives for investors/exporters to develop such a capability. They may include tax concessions and other incentives to open distributor networks (including offices, warehouses and stores for undertaking retail and wholesale sales in buyer countries), develop data bases of supplier capabilities, undertake training of personnel ( in ICT and foreign languages), acquire the required machinery and equipment and develop the necessary IT infrastructure. Here is an unprecedented opportunity presented by technology to earn premium returns for our goods and services without incurring heavy investments. We should grab it by both hands, so to speak, to bring prosperity to this country and alleviate poverty. (By the way developments in bio- technology, the latest technology revolution is presenting greater opportunities in other fields such as agriculture, pharmaceuticals and medicine). These should be seized with alacrity to enable us to take an early lead and 'leap frog' into the future over competitors. Government budget makers may please note. |
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