Moving up the value chain: A strategic imperative

The global trading environment is changing. From China as the “factory of the world”, companies have been shifting towards near-shoring, led by both rising labour costs in China and the advent of new technologies, which make it cost effective to produce some goods in developed countries.

Firms from emerging countries are rapidly gaining in size and economies of scale, going regional and subsequently global. According to a McKinsey study, 46% of Fortune Global 500 companies in 2025 will come from Greater China and from other emerging markets, a jump from 17% in 2010 and 9% in 2000.

With this shifting landscape SMEs in Asia can no longer rely on just being low-cost suppliers or subcontractors to multinational companies, or being intermediaries in emerging markets. Instead they must move up the value chain, developing new products and services with their own brands and market positioning.

Developing new products and services

Matex International Ltd is a Singaporean specialty chemical company established in 1989 and listed on the Singapore Stock Exchange in 2004. It primarily engages in the formulation, manufacture, supply, and sale of dyestuffs and auxiliary chemicals, for the textile, leather, paper and polymer industries.

After having grown organically for a number of years to having sales offices and distributors in more than 30 countries, Matex faced stiff competition from companies providing ever lower prices.  Rather than compete based on price however, it focused on developing differentiation through innovation.

It consolidated its HQ operations in Singapore, and production facilities in China, conducting R&D in both countries. It continues to plough up to 10% annually back into new product and process development.

Matex came up with its own Megapro product system, which uses less salt, hazardous chemicals, and water in the dyeing application process, as well as needing lower water temperatures. This ensures that while the product selling price itself can be higher than traditional items, there are still significant cost savings from utilities cost in addition to environmental benefits.

Creating new value propositions

Traditionally, many companies in Asia have acted as traders and distributors, playing an important role in the supply chain finding sources for the multinational buyers who are less familiar with Asian markets and suppliers.

But in the age of global sourcing, made easy by improving communications and visibility, it has become more difficult to function purely as a trading intermediary.

Another Singapore-based firm, Pacific Agriscience was started in 1998 as a provider of generic crop protection products from India and China. Apart from its HQ in Singapore, it also operates offices in Hong Kong and Australia.

The firm buys generic fertilizers and pesticides from manufacturers in China and to a lesser extent India, and then distributes them to markets in Asia, Australia and other parts of the world.

This was a very successful model until the early 2010s, when Chinese manufacturers began to sell their products directly to overseas customers. At the same time overseas buyers became more confident in sourcing directly from China.

With trading margins inevitably starting to decline, Pacific Agriscience embarked on several initiatives to keep itself relevant in the value chain. These included finding new and innovative higher value products from Europe and the US, such as biostimulants and biopesticides that it was able to sell to its traditional customer base.

The firm leveraged on its global network of agricultural chemical players to engage in an advisory and consultancy role, especially for start-up companies with intellectual properties. In 2016 it was able to tap on a growing wave of industry consolidation by putting together a merger deal between Brazilian farmer cooperative, CCAB Agro, and InVivo, a French farmers’ cooperative.

No more business as usual

Faced with increasing competition and lower margins, Asian businesses which have traditionally been successful will likewise need to adapt.

Different companies have reacted to this challenge in different ways, but with a clear intent not to do business as usual.

As these two examples show, turning around successfully and moving up the value chain beyond traditional Asian low cost propositions, can be done through a combination of will, creativity, and a deep understanding of industry needs.

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