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Journal of Agribusiness in Developing and Emerging EconomiesEmerald Article: Cooperation in coffee markets: the case of Vietnam andColombia

Maria-Alejandra Gonzalez-Perez, Santiago Gutierrez-Viana

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To cite this document: Maria-Alejandra Gonzalez-Perez, Santiago Gutierrez-Viana, (2012),"Cooperation in coffee markets: the case

f Vietnam and Colombia", Journal of Agribusiness in Developing and Emerging Economies, Vol. 2 Iss: 1 pp. 57 - 73

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Cooperation in coffee markets:the case of Vietnam and Colombia

Maria-Alejandra Gonzalez-Perez and Santiago Gutierrez-VianaDepartment of International Business, Universidad EAFIT, Medellin, Colombia

Abstract

Purpose The purpose of this paper is to present a cross-country study comparing Colombia andVietnam, two of the major coffee exporting countries in the world, in terms of their infrastructures, theroles of external shocks, technology adoption at different stages of production, added value,positioning in both domestic and global markets, internationalisation patterns, marketing andbranding innovations, regulatory frameworks, and policy environments. This study also exploresother aspects linked to production, and marketing strategies that open niche markets such asspeciality coffees, and socially-, labour- and environmentally-responsible trade. Furthermore, itidentifies opportunities of cooperation and competition between these two countries.

Design/methodology/approach Using value chain analysis as primary research method, thispaper identifies links and dynamics in the value chains that have been developed in the coffee industryin both countries to improve competitiveness, increase sustainability, and respond to market demands.Findings Using value chain analysis, it was found that Colombia and Vietnam produce differenttypes of coffee, and that both have implemented diverse strategies in order to be more competitive indomestic and foreign markets via product differentiation. These differences make explicit room forcooperation between these two countries in an international environment where fierce competitionpersists.Originality/value Cooperation between producing countries is an under-researched subject. Thesefindings will be useful both for policy makers in coffee-producing countries and agribusinessresearchers.

Keywords Vietnam, Colombia, Coffee, Value chain, Emerging countries, Coffee production,Coffee market, International business, Agribusiness

Paper type Research paper

1. IntroductionCoffee is the second most traded commodity in the world after oil. It is producedroughly in 55 countries, but 57 per cent of the worlds output is concentrated amongthree players: Brazil, Vietnam and Colombia. In 2010, Brazil, market leader since 1840,produced 48.1 million 60-kg bags, that is 36 per cent of the 132.5 million total globalproduction. Vietnam harvested 18.5 million bags, close to 14 per cent of the total,and Colombia 9.2 million, a distant 7 per cent (International Coffee Organisation(ICO), 2010).

Behind these figures, close to one million families in Colombia and Vietnam derivetheir incomes from the crop. As with many commodities, advancement of producersdepends crucially on the evolution of domestic costs and international prices. It is not

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Journal of AgribusinesDeveloping and Emerging Econom

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DOI 10.1108/20440831211219

The authors would like to acknowledge the collaboration of Dr Pham Thu Huong, Professor DaoNgoc Tien and Ms Nguyen Thu Hang at the Foreign Trade University in Vietnam, and AdrianaRoldan, Catalina Tabares, Franz Riegler and Stephanie Riegler from the Universidad EAFIT inColombia. Part of this paper was built upon a research project by Maria-Alejandra Gonzalez-Perez and Adriana Roldan, carried out in a joint South-South cooperation program sponsored bythe virtual institute of the United Nations Conference for Trade and Development (vi UNCTAD),between Universidad EAFIT and the Foreign Trade University.

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only a matter of their income. Market conditions affect aspects such as child survivalthrough unexpected channels such as the change in the value of time (Miller andUrdinola, 2010).

In a competitive environment, a natural strategy for a revenue-maximizing country

is to increase market share either by cutting costs, by relying on enhanced productivityor by devising and introducing other product-related advantages. This paper showsthat there is another avenue for industry and farm-income growth in Colombia andVietnam: cooperation, a forgotten element in the post-International Coffee Agreementworld that began in the 1990s.

Our research shows that these countries have developed substantially differentvalue chains for their coffee, but this is not always recognized by producers in eithercountry. As interviews in this paper proved, they seem to think that they competeon exactly the same grounds. This paper explores the main features that set the twovalue chains apart, and show some areas in which cooperation, in the sense describedby Sturgeon (2000), could lead to a Pareto superior outcome.

As shown by Fitter and Kaplinsky (2001), a general value chain for the coffee

industry can be described as follows:. Farmers pick, and dry or wet process the coffee cherries. They receive a farm-gate

price for the cherries.

. Cherries are processed into parchment coffee and then into green coffee. Forparchment or green coffee a farm or factory-gate price is paid.

. Green coffee is passed to an intermediary for export, at the FOB price.

. The beans are sent to importing countries, where they arrive at CIF prices.

. The beans are then sold at wholesale prices.

. The beans are then roasted and/or ground and packed and sold at factory gate

prices. Finally, coffee is sold at retail prices by retailers to the public for domesticconsumption, or for out-of-home consumption by restaurants, caterers and coffeebars (Fitter and Kaplinsky, 2001).

This structure serves as the basis for the analysis carried out in this paper in twoways. First, to select the sample for non-structured interviews, as shown in the nextsection and second, as the backbone for the discussions of different aspects of the valuechains in both countries, and to highlight their similarities and differences. Thepurpose of this exercise is to find ways to upgrade the global value chain (GVC), that is,to find ways that allow participants to obtain better or more stable rewards(Riddell, 2006). This will be done by identifying and using in an appropriate mannerGVC differences.

This paper is organized as follows. Section 2 provides a description of theobservation protocol and some other methodological issues. Section 3 gives a firstlook at the coffee value chain in Colombia and Vietnam on aspects such as varietiesgrown, logistics, technology adoption and innovation, institutions and labourconditions. Then focuses on the international market side of the GVC. Section 4evaluates the possibility to upgrade these value chains, through the sale offinished coffee-products on international or domestic markets. Section 5 evaluatesif cooperation is a feasible alternative to upgrade these value chains, and laysdown some areas of possible collaboration. Section 6 provides some concludingremarks.

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2. MethodologySince there is no previous comparative study of these countries, the research focusedmainly on the collection of primary data in both countries. Value chain analysis (Dolanand Humphrey, 2000; Gereffi, 1999; Gereffi et al., 2005; Gereffi and Kaplinski, 2001;

Humphrey and Schmitz, 2001; Kaplinsky, 2000; Kaplinsky and Morris, 2000; Ponte,2002; Tallontireet al., 2009; Sturgeon, 2000) was chosen in the first place as the centralmethodology for selecting the potential sample, as well as for designing theobservation protocol that constituted the main research instrument of this survey. Thisprotocol served as a detailed guide for non-structured interviews, and as a checklist ofkey aspects to be observed. It is critical to mention that the instrument needed to beflexible in order to adapt to different types of research participants and differentgeographical locations.

The observation protocol was based to a lesser extent on literature on the coffeeindustry and data from secondary sources. This instrument went through a rigorousprocess of refinement and augmentation during the study, and the final versioncontained close to 70 categories. These included land conditions, producing regions,

farm size and infrastructure availability, in addition to a range of other categoriesscoping from vulnerability to shocks to factors like climate or policy changes. Othercategories included consumption trends, market forecasts, brand innovation,technology development and adoption, size and location of roasters and exporters,certification types, depth of the specialty coffee trade, internationalization patterns andgovernment legislation. A partial collection of these categories and of its findings canbe found in Table I.

Field trips were conducted in Colombia and Vietnam and included in-depthinterviews with key players in both coffee industries. Research participants weregeneral directors, managing directors, export executives, marketing executives andfarmers from various coffee manufacturers, export companies and associations ofcoffee growers. The fieldwork in Colombia was conducted in the Antioquia coffee

region and in Medellin between October 2008 and January 2009. The fieldwork inVietnam took place during February 2009 in Hanoi, Ho Chi Minh City andBuonmethuot.

Research participants were carefully chosen with the aim of having representationfrom each link of the value chain. Given the sensitivity of some issue on competitionbetween the two countries, interviewees were offered that their names, affiliation andpositions would remain anonymous in this paper.

The objective of the fieldwork was to find out the main features of the coffeeindustry in each country; the differences between the coffee industries; and theparticipation of each player and each country in the global coffee value chain.

A process of data analysis took place after the fieldwork. The observation protocoland its categories served to guide the qualitative analysis phase of this research. From

the data analysis, case studies were drafted for each country to illustrate theparticipation of specific players in the value chain.

Although this research was limited in scope (it did not sample all the coffee regionsin both countries, and it did not interview all their main players of the industry), itcertainly provides a previously unavailable comparative overview of these industries.It is expected that the same methodology and the same research instrument could beused to compare other coffee-producing countries.

This research heavily relies on secondary data. Secondary data for this researchincluded company and industry reports, books, academic papers, articles, databases

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Co

lombia

Vietnam

Infrastructure

Historyofthecoffeeindustry

Dateofcreation

Firstcoffeeplantation1730coffeehistorical

gr

owthby1950s

Firstcoffeeplantationwas1857inFrench

colony

Managementsystem/style

Co

operatives

None

Numberofownedfarms

66

1,613

None

Numberofthreshers

13

2(2008)

na

Cultivatedarea

87

7,713(2008)

506,000ha

Associationsofcoffeeprovid

ers

38

cooperativesand494purchasingcen

tres*

None

Numberofgrowers

51

1,133coffeegrowers

600,000coffeegrowers

Formsofworkersrepresenta

tion

Co

operatives

None

%ofemployeeswhoarepartofatradeunion

None

None

Corporateorganization

None

None

Economicindicators(netpro

fit,sales,etc.)

To

talproduction:12.6millionbags(2007)

Totalproduction961,000ton

nes(2007)

To

talexports:11.3millionbags(2007)

Totalexport897milliontonnes(2007)

Numberofemployees

64

0,000directemployment

na

Numberofworkerswithper

manentcontract

90

-95%havenopermanentcontract,they

workonlyatharvesttime

na

Productioncapacity(farms,processingmills,etc.)

1-5ha,averagefarmarea:1,628,396ha

na

Growthinthelasttenyears

(1998-2007):0.3%

(1998-2008)14%

Marketprojectionsinthenexttenyears

Increasespecialitycoffeeproduction

Increasedomesticconsumption

ShiftfromRobustatoArabicacoffeetypes

Marketpositioning

MainColombianexports(2006)

Mainexportin2006

1.

USA:35%

1.Germany:19.9%

2.

Japan:15%

2.USA:16.4%

3.

Germany:14%

3.Spain:11.2%

4.

Canada:6%

4.Italia:10.1%

5.

BelgiumandLuxembourg:5%

5.Belgium:3.4%

(continued)

Table I.Coffee industry structurein Colombia and Vietnam

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Co

lombia

Vietnam

Addedvalue

Certifications

Rainforest

None

Fa

irtrade

UTZcertified

USDAorganic

Typesofcoffee

ArabicaColombianMild

Robusta

Specialitycoffee

1.

Origincoffees:regionalcoffee,exoticcoffee,

statecoffee

Traditionalcoffee,Weaselco

ffee

2.

Sustainablecoffees:certifiedorganic,

relationshipcoffee,conservationcoffee

3.

Preparationcoffees:peaberrycoffee,

su

premoscoffee,selectcoffee

Culicoffee

Internationalisationpatterns

Alliances-jointventureswith

tradersretailers

Pr

ocafecolhasallianceswith:CoffeeAra

bicas

BeveragesS.A,productionanddistribution

allianceofColasdeCafe

None

PodColCoffeeLtd(PCCLtd),production

allianceforPods

CafescolTiendas,forthecreationofJuan

Va

ldezsstoresinSpain

NFCGCInvestmentInc.,forthecreationof

JuanValdezstoresinUSA


multinationals

AlliancewithMitsubishitopenetrate

Japanesemarket

None

AlliancebetweenFNCandCocaCola

co

mpany,distributionalliance


roasters

na

None

(continued)

Table

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C

olombia

Vietnam

Marketing

andbrand

innovation

Country

brands

F

NC:JuanValdezdifferenttypeofcoffees,

freezedriedcoffee(fromBuenDiafactory)

TrungNguyen(groundroas

tedcoffee),G7

andMoment(instantcoffee)

C

olcafeSelloRojoandSellodorado

A

guilaRoja:AguilaRoja

C

asaLuker:LukafeandNewColony

Origendenomination

100%Colombiancoffee

na

JuanValdezsbrandslike:Cundinamarca,

H

uila,Amazonico,GuajiraandNarino.

They

representthedifferentcoffeedepartmentsof

C

olombia

100%coffeeofXXX

T

rademarkforallthecoffeeexports10

0%

C

olombiancoffee

No

Regulatoryframeworksand

policies

Governmentlegislationregardingcoffee

n

a

na

Agricultu

rallegislation

n

a

na

Environm

entallegislation

S

ameappliedtoallindustries

Sameappliedtoallindustries

Labourle

gislation

S

ameappliedtoallindustries

Sameappliedtoallindustries

NationalAssociationofCoffeeGrowers

F

NC

VICOFA

Certifications(nationaland

international)

ISO14001Environmentalmanagement

system

ISO9000

R

ainforestalliance

K

osher

F

airtrade

U

tzcertified

U

SDAorganic

Note:*InformationbasedonpersonalinterviewsbothinColombiaandVietnam

Table I.

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and web sites. The information gathered in the interviews is the main source ofmaterial for this paper, but sometimes when exact data were missing from interviews,secondary data were used to illustrate the findings.

3. Comparative analysis of participation in coffees GVCGVC analysis has proved a better tool than conventional international trade economicanalysis in instances in which it is interesting to find how firms or countries build,coordinate and control the links and flows of produce from raw materials to consumers(Gibbon and Ponte, 2005; Riddell, 2006; Murphy, 2006).

It is also a useful method to identify opportunities for upgrading as shown inGibbonet al.(2008), where categories such as entry barriers, shifting power dynamics,mechanism of governance of value chains are studied.

In the following sections, this paper follows coffee GVC in Colombia and Vietnam tofind such opportunities for upgrading through cooperation.

3.1 The coffee industry environment

Colombia and Vietnam are far from similar. Colombia has a population of 45 millioninhabitants and registered a GDP of $280 billion in 2010. Vietnam almost doublesColombia in population size with 86 million inhabitants, but has a smaller economywith a GDP of $118 billion.

Their industries have some similarities like the number of families involved inproduction: close to 511,000 families in Colombia (Federacion Nacional de Cafeteros deColombia (NFC), 2007) and close to 600,000 in Vietnam (Association of Coffee andCacao of Vietnam (VICOFA), 2009). They also share the fact that coffee is not anindigenous specie, and it was introduced in colonial times (1730 in Colombia and1857 in Vietnam).

But differences outweigh likenesses. Specific natural conditions make Vietnam bestsuited for harvesting the Robusta coffee variety and Colombia better for the Arabica

coffee variety. There are also different harvesting seasons. Vietnam has a floweringperiod from March to May and harvest from November to February. Colombia has twoflowering periods, one from January to March and the other from July to September.The main harvest takes places from September to December and there is a secondaryharvest between April and June.

Harvested areas are also dissimilar. Colombia grows coffee on 877,700 hectaresdivided up into 661,600 farms, while Vietnam plants 300,000 hectares (42 per cent lessthan Colombia) in 300,000 farms (50 per cent of the Colombian figure). Therefore,productivity in Vietnam is much higher. The Asian economy produces 61.6 bags perhectare per year, compared to 16.5 bags per hectare per year in Colombia (ICO, 2010).

This gap is explained by the fact that both industries have chosen to maintainmanual harvesting methods, and they are both characterized by small (less than five

hectares) farms, but the Colombian method requires the careful selection of cherriesfrom the tree; consequently, yield cannot be substantially increased withoutcompromising quality. Besides, nearly all Colombian coffee is mountain grown, atype of farming that is hard to mechanize and not readily suited to obtain significanteconomies of scale (Reinhardt, 1988).

Logistics are also different in both industries. In Colombia, coffee production isscattered through the Andean region that crosses the country from north to south.Coffee is grown in 20 out of 32 provinces. Beans are transported through narrow,unpaved roads from farms to buying centres, then moved to threshers in larger cities

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and then transported to ports. Colombian freight rates are very high by internationalstandards. NFC has shown that it is far more expensive to take a container fromcoffee growing in Armenia to Cartagena (900 km) than from China to one of Colombiasports.

In S-shaped Vietnam, production is concentrated in central highland provinces suchas Lam Dong and Daklak. Upon harvesting, coffee is shipped to the Province of BinhDuong for processing and then exported through the port of Ho Chi Minh. Thiscomprises a short, less expensive movement.

Both countries face challenges associated with improving labour conditions, butColombia looks better off than Vietnam in this aspect. Permanent contracts for coffeepickers are basically non-existent in both countries, but child labour is far moreprominent in Vietnam than in Colombia, where the government and the main actors ofthe industry have made substantial efforts to eradicate it. Commitment to workershealth and safety seems to be higher in Colombia than in Vietnam. The practice ofadopting international certifications and continuous monitoring systems inColombia has positively influenced the use of better health and safety practices,

while in Vietnam as observed in the fieldwork some workers do not wear shoes orother protective equipment.

Interviews also highlighted a large gap in technology adoption and innovation. Onthe one hand, both countries use readily available machines and agro compoundsdeveloped in the USA, Germany, Italy and Japan. It is worth noting that they also buyfrom Brazil, the only producing country that has a world-class industry in agriculturalsupplies. Some Colombian firms have designed drying chambers for Pergamino coffee(beans with dried parchment skin still adhering to it) and some other low-techmachines, but they have not moved further in the value chain into electronic selectionmachines or automated threshers (Cano, 1996).

On the other hand, Colombians have a coffee research institute (Cenicafe), which hasno counterpart in Vietnam. This institute has a well-funded programme that

concentrates on increasing plant productivity, as well as pest and disease controls.It has made some progress in the development of varieties that better endure leaf rustand of systems to control the berry borer, two of the worst problems farmers face.Cenicafe has also been working for a number of years on coffee genomics (Sald as and

Jaramillo, 1999).Coffee institutions are also unique to Colombia. It is the only producing country

with an institution that represents the coffee sector domestically and internationally.The NFC is an important institutional actor that has the mission of guaranteeing thewelfare and progress of the coffee industry in the country (Saldas and Jaramillo, 1999).The NFC transfers a significant part of the international price to coffee growers, butmost important according to interviews, has built a stabilization fund to buy coffee inharvest time, and to maintain prices above international level when they drop below a

threshold. It also provides agricultural extensions and has a strict quality controlscheme to assure a consistently superior coffee for export. Additionally, the NFCpromotes Colombian coffees position in international markets.

The Federation has also made substantial investments in social and physicalinfrastructure in coffee-growing regions. It has financed or co-financed roads,electricity, drinking water and health services. It has pushed the use of environmentallyfriendly methods of planting and wet processing, as well as the adoption of greencertificates by farmers (Potts et al., 2010). These practices set Colombia apart fromVietnam.

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Finally as a GVC governance mechanism, NFC has also promoted international self-regulatory systems, such as minimum quality controls, that in some instances havelimited Vietnams exports. They sold to international firms a product that couldhardly be called coffee (interview carried out in Colombia, 2009). These governance

systems improve the reputations of their members and facilitate better relationshipsbetween roasters, traders and growers. National coffee institutes in producingcountries have particularly improved coordination among the links of the chain(Muradian and Pelupessy, 2005).

3.2 Position in global marketsDifferences found in the first stages of both value chains, carry on to its internationalportion. Colombia has been an exporter of coffee since the beginning of the twentiethcentury. Vietnam, in contrast, only appeared on international markets in the 1990s as adeliberate government response to a boom in world price of coffee and to the realizationthat Vietnam had a comparative advantage as a grower (Klump and Bonschab, 2004).

This plan generated a production leap, where coffee-export growth rates reached

close to 60 per cent per year between 1993 and 1998. It also shifted the balance in worldmarkets. In 1995, Vietnams coffee exports were 3.53 million bags, while Colombiaexported 9.81 million bags. By 2000, Vietnam had become the second coffee exporter inthe world, displacing Colombia. In 2009, Vietnam exported 18 million bags whileColombia reduced its exports to 8.5 million bags.

After this major change induced by Vietnams fast market entry, this GVC haschanged in recent years, in response to trade liberalization (Fitter and Kaplinsky, 2001),and to changes in domestic and world economies. One such change is that in bothcountries coffee has lost relevance in their international trade (Ponte, 2001). Accordingto Central Bank statistics, in 1970 coffee exports represented close to 60 per cent of allColombian exports, and by 2007 declined to only 5.7 per cent of total exports. InVietnam they accounted for 10.3 per cent of total exports in 1995, and only 3.87 per cent

in 2007. The commodity was replaced by oil, gas and mineral products in the case ofColombia (Gutierrez de Pineres and Ferrantino, 1999), and by industrial goods inVietnam (Athukorola, 2009). In spite of this trend, coffee is still an important source offoreign exchange in both countries (Hallan, 2003). Vietnam exports 14.2 million bagswhich render around $1.5 billion per year, and Colombia 7.8 million bags which arevalued at around $1.7 billion per year (ICO, 2008).

These figures also show that coffee-export prices are considerably higher inColombia. The average price for Colombian coffee in 2001 was $0.72 per pound, 61 percent more than Vietnams price of $0.28 per pound. In 2009, the average price was $1.77for Colombian coffee, 56 per cent over Vietnams $0.77 (ICO, 2010). Intervieweesexplained that the premium corresponds to a quality disparity between Mild Arabicasand Robusta varieties, to a country brand difference, and to a reputation for reliable

supply that Colombian exporters have built through the years (interviews carried outin Colombia and Vietnam, 2009).

Final export markets also have an influence over prices. Colombias main fivemarkets are: the USA, Japan, Germany, Canada and Belgium and Luxembourg. TheUSA represents the main market, accounting for 35 per cent of the total Colombiancoffee exports; second is Japan with 15 per cent, third is Germany with 14 per cent,fourth is Canada with 6 per cent and fifth is the combined Belgium and Luxembourgmarket with 5 per cent. Three countries, the USA, Japan and Germany accordingly buy64 per cent of Colombias coffee (see Table I).

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Vietnam, on the other hand, has its biggest markets in Germany, Spain, the USA,Italy and Poland. Germany is the main market for Vietnam, accounting for 14.5 percent of the total coffee exports, followed by Spain with 11.28 per cent, the USA with11.20 per cent, Italy with 7.15 per cent and Poland with 5.16 per cent. European

countries are the largest importers of Vietnams coffee, representing approximately40 per cent of the total (see Table I). According to interviewees, Spain, Italy and Polandpay less than quality sensitive Germany (interviews carried out in Colombia andVietnam, 2009).

Cooperation in marketing strategies seems to be possible between the two countriesto increase revenues, according to some interviews. Changes in destination marketsshould not be very difficult to coordinate in each country, due to the small number oflarge exporters. In Colombia, international coffee sales are concentrated in the NFCand five private exporters. In Vietnam, there are around 150 exporters, but sales arehighly concentrated among a few of them such as Vinacafe (interviews carried out inColombia and Vietnam, 2009).

A word of caution comes from interviews in the sense that international prices do

not depend on destination markets alone. Prices are determined by fundamentals ofsupply and demand. In 1999, for instance, prices dropped by 21 per cent as a responseto a world production increase mainly because of new production areas in Brazil andrapid production growth in Vietnam. Nonetheless, they currently receive substantialspeculative pressures from hedge and investment funds which have gained greatrelevance in price formation (Gilbert and Morgan, 2010).

4. Vietnams and Colombias participation in the coffee GVCAn option to increase farm revenues is to move along the value chain, a task in whichColombia has surpassed Vietnam. Both countries are trying to participate more in theprocessed and specialty coffee markets, in order to move away from green coffees.

Vietnam has been focusing in the low-priced Robusta market and is timidly

beginning to join the processed coffee segment. In 2010, 1.3 per cent of its 17.4 millionbags exported were processed coffees (1 per cent instant and 0.3 per cent ground)(Landell Mills Commodities (LMC), 2011). It also has a minor market for specialtycoffees with its Weasel coffee (or Civet coffee), which is the most expensive in the world.This coffee was once obtained from beans eaten by the Asian Palm Civet, but it iscurrently artificially produced (Powell et al., 2011). The country is also beginningto identify the possibilities of producing Culi coffee as a high-end Robusta selection.Culi coffee is made with small un-split beans (peaberries), and recently began topromote Arabica planting.

Colombia, on the other hand, is in the high-priced Arabica segment. It has built astrong position in instant coffee and has successfully developed some specialty brands.According to an interview with NFCs general manager, 32 per cent of all exports in

dollar terms have value added, (6 per cent for processed and 26 per cent for specialty).This brand-building path to upgrading these countries GVC is not easy. Coffee has

a buyer-driven GVC where players such as Altria, Nestle , Sara Lee and Procter &Gamble play a major role (Bitzer et al., 2008; Muradian and Pelupessy, 2005 andinterviews). Nestlehas made relevant investments and a large share of instant coffeeproduction in both countries (46 per cent in Colombia and 33 per cent in Vietnam)(Ibrahim and Zailani, 2010). Nestleis the largest instant coffee producer in Colombia,followed by Colcafe, and it ranks second in Vietnam, behind Vinacafe, which has50 per cent of the market. This situation reflects the dominance of multinational

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companies in the world coffee industry, especially brand-named instant coffee.Exporting countries fear to compete with multinational roasters, in internationalconsumer markets because it is tremendously expensive, and because they are, at leastfor the time being, also their main customers (interviews carried out in Colombia and

Vietnam, 2009).Hence is it not surprising that the coffee GVC has been upgraded through product

development and positional consumption: agricultural producers have focused mainlyon productivity improvement, whereas roasters and retailers have emphasizedproduct innovation and differentiation (Kaplinsky, 2006). The obvious brand-buildingstrategy has not been a financial success in Colombia. The Juan Valdez coffee-bar chainhas proven a difficult endeavour. After seven years in operation, it has not producedprofits nor dividends for stockholders (interviews carried out in Colombia andVietnam, 2009).

With respect to functional upgrading, growers have been blocked from moving upthe value chain by tariff escalation policies (Talbot, 1997a, b). Customs tariffs have beenconsiderably reduced over the years, but a number of importing countries protect their

roasting industries through tariff escalation measures. Tariff escalation involvesan increase in duties applicable to each stage of production, from the processing of thegreen coffee to the final product. According to ICO (2010) figures, the EuropeanCommunity applies an ad valorem tax of between 7.5 and 9 per cent while Japanapplies a tax of 20 per cent on its imports of processed coffee.

4.1 Domestic coffee consumption in Colombia and VietnamAnother opportunity to increase country or farm revenue is to develop localconsumption, which has become more important in recent years because of therecession in developed economies. Although promising, it also appears to have a slowdevelopment. The Vietnamese domestic market consumes around 5 per cent of itsproduction while in Colombia the figure is closer to 10 per cent. Vietnam has a per

capita demand of 0.5 kg per annum, almost a fourth of the 1.9 kg per person per annumin Colombia. In both countries domestic consumption is smaller than in otherproducing countries like Brazil or Mexico.

In 2003 the Colombian NFC and local roasters tried unsuccessfully to triggerdomestic consumption with a plan that followed a Brazilian scheme that doubledper capita consumption in ten years (NFC, 2010). Nonetheless, the strategy wasrelaunched in 2010 with a new, more modest goal to increase consumption by 30 percent in six years.

There are some factors that could bring down domestic coffee consumption.Demand for substitutes like iced tea and water is growing explosively in Colombia.Interviews with marketing managers point out that Nielsen surveys show double-digitgrowth in both categories, and that domestic consumers are increasingly concerned

with health issues related to coffee consumption.As domestic consumption increases, Colombia also increased its coffee imports to

nearly 300,000 bags in 2010. This trend might be reinforced in the future by changingtastes in local markets, as new blends become available. The fact supported byinterviews is that a large majority of Colombians drink lower quality coffee. Thisimplies that a rise in consumption will almost surely lead to higher imports (interviewscarried out in Colombia and Vietnam, 2009).

Coffee consumption in Vietnam is less important due to the strong tea tradition thathas influenced buying patterns over the years. According to interviews, this trend will

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probably change in the future due to the proliferation of coffee bars and the changes inconsumption patterns in the world. Tea is among the cheapest beverages in emergingmarkets, but its consumption is sensitive to international price increments. A studycarried out by FAO shows that its consumption in countries with tea culture such as

Sri Lanka, Bangladesh and China could fall between 7 and 17 per cent on a 1 per centprice increase (FAO, 2010). Nevertheless, according to interviewees, this transitionwill be slow.

5. Cooperation and competition between Colombia and Vietnam: adiscussionFrom the evidence put forward in the previous sections, it seems clear that Colombiancoffee is highly different from Vietnamese coffee, because of the deep disparitiesthey exhibit in their value chain, in terms of production costs, location, social andenvironmental practices. Nonetheless, this is not always recognized by producers ineither country. They seem to think that they compete on exactly the same grounds.

Colombians perceive Vietnam as a fierce competitor that has driven them out of

some markets based on low prices. But a closer look at its value chain shows that socialand environmental considerations could place Colombia on a different standing than itsAsian counterpart.

The Vietnamese, on the other hand, think that their low-cost product strategy issustainable in the long run. They do not perceive Cambodia, Laos or Myanmar ascompetitors, although they surely have the potential to be, since they too have goodclimate conditions and low labour costs. Nor do they appear to care much about the factthat developed markets will require green and social standards that they currently donot meet.

Because these differences make each product unique, they can be used as a tool forcooperation and hence boost the initial comparative advantages each country has.

Colombia cannot compete with Vietnam in terms of costs. Aside from lower labour

costs, elements such as interest free loans granted for 50 years by the Vietnamesegovernment to promote coffee farming, lower production costs even more. Due to itslocation and cultural proximity, Vietnam is also the natural seller to other Asiancountries, a market that according to interviews to NFC officers, absorbs 13.2 millionbags, and has grown from 2004 to 2010 at a rate similar to the world, 2 per cent per year(Saldas and Jaramillo, 1999). As a consequence, Vietnam has and probably willcontinue to have a competitive advantage in lower production costs.

Colombia, in turn, has a more expensive coffee to produce and take to internationalmarkets, it has built its competitive advantage on quality, environmental and socialpractices.

Some cooperation strategies could be followed to strengthen both countriescompetitive positions and upgrade the value chain. But are there incentives to

cooperate? The answer drawn from interviews and from the authors conclusionsseems to be yes.

In marketing, some strategies followed by each country alone, such as movingcloser to final consumers or developing the domestic market, are interesting butcostly and slow. Cooperation seems to provide a faster way to increase market shareand revenues. Colombians could profit from the Vietnamese knowledge of Asianmarkets. Vietnamese, in turn, could free ride on the image of Juan Valdezand Colombian coffee, brands that have been built for at least four decades atmultimillion-dollar costs.

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Strategic partnerships can be explored in avenues such as coffee bar chains. TheColombian chain Juan Valdez would clearly benefit from a union with Vietnameseexperts, who could help usher them into China, a move that international competitorslike Starbucks and Costa have already made.

Cooperation could move both countries in the direction of developing new blendsand products that could be sold on international markets. For Colombians, using lower-priced Vietnamese coffees would be a way to lessen competitiveness loss due to highlabour costs. Even the creation of bi-national specialty coffees is something that can beexplored and where Vietnamese could profit from the experience of the SouthAmericans.

Additionally, the development of the Colombian domestic market (which has beenstagnant at 1.4 million bags for at least ten years), could rely heavily on lower costVietnamese-based blends. Higher priced Colombian coffee can be exported, at a netgain to local producers.

Colombians could transfer their experiences on good social and environmentalpractices, and they could transplant some of their institutional infrastructure, such as

the Federation of Coffee Growers and Cenicafe, that have proved useful in promotingtechnological advancement in coffee plantations.

Financing is another area of cooperation, which could render interesting results forboth parties. A coffee-backed security is an instrument that, according to theinterviews, has been considered in Colombia as a tool to provide working capital forcoffee growers. A bi-national security could have less agrological risk and greaterliquidity, thus reducing the final cost for farmers.

But most importantly, coordination between these countries could partially shift theaxis of power of the coffee industry away from Brazil. Currently, international pricesare determined mostly by changes in Brazilian production, given its 40 million bagsoutput. Coordination would centralize decisions on the production of Vietnams 18million bags and Colombias 9 million bags, which would make each country more

interesting for investors in this commodity.

6. Concluding remarksLately, some important trends have influenced major changes in world coffeeconsumption[1], with particularly strong implications for Colombia and Vietnam. First,changing income levels in consumer countries, which is a primary driver of long-termdemand. Second, the emergence of major urban centres, and a new middle class indeveloping economies. Third, new technologies such as the steam process[2] thatenable roasters to incorporate a wide range of coffees into their blends. Fourth, theinterest of roasters to mix new coffees in their blends in order to have broader access toraw materials at a wider price range[3]. Fifth, a brand-coffee war that induces fasterinnovation to increase market shares in different segments, while consumers are

simultaneously entering the market, attracted by new coffee products. Traditionalproducts are stagnating and new products are gaining more space, such as differentflavoured coffees. Sixth, coffee is available in a larger number of places in majorconsumer countries; supermarkets and other retailers are increasing their presence.Coffee bars are also growing and they are highly visible in major cities. An example ofthis fast growth is the UK-based chain Costa Coffee. It has set a goal to almost doubleits 1,870 store chain to 3,500 worldwide by 2013 (Balch, 2009).

These trends will change the appearance of the world coffee market, in some cases,threatening Colombian producers, and in some others, Vietnams. They will, for

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instance, move demand from developed economies to emerging economies; they willrequire new logistics (shipping smaller lots in a just in time fashion to stores indiverse locations), new products (with new blends, flavours and appearances). In thisnew, at times, harsher scenario, Colombia and Vietnam can choose to compete or

cooperate. The later is a choice that has never been considered until now, but seems tocreate room for better outcomes for both.

Notes

1. Those major changes are described in detail in Lewin et al. (2004).

2. Steam process is widely used in Europe, especially in Germany, and results in cleaningthe Robusta aftertaste and reducing the bitterness of the Robusta green coffee beans in theroasting process. For instance, some years ago Germany used to consume higher quantitiesof Colombian coffee. Nowadays, Germans are buying more Robusta and it has become animportant market for Vietnams coffee exports.

3. This trend is not common yet in Colombia and Vietnam, but in the near future when those

countries increase their domestic consumption they likely will incorporate coffees of otherorigin in their blends.

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Gereffi, G., Humphrey, J. and Sturgeon, T. (2005), The governance of global value chains,Review of International Political Economy, Vol. 12 No. 1, pp. 78-104.

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Gibbon, P., Bair, S. and Ponte, S. (2008), Governing global value chains: an introduction,Economy and Society, Vol. 37 No. 3, pp. 315-38.

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Gibbon, P. and Ponte, S. (2005), Trading Down: Africa, Value Chains and the Global Economy,Temple University Press, Philadelphia, PA.

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Hallan, D. (2003), Falling commodity prices and industry responses: some lessons from theinternational coffee crisis, FAO Corporate Document Repository, Rome, available at:www.fao.org/docrep/006/y5117e/y5117e03.htm

Humphrey, J. and Schmitz, H. (2001), Governance in global value chains, IDS Bulletin, Vol. 32No. 3, pp. 1-17.

Ibrahim, H.W. and Zailani, S. (2010), A review of competitiveness of global supply chain in acoffee industry in Indonesia,International Business Management, Vol. 4 No. 3, pp. 105-15.

International Coffee Organisation (ICO) (2008), Historical data exports of exporting members,Chinchina, Colombia, available at: www.ico.org/new_historical.asp

International Coffee Organisation (ICO) (2010), Annual review 2008-2009, London, available at:http://dev.ico.org/documents/annual-review-10e.pdf

Kaplinsky, R. (2000), Globalisation and unequalisation: what can be learned from value chainanalysis?, Journal of Development Studies, Vol. 37 No. 2, pp. 117-46.

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Tallontire, A., Opondo, M., Nelson, V. and Martin, A. (2009), Beyond the vertical? Using valuechains and governance as a framework to analyse private standards initiatives inagri-food chains,Agriculture and Human Values, Vol. 28 No. 3, pp. 427-41.

Further reading

Fairtrade Labelling Organisations (FLO) (2008), Global Fairtrade sales increase by 47%,FLO Press Release No. 20080522, FLO, Bonn.

Gereffi, G. (1994), The organisation of buyer-driven commodity chains: how US retailers shapeoverseas production networks, in Gereffi, G. and Korzeniewicz M. (Eds), CommodityChains and Global Capitalism, Greenwood Press, Westport, CT, pp. 95-122.

Gereffi, G. and Korzeniewicz, M. (1994), Commodity Chains and Global Capitalism, GreenwoodPress, Westport, CT.

International Coffee Organisation (ICO) (2009a), Evolution of the world coffee market 2000-2008(slides presented by Nestor Osorio), London, available at: http://dev.ico.org/presents/0809/icc-mar09.pdf (accessed 2 April 2009).

National Federation of Coffee Growers (NFC) (2006),El comportamiento de la industria cafeteracolombiana durante el 2006, NFC, Chinchina, Colombia.

Roldan-Perez, A., Gonzalez-Perez, M.A., Huong, T. and Tien, D.N. (2009), Coffee, cooperation andcompetition: a comparative study of Colombia and Vietnam, report, Virtual Institute,UNCTAD, available at: http://vi.unctad.org/index.php?actshow&doc_namecoffee-cooperation-and&optioncom_gslink (accessed 15 March 2011).

About the authors

Maria-Alejandra Gonzalez-Perez is the Head of the Department of International Business,

and the Director of the International Studies Research Group at the Universidad EAFIT

(Colombia). She is the coordinator of the Colombian universities in the virtual institute of the

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United Nations Conference for Trade and Development (UNCTAD). She holds a PhD in

Globalization and Corporate Social Responsibility (international business), and a Masters in

Business Studies in Industrial Relations and Human Resources Management from the National

University of Ireland, Galway. She did Postdoctoral research at the Community Knowledge

Initiative (CKI) in NUIGalway. Prior her positions in Colombia, she worked as a researcher indifferent organizations such as the Centre for Innovation and Structural Change (CISC), Irish

Chambers of Commerce, and Economics of Social Policy Research Unit (ESPRU) in Ireland.

Maria-Alejandra Gonzalez-Perez is the corresponding author and can be contacted at:

[email protected]

Santiago Gutierrez-Viana (PhD) is an Economist from Universidad Javeriana in Bogota,

Colombia. He completed his PhD studies at the University of Minnesota, USA. He has been an

economic researcher at Fedesarrollo, Econometria s.a. and Fenalco. He was Vice President at the

Colombian Bankers Association and bank IFI. He was the Director for Dinero.com from

March 2008 until November 2011, and previously, since September 2003, Economics Editor

at Dinero Magazine. He was the General Manager of the HMO Humana s.a., has written

numerous professional articles, chapters in books and been editor for books at Asociacion

Bancaria. He also taught undergraduate and graduate courses and seminars in Microeconomics,Mathematical Economics, Topology, Game Theory, Banking, and Monetary Economics at

Los Andes and Javeriana universities and still teaches a course in Banking Economics at

Universidad de Los Andes. In 2002, he was selected Outstanding Economist by Universidad

Javeriana.

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