Journal of Agribusiness in Developing and Emerging Economies

Emerald Article: Cooperation in coffee markets: the case of Vietnam and

Colombia
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
of Vietnam and Colombia", Journal of Agribusiness in Developing and Emerging Economies, Vol. 2 Iss: 1 pp. 57 - 73
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Maria-Alejandra Gonzalez-Perez, Santiago Gutierrez-Viana, (2012),"Cooperation in coffee markets: the case of Vietnam and
Colombia", Journal of Agribusiness in Developing and Emerging Economies, Vol. 2 Iss: 1 pp. 57 - 73
http://dx.doi.org/10.1108/20440831211219237
Maria-Alejandra Gonzalez-Perez, Santiago Gutierrez-Viana, (2012),"Cooperation in coffee markets: the case of Vietnam and
Colombia", Journal of Agribusiness in Developing and Emerging Economies, Vol. 2 Iss: 1 pp. 57 - 73
http://dx.doi.org/10.1108/20440831211219237
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Cooperation in coffee markets:
the case of Vietnam and Colombia
Maria-Alejandra Gonzalez-Perez and Santiago Gutierrez-Viana
Department of International Business, Universidad EAFIT, Medellin, Colombia
Abstract
Purpose The purpose of this paper is to present a cross-country study comparing Colombia and
Vietnam, two of the major coffee exporting countries in the world, in terms of their infrastructures, the
roles of external shocks, technology adoption at different stages of production, added value,
positioning in both domestic and global markets, internationalisation patterns, marketing and
branding innovations, regulatory frameworks, and policy environments. This study also explores
other aspects linked to production, and marketing strategies that open niche markets such as
speciality coffees, and socially-, labour- and environmentally-responsible trade. Furthermore, it
identifies opportunities of cooperation and competition between these two countries.
Design/methodology/approach Using value chain analysis as primary research method, this
paper identifies links and dynamics in the value chains that have been developed in the coffee industry
in 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 different
types of coffee, and that both have implemented diverse strategies in order to be more competitive in
domestic and foreign markets via product differentiation. These differences make explicit room for
cooperation between these two countries in an international environment where fierce competition
persists.
Originality/value Cooperation between producing countries is an under-researched subject. These
findings will be useful both for policy makers in coffee-producing countries and agribusiness
researchers.
Keywords Vietnam, Colombia, Coffee, Value chain, Emerging countries, Coffee production,
Coffee market, International business, Agribusiness
Paper type Research paper
1. Introduction
Coffee is the second most traded commodity in the world after oil. It is produced
roughly in 55 countries, but 57 per cent of the worlds output is concentrated among
three 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 global
production. 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 derive
their incomes from the crop. As with many commodities, advancement of producers
depends crucially on the evolution of domestic costs and international prices. It is not
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/2044-0839.htm
Journal of Agribusiness in
Developing and Emerging Economies
Vol. 2 No. 1, 2012
pp. 57-73
rEmerald Group Publishing Limited
2044-0839
DOI 10.1108/20440831211219237
The authors would like to acknowledge the collaboration of Dr Pham Thu Huong, Professor Dao
Ngoc Tien and Ms Nguyen Thu Hang at the Foreign Trade University in Vietnam, and Adriana
Roldan, Catalina Tabares, Franz Riegler and Stephanie Riegler from the Universidad EAFIT in
Colombia. 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 by
the virtual institute of the United Nations Conference for Trade and Development (vi UNCTAD),
between Universidad EAFIT and the Foreign Trade University.
57
Cooperation in
coffee markets
only a matter of their income. Market conditions affect aspects such as child survival
through unexpected channels such as the change in the value of time (Miller and
Urdinola, 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 productivity
or by devising and introducing other product-related advantages. This paper shows
that there is another avenue for industry and farm-income growth in Colombia and
Vietnam: cooperation, a forgotten element in the post-International Coffee Agreement
world that began in the 1990s.
Our research shows that these countries have developed substantially different
value chains for their coffee, but this is not always recognized by producers in either
country. As interviews in this paper proved, they seem to think that they compete
on exactly the same grounds. This paper explores the main features that set the two
value chains apart, and show some areas in which cooperation, in the sense described
by 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. For
parchment 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 domestic
consumption, or for out-of-home consumption by restaurants, caterers and coffee
bars (Fitter and Kaplinsky, 2001).
This structure serves as the basis for the analysis carried out in this paper in two
ways. First, to select the sample for non-structured interviews, as shown in the next
section and second, as the backbone for the discussions of different aspects of the value
chains in both countries, and to highlight their similarities and differences. The
purpose 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 manner
GVC differences.
This paper is organized as follows. Section 2 provides a description of the
observation protocol and some other methodological issues. Section 3 gives a first
look at the coffee value chain in Colombia and Vietnam on aspects such as varieties
grown, logistics, technology adoption and innovation, institutions and labour
conditions. Then focuses on the international market side of the GVC. Section 4
evaluates the possibility to upgrade these value chains, through the sale of
finished coffee-products on international or domestic markets. Section 5 evaluates
if cooperation is a feasible alternative to upgrade these value chains, and lays
down some areas of possible collaboration. Section 6 provides some concluding
remarks.
58
JADEE
2,1
2. Methodology
Since there is no previous comparative study of these countries, the research focused
mainly on the collection of primary data in both countries. Value chain analysis (Dolan
and Humphrey, 2000; Gereffi, 1999; Gereffi et al., 2005; Gereffi and Kaplinski, 2001;
Humphrey and Schmitz, 2001; Kaplinsky, 2000; Kaplinsky and Morris, 2000; Ponte,
2002; Tallontire et al., 2009; Sturgeon, 2000) was chosen in the first place as the central
methodology for selecting the potential sample, as well as for designing the
observation protocol that constituted the main research instrument of this survey. This
protocol served as a detailed guide for non-structured interviews, and as a checklist of
key aspects to be observed. It is critical to mention that the instrument needed to be
flexible in order to adapt to different types of research participants and different
geographical locations.
The observation protocol was based to a lesser extent on literature on the coffee
industry and data from secondary sources. This instrument went through a rigorous
process of refinement and augmentation during the study, and the final version
contained close to 70 categories. These included land conditions, producing regions,
farm size and infrastructure availability, in addition to a range of other categories
scoping from vulnerability to shocks to factors like climate or policy changes. Other
categories 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 and
government legislation. A partial collection of these categories and of its findings can
be found in Table I.
Field trips were conducted in Colombia and Vietnam and included in-depth
interviews with key players in both coffee industries. Research participants were
general directors, managing directors, export executives, marketing executives and
farmers from various coffee manufacturers, export companies and associations of
coffee growers. The fieldwork in Colombia was conducted in the Antioquia coffee
region and in Medellin between October 2008 and January 2009. The fieldwork in
Vietnam took place during February 2009 in Hanoi, Ho Chi Minh City and
Buonmethuot.
Research participants were carefully chosen with the aim of having representation
from each link of the value chain. Given the sensitivity of some issue on competition
between the two countries, interviewees were offered that their names, affiliation and
positions would remain anonymous in this paper.
The objective of the fieldwork was to find out the main features of the coffee
industry in each country; the differences between the coffee industries; and the
participation of each player and each country in the global coffee value chain.
A process of data analysis took place after the fieldwork. The observation protocol
and 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 the
participation of specific players in the value chain.
Although this research was limited in scope (it did not sample all the coffee regions
in both countries, and it did not interview all their main players of the industry), it
certainly provides a previously unavailable comparative overview of these industries.
It is expected that the same methodology and the same research instrument could be
used to compare other coffee-producing countries.
This research heavily relies on secondary data. Secondary data for this research
included company and industry reports, books, academic papers, articles, databases
59
Cooperation in
coffee markets
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Table I.
Coffee industry structure
in Colombia and Vietnam
60
JADEE
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Table I.
61
Cooperation in
coffee markets
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Table I.
62
JADEE
2,1
and web sites. The information gathered in the interviews is the main source of
material 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 GVC
GVC analysis has proved a better tool than conventional international trade economic
analysis 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 in
Gibbonet 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 to
find 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 million
inhabitants and registered a GDP of $280 billion in 2010. Vietnam almost doubles
Colombia in population size with 86 million inhabitants, but has a smaller economy
with a GDP of $118 billion.
Their industries have some similarities like the number of families involved in
production: close to 511,000 families in Colombia (Federacion Nacional de Cafeteros de
Colombia (NFC), 2007) and close to 600,000 in Vietnam (Association of Coffee and
Cacao of Vietnam (VICOFA), 2009). They also share the fact that coffee is not an
indigenous specie, and it was introduced in colonial times (1730 in Colombia and
1857 in Vietnam).
But differences outweigh likenesses. Specific natural conditions make Vietnam best
suited for harvesting the Robusta coffee variety and Colombia better for the Arabica
coffee variety. There are also different harvesting seasons. Vietnam has a flowering
period from March to May and harvest from November to February. Colombia has two
flowering 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 secondary
harvest between April and June.
Harvested areas are also dissimilar. Colombia grows coffee on 877,700 hectares
divided up into 661,600 farms, while Vietnam plants 300,000 hectares (42 per cent less
than 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 per
hectare 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 maintain
manual harvesting methods, and they are both characterized by small (less than five
hectares) farms, but the Colombian method requires the careful selection of cherries
from the tree; consequently, yield cannot be substantially increased without
compromising quality. Besides, nearly all Colombian coffee is mountain grown, a
type of farming that is hard to mechanize and not readily suited to obtain significant
economies of scale (Reinhardt, 1988).
Logistics are also different in both industries. In Colombia, coffee production is
scattered 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
63
Cooperation in
coffee markets
and then transported to ports. Colombian freight rates are very high by international
standards. NFC has shown that it is far more expensive to take a container from
coffee growing in Armenia to Cartagena (900 km) than from China to one of Colombias
ports.
In S-shaped Vietnam, production is concentrated in central highland provinces such
as Lam Dong and Daklak. Upon harvesting, coffee is shipped to the Province of Binh
Duong for processing and then exported through the port of Ho Chi Minh. This
comprises a short, less expensive movement.
Both countries face challenges associated with improving labour conditions, but
Colombia looks better off than Vietnam in this aspect. Permanent contracts for coffee
pickers are basically non-existent in both countries, but child labour is far more
prominent in Vietnam than in Colombia, where the government and the main actors of
the industry have made substantial efforts to eradicate it. Commitment to workers
health and safety seems to be higher in Colombia than in Vietnam. The practice of
adopting international certifications and continuous monitoring systems in
Colombia 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 or
other protective equipment.
Interviews also highlighted a large gap in technology adoption and innovation. On
the one hand, both countries use readily available machines and agro compounds
developed in the USA, Germany, Italy and Japan. It is worth noting that they also buy
from Brazil, the only producing country that has a world-class industry in agricultural
supplies. Some Colombian firms have designed drying chambers for Pergamino coffee
(beans with dried parchment skin still adhering to it) and some other low-tech
machines, but they have not moved further in the value chain into electronic selection
machines or automated threshers (Cano, 1996).
On the other hand, Colombians have a coffee research institute (Cenicafe), which has
no 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 rust
and 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 the
welfare and progress of the coffee industry in the country (Sald as and Jaramillo, 1999).
The NFC transfers a significant part of the international price to coffee growers, but
most important according to interviews, has built a stabilization fund to buy coffee in
harvest time, and to maintain prices above international level when they drop below a
threshold. It also provides agricultural extensions and has a strict quality control
scheme to assure a consistently superior coffee for export. Additionally, the NFC
promotes Colombian coffees position in international markets.
The Federation has also made substantial investments in social and physical
infrastructure in coffee-growing regions. It has financed or co-financed roads,
electricity, drinking water and health services. It has pushed the use of environmentally
friendly methods of planting and wet processing, as well as the adoption of green
certificates by farmers (Potts et al., 2010). These practices set Colombia apart from
Vietnam.
64
JADEE
2,1
Finally as a GVC governance mechanism, NFC has also promoted international self-
regulatory systems, such as minimum quality controls, that in some instances have
limited Vietnams exports. They sold to international firms a product that could
hardly be called coffee (interview carried out in Colombia, 2009). These governance
systems improve the reputations of their members and facilitate better relationships
between roasters, traders and growers. National coffee institutes in producing
countries have particularly improved coordination among the links of the chain
(Muradian and Pelupessy, 2005).
3.2 Position in global markets
Differences found in the first stages of both value chains, carry on to its international
portion. Colombia has been an exporter of coffee since the beginning of the twentieth
century. Vietnam, in contrast, only appeared on international markets in the 1990s as a
deliberate government response to a boom in world price of coffee and to the realization
that 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 world
markets. In 1995, Vietnams coffee exports were 3.53 million bags, while Colombia
exported 9.81 million bags. By 2000, Vietnam had become the second coffee exporter in
the world, displacing Colombia. In 2009, Vietnam exported 18 million bags while
Colombia reduced its exports to 8.5 million bags.
After this major change induced by Vietnams fast market entry, this GVC has
changed 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 both
countries coffee has lost relevance in their international trade (Ponte, 2001). According
to Central Bank statistics, in 1970 coffee exports represented close to 60 per cent of all
Colombian exports, and by 2007 declined to only 5.7 per cent of total exports. In
Vietnam 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 of
Colombia (Gutierrez de Pineres and Ferrantino, 1999), and by industrial goods in
Vietnam (Athukorola, 2009). In spite of this trend, coffee is still an important source of
foreign exchange in both countries (Hallan, 2003). Vietnam exports 14.2 million bags
which render around $1.5 billion per year, and Colombia 7.8 million bags which are
valued at around $1.7 billion per year (ICO, 2008).
These figures also show that coffee-export prices are considerably higher in
Colombia. The average price for Colombian coffee in 2001 was $0.72 per pound, 61 per
cent more than Vietnams price of $0.28 per pound. In 2009, the average price was $1.77
for Colombian coffee, 56 per cent over Vietnams $0.77 (ICO, 2010). Interviewees
explained that the premium corresponds to a quality disparity between Mild Arabicas
and Robusta varieties, to a country brand difference, and to a reputation for reliable
supply that Colombian exporters have built through the years (interviews carried out
in Colombia and Vietnam, 2009).
Final export markets also have an influence over prices. Colombias main five
markets are: the USA, Japan, Germany, Canada and Belgium and Luxembourg. The
USA represents the main market, accounting for 35 per cent of the total Colombian
coffee 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 Luxembourg
market with 5 per cent. Three countries, the USA, Japan and Germany accordingly buy
64 per cent of Colombias coffee (see Table I).
65
Cooperation in
coffee markets
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 per
cent of the total coffee exports, followed by Spain with 11.28 per cent, the USA with
11.20 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 approximately
40 per cent of the total (see Table I). According to interviewees, Spain, Italy and Poland
pay less than quality sensitive Germany (interviews carried out in Colombia and
Vietnam, 2009).
Cooperation in marketing strategies seems to be possible between the two countries
to increase revenues, according to some interviews. Changes in destination markets
should not be very difficult to coordinate in each country, due to the small number of
large exporters. In Colombia, international coffee sales are concentrated in the NFC
and five private exporters. In Vietnam, there are around 150 exporters, but sales are
highly concentrated among a few of them such as Vinacafe (interviews carried out in
Colombia 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 of
supply and demand. In 1999, for instance, prices dropped by 21 per cent as a response
to a world production increase mainly because of new production areas in Brazil and
rapid production growth in Vietnam. Nonetheless, they currently receive substantial
speculative pressures from hedge and investment funds which have gained great
relevance in price formation (Gilbert and Morgan, 2010).
4. Vietnams and Colombias participation in the coffee GVC
An option to increase farm revenues is to move along the value chain, a task in which
Colombia has surpassed Vietnam. Both countries are trying to participate more in the
processed 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 million
bags 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 specialty
coffees 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 is
currently artificially produced (Powell et al., 2011). The country is also beginning
to 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 to
promote Arabica planting.
Colombia, on the other hand, is in the high-priced Arabica segment. It has built a
strong 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 and
interviews). Nestle has made relevant investments and a large share of instant coffee
production in both countries (46 per cent in Colombia and 33 per cent in Vietnam)
(Ibrahim and Zailani, 2010). Nestle is the largest instant coffee producer in Colombia,
followed by Colcafe, and it ranks second in Vietnam, behind Vinacafe, which has
50 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 international
consumer markets because it is tremendously expensive, and because they are, at least
for 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 mainly
on productivity improvement, whereas roasters and retailers have emphasized
product innovation and differentiation (Kaplinsky, 2006). The obvious brand-building
strategy has not been a financial success in Colombia. The Juan Valdez coffee-bar chain
has proven a difficult endeavour. After seven years in operation, it has not produced
profits nor dividends for stockholders (interviews carried out in Colombia and
Vietnam, 2009).
With respect to functional upgrading, growers have been blocked from moving up
the value chain by tariff escalation policies (Talbot, 1997a, b). Customs tariffs have been
considerably reduced over the years, but a number of importing countries protect their
roasting industries through tariff escalation measures. Tariff escalation involves
an increase in duties applicable to each stage of production, from the processing of the
green coffee to the final product. According to ICO (2010) figures, the European
Community applies an ad valorem tax of between 7.5 and 9 per cent while Japan
applies a tax of 20 per cent on its imports of processed coffee.
4.1 Domestic coffee consumption in Colombia and Vietnam
Another opportunity to increase country or farm revenue is to develop local
consumption, which has become more important in recent years because of the
recession in developed economies. Although promising, it also appears to have a slow
development. The Vietnamese domestic market consumes around 5 per cent of its
production 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 annum
in Colombia. In both countries domestic consumption is smaller than in other
producing countries like Brazil or Mexico.
In 2003 the Colombian NFC and local roasters tried unsuccessfully to trigger
domestic consumption with a plan that followed a Brazilian scheme that doubled
per capita consumption in ten years (NFC, 2010). Nonetheless, the strategy was
relaunched in 2010 with a new, more modest goal to increase consumption by 30 per
cent 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-digit
growth 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 changing
tastes in local markets, as new blends become available. The fact supported by
interviews is that a large majority of Colombians drink lower quality coffee. This
implies that a rise in consumption will almost surely lead to higher imports (interviews
carried out in Colombia and Vietnam, 2009).
Coffee consumption in Vietnam is less important due to the strong tea tradition that
has 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 in
consumption patterns in the world. Tea is among the cheapest beverages in emerging
markets, but its consumption is sensitive to international price increments. A study
carried 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 cent
price increase (FAO, 2010). Nevertheless, according to interviewees, this transition
will be slow.
5. Cooperation and competition between Colombia and Vietnam: a
discussion
From the evidence put forward in the previous sections, it seems clear that Colombian
coffee is highly different from Vietnamese coffee, because of the deep disparities
they exhibit in their value chain, in terms of production costs, location, social and
environmental practices. Nonetheless, this is not always recognized by producers in
either 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 social
and environmental considerations could place Colombia on a different standing than its
Asian counterpart.
The Vietnamese, on the other hand, think that their low-cost product strategy is
sustainable in the long run. They do not perceive Cambodia, Laos or Myanmar as
competitors, although they surely have the potential to be, since they too have good
climate conditions and low labour costs. Nor do they appear to care much about the fact
that developed markets will require green and social standards that they currently do
not meet.
Because these differences make each product unique, they can be used as a tool for
cooperation 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 Vietnamese
government to promote coffee farming, lower production costs even more. Due to its
location and cultural proximity, Vietnam is also the natural seller to other Asian
countries, a market that according to interviews to NFC officers, absorbs 13.2 million
bags, and has grown from 2004 to 2010 at a rate similar to the world, 2 per cent per year
(Sald as and Jaramillo, 1999). As a consequence, Vietnam has and probably will
continue to have a competitive advantage in lower production costs.
Colombia, in turn, has a more expensive coffee to produce and take to international
markets, it has built its competitive advantage on quality, environmental and social
practices.
Some cooperation strategies could be followed to strengthen both countries
competitive positions and upgrade the value chain. But are there incentives to
cooperate? The answer drawn from interviews and from the authors conclusions
seems to be yes.
In marketing, some strategies followed by each country alone, such as moving
closer to final consumers or developing the domestic market, are interesting but
costly and slow. Cooperation seems to provide a faster way to increase market share
and revenues. Colombians could profit from the Vietnamese knowledge of Asian
markets. Vietnamese, in turn, could free ride on the image of Juan Valdez
and Colombian coffee, brands that have been built for at least four decades at
multimillion-dollar costs.
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Strategic partnerships can be explored in avenues such as coffee bar chains. The
Colombian chain Juan Valdez would clearly benefit from a union with Vietnamese
experts, who could help usher them into China, a move that international competitors
like Starbucks and Costa have already made.
Cooperation could move both countries in the direction of developing new blends
and 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 high
labour costs. Even the creation of bi-national specialty coffees is something that can be
explored and where Vietnamese could profit from the experience of the South
Americans.
Additionally, the development of the Colombian domestic market (which has been
stagnant at 1.4 million bags for at least ten years), could rely heavily on lower cost
Vietnamese-based blends. Higher priced Colombian coffee can be exported, at a net
gain to local producers.
Colombians could transfer their experiences on good social and environmental
practices, and they could transplant some of their institutional infrastructure, such as
the Federation of Coffee Growers and Cenicafe, that have proved useful in promoting
technological advancement in coffee plantations.
Financing is another area of cooperation, which could render interesting results for
both parties. A coffee-backed security is an instrument that, according to the
interviews, has been considered in Colombia as a tool to provide working capital for
coffee growers. A bi-national security could have less agrological risk and greater
liquidity, thus reducing the final cost for farmers.
But most importantly, coordination between these countries could partially shift the
axis of power of the coffee industry away from Brazil. Currently, international prices
are determined mostly by changes in Brazilian production, given its 40 million bags
output. Coordination would centralize decisions on the production of Vietnams 18
million bags and Colombias 9 million bags, which would make each country more
interesting for investors in this commodity.
6. Concluding remarks
Lately, some important trends have influenced major changes in world coffee
consumption[1], with particularly strong implications for Colombia and Vietnam. First,
changing income levels in consumer countries, which is a primary driver of long-term
demand. Second, the emergence of major urban centres, and a new middle class in
developing economies. Third, new technologies such as the steam process[2] that
enable roasters to incorporate a wide range of coffees into their blends. Fourth, the
interest of roasters to mix new coffees in their blends in order to have broader access to
raw materials at a wider price range[3]. Fifth, a brand-coffee war that induces faster
innovation to increase market shares in different segments, while consumers are
simultaneously entering the market, attracted by new coffee products. Traditional
products are stagnating and new products are gaining more space, such as different
flavoured coffees. Sixth, coffee is available in a larger number of places in major
consumer countries; supermarkets and other retailers are increasing their presence.
Coffee bars are also growing and they are highly visible in major cities. An example of
this fast growth is the UK-based chain Costa Coffee. It has set a goal to almost double
its 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 will
require new logistics (shipping smaller lots in a just in time fashion to stores in
diverse locations), new products (with new blends, flavours and appearances). In this
new, 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 to
create 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 cleaning
the Robusta aftertaste and reducing the bitterness of the Robusta green coffee beans in the
roasting process. For instance, some years ago Germany used to consume higher quantities
of Colombian coffee. Nowadays, Germans are buying more Robusta and it has become an
important 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 other
origin in their blends.
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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 in
different 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:
mgonza40@eafit.edu.co
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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