Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster DAVID CHAN SABINE PRINZ CARLOS RIVERA HELENE SOW HARVARD BUSINESS SCHOOL MICROECONOMICS OF COMPETITIVENESS PROFESSORS LAURA ALFARO, CHRISTIAN KETELS, AND JORGE RAMIREZ-VALLEJO
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Sustaining Competitive Advantage: The Challenge for Belgium’s
Chocolate Cluster
è
DAVID CHAN SABINE PRINZ
CARLOS RIVERA HELENE SOW
HARVARD BUSINESS SCHOOL MICROECONOMICS OF COMPETITIVENESS
PROFESSORS LAURA ALFARO, CHRISTIAN KETELS, AND JORGE RAMIREZ-VALLEJO
Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster
Introduction
‘National competitiveness is created, not inherited. It does not grow out of a country’s natural endowments, its labor pool, its interest rates, or its currency’s value, as classical economists insists. A nation’s competitive advantage depends on the capacity of its industry to innovate and upgrade. Companies gain advantage against the world’s best competitors because of pressure and challenge. They benefit from having strong domestic rivals, aggressive home-‐‑based suppliers, and demanding local customers. In a world of increasingly global competition, nations have become more, not less, important. As the basis of competition has shifted more and more to the creation and assimilation of knowledge, the role of the nation has grown.’
-‐‑ Michael Porter, On Competitioni
As Michael Porter notes in the above quote, nations have become increasingly more
important in an era of global competition. Given that the basis of competition has evolved to the
amalgamation of knowledge, nations play a pivotal role in facilitating both the creation and sharing of
knowledge between market participants in an economy. Indeed, such is the genesis for the
development of competitive clusters – after all, clusters are ‘geographic concentrations of
interconnected companies, specialized suppliers, service provides, firms in related industries, and
associated institutions’ii, and cluster knowledge and expertise serve as the interstitial glue that
connects the different cluster pieces together to compete effectively.
Such has been the story of Belgium’s chocolate cluster to date – since 1635 when chocolate
was first brought into the country by the Abbot of Baudeloo in Ghent, the development of the Belgian
chocolate cluster has been one of knowledge creation and sharing over generations, which has
allowed the country to not only gain a competitive advantage in chocolate manufacturing, but more
importantly become synonymous with chocolate itself. Coupled with a favorable location at the heart
of Europe which led to the development of quality ports and transportation infrastructure, strong
domestic and regional demand, and favorable policies, Belgium has not only been able to establish
itself as a market leader, but also prevent new entrants from eroding its competitive position. Its
colonial legacy and close relationships with Africa have also proven beneficial, and continuous
restructuring of Belgian chocolate companies have allowed the country to gain a competitive
advantage at each step of the value chain unlike its competitors. More importantly, given the
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Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster
commodity-‐‑like nature of its primary raw product, Belgium’s chocolate cluster has benefitted from
the rise of institutes for collaboration on multiple levels – local, regional, and global.
However, this paper is worried about a few trends – first, the cluster has been stagnant in
recent years, and has been overly focused on producing only chocolate rather than considering a
diversification into other by-‐‑products. Moreover, there are questions over the sustainability of
chocolate production given the availability and quality of cocoa beans, as well as the sustainability of
domestic and regional demand should Belgium lag expansion into new markets. In addition, given
consumers demand for healthier food options, Belgium chocolate manufacturers are facing a
fundamental secular challenge to their hitherto manufacturing processes – while these processes
have been handed down and improved on over generations, changing consumer patterns imply that
the the company may have to alter their current methods and innovate further. More importantly,
Belgium faces a fundamental constitutional question about its polity – it has been held together by an
unnatural alliance between Brussels, Wallonia, and Flanders, and questions around the sustainability
of this political structure remain unanswered. Indeed, these differences are not only accentuated
through the economic performances of these regions, but also in the type of policies each region has
implemented – this lack of harmony is disconcerting, and limits the potential of Belgium to enhance
its position further.
In analyzing Belgium’s economy, the development of the chocolate cluster, and the global
chocolate value chain, this paper thus argues that Belgium’s primary challenge moving forward is in
sustaining and improving its competitive advantage. It cannot rely purely on its legacy or historical
competitive advantage to ensure future competitive advantage, and needs to formulate a concerted
cluster policy to address these issues to maintain a clear value proposition.
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Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster
Overview of Belgium
Located in Western Europe, Belgium is a federal constitutional monarchy with a
parliamentary system of governance, consisting of a Senate and a Chamber of Representatives.
Divided into three separate regions, Brussels, Wallonia, and Flanders, Belgium straddles Germanic
and Latin Europe, and is home to two major language groups, the Dutch-‐‑Speaking Flemish
community in the north, and the French-‐‑speaking Wallonia community in the south. It gained its
independence from Netherlands in 1830, and during the 20th century occupied a number of African
colonies, including parts of Rwanda and Burundi, and the modern-‐‑day Democratic Republic of Congo.
It had also been occupied by Germany in both World Wars, and has played a major role in the post-‐‑
war reconstruction of Europe, not only as the founding member of the Eurozone, European Union,
and NATO, but also the headquarters of the latter two organizations in addition to many other
international institutionsiii.
In terms of geography, Belgium is approximately 30,528 square kilometers large,
approximately the size of Maryland. It is located in between Netherlands and France, and borders the
North Sea, allowing for easy access to major European shipping routes which have led to the
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Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster
1.40%
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GDP@Composition@ by@ Sector
2000 2015
development of Antwerp as a major port in the region. It has a population of 11.3 million, with a
0.76% growth rate, a median age of 41.4 years, and a dependency ratio of 54.2%iv.
Belgium’s Economy
Given its central location, developed transportation network, and diversified consumer and
industrial base, Belgium has managed to achieve solid economic performance over the past thirty
years – GDP per capita has increased nearly 4.5 times from $10,491 in 1980 to $44,706 in 2015, and
higher than the Eurozone and OECD averages as seen in the chart belowv. In 2015, Nominal GDP was
$494 billion, and the economy grew by 1.3%. In terms of GDP composition, Belgium also has had a
heavy dependence on the financial services sector – since 2000, the share of services as a % of total
GDP has increased from 71% to 77%, industry has declined from 27% to 22%, and agriculture as a
proportion of GDP has also halved. In the context of chocolate manufacturing, it is also worth noting
that manufacturing only accounts for 13.1% of GDP, and employs 13% of the current Belgian
workforce.
$20,000
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Belgium OECD Eurozone France Netherlands
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Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster
However, Belgium’s economy has revealed cracks in recent years. As noted in the following
chart, Belgium’s nominal GDP growth rate has been lagging the OECD average. Moreover,
unemployment has been persistently high at 8.6% for the past 15 years, suggesting broader anemic
growth and weak job creation. Inflation stands at 0.5% in line with broader Eurozone deflationary
pressures. While the Economic Intelligence Unit suggests that inflation in 2019 could rebound to
1.5% due to enhanced ECB quantitative easing and commodity price normalization, the projections
for unemployment remain flat at 8%vi.
Belgium also faces a bigger challenge of managing its fiscal budget – while is has managed to
trims its budget deficit from 3.1% of GDP in 2014 to 2.7% in 2015, allowing it to exit the EU’s
excessive deficit procedure (EDP), the current government still faces an uphill task to follow through
on its commitment to fiscal consolidationvii. Admittedly, a large part of the overhang over the past
!0.5
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Unemployment4 (%)
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Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster
few years has been due to the government’s recapitalization of the banking sector post-‐‑financial
crisis and through the Euro crisis in 2010. However, it is clear that the country has unsustainable
fiscal policies – social security and welfare account for 37.6% of government expenditure, following
by healthcare at 15.2%. The current government has set an aggressive structural adjustment target
of 0.7% of GDP per year in 2017, and has proposed a reform program aimed at shifting from a
revenue based adjustment to an expenditure based adjustment with significant cuts to public
spending through the tightening of the social welfare criteria. Given anemic unemployment largely
driven by high direct and indirect taxes of close to 55% (versus 48% in France and 31% in the US),
the Belgian government has also proposed the gradual increase in the retirement age to 67 by 2030,
and has also taken steps to cut employers’ social security contribution from 33% to 25% to reduce
the high cost of labor, and increase worker productivity. In order to account for this tax revenue
shortfall, the government will also increase taxes on electricity, diesel fuel, and speculative gains,
shifting revenue from labor to consumptionviii. While ideal in theory, the proposal still faces
numerous challenges – (a) austerity limits the government’s ability to deliver on other aspects of its
policy agenda to increase jobs and promote competitiveness due to reduced public spending in
training and infrastructure. (b) More specifically, the government will likely face complaints from
trade unions and the Wallonia government given the complex political structure, and this disunity
will hurt its agenda. (c) there will likely be higher spending pressures due to increased counter-‐‑
terrorism expenditure and from refugee integration efforts.
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Budget3Balance3(%3GDP)
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Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster
As for Belgium’s terms of trade, its current account balance was 0.5% of GDP in 2015ix,
having improved since the financial crisis, as low commodity prices reined in import costs and the
depreciating euro supported exports. As noted the chart below, export growth has rebounded, and
Belgium’s wage moderation program could serve to improve competitiveness moving forward and
stimulate further export growth.
Belgium’s top trading partners are France (at 14% of total trade), Germany (13%),
Netherlands (13%) and the United Kingdom (9%). Outside Europe, the United States is Belgium’s
!2!10123456789
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Export2Growth2(%)
Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster
largest trading partner, following by India (3%) and China (3%)x. In terms of its export portfolio,
Belgium’s largest export consists of oil and gas products at $54 billion, followed by pharmaceuticals
at $49 billion. It is important to note that the majority of products are within the top ten world export
rankings, not only indicating the competitiveness of Belgium’s industries, but also its diversity. It is
also worth noting here that cocoa and cocoa preparation accounts for approximately $3.5 billion of
Belgium, while Food Processing and Manufacturing accounts for $33 billion of total exportsxi.
Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster
Belgium Competitiveness / Diamond Analysis
According to the New Global Competitiveness Index Report, Belgium is the 14th most
competitive country in 2015. This is determined according to the following metrics: Company
Operations and Strategy (15th), Factor Conditions (18th), Demand Conditions (20th), Supporting and
Related Industries and Clusters (9th), Context for Strategy and Rivalry (17th), Social Infrastructure
and Political Institutions (16th), and Monetary and Fiscal Policy (42nd). This paper will now analyze
the following categories in depth, and argues that Belgium’s competitive positioning essentially
explains the composition of its cluster portfolio and performance to date.
Factor Conditions: given Belgium’s location at the heart of Europe and proximity to the
North Sea, it is blessed with a natural advantage, which the government has capitalized on through
significant physical infrastructure investment for multiple modes of transportation. The Belgian road
network has seven international motorways with a combined length of 1763 km, linking seamlessly
with France, Germany, and Netherlandsxii. It also has one of the densest rail networks in the world,
carrying 188 million passengers and over 62 million tons of freight each year, with high speed trains
running up to 10 times a day to Londonxiii. Most famously, Antwerp is home to the second largest port
9
Factor Conditions:• Multilingual population and openness
to foreign skilled labor (+)• Large FDI as a source of capital and
expertise (+)• Well developed physical infrastructure
including ports, rail, roads, and airtransportation (+)
• Highly skilled work force (+)• High quality of education (+)• High labor productivity per hour (+)• Limited natural resources (E)• Strong influence ofunions (E)
Context for Firm Strategy and Rivalry:• Integration with EU: Full adoption of
policies and standards (+)• No tariffs: open borders and open
trade promotes local competition andrivalry (+)
• Preferential international traderelations (+)
• Favorable investment climate fordomestic and foreign investors (+)
• Modernization of SOE through partEprivatization program (+)
• Austerity measures and fiscalconsolidation plans may inhibit growth(E)
• Lack of coherent national policy foreconomic competitiveness (E)
• Fragmented federal structure adds tocomplexity and decreasesaccountability (E)
Demand Conditions:• Central location in Europe with
access to local markets and 500million customers (+)
• Affluent EU consumers with highquality standards (+)
• Belgian consumers enjoy high GDPper capita and disposable income (+)
• Closely linked to neighboring EMEAregion (+)
• Domestic demand not a significantdriver of growth given country size (E)
Related and Supporting Industries• Access to wide supplier base
throughout the EU• Firms that hold products across
multiple clusters able to driveimprovements in performance
10
Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster
in Europe behind Rotterdam, handling 25.7% of total container traffic in Europe versus Rotterdam’s
of 34%xiv. However, Antwerp’s container volume growth has double Rotterdam’s, growing by 9.5%
while Rotterdam trailed with a 3.7% increasexv. Indeed, the important point to note is that Belgium
has been continuous re-‐‑investing in its infrastructure, and is currently in talks to invest another $3.7
billion in the Port of Antwerp to increase capacityxvi, explaining why Cushman and Wakefield reports
on European Distribution consisting rank Belgium the first in Europe for its excellent distribution
networkxvii. This may further elucidate why oil and gas products rank top in Belgium’s cluster
portfolio – most of the oil and gas companies that operate in Belgium are mostly in the downstream
sector, focusing on refining oil and purifying gas. Belgium essentially serves as a link between
upstream producers and final end-‐‑users of oil and gas, and it is of pivotal importance that a
downstream hub is convenient located close to major sea or rail routes. Belgium’s factor conditions
thus allow it to gain a comparative advantage in this export cluster, which the country has continued
Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster
the companies and elevating the competitiveness of all the Belgian firms in comparison to their
international competition.
Demand Conditions: The global demand growth for chocolate over the last two decades has greatly
benefited the Belgian chocolate cluster. Particularly, the growth in demand from the EU has been
helpful to the cluster as the growth Belgium has struggled to capitalize on the growth in the
American market with the rise from competitors such as Mexico. However, as noted in our analysis of
the global chocolate industry, demand in these markets is stable and unlikely to accelerate. Belgium
needs to look into other emerging markets like China and India to expand consumer demand.
Belgium has also benefitted from domestic demand – it currently ranks 5th in the world in terms of
consumption per capita. This internal demand is particularly helpful in supporting the small to
medium businesses that make up a majority of the cluster in Belgium. However, a major weakness is
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Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster
in the sustainability of this demand – it still lags behind other European markets, and there is more
that the cluster can do to promote further domestic consumption.
Context for Firm Strategy and Rivalry: EU membership has certainly been helped in providing an
access point to the strongest market. Strong internal demand has produced a strong internal
competitive landscape that continues to fuel innovation. While labor cost is high as compared to
some competitors, technological advances have kept strong margins, particularly for the large scale
producers. Meanwhile, the boutique shops, have generations of knowledge and skills that are difficult
to replicate in newer markets.
12.22
8.86
8.8
7.58
7.54
7.23
6.69
5.84
5.66
3.93
3.42
2.87
2.74
0 2 4 6 8 10 12 14
Germany
United7Kingdom
Austria
Denmark
Belgium
Finland
France
Ireland
Lithuania
Italy
Spain
Portugal
Poland
CONSUMPTION*OF*CHOCOLATE *PER*EU *RES IDENT*(KG)
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Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster
Related and Supporting Industries: The strongest performing part of the sector is the production of
industrial chocolate or coverture – as previously mentioned, this intermediate product is produced at
a global scale. However, a clear risk to this part of the cluster diamond, is that nearly all the raw
materials necessary for this product are imported, and as noted in our chocolate industry analysis
above, there are questions over the sustainability of supply. Other supporting institutions include the
Port of Antwerp which acts as a central logistics hub for several different chocolate markets,
including competitors, as well as public and private agencies that help lobby for the industry inside of
Belgium as well as the EU – such as Flanders Food and Choprabisco which will be described in
greater depth later in the paper.
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Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster
Belgian Chocolate Cluster: Government Policies and Institutes for Collaboration
The government involvement with the Belgian Chocolate Cluster has been quite extensive,
and what is unique about the chocolate cluster is that it has institutes for collaboration on three
different but intersecting levels: Local, Country, and EU. An analysis of the government involvement
reveals some tensions inside the cluster that are not otherwise apparent – there are two points of
contention for the cluster, primarily over origin and definition.
First, it is worth noting that there is a distinct definition for what constitutes Belgian
Chocolate which has effectively solidified Belgium’s competitive position – this serves as a high
barrier to entry, and gives Belgian manufacturer’s a monopoly position. This Belgian chocolate code
was created by Choprabisco, the Royal Belgian Association of the Biscuit, Chocolate, Pralines and
Confectionary – this private/public organization counts 180 members, ranging from the small
company to the multinationals companies. A vast majority of members are small local companies,
and therefore the Belgian Chocolate Code is written to address the concerns of SMEs. Specifically, the
requirements around defining place of origin have been contested as the larger Belgian chocolate
companies have started to produce a portion of their final products outside of Belgium. The
requirements imposed by the Belgian Chocolate Code are in many ways more onerous than those of
the EU regulations around origin. xlvii Nonetheless, this combination of local and regional policy
around origin has served to enhance the cluster’s value proposition by increasing consumer
willingness to pay.
The second area of contention was what was known as the 30 year “Chocolate War”. This
battle played out at the EU level and pitted the traditional strongholds of chocolate production,
Belgium, France, Switzerland and Germany against the United Kingdom and the Nordic countries.
The battle centered around the definition of chocolate, and traditional actors, led by Belgium argued
that anything defined as “chocolate” should not be allowed to include vegetable oil of any percentage
and should strictly use milk. This battle lasted for 30 years and was finally resolved by a European
Court of Justice ruling and by the European Directive 2000/36 which mandated that vegetable oil
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Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster
substitute could still be used to produce chocolate up to a maximum of 5%. This was seen as a clear
levelling of the quality standards for chocolate products in general because most Belgian companies
pride themselves in only using 100% cocoa butter. Consequently, this is still being considered by
many Belgian manufacturers as a potential threat of reduced quality standards for chocolate, and to
the Belgian code has became stricter in response to these regulation. The Ministry of Economic
Affairs instituted the Ambao certification program to tighten the definition of Belgian chocolate,
which has further frustrated the larger Belgian chocolate corporations. xlviii
Indeed, it is important to note that the commodity-‐‑like nature of chocolate creates significant
opportunity for collaboration on multiple levels – apart from Choprabisco on the local level, the
Belgian chocolate cluster is also involved with Caobisco on the regional level, and the International
Cocoa Organization on the global level. The important point is that the Belgian cluster is a pivotal
member of these respective institutions – they are at the forefront of shaping regulation and
guidelines, and also provides an opportunity for knowledge sharing between different partners in the
supply chain across three dimensions. This sharing of knowledge enhances the existing knowledge
sharing on the cluster level, and further strengthens Belgium’s positioning.
Federalism and Chocolate Cluster Performance By Region
Institutionally, Belgium is divided into four language areas (the Dutch-‐‑speaking, the bilingual
Dutch/French, the French-‐‑speaking and the German-‐‑speaking), and is composed of three
Communities (the Flemish, the French and the German-‐‑speaking) and three Regions (Flemish,
Brussels Capital and Walloon). Consequently, policy-‐‑making within the country is prepared and
executed by various authorities, based on three distinct pillars, each with their own range of
competencies: a federal, a community, and a regional pillarxlix. Consequently, the Belgian form of
federalism is unique, because each region has exclusive powers and competencies in a number of
areas – there are no shared competencies between the regions, so that each entity has its own
separately elected parliament, government, administration, legislation, and advisory bodies. No
hierarchy exists between the different entities regarding their competencies so that no overruling is
possible. In 1980, the regional authorities were establishedl – the Flemish authorities decided to
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Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster
merge the existing institutions of the Flemish Community and the Flemish Region. Since then, a single
Flemish Parliament, Flemish Government, and administration, with consultative or advisory bodies,
have managed and overseen both community and regional competencies in the various policy
domains. The Flemish Parliament debates and legitimates all official legal decisions pertaining to
both community and regional competence. Likewise, the Government of Flanders is charged with the
execution and implementation of policy decisions of both the community and the regional
competencies. This decision making process differs in the French-‐‑speaking part of the country, where
the French Community and the Walloon Region are separate institutional entities with different
parliaments, governments and public authoritiesli.
Based on Oxfam’s analysis of the Belgium Chocolate Clusterlii, one notes that there are
significant differences in performance by region. As noted in the graph above, Flanders is responsible
for nearly 75% of total employment, turnover and number of companies in the chocolate, cocoa, and
sugar confectionary industry in Belgium. This indicates the following: (a) the chocolate cluster is
disproportionately concentrated in the North of the country arguably due to greater access to the
North Sea, (b) As a result, Flanders has benefitted from increased employment in the chocolate
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Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster
cluster, and it also has a more robust knowledge base given the historic presence of most companies
in the region – this has also allowed it to develop a strong cluster around food manufacturing over
the years.
Comparison of Regions
In order to understand this difference in performance, and evaluate future prospects for the
Belgium chocolate cluster, one needs to understand what each region’s strengths and weaknesses
are, and how current processes can be improved.
Flanders – Flander’s population accounts for about 58% of Belgium's total population,
whilst its surface area covers about 44% of the country. The majority of the companies and the
working population of Belgium are located in its northern region, which also has a higher
employment rate. As a result, the economy of Flanders represents about 58% of the Belgian economy
(as measured in GDP). It is also a very open economy: according to the EU definition, exports from
Flanders are worth almost 125% (2014) of its GDP (partly due to the trade of goods arriving in the
harbor of Antwerp). On the other hand, the relative wealth of Flanders -‐‑ as measured in GDP per
capita-‐‑ is about 20% higher than the EU-‐‑28 average but slightly lower than the Belgian average. The
main reason for the latter is the “capital city” effect of the small Brussels Capital region, with its
strong presence of company headquarters and public administrations. If the wealth generated by the
daily commuters from Flanders into the Brussels Capital Region were attributed to their residence in
the Flemish Region, the Flemish GDP per capita would rise above the Belgian value. Total
expenditure on R&D (GERD) in Flanders, which reaches 5.8 billion euro, equates to over 64% of the
Belgium total (2013) and the Flemish R&D intensity exceeds the national value for Belgiumliii.
Strong Institutions for Collaboration: The backbone of the Flanders’ knowledge base is
shaped by the 5 university associations, 5 strategic research centers, and a number of other
knowledge institutes in specific domains such as marine sciences, tropical health, agriculture
research, and various collective research institutes active in specific fields – institutions such as
Ghent University, the Flanders Institute of Biotechnology and the Agency for Innovation by Science
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Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster
and Technology have played a key role in fostering the development of the food manufacturing sector
in Belgium overall and in Flanders specifically. Several of these knowledge actors in Flanders are
recognized as centers of excellence in their field of activity and conduct research integrated in
renowned international networks and with partners throughout the world. Some of these, such as KU
Leuven or Ugent have established subsidiary activities abroad (US, Asia) by often involving local
counterparts or partners. The European Research Ranking, which is based on the publicly available
data from CORDIS on European research projects funded by the European Commission during the
past years, contains three institutes from Flanders in the top-‐‑100: KU Leuven, iMinds and VUB.
Indeed, ‘the winning combination of Flander’s dense population of companies, SMEs, large
enterprises, local companies, and their traditional willingness to cooperate in order to extend
themselves, has provided a hotbed for the development of various knowledge clusters’liv – which
provide a critical backdrop for the formation of specialized clusters. This economic specialization
pattern (based on the relative export shares) of Flanders reflects the pattern of a mature economy as
well as that of a highly diversified economy. In most sectors the Flemish economy has maintained a
critical mass to remain competitive. The food and beverages sector is the largest industrial sector in
terms of employment with a wide set of specializations in pork meat, frozen vegetables and potatoes,
beer and chocolateslv.
Policies: The Government of Flanders has supported several innovative networks, involving
various knowledge actors and industries, usually including companies from a specific sector. The
main policy instrument is the “VIS-‐‑scheme” which provides a legal structure for various types of
networks/projects that offer innovative solutions to a specific problem or a demand-‐‑driven
opportunity relating to a collective of companies, resulting in a clear economic added value for a
broad target grouplvi. Since 2002, the VIS-‐‑scheme has supported the emergence of excellence centers
or innovation platforms – these organizations coordinate between different actors such as industrial
partners, universities, professional organizations of a specific industry, by providing relevant
research and innovation potential and diffuse knowledge in the Flanders region. As the OECD notes
in its report on innovation policy, the ‘VIS scheme is targeted to intermediary network organization
that actively support technological innovation in companies’, and critically helps to increase
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Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster
awareness and improve access to technology and knowledge transfer for enterpriseslvii. Flanders
Food is one of the initiatives supported by VISlviii – consisting of 181 member companies and 25
knowledge institutes, it serves as a consolidated knowledge center that brings together food
companies dedicated to innovationlix, specifically in the West Flanders region due to a combination of
geographical proximity to the ports, as well as unique climatological conditions that allow West
Flanders to use two-‐‑thirds of its surface for agriculture and horticulturelx.
In 2015, the Flemish Government also approved a Concept Note on Cluster Policy that
describes the framework of a more general Flemish cluster policy. It includes initiatives that
reshuffle the existing landscape, among other by adapting funding criteria, and direct future
innovative cooperation among companies’ networks into two types of clusters: spearhead clusters
and innovative enterprise networks. Spearhead clusters will be complementary to the strategic
domains, large scale, limited in number, and strictly selected. It will be supported for a 10-‐‑year
period with a 50% public support part, and require a triple helix model. In contrast, the innovative
enterprise networks will be shaped on a smaller scale, through a bottom-‐‑up approach, and focus on
future potential by concentrating on emerging markets or the bundling of various small initiatives.
During a 3-‐‑year period, a 50% public support part will be available, and the simplification and
streamlining of the large number of intermediaries, structures, and innovation actors are the leading
goals of this new policy slated to be implemented in 2016 or 2017 intended to foster the
development of a more focused demand-‐‑driven approach. Indeed, the aim of this on-‐‑going policy
process is to unlock unused economic potential and to increase the competitiveness among Flemish
companies through an active and continuous cooperation of actors, to contribute to a solution for
societal challenges with an economic added value for companies. Indeed, according to Jan Larosse at
the Flanders Department of Economy, Science and Innovation, a key challenge moving forward is
dealing with the innovation paradox in Flanders – primarily the translation of innovation projects to
monetization, which the 2014-‐‑2019 governing agreement has established as the core focuslxi.
Wallonia – Concentrated in the Southern region of Belgium, it covers 55% of the total land
area but only makes up 33% of the total country population. While it covers the majority of the
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Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster
country, GDP only accounts for 23% of Belgium’s totallxii. As highlighted above, Wallonia has its own
separate competencies with respect to how it functions as a region within the overall Belgian federal
framework – it is thus responsible for its economic policies and is allowed to pursue its own external
trade policies, including the signing of treaties. This autonomy may be part of the reason why
Institutions for Collaboration (IFCs) only exist at the regional and not the national level. Despite the
fact that the population of Wallonia is highly educated, overall labor market data in Wallonia
highlight crucial economic problems. With an employment rate of 57.2%, Wallonia is doing worse
than Belgium and the EU-‐‑27 on average. This, coupled with an unemployment rate of 9.6%, also
higher than Belgian and EU-‐‑27 averages, raises some concerns about the region. One potential
explanation for these severe underutilization indicators is the recent de-‐‑industrialization processes
that Wallonia has experienced over the second half of the 20th century.
Policies: In August 2005, the Government of Wallonia decided to implement the “Priority
Action Plan”, or also “Marshall Plan” which aimed at supporting Wallonia’s economy and giving it a
qualitative jump. Spearheaded by AMEX, the Wallonia Export and Investment Agency, this new
industrial policy mainly focused on the development of industrial networking through two policies
which are linked very closely to each other: (a) The Competitiveness Poles policy: The main objective
of this policy is to develop some key growth sectors on the basis of strong partnerships projects
between enterprises, research and training centers. It aims to implement leading industrial and
technological projects within the 5 sectors considered essential for the regional economy: life
sciences and health (Biowin), the agrifood industry (Wagralim), the Aeronautics and space industry
(Skywin), mechanical engineering (Mecatech), transport & logistics (Logistics in Wallonia). (b) The
Clustering policy: The objective of this policy is to develop business networks in specific domains,
and eventually with research operators, and, to develop a cooperation framework and a stronger
economic structure within the sectorlxiii. Given this paper’s focus on the chocolate cluster, we look at
Wagralim, the agri-‐‑food cluster, which was created as part of the ‘Marshall Plan’ to shore up the
competitiveness of companies and to boost business and jobs in the sector. The regional government
has set aside close to € 55.3 million for projects, with € 38.3 million of which from the public purse
37
Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster
(funding by the Walloon Region). The Cluster’s partners mainly include companies, scientists from
universities, research centers, and training institutes. At present, there are 40 industrial partners
(including 19 SME) as well as 31 scientific players are project members, and entities such as industry
federations like Fevia Wallonia aid in the development of the cluster.
However, the problem is that only one chocolate factory, Ferrero in Arlonlxiv, is currently
based in Wallonia – as noted above, the majority of companies are still concentrated in Flanders, and
there are questions over the success of the above initiatives. As noted by Florence Hennart, from
Wallonia’s Economic Policy Department, Wallonia’s ranking in agriculture production across the EU
stands at 72, and more needs to be done to improve its performancelxv.
Brussels – While Brussels only accounts for 3% of overall production volume in the food
sector, it plays a pivotal role in the development of the sector in Belgium as a whilelxvi. Through the
Brussels Enterprise Agency, the Brussels has focused its efforts on being the ‘interface that enables
all those doing business in the Brussels region’ to find the necessary information, and provide
selective support to high potential industries which will lead to the growth of a sustainable
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Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster
ecosystem for innovate enterpriseslxvii. In particular, Brussels has focused on the development of the
biotechnology sector given the relationship between biotechnology, and the development agri-‐‑food
specific innovations in additives, nutrients, and even packaginglxviii. This paper argues that the
presence of large multinational corporations like Nestle, Danone, Ferrero, and Unilever in the capital
serves two important functions: (a) given that these companies need to be in Brussels either to lobby
politicians in the European Union or to keep abreast of the latest regulation, there is a natural
community for knowledge sharing that can only benefit the development of Belgium’s own agri-‐‑food
cluster. (b) The fact that these corporations have chosen to site their regional headquarters in
Brussels also creates a powerful signaling effect indicating the importance of Belgium at the heart of
Europe. In this sense, Belgium has a powerful competitive advantage not completely due to its
inherent competencies, but also in part due to the fact that it is also the capital of Europe, giving it the
opportunity to leverage on this position to grow its agri-‐‑food cluster moving forward.
Sustaining Competitive Advantage and Improving the Value Proposition
In this paper’s analysis, while Belgium certainly has an established comparative advantage in
the chocolate cluster, it needs to continue sustaining and improving on this advantage for it to
continue being a market leader. Indeed, Belgium’s current value proposition is this – it has the
experience and expertise in chocolate manufacturing forged over generations of history and practice,
which has not only allowed it to produce a superior product, but also increase consumer willingness
to price. This superiority has been solidified through a combination of regional and domestic
legislation that has protected the ‘Belgian Chocolate’ label, giving it an essential monopoly over its
production even though the raw materials are almost entirely sourced from outside its borders. In
addition, its central role in linking domestic, regional, and international cocoa organizations gives it
an influential voice in shaping regulation and policies for the industry – it is able to dictate the
contours of industry guidelines moving forward, preventing it from being blind-‐‑sided by other
competitors. Moreover, given the improvements it has made to manufacturing processes through the
consolidation of the industry, the cluster has also been able to lower processing costs. Couple with
Belgium’s inherent strength in infrastructure and proximity to major transportation routes, retail
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Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster
and transportation costs have been significantly reduced. It essentially has a natural advantage at
each step of the value chain, which has allowed to indirectly integrate manufacturing across
vertically. This combination of increased willingness to pay, and lower marginal costs has allowed
the cluster to create and capture value not only for itself but also for the country as a whole, but it
needs to improve on a few areas for it to sustain its value proposition.
Country Recommendation
This paper is believes that a major hindrance for Belgium moving forward is in its political
structure – while the regional federalist structure may have worked for now, it is tenuous, and has
the ability to fracture at a moment’s notice, possibly unraveling generations of investment and
expertise in the chocolate cluster. Moreover, the country’s anemic economic position is concerning,
and it needs to solve its current fiscal position in order to ensure the sustainability of existing policies
and programs. Here are our recommendations in order of importance:
Recommendation 1: Address lingering concerns over the democratic structure and
relationship between the three different regions.
It is incredibly worrying that Belgium did not have an elected government for nearly 589 days in
2010-‐‑2011 because opposing Flemish and Walloons were not able to agree on how to form a
governing coalitionlxix. This not only hamstrung the government’s ability to conduct any policy, but
also create a perverse sense of uncertainty about the business and investment community that is
inherently inimical to growth and competitiveness. While this scenario has been solved, there is no
guarantee that it could not happen again, and this paper argues that Belgium needs to settle the
structure of polity soon through a more intense dialogue– continued rumors over the breakup of
Flanders and Wallonia are not helpful, and needs to addressed comprehensively as it dictates the
scale and scope of cluster policy moving forward. The major actors involved in this step are likely to
be the respective regional governments, the European Union, and likely the population through a
referendum. Realistically however, given existing talks of Brexit, it is unlikely that Belgium will
undertake a similar referendum – rather, similar to what it has been doing thus far, it will continue to
40
Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster
punt the issue, leaving a shroud of uncertainty which will cloud the development of successful cluster
policies on both the regional and federal level.
Recommendation 2: Belgium needs to improve on its cluster coordination across all three
regions in order to develop a successful chocolate cluster policy
As noted above, each of the three regions have detailed plans for the development of the agri-‐‑food
and manufacturing cluster. However, there is little communication and harmonization across the
three regions apart from some coordination between Flanders and Brussels given their proximity.
The lack of partnership implies that policies may overlap and compete with each other rather than
competing with external competitors. While regional competition is common, as noted in South
Carolina in the United States, there is a sense that competition between Flanders and Wallonia is
tinged with a degree of antagonism due to its acrimonious history and relationship. This is counter-‐‑
productive, and limits the oveall potential of Belgium’s chocolate cluster if not adequately addressed.
Given the tense relationship between regional governments which may limit the viability of forming
cross-‐‑regional taskforces on the governmental level, companies in each region should organize
specific committees and councils dedicated to the harmonization of strategy. The role of Choprabisco
is key – as domestic institutions overseeing the chocolate cluster, they play a neutral role, and could
be a pivotal force in influencing governmental collaboration.
Recommendation 3: The government needs to solve Belgium’s current fiscal position which is
not sustainable, as well as address the high tax burden which has decreased the incentives to
work and invest in the country
As noted above in our country analysis, Belgium’s high tax rate has worsened incentives to work and
invest since 2000, and this is inimical to the development of strong clusters given the impact on
productivity, labor force participation, and economic growth. It is comforting to note that the
government has put forward a series of austerity measures, but its impact is still questionable, and
continues to be challenged by the Wallonia government. Indeed, part of this issue lies in the inherent
tension between regions which has limited the ability of the government to formulate acceptable
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Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster
policies without facing challenges from either side. In any case, the government needs to follow
through on its plans for tax reform, and also offer more clarity on its tax incentives for R&D which
can stimulate further investor interest and involvement in the country.
Recommendation 4: Improve access to credit by strengthening the banking sector
As highlighted above, the weakening of the credit markets has impacted small and medium
enterprises the most, which constitutes a significant portion of the chocolate manufacturing industry.
This also explains why innovation in SMEs is low relative to other European Union economies – given
weak credit conditions, SMEs are less incentivized to invest in R&D given funding constraints,
creating a vicious spiral. The government (Ministry of Economic Affairs, and the Ministry of Finance),
in collaboration with industry associations such as Choprabisco, needs to partner with banks to re-‐‑
invigorate lending in Belgium – this in part depends on the lending standards across the Eurozone,
but with the European Central Bank’s easing bias, and continued quantitative easing through asset
purchases and offering cheap financing to banks in the form of long-‐‑term financing operations
(LTRO), one can argue that credit conditions will gradually improve over in the coming years and
bolster growth.
Cluster recommendations
This paper believes that Belgium’s chocolate cluster faces three secular headwinds – first,
concerns over the sustainability and supply of cocoa; second, over the stagnation of its global market
share due to an over-‐‑reliance of a stable European market; and three, meeting evolving consumer
demands in an increasing crowded space. These are worrying trends that may inhibit the cluster’s
ability to continue sustaining its competitive advantage and value proposition. Here are some
recommendations to address these issues in order of priority:
Recommendation 1: Improve sustainability of the supply of cocoa beans in order to ensure
long term availability and quality of cocoa beans. The cluster should pre-‐‑empt the demand for
increased corporate social responsibility, and take more discrete measures to improve its
adherence to global CSR norms
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Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster
As noted in our analysis, Belgium largely imports all of its raw materials in cocoa production. This
implies that it is not only susceptible to supply shocks, but more importantly, may be vulnerable to
changes in the production process. This could happen in two ways: (a) companies decide to move
their production facilities closer to the raw materials, or (b) exporting countries begin developing
their own chocolate manufacturing capabilities and export end-‐‑products on their own. While this
paper does not think these are likely in the near term given Belgium’s value proposition, and control
over the Belgium-‐‑chocolate label, it still needs to ensure that it is not vulnerable to supply changes. It
is worth noting that the country has a long term relationship with Ivory Coast, as well as cooperation
programs with most of the African producers of cocoa given its historical links with Africa. The
government should continue building on these relationships through diplomatic efforts either on a
Track 1 basis, or through industry associations like ICCO. Moreover, given this relationship, it is also
well placed to influence these countries to adopt CSR-‐‑adherent production best practices. Given
increased consumer demand for socially conscious products, Choprabisco should take a lead in
pushing for increased certification of cocoa beans, and securing long-‐‑term supply contracts for these
products to meet demand. In addition, other institutes for collaboration like the Belgium Trade for
Development Center should also improve its marketing of Belgian chocolates by emphasizing
sustainability as a key principle of the cluster.
Recommendation 2: Promote Belgian Chocolate Brand to enhance customer willingness to
pay, especially in the emerging market
The Belgium chocolate cluster should reinforce its position in quality products and the top segment
of the market – while Ambao and Choprabisco have done a commendable job in promoting the
Belgium brand across historical markets in Western Europe and North America, these markets are
experiencing stagnant and stable growth. The cluster thus needs to expand into growing regions in
the emerging market such an India and China, and create greater awareness of Belgium chocolates
through partnerships with local distribution networks, retailers, and domestic suppliers. While the
institutes for collaboration and industry groups play a critical role in this endeavor, the respective
regional governments and trade promotion agencies like Flanders Food can also play a pivotal role
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Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster
by inviting foreign distributors and retailers to observe production process of Belgium chocolate
manufacturing. Indeed, the key point here is to build on the established Belgium chocolate brand
name – while it is unlikely that its reputation will decline, it still faces competition from other
producers in Switzerland, and the cluster needs to not only retain its customers through product
differentiation from other lower quality options, but also continue growing consumers’ willingness to
pay in order to sustain its competitive advantage. It has certainly helped that the European Union has
clarified the definition of milk chocolate through the European Directive 2000/36, but there can be
further dialogue between industry groups and regulators to ensure the competitive position of
Belgium forward.
Recommendation 3: Maximize value added throughout the supply chain by improving on
current processes, and through innovation.
Belgium chocolate industry players have acquired a leading position in the intermediate products but
should improve on its efficiency to reinforce their position – while restructuring in the 1970s and
1980s has helped to bolster current operational effectiveness, it should continue enhance
improvement efforts. Indeed, Belgium’s competitive advantage across the value chain can be
enhanced through innovation projects either through more energy efficient manufacturing
processes, or by developing new technologies to facilitate increase export volume. This can be led by
a partnership between regional cluster groups such as Wagralim or Flanders Food, with research
institutions like the Agency for Innovation by Science and Technology, and Choprabisco.
Recommendation 4: Stimulate national consumption
As highlighted previously, while the average Belgium citizen consumers 7.5kg of chocolate per year,
it still lags behind Germany, the United Kingdom, and Austria. While its domestic market is small, the
cluster can still promote further consumption – for instance, industry associations like Choprabisco
should capitalize on the recent policy developments which acknowledge the health benefits of
moderate chocolate consumption to increase the share of the chocolate sales in the consumers’
basket. Targeted marketing efforts are needed to nurture further demand for chocolate as a health
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Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster
product rather than a compulsive purchase. Given the similarity of German and Austrian consumers
with Belgium consumers, industry groups should conduct a cross-‐‑border analysis of consumer
patterns to gain a deeper understanding of success factors which can translate into further domestic
sales.
Recommendation 5: It should also address stagnant market share in chocolates by
diversifying into other by-‐‑products and developing other niche products
The ITC Trade Map indicates that while Chocolate accounts for the largest share of Belgium’s cocoa
export portfolio, its change in market share is stagnant. In contrast, Cocoa beans and cocoa butter
have been growing at a rate of 15% and 8% respectively since 2000. While a small part of the overall
export portfolio, there is great potential in developing these by-‐‑products, and the cluster should look
to diversifying into other products to gain a further advantage over other manufacturing peers.
Similarly, it should increase R&D efforts in promising niche areas such as organic chocolate and low
diet products – this not only address changing consumer demands, but also allows it to create value
by expanding the market. This should be led by a consortium of firms, research institutes, industry
groups, and regional cluster agencies.
Conclusion
‘Whatever the future holds, one thing is certain. As competition continues to evolve, it will be both unsettling and the source of much of our prosperity.’
-‐‑ Michael Porter, On Competitionlxx
In summary, there is little doubt that Belgium’s chocolate cluster has come a long way, and
has already entrenched itself as a market leader in chocolate manufacturing – its success has
certainly confirmed the notion that cluster knowledge serves as the interstitial glue connected
related industries across the value chain in a particular geography. However, as this paper argues,
the path forward is less clear – given concerns over the sustainability of its raw materials, the
sustainability of the Belgium polity, and the sustainability of chocolate demand in its traditional
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Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster
markets, Belgium faces a fundamental challenge to the sustainability of its competitive advantage in
chocolate manufacturing.
Indeed, competition is unsettling, but as Michael Porter notes above, it can be the source of
much prosperity. There are certainly numerous challenges in the road ahead, and this paper has
offered a few recommendations on how to solve them – while it may require a degree of effort,
Belgium has the potential to create and capture further value in the industry given its existing
advantage in all parts of the value chain, its brand, and its role in all three levels of IFCs (local,
regional, and global). More importantly, Belgium’s chocolate cluster has shown tremendous
resilience over the years, from its innovation of the couverture in 1912 to the restructuring of
business processes in the 1970s, and this paper is convinced that the cluster will continue to
innovate and improve to enhance its value proposition for generations to come.
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Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster
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Sustaining Competitive Advantage: The Challenge for Belgium’s Chocolate Cluster
lxii https://ec.europa.eu/growth/tools-‐‑databases/regional-‐‑innovation-‐‑monitor/base-‐‑profile/wallonia lxiii https://www.awex.be/fr-‐‑BE/Pages/Home.aspx lxiv https://www.rtbf.be/info/regions/luxembourg/detail_arlon-‐‑ferrero-‐‑investit-‐‑21-‐‑000-‐‑000-‐‑dans-‐‑son-‐‑usine-‐‑et-‐‑cree-‐‑50-‐‑emplois?id=9195111 lxv Florence Hennart, ‘Evaluation of the Cluster Policy in Wallonia’, Presentation, November 17, 2015, http://clustermapping.us/sites/default/files/files/page/Hennart_Wallonia.pdf lxvi http://business.belgium.be/en/investing_in_belgium/key_sectors/agro_food_sector lxvii http://www.abe-‐‑bao.be/content/about-‐‑impulsebrussels lxviiihttp://business.belgium.be/en/investing_in_belgium/key_sectors/agro_food_sector lxix Valerie Strauss, ‘589 with no elected government’, Washington Post, Oct 1, 2013, https://www.washingtonpost.com/news/answer-‐‑sheet/wp/2013/10/01/589-‐‑days-‐‑with-‐‑no-‐‑elected-‐‑government-‐‑what-‐‑happened-‐‑in-‐‑belgium/ lxx Michael Porter, On Competition (Boston: Harvard Business Review Press, 2008), xxx.