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Principles for TNC-SME cooperation: The experiences of UNILEVER
Case study by André R. van Heemstra
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Principles for TNC-SME cooperation: the experiences of UNILEVER
by Mr. André R. van Heemstra
The case for successful synergy between TNCs and SMEs is eminently strong. While the arguments presented in this paper are of general nature, the underlying experiences, beliefs and values are those of Unilever. There are many examples across the world where Unilever can point towards mutual benefits and, in addition, to the effect that Unilever’s co-operation with local SMEs has on the economic growth of host countries.
There are a number of pre-conditions, which help reassure the proper delivery of such mutual benefits. Firstly, TNCs must act on the basis of their own ethics rather than on ones which are externally imposed. Such principles should be well defined and should be made public, as well as contain the essential aspiration to be an integral part of the society, to be a contributor and not an exploiter. Secondly, TNCs are well advised to see the human world as not something monolithic and to demonstrate a high degree of cultural sensitivity. In the case of Unilever, it is the company’s ambition to be seen as a truly multi-local multinational firm. Finally, TNCs should have their eyes firmly on the long-term horizon in order to bring about an appropriate balance between give and take. On the taking side, there are the profits which are often remitted to shareholders far away. On the giving side, there are the products and services which TNCs provide, the direct and indirect employment creation, the transfer of skills and technology and finally the demonstration of responsible care for human safety and health and for the environment.
As far as SMEs are concerned, they should display a hunger for upgrading, for help from government side, as well as from international and private entities. Secondly, and that is a very important point, SMEs should be eager to pick up those activities which TNCs are prepared to shed. In the case of Unilever, the company will concentrate more and more on its core activities, while disinvesting activities that used to be integral to the firm’s internal operation in the past which, however, could and should be better provided externally by SMEs.
What are the possible benefits the SMEs can reap from linkages with larger firms? Directly, there is the uplift of supply chain activity of manufacturing contractors through the upstream involvement of suppliers’ raw and packaging materials and the downstream activities of the distributors in both whole- and retail sale. Indirectly, and as a consequence of a dynamic integration into the local society, SMEs and the national economy as a whole stand to benefit from indirect ripple effects. These effects include job creation, raising the standard of markets through continuous improvement of the quality-to-cost ratio and the development of larger markets and more competition as a result of energetic marketing, as well as injection of international “best practice” and direct involvement with the community. Such involvement, for example, is demonstrated in Unilever’s initiative in Manila in taking a lead in the cleaning up of the Pasig river.
A few comments on the roles of government and society. On the government side, it is of crucial importance that it demonstrates both understanding and recognition of the underlying mechanism and set the appropriate framework for the optimal corporation between TNCs and SMEs and ensures the encouragement of such activities. On the other hand, groups from the civil society should come forth openly with issues and make them debatable.
Unilever’s co-operation with SMEs can be quantified with a few figures, using Indonesia and Vietnam as examples. Unilever’s first activities in this country date back 70 years. Currently, Unilever operates four factories in Indonesia and has 14 sales depots spread across the archipelago and employs a total of 2,160 persons. Regarding partnerships with local SMEs, Unilever has 322 suppliers of raw and packaging materials, 276 distributors who employ 7,150 persons, 29 manufacturing contractors employing a total staff of 1,775. Under the ice cream operation, there are some 3,500 independent sales persons employed. Moreover, a number of factory services have been outsourced to external contractors employing a total of about one thousand workers. It can be fairly estimated that for every person, who is directly employed by Unilever, there are 7 persons who in a dedicated way cooperate with Unilever.
In Vietnam, where Unilever has increased its turnover from 10 million USD in 1994 to 137 million USD in 1999, the company helped local SMEs to ride on the success of its activities in the country. It has given orders to local suppliers who provide some 60 per cent of the raw materials needed, and account for the total packaging material needed by Unilever Vietnam. Moreover, Unilever also helped local distributors to expand their distribution networks and to increase their profitability by enabling a high turnover while costs were kept in check.
Success in the co-operation between TNCs and SMEs, as it is demonstrated in Unilever’s operations in Indonesia and Vietnam, can be attributed to several key factors. Firstly, respect between potential partners is the very foundation of a constructive dialogue. Secondly, a TNC-SME relationship is essentially symbiotic in nature and is one which, as all relationships, must be actively worked at all times. Thirdly, no TNC should take its hospitality for granted, but must be seen to make tangible contributions to its host environment. Finally, a realistic view should prevail, acknowledging that some goals are irreconcilable, but with a will to succeed and the grace to compromise all things are possible.