Private sector must invest in intangible asset building

Last week I had an invite to address a Rotary Club that consists of a fair cross section of the private sector and I thought of highlighting the importance of investing in intangible assets in a company, given that the private sector has to date made a profit in excess of 250% in the last financial year.

I felt the thought was timely, given that the Budget of 2011 that was passed in Parliament last Friday was totally development-focused, mainly on the premise of productive asset building. Some of the key recommendations on these lines were as follows:

1.    The reduction of duty on machinery, so that modern technology can be introduced can spruce up productivity. The depreciation of 33 1/3rd will make this proposition very attractive to the private sector.

2.    Lowering of income tax from 15% to 10% for industries that do value addition of 65%+ and in the case of export and tourism companies from 15% to 12% can attract companies to practice concepts like branding which is intangible asset building.

3.    The income tax reduction on profits from 35% to 28% can be re-invested by the private sector for business development initiatives like R&D as there is a 200% deduction on such initiatives.

4.    The reduction of personal income will motivate the private sector’s working class to be more integrated to the county’s economic development agenda.

Whilst some can say that it is a revolutionary budget, the fact is that for a development-driven country registering a GDP growth of seven per cent plus, one has to have this kind of a budget. Now, what’s important is how a company uses this new policy to driving a new organisation strategy, which is the challenge.

I would argue that one must focus on investing in a company’s intangible assets like brand building, whilst also using the incentives to modernise one’s machinery. If this is done properly, I would summarise that the overall value of the total assets of a company would multiply.

In order to highlight this concept of tangible and intangible assets, I took two totally different industries as I had the data already with me but in all honesty, it can have many limitations on its computations and perspectives. Hence, one needs to understand the concept and not make any judgement on the selected examples.

Top 100 brands equal one-third of world income

Let me initially share some information on branding and brand values which are essentially on intangible asset building. As per the Interbrand Corp., J.P. Morgan Chase has revealed that the top 100 brands in the world account for US$ 988,287,000,000 (almost $ 1 trillion).

This is equivalent to gross national income of 63 countries as per World Bank defined low income countries, which gives us an idea of the value of brand building. Another important aspect that one needs to know is that the one trillion dollar value of the top 100 brands of the world is equivalent to one-third of the world’s income which gives us an idea of the power branding and how important it is to invest in intangible asset building in a company.

A point that needs to be noted is that intangible asset building is not developing sexy advertising and public relations programmes that end up with the brand featured on all the cover pages of magazines and newspapers.

Strong intangible asset development is where all communication efforts contribute to sharp value proposition in the minds of a consumer – similar to what a brand like Dialog has done in the last decade, where an imagery of a ‘contemporary communication provider’ has been wrapped around the brand name in over 13 million people in Sri Lanka.

The logic for this investment on media advertising, which is of intangible nature, is that the sharp image in a consumer’s mind propels a strong brand equity, which results in a customer having a top of the mind brand recall. This leads to repeat purchase increasing. This in turn builds market share and overall brand value.

Globally, Samsung is a classic example in the world of today that has captured what a powerful brand can do for a company and how the competitor Sony was beaten all ends up. It took time to unearth conclusive data but the latest I got was that the company had $ 59.2 billion in group sales with a reported profit of $ 7.9 billion, which was 13 times as much as the earnings forecasted by traditional rival Sony.

Samsung today has become an outstanding company for refining other people’s inventions and building brand value, which has resulted in its climb to be a top 100 brand globally, although once limited to mainly American and Japanese brand builders.

A senior company official from brand marketing had made a comment recently, that “Samsung has mastered one crucial factor: Making brands relevant to a consumer.” This is a result of a deep understanding of the consumer requirement and brand building communication that resulted in building an intangible asset for the organisation which actually may be more valuable that all the plant and machinery put together, explaining the importance of intangible asset creation in a company.

Asset value example

On the other hand, if I take a totally different industry only for argument’s sake on the area of tangible asset enhancement like the corporate tea sector of Sri Lanka, we see that 20 regional plantation companies in 1996 had a total assets value as mentioned in the Annual Reports of the RPC’s of Rs. 25.6 billion. Thirteen years after in 2007, as per the annual reports once again, it states Rs. 19.9 billion after it had been discounted on the GDP deflator factor.

But a point to note is that the corporate tea sector does not own the tea estates and it is only on lease to the private sector. Hence at the end of the day, investing on the asset that does not belong to you can be in question unless the owner provides the policy framework of doing so.

This argument is more valid given that the Return on Equity (ROE) as per the annual report of 2007/8 was 27% at the best prices of tea that Sri Lanka has recorded, whilst in 2004/5 the industry recorded a low ROE of almost 9.30%, which gives us an indication of the reality of the financial issues with which the industry was challenged. This in fact makes the argument of investing on asset enhancement practically impossible; leave alone the idea of brand building.

Taking this argument further, based on the published annual reports of 2007/8, the RPCs revenue earnings was Rs. 41 billion, with gross profit recording 18.6% and net profits of 10.3%, but way back in 2004 the numbers were at a low ebb of 2.6% net profit, which makes the total industry be on survival mode rather than any form of asset enhancement.

In simple words, Sri Lanka must be thankful to the corporate tea sector for supporting the country by managing these white elephants which in fact were making a loss of over Rs. 1.5 billion way back in 1992 and have now turned around to make a profit of half a billion.

Next steps

Now that the country has moved to an economic growth agenda, with many incentives to drive asset enhancement given to the private sector, the focus will naturally move to increasing productivity.

However, the challenge is how the private sector can couple it with brand value building activity, whereby overall value creation can be catapulted to the numbers like what companies like Dialog have achieved.

This will require not only sharp business leadership but also insightful brand marketing initiatives whereby strong value propositions can be developed, like what Dilmah has done in the tea industry.

Maybe the 10 million dollar tea promotional fund that will come to play in the Sri Lanka Tea Board can set the stage. Hence, the essence is that one must focus on intangible asset creation whilst driving hard asset enhancement so that the overall organisational value multiplies.

Conclusion

The challenge for the accounting fraternity is how an organisation’s balance sheet includes the tangible and intangible assets so that the true health of a company is reflected. Maybe one needs to also carefully examine the numbers that are inserted into the asset value of a company as later on there can be comparisons made and the real worth of a organisation like in the case we see when a company resorts to action like liquidation.

May be with more companies getting listed on the stock exchange, one day we might be able to calculate the value of ‘Brand Sri Lanka’ from a tangible and intangible asset value, rather than just looking at traditional models like GDP.

(The author is a corporate personality and also serves the public sector on many boards of management on an honorary basis. The thoughts expressed are based on doctoral studies the author is engaged in and not the views of the positions he holds either in the State or private sector.)