Influence the marble cluster in Afghanistan:

Threat of new entrants: “new entrants to an industry bring new capacity, the desire to gain market share, and often substantial resources.” The seriousness of entry depends on two main things: a) the barriers that exist against the new entrants in the business environment and b) the reaction of the existing competitors against the new entrants (Porter, 1998). The barriers in relation to the afghan marble cluster competitiveness are as follows:

1. Economies of scale: for a new entrant into the cluster, it is essential to reduce the unit cost of production in order to be able to compete with the existing companies; to do so the new company needs to establish with large scale. This requires huge capital cost. According to the OTF group estimations, “with a minimum project cost of $500,000 for a quarry and over $1 million for a plant it is difficult for SMEs to invest. Most of the businesses operating in the Afghan marble industry today are relatively small and even with loans; they cannot put up 30-40% equity stake” (the OTF group, 2006). There is potential for foreign investors to capture economies of scale in Afghanistan and compete very easily with the domestic producers.

2. Product differentiation: “brand identification creates a barrier by forcing entrants to spend heavily to overcome customer loyalty” (Porter, 1998). However, the marble

products in Afghanistan are not known under any specific brand; they are considered

as the afghan marble under several different names regardless of the names of the

companies who produce them. So, product differentiation does not remain a barrier to entry into the cluster.

3. Capital requirements: as mentioned above, the huge fixed cost plus some variable

costs to establish a quarry as well as a processing plant is a real barrier for the new entrants. “Few banks in Afghanistan are giving business loans to projects of this size. The cost of financing and inability to put together an adequate business plan are further impediments to accessing financing” (the OTF group, 2006).

4. Cost disadvantages: there are certain advantages that stem from past experience as companies keep practicing the same manufacturing process for years and years. This is referred to as the “experience curve,” which gets improving in terms of knowledge and skills of the workers in a company as time goes on. This could be considered a barrier for a new entrant in the afghan marble cluster; however, it is not so serious because the existing competitors practices in terms of the international standards are not so well and therefore, there is potential for a new entrant to establish putting up the standard practice, which has not been experienced by any of the existing practitioners in the cluster. This is true especially with the new technology and machineries innovated for the industry worldwide, but not yet practiced by the afghan processors.

5. Access to distribution channels: the level of production for the domestic marble in Afghanistan is not at a level to require very complicated distribution channel; it is taking place through a number of retail shops at several specified marketplaces for marble. The retail shops are supplied by the marble processing companies. In few cases the SMEs have established their own distribution points, but in general the same retail shops are supplied by the same or different marble processing companies. As a whole, access to “distribution channel” does not seem to be a serious barrier for the new entrants.

6. Government policy: government has influenced the industry greatly by setting policies that do not easily facilitate the development of the cluster. The pricing policy for quarrying of marble is not fair. Although it is claimed to be through a full and open competitive process, the minimum cost for royalty fee has not been set competitively in compare with the quarries in Pakistan, Iran, and India—the neighboring countries. The ministry’s not initiating policies, strategies and tactics to facilitate and enforce development of the cluster. As mentioned in previous sections, the expertise at the ministry is very focused around the geological aspect of the minerals rather than the business side of it, which causes the ministry personnel to rarely think about the economy and business part of the mineral industries. There are a lot of rooms for improvement in terms of effective policies and new strategies/tactics, which by itself is the biggest barrier against the development of the cluster at this time. Currently the Ministry’s pricing policy for quarrying contracts is in no way competitive; this is why 65% of companies that established did not produce a single tile since 2001 and 14% of companies that established could only continue until early 2008. Government policy is the biggest barrier against the development of the cluster at the moment.

In addition to the barriers discussed above “the potential rival’s expectations about the reaction of existing competitors” also influences their decision to enter into the marble cluster. However, this does not seem to be a big challenge; it is a matter of establishing good relationship with the existing competitors on the ground. The AMGPA, as the association to promote marble cluster, can always play a positive role in this regard. Bargaining power of suppliers: “Suppliers can exert bargaining power on participants in an industry by raising prices or reducing the quality of purchased goods and services” (Porter, 1998). From the author’s perspective, suppliers for marble production in Afghanistan are classified into two categories: a) primary suppliers consisting of companies that provide raw materials (blocks) to the processing plants and b) secondary suppliers that include companies that provide machineries, spare parts, and lubrications to both the quarry operations as well as the processing plants.

a) Primary suppliers are referred to the block producers that supply the processing plants with raw materials—the marble blocks. Level of power of the primary suppliers depends on the status of the following conditions influencing their power:

Dominance by few quarrying companies: In terms of block suppliers, there are five companies and/or individuals who hold contracts from the Ministry of Mines to do the quarrying operations and supply marble blocks to the processing plants. The limited number of block suppliers is not a good idea for the cluster. The few suppliers can hold the power to “squeeze profitability” out of the cluster and leaving the cluster unable to recover cost increases. The limited number of block suppliers is because of the unhealthy government policies.

Product differentiation: The blocks are mostly extracted by explosives, and therefore producing badly shaped blocks to the processing plants. Only few companies: Mir Limited and Madan Limited use wire saw in Hirat province to produce regular blocks; these are the only two companies producing standard marble blocks to the processing plants. Their products are differentiated; they come with regular shapes reducing the processing wastage to a large extent. Being few and the only producers of differentiated blocks, the two companies have the power of supplying raw materials to the processing plants

Integration of suppliers in the actual marble business: Some of the block suppliers are the ones who supply their own processing plants as well as others. This practice gives a weaker position for the rest of the processing plants to compete in terms of production.

Importance of marble industry to the block suppliers: Although some of the block suppliers supply their own processing plants they also end up with surplus amount of blocks that they need to sell. Therefore, the marble industry is very important for them to absorb their surpluses. For the rest of the block suppliers the industry is the only source of raw material, except for the ones exporting blocks to other countries. Having said this, the processing plants are not so much under pressure by the suppliers of blocks. But still it is a factor that might give power to suppliers of blocks as situation changes.

b) Secondary suppliers are referred to providers of machineries, spare parts, lubrications, fuel, etc. that move the whole process of production in the quarries as well as in the processing plants. The suppliers are usually international companies located outside the country mainly in Pakistan and China. Firstly Afghanistan and secondly marble cluster as a whole is only a minor segment amongst their target buyers. Therefore, they have un-influence-able power over the afghan buyers in the marble cluster. The Afghan members of marble cluster have to follow the overall trend of the market. Bargaining power of buyers: Customers also “can force down prices, demand higher quality or more service, and play competitors off against each other” (Porter, 1998). The power of buyers depends on the status of the following factors in the afghan marble market:

Large-volume purchases: Marble is used as “dimension stone” for construction purposes; most of the consumers are small private construction projects. Purchases are usually in small scale filling the demand of the domestic buyers; they take place in large-volumes occasionally and only when there are some large construction projects. For example, construction of the new terminal-building for Kabul Airport was one of the large projects, which was supplied with afghan marble dimension stone last year. In summary, purchases are not concentrated or in large volumes to give a powerful position to the buyers; therefore, buyers cannot act collectively and influence the cluster.

Differentiation versus standard products: A buyer can be powerful if “products it purchases from the industry are standard or undifferentiated” (Porter, 1998). As mentioned in previous sections, the nature of demand is very simple in the afghan marble market. Marble is consumed only in the form of tiles in several standard sizes for construction purposes. Buyers have stronger position because they can access the same marble sizes from different suppliers.

Marble being a component of a larger project: The marble buyers have powerful position in buying marble products because marble is usually used as a single component of a larger construction project. Therefore, “the buyers are likely to shop for a favorable price and purchase selectively” (Porter, 1998).

Threat of substitute products: “In Porter’s model, substitute products refer to products in other industries” (Quick MBA, 2007). For example, substitute products for marble tiles are products coming in the form of mosaic tiles, ceramic tiles, granite, and other dimension stones. “By placing a ceiling on prices it can charge, the substitute products or services limit the potential of an industry” (Porter, 1998). Substitute products for marble tiles in terms of price are much lower and accessible by the average consumers—the largest number of consumers in the segment. Consumers of marble tiles are mostly construction projects; most of the consumers are the average people—from the economic perspective—who do not prefer costly products. Substitute products are cheaper and available in different colors and designs. The government as well as the members of the marble cluster needs to follow such pricing strategies and tactics that could place the industry in a better position to compete with the substitutes.

Rivalry among existing competitors: According to Michael Porter, this rivalry “takes the familiar form of jockeying for position—using tactics like price competition, product introduction, and advertising slugfests” (Porter, 1998). This rivalry—in the context of the afghan marble market—can be influenced by different factors such as the following:

• Number of competitors in the cluster: competitors in the marble cluster are not so many and are limited to the domestic companies. Out of these companies, only 14% that established operations in 2001 have been able to continue operation; the rest gave up and went bankrupt. The competitors are roughly same in size and less different in terms of capacity from each other. Rivalry is not so complicated within the cluster at this time because as the number of companies increases; they have to be still competing for the same number of customers, which makes the nature of competition more complicated.

• Slow market growth for the cluster: Marble cluster growth is taking place very slowly. The companies need to fight for market share in order to improve revenues as a result of expanded market share.

• Fixed costs: Capital cost—the part that goes to fixed cost—for establishing of a marble processing plant is huge, which makes the companies to produce near capacity production to attain the lowest unit cost possible. This can result an increase in rivalry, but for the time being, most of the existing companies are same in size as well as in terms of type of technology. Therefore, the rivalry issue is not that hard.

• Low switching costs: there is no switching cost for marble buyers to change their suppliers. This can result increased rivalry amongst the marble producers.

• Product differentiation: marble products are limited to dimension stones—usually tiles in different sizes. There is very low level of differentiation; this can also result increased rivalry.

• Exit barriers: since the capital cost for setting up a marble processing plant is huge, it makes it difficult for a company to withdraw and exit from the business. The equipments and machineries are very specialized to the marble manufacturing; they cannot be sold so easily. To exit from the business is very difficult and almost impossible. Therefore, one needs to continue and compete.

• Diversity of rivals: Diversity of rivals in terms of culture, type of people, etc. can make an industry unstable (Quick MBA, 2007). Marble processors in Afghanistan are all domestic and coming from the same culture and history; this makes the rivalry understandable and intense.

Afghan Government and Private Sector Join Forces to Strengthen Marble Industry KABUL, AFGHANISTAN | MAY 11, 2013 –

Afghanistan is home to 60 known deposits of 35 varieties of marble. To promote the growth of this sector, the Export Promotion Agency of Afghanistan (EPAA), and the U.S. Agency for International Development (USAID) organized a seminar on exports of the country’s high-quality marble products. The seminar presented an opportunity for the representatives of Afghan marble associations, marble traders, officials from the Afghan Marble Center of Excellence and other government officials to discuss challenges to trade and strategies to boost Afghanistan’s marble exports.

• Minister of Commerce and Industries Anwar-ul-Haq Ahadi opened the seminar by highlighting the vast potential of Afghanistan’s marble industry. “Afghanistan can export $700 million to $800 million of marble to other countries,” said Minister Ahadi.

• The marble deposits of Herat province in western Afghanistan, Nangarhar province in eastern Afghanistan, Wardak province in central Afghanistan, and Helmand province in southern Afghanistan are of similar, or better quality than the world’s biggest marble exporters, including countries such as Italy.

• “The current world market for marble imports is estimated at $3.5 billion,” said Deputy Mission Director Jerry Bisson, noting that the industry has the potential to be a driving force in Afghanistan’s economy.

• The seminar covered the issue of taxation on exports of Afghanistan’s processed marble; imports of low-quality marble from neighboring countries; tariffs imposed by other countries on marble coming from Afghanistan; and the best transport corridors for Afghanistan’s marble exports.

• The seminar is one of many USAID efforts to facilitate the Afghan Government and private sector partnership in resolving challenges to trade and exports. Afghanistan has vast reserves of marble, minerals, and precious stones that can strengthen the economy, create jobs, attract investment, and improve livelihoods.

(http://afghanistan.usaid.gov/en/USAID/Article/2976/Afghan_Government_and_Private_Sector_Join_Forces_to_Strengthen_Marble_Industry)