Invest on intangible asset building

Rohantha ATHUKORALA

I thought of highlighting the importance of investing on intangible assets in a company given that the private sector has to date made a profit in excess of 250 percent in the last financial year.

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

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.

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

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

Intangible value creation must become a priority for corporate Sri Lanka

The reduction of personal income will motivate the private sector's working class to be more integrated to the country'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 percent plus one has to have this kind of a budget.

Now, what's important is that how a company uses this new policy to driving a new organization strategy is the challenge.

I would argue that one must focus on investing on a company's intangible assets like brand building whilst also using the incentives to modernize ones machinery. If this is done properly I would surmise that the overall value of the total assets of a company will multiply.

In order to highlight this concept of tangible and intangible assets I took two totally different industries as I have 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=1/3rd 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 accounts for US dollars 988,287,000,000 (Almost a $ 1 Trillion).

This is equivalent to gross national income of 63 countries of 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 1 trillion dollar value of the top 100 brands of the world is equivalent to 1/3rd of the world's income which gives us an idea of the power branding and how important it is to invest on intangible asset building in a company.

A point that needs to be noted is that Intangible asset building is not developing sexy advertizing and public relations programs that end up with the brand featured in 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.

Like what a brand like Dialog has done in the last decade where an imagery of 'modern 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 advertizing which is of intangible nature is that the sharp image in a consumers' mind propels a strong brand equity that results in a customer having a top of the mind brand recall which this leads to repeat purchase increasing.

This in turn builds market share and the overall brand value.

Globally, Samsung is a classic example in the world of today that has captured what a powerful brand can do to a company and how the competitor Sony was beaten.

It took time to unearth conclusive data but the latest I got was that the company had a $ 59.2 billion in group sales with a reported profit of $7.9 billion which was 13 times as much as the earnings forecast by traditional rival Sony.

Samsung today has become an outstanding company for refining other people's inventions and building brand value that has resulted in climbed to be a top 100 brand globally which was once limited to mainly American and Japanese brand builders.

A senior company official from the Brand marketing had made a comment recently 'Samsung has mastered one crucial factor: Making brands relevant to a consumer'.

This to my mind is a result of a deep understanding of the consumer requirement and brand building communication that resulted in building an intangible asset for the organization which actually may be more valuable that all the plant and machinery put together.

Which explains 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 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 25.6 billion.

Whilst thirteen years after in 2007 as per the annual reports once again it state a Rs 19.9 billion after it has 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 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 percent 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 percent which gives us an indication of the reality of the financial issues that the industry was challenged with which 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 the Gross Profit recording a 18.6 percent and Net Profits of 10.3 percent but way back in 2004 the numbers were at a low ebb of 2.6 percent net profit which makes the total industry be on survival mode 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 was making a loss of over Rs 1.5 billion in 1992 and now, turned around to make a half a billion profit.

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 where by overall value creation can be catapulted to the numbers like what companies like Dialog has achieved.

This will require not only sharp business leadership but also insightful brand marketing initiatives where by strong value propositions can be developed like what Dilma has done in the given industry of tea.

May be the 10 million dollar tea promotional fund that will come to play in the Sri Lanka Tea Board can set the stage.

The essence is that one must focus on intangible asset creation whilst driving in the hard asset enhancement so that the overall organizational value multiplies.

The challenge for the accounting fraternity is how an organization's balance sheet includes the tangible and intangible assets so that the true health of a company is reflected.

May be 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 organization like in the case we see when a company resorts to action like liquidation.

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