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Case on India and China Corporations and Small Farmers fin…

Case on India and China Corporations and Small Farmers fin…

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Published by Sivakumar_Surampudi
Lessons from China Small Farmer Agriculture Models in partnership with Big Businesses
Lessons from China Small Farmer Agriculture Models in partnership with Big Businesses

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Published by: Sivakumar_Surampudi on Dec 31, 2009
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05/11/2014

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Large Corporations Engaging Small Producers—Fruits and Vegetables in India and China
Live Case prepared and presented by Nancy Barry, President of NBA Enterprise Solutions toPoverty at the Harvard Business School Forum on the Future of Market Capitalism, October 9and 10, 2009S. Sivakumar (Shiv), CEO Agribusiness of ITC, was intrigued to see what he could learn froma week in rural China. Shiv had built the Agribusiness Group of ITC to US$1 billion in revenues,with sourcing and input distribution in over 40,000 villages through his world famous eChoupalsystem. ITC was already purchasing cereals directly from over 3 million small farmers, havingintroduced pricing based on quality, rather that the traditional weight-based pricing frommiddlemen.Over the last two years, through Enterprise Solutions to Poverty (ESP) Innovation Group forAgribusiness in India, which Shiv helped create, Shiv had been working with agribusiness CEOsof five other Indian giants. Together, they were building a major fruit and vegetable initiative withsmall farmers in India. Leaders of these companies were now traveling to China to see majorfruit and vegetable companies of China, also engaged in ESP. Shiv knew that each ofagribusiness leaders and their companies brought different experience, company cultures andstrengths to the challenges ahead: Traveling with him were executives from:
Tata Chemicals Ltd
is a subsidiary of the US$62.5 million Tata Group, one of India’slargest and most respected conglomerates. TCL’s revenues approach US$3 billion, largely infertilizers and inorganic chemicals. TCL has built a successful agricultural input distributionsystem using its fertilizer output as the core. In 2007, Tata Chemicals entered into a 50:50 jointventure with Total Produce PLC, one of Europe’s largest fresh produce providers. The jointventure, Khet-Se Agriproduce, is geared to leveraging TCL’s relationship with farmers andpresence in rural communities to create a state of the art supply chain and wholesale operation infresh fruits and vegetables. TCL is focused on building solid production in bananas for domesticand export sales, in building out value chain operations with small vegetable producers fordomestic wholesale, with a focus on building productivity, quality and earnings of smallholderfarmers As an international joint venture, Tata Khet-Se is precluded from retail sales and ispursuing measures to mobilize push cart venders as a formal-informal sector alliance, building onthe traditional mode of retail purchase in India.
Mahindra and Mahindra
, with US$6.8 billion in annual revenues, mainly from tractors andother automotive established MSSL as its agribusiness arm in 2000 with an initial focus on grapeexports. Mahindra had built a successful collaboration and co-branding strategy with Capespan,to become India’s leading grape exporter with US$5.3 million in export sales, with MSSL the firstto receive GLOBALGAP certification. Mahindra is using its tractor financing company to build outbroad-based rural finance. At the same time, Mahindra had closed down its capital intensive huband spoke agricultural input operations. Mahindra management was uncertain on how much of itsresources to commit to agribusiness. MSSL is now focusing on pomegranates and seed potatooperations.
Bharti
, with its US$1.3 billion in revenues coming largely from having become India’s largestmobile phone provider, is a new entrant to fruits and vegetables. Bharti is pursuing local andexport sales of fresh and processed fruits and vegetables under a joint venture with Del Monteand is the Indian partner of Wal-Mart. As an international joint venture, Bharti-Wal-Mart ispursuing wholesale, with a separate company, Bharti Field Fresh, opening domestic retail stores.The CEO of Bharti is pushing to reach US$1 billion in revenues from fruits and vegetables in tenyears.
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Jain Irrigation
is slated to become the world’s leading drip irrigation manufacturer by theend of 2009, with revenues of over US$600 million. Beginning in 2004, Jain Irrigation has utilizedits deep knowledge of farming and its connections with farmers to build export operations withsmall farmers in dried mango and dried onion, and has now become India’s leading exporter ofboth.
ITC
is one of India’s largest companies with 2008 revenues of over US$5 billion, nearly US$1billion in its Agribusiness Division. ITC is considered by all to be the natural leader in this groupof six industry leaders in agribusiness with small farmers. ITC has 30 years of experienceworking with small farmers in tobacco. ITC has invested in understanding the dynamics of smallfarmers and rural markets; its e-Choupal and Choupal Sagaar systems co-opted many traditionalmiddlemen to become operators of ITC’s information service and hub and spoke platform forsourcing and distribution of agricultural inputs. ITC has been a leader in applying informationtechnology to build efficient rural distribution platforms. 6500 e-Choupals reach 40,000 villagesand 4 million farmers; this system has evolved to become a sourcing and distribution platform,now sourcing from over 3 million cereal farmers, and used to sell agro-inputs and fast movingconsumer goods in rural areas. And having built solid early fruit and vegetable operations inmango, green vegetables and seed potatoes with its Choupal Fresh operations and small formatstores, S. Sivakumar is the leader of the ESP Innovation Group on Agribusiness in India.
Reliance Industries,
active in the ESP Fruit and Vegetable initiative, was unable toparticipate in the China trip. The annual revenues of Reliance exceed US$34 billion, is India’slargest conglomerate, with major operations in oil and gas, petroleum and petrochemicals, andmobile telecom. Reliance was the first Indian giant to enter into “farm to fork” fruit and vegetableoperations three years ago. Reliance had assumed that its unmatched executing capabilities inrolling out petrochemical plants and mobile phone distribution would translate into value chainoperations with small farmers, with RIL’s CEO having targeted doubling the income of 10 millionsmall farmers through Reliance’s disruptive business models over ten years. Early frustrationsfor Reliance included resistance by small shopkeepers, local politicians and consumers as itrolled out its small format Reliance Fresh stores before having organized procurement of qualityproduce.
Challenges
These industry leaders have recognized that if they are going to succeed, they will need tofind ways to shorten the value chains and deal more directly with producers. In their desire to filltheir small format stores, several companies fell back on purchasing from the traditionalgovernment markets and middlemen. The result was low quality, low freshness, and no priceadvantage. The ESP Fruit and Vegetable initiative involves commodity-specific approaches toincrease quality, productivity and efficiency of direct procurement from small farmers. Keycomponents are different aggregation models, include producer companies; collaborations withbanks to enable small farmers to make the needed investments in green housings, shade netsand irrigation; and introduction of crop insurance, tracing, and certification measures.While ESP and agribusiness leaders of India realize that these measures will provide a solidbase from competitive operations, in many cases doubling the incomes of participating smallfarmers, there is a sense that greater innovation in business models will be important in creatingrapid growth and competitiveness in fruits and vegetables. ESP, which also works with leadingagribusinesses in China, has organized a trip in September 2009, to explore what methods andlessons can be learned for Indian fruit and vegetable operations.
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Shiv and the other agribusiness leaders realize that Indian and Chinese farmers face somesimilar realities in building fruit and vegetable operations with small farmers.
Characteristics India China
People making under US$2per day880 million 620 millionPercentage of peopledependent of agriculture formajority of livelihoodOver 60% About 60%, decliningPercentage of farmers withunder 1 hectare of landOver 80%, 87 million smallholdings accounting for 52% offruit and 61% of vegetableproduction. Large farmsaverage 7 hectares.Over 80%--farmers had givenabout 0.3 to 0.5 hectare ofland for rights of use bygovernment.Number of people in middleclass, and annual growth100 million, growing by over10% paAnnual growth in fruit andvegetable production, tenyears6% pa growth since 1990, from76 million mt to 170 million mt in2008. Second only to China inoutput and growth.Exponential growth: 146million in 1990 to 502 million in2004.Competitiveness inproductivity in fruits andvegetablesHigh in vegetables, sometropical fruitsHigh in temperate fruits
Lessons from Agribusiness Leaders in China
Shiv joined the other Indian agribusiness leaders in China in early September 2009, meetingwith the leading wholesaler and retailer in Beijing, and visiting ten companies in three provinceswhere fruit and vegetable operations are concentrated. Two of the three are Western provinces,in the part of China where poverty is concentrated. Each company visit illuminated a facet of therapidly evolving agricultural sector in China:
COFCO,
on the Fortune 500 list since 1994, is the large import-export government-controlledagribusiness with US$ billion in revenues in 2008. In 2005, COFCO purchased controllinginterests in Tunhe, a leading tomato paste producer operating in thinly populated northwestChina. COFCO Tunhe has forged highly effective collaboration with Heinz and other leaders intomato production and processing. In 2007, COFCO Tunhe purchased 2.2.million metric tons offresh tomatoes from over 200,000 mainly small farmers who worked 33,000 hectares. By 2009,with encouragement from Heinz to improve quality and productivity, COFCO Tunhe had takenadvantage of the available large tracks of government land to move rapidly to one third largeplantation farming, one third contracting with farmers for efficient production on COFCOcontrolled land, and one third in integrated operations with small farmers. Productivity on largefarms has been double that of yields from small holdings.
The Wumart Group
, Beijing’s largest retail chain, has grown rapidly, with over 104superstores and 330 mini-marts and revenues of US$1.4 billion at end 2008. .Piloted over the lasttwo years, Wumart is moving from traditional reliance on fruit and vegetable wholesalers,launching its direct sourcing model, primarily in Shandong province. This direct procurementoperation works with specialty cooperatives and the small farmers associated with these
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