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Expansion of ITC’s eChoupal Initiative in Kyrgyz Republic via FDI


An Interactive Case Study

Table of Contents

Section 1: ITC eChoupal Initiative: An Executive Summary


of the Harvard Business School Case1 p. 2
Section 2: Assumptions for the Interactive Case Study “Expansion of ITC’s eChoupal
Initiative into Kyrgyz Republic via Foreign Direct Investment” p. 6
Section 3: Questions from Host Government’s Perspective2 p. 6

Section 4: Questions from ITC’s Perspective p. 7


Appendix A Glossary of Terms p. 8
Appendix B Other Questions That Are Often Raised by Foreign Direct Investors p. 9

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Summarized by Raymond Shen (MBA 2004, Stillman School of Business of Seton Hall University) from
David M. Upton and Virginia A. Fuller, “The ITC eChoupal Initiative,” Harvard Business School Case
N9-604-016 (REV: January 15, 2004). The UNITAR Hiroshima Office for Asia and the Pacific and New
York Office gratefully acknowledge the receipt of the case from Dr. Virginia A. Fuller.
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Questions from Host Government as well as ICT’s Perspectives were prepared by Raymond Xinshi Shen
under the direction of Dr. Andrew B. Kim, Co-founder of Sit/Kim International Investment Associates in
New York and Dr. Yeomin Yoon, Professor of Finance & International Business at the Stillman School of
Business of Seton Hall University and Senior Special Fellow of the UNITAR.
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Section 1
ITC e-Choupal Initiative: An Executive Summary of the Harvard
Business School Case
On the challenge of inclusive growth:

It is now universally acknowledged that no long-term economic growth agenda for India
can be feasible without including in its fold the agricultural sector, which is the home to 72% of
the population and 60% of the nation’s workforce. The challenge lies in sustaining high rates of
economic growth with the equity over the many years in order to convert the world’s largest pool
of economically disadvantaged people into viable consumers, thereby translating development in
economic freedom.

On ITC’s purpose:

ITC consciously exercises the strategic choice of contributing to and securing the
competitiveness of the entire value chain of which it is part. This philosophy has shaped the
vision for your company, the vision I have referred to in earlier years as “A Commitment Beyond
the Market.” Creative use of information technology through the e-Choupal initiative has
enabled your company to bring together diverse agencies, each with specialized competencies, in
a bid to empower the Indian farmer.

- Excerpts from speech by Chairman Shri Y. C. Deveshwar, ITC Annual General


Meeting, 2003

Choupal and ITC Corporation


In Hindi, the word for a meeting place was choupal. The choupal constitutes an informal
assembly, a forum that villagers could call their own, a place where knowledge could be shared
and captured. One important aspect of Indian culture for Indian farmers is the choupal meeting,
which is like an informal gathering of farmers in the evening on their way home from their fields
to discuss the news of the day.

In the year of 1998, the performance of ITC Corporation’s International Business Division (IBD),
which was the agricultural commodities export division of ITC, was far lagged behind to ITC’s
other divisions. ITC knew that it had to create some new ways to help its IBD.

ITC had a 100-year affiliation with the farmers in the central state of Madhya Pradesh; this area is
known as India’s “soyabowl” producing 80% of the soy crop (4 million tons). ITC’s vertical
integration and its known relationship with farmers provided it with an integrated presence
throughout its supply chain of purchasing beans from farmers, processing plants, exporting via
vessel loads and shipping containers. Eighty percent of the finished product was exported as soy
meal an additive for poultry and cattle feed, the remaining 20% of soybeans (edible oil) was sold
domestically as cooking oil.

Inefficient Supply Chain and eChoupal Concept


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Although ITC was successful in processing and selling soybean products, the business
performance was not satisfactory. Both farmers and soybean processors were locked in an
unproductive cycle.

The process of getting crops to market began with farmers harvesting the soybeans and loading
them onto tractors and bullock carts. After the harvest, farmers hauled their loads of products to
the closest mandi 3 and then waited for the crop to be auctioned. The auction began when a
government-appointed bidder valued the produce and set the initial bid. From here, government-
licensed buyers called commission agents (CAs) bid upwards until the crop was sold. ITC cannot
bid directly but must deal through a specific CA at each mandi. The whole process was inefficient
due to following several reasons.

• Doing trades through mandi was the only available and legal way for both farmers and
soybean processors, which gave CAs the power to monopoly.
• CAs could manipulate the auction prices to reduce farmers’ earnings and processors’ profits.
• Farmers spent days of time and efforts to sell their products in mandi.
• Farmers were lack of price information.

In May 1999, Mr. Sivakumar, Chief Executive of ITC, anchored a brainstorming session of the
ITC management team. The team knew that, in order to reduce costs and inefficiencies incurred
along the supply chain, the “village A à mandi B à factory C” cycle had to be broken. The idea
of digital technologies came in handy. Indeed, the team worked to develop a business model that
incorporated “e” into the age-old tradtion of village choupals to facilitate a reorganization of the
channel. Knowledge shared and captured in the traditional choupal could be extraordinarily
useful to farmer, but it had traditionally been limited to verbal communication. Farmers not
knowing market prices ahead of harvest were not able to plan and create a secure financial base
but instead had an existence based on day-to-day survival. Unknown to the farmers soybean
prices usually followed the agriculture futures market on the Chicago Board of Trade and the
Kuala Lumpur Commodity Exchange. IBD knew that soybeans price trends and subsequent
products could be forecasted, this daily information in the hands of the farmers would greatly
improve their livelihood. To provide information of soybeans through the choupal meeting using
some new technologies was the idea generated by the team.

Components of eChoupal and Reorganized Supply Chain


At the May 1999 meeting, Sivakumar and his team conceived ITC’s eChoupal initiative. The
eChoupal was based on the knowledge sharing found in the traditional choupal model, but took
the concept one step further. ITC supplied a computer kit to each village with the following
components:
1. A PC with a Windows/Intel platform, multimedia kit, and connectivity interface
2. Connection lines, either telephone (with a bit rate between 28.8 and 36 Kbps) or, more
commonly, VSAT (Very Small Aperture Terminal: in 75% of eChoupals; average 2003
usage 64Kbps inbound, 1 Mbps outbound)
3. A power supply consisting of UPS (Uninterruptible Power Supply) and solar-powered
battery backup
4. A dot-matrix printer
3
Hindi word meaning market yard.
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ITC’s cost for the equipment setup totaled $3,762 per choupal, an additional $2,213 was spent on
people, travel, communication, software and training. A dedicated ITC website
www.soyachoupal.com was accessible to the farmers introducing them to the World Wide Web.
The site and the data uplink were maintained by ITC Infotech India Ltd., an ITC subsidiary. The
eChoupal site has eight links to critical information.

• Weather Page: Local weather forecasts


• Best practices page: Information for farmers to increase its Instructional materials are posted
on the website to improve the farmers’ crops (e.g. “How to take a good soil sample”) and
information is posted on why this is helpful and required.
• Market Information: Four links are provided on this site providing the farmer with options to
explore world demand, world production, mandi trading volume, and mandi price lists.
• Q+A forum (FAQs): The website provided an interactive feature, which allowed the farmer
to ask a question and have it answered by the appropriate panel of experts.
• News page: This website held excerpts of relevant news items, including government
decisions on subsidies or minimum support prices (MSP’s) and innovation in other countries.
Local news pertaining to farmers successes were also posted.
• Place for suggestions: The website was fluid, continually tailored to meet the farmers’ needs.
ITC relied on the farmers’ participation to keep the site relevant and in a constant
improvement mode.

The eChoupal initiative was based on the belief that the farmer needed an alternative to the mandi
system. By participating in the eChoupal network, farmers were offered new channels through
which they could sell directly to ITC, thus eliminating the cost inflation and cheating that
occurred through the middleman.

The new supply chain through eChoupal provided farmers a more efficient way to trade their
soybeans.

ITC chose a lead farmer called Sanchalak in each village and whose home was a choupal to
house the equipment. The Sanchalak had received basic IT training from ITC, as well as
instruction in effective methods of communication. This qualified him to open the site to other
farmers, who could then navigate the site themselves. According to the information provided by
ITC’s website, farmers brought samples of their soybean crop to the Sanchalak’s home, where he
was equipped by ITC with moisture meters and other tools used to assess the quality of the beans.
Sanchalak gave reference price for farmers based on the degree of variance from that “best-
quality” sample provided by ITC website.

After getting the price from eChoupal meeting, farmers could decide to ship their soybeans to
ITC Hubs immediately or wait for a better price according to the information from the futures
market. The physical architecture of the eChoupal model called for a web kiosk within walking
distance and a hub within driving distance of every targeted farmer. When the farmer shipped its
beans and arrived at one of ITC’s hubs, his beans were weighed and he was paid in cash
according to the published prices in ITC’s website.
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Moreover, three arrangements were available to farmers to purchase goods, like herbicides,
sowing seeds, and soybean oil through eChoupal. First the Sanchalak would place specific
farmers’ orders; second, the Sanchalak ordered supplies on projection had stock. The third
arrangement was for the farmers to purchase directly from the ITC hub when they visited ITC’s
facilities.

Using the eChoupal concept, the traditional supply chain of the “village A à mandi B à factory
C” was changed to

Other products

EChoupal Soybeans
Info. Farmers ITC Hubs
(Sanchalak)

Other products

Benefits of Using eChoupal


Using eChoupal as an additional trading way for the farmers and the soybeans have following
benefits.

• Farmers have more knowledge of prices and could have a much better control over the timing
of making its trade.
• Reduce the monopoly power of CAs, which cut the costs for both the farmers and soybeans
processors.
• Save time and efforts for soybean farmers.
• The transparency of the eChoupal – the fact that the website was accessible to anyone,
including the government, to cross-check ITC’s prices at any time – helped to convince the
government to legalize the purchases of beans (and other agricultural commodities) outside
the mandi (mandi was the only place to do the purchase before)
• Farmers could use eChoupal to buy the supplies they need.

Other Business Opportunities with eChoupal

Based on the soybean findings, margins could be generated in other products in a similar manner
between the farmer and the ITC factory. ITC believed it could generate value through three
primary mechanisms: traceability (accountability for the quality of the product), ability to match
farmer production to consumer demand, and facilitation of an electronic marketplace. Coffee and
spices in Karnataka, aqua (seafood) in Andhre Pradesh and wheat in Uttar Pradesh were the next
candidates for ITC’s eChoupal model.
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Looking at its long-term future and growth in rural India (representing 60% of the workforce) and
how eChoupal’s website continually changed to address farmers’ needs; ITC created a vision for
marketing and distribution. The eChoupal vision consisted of three features: superior product and
distinctive functional benefits (simplified transactions between buyer and seller), process benefits
and relationship benefits (farmers’ willingness to identify themselves and reveal their purchasing
behavior). ITC envisioned new concepts and ideas could be transformed into new businesses or
products, these businesses and products would be marketed on eChoupal to the farmers
increasing the value of the farmers’ produce and generating additional revenue for ITC. This
philosophy is called “commitment beyond the market.” New products that could be launched
through eChoupal included products like fertilizers, agrochemical and seeds. ITC also believed
that it could provide services like insurance and credit through eChoupal.

ITC believed that many new markets would open based on the success of its current operations;
they did understand that eChoupal could not and would not be everything to everyone.

Section 2
Assumptions for the Interactive Case Study: “Expansion of ITC’s
eChoupal Initiative into Kyrgyz Republic via Foreign Direct
Investment”
Capitalizing its success in India in implementing its revolutionary eChoupal initiative, ITC’s
International Business Division (IBD) wishes to tap the vast agricultural and/or fishery sectors in
other developing countries. Assume that ITC has dispatched a delegation to Kyrgyz Republic
(KR) in order to explore the feasibility of making foreign direct investment by either forming a
joint venture or establishing a wholly-owned subsidiary in that country. Also, assume that you
are an advisor or consultant to a local firm (in the prospective host country) or a government
agency that promotes inward FDI.

Section 3
Questions from Host Government’s Perspective

Please provide answers to the following questions from the host company’s or government’s
perspective:

1. To what extent should the government of KR open its agricultural fishery sectors to
foreign direct investment?

2. Is the eChoupal (e-agriculture) initiative appropriate for the country’s agriculture sector?

3. What measures should be taken to increase country’s attractiveness to FDI?

4. What kinds of policies and/or practices would discourage foreign investors? How could
such policies/practices be avoided?
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5. How would you differentiate country’s advantages in attracting FDI compared to other
neighboring countries including China?

6. From the perspective of a local company or government, what are the pros and cons (or
advantages and disadvantages) of inviting ITC as a foreign director investor? Are there
any potential risks for the country to take if it accepts ITC’s direct investment?

7. Address any other relevant questions or issues.

Section 4
Questions from ITC’s Perspective
The host government (or local partner) and the foreign director investor are like the two
sides of one coin. At this time, you (or your case study team) are asked to wear the hat of
the ITC delegation and answer the following questions from the perspective of ITC:

1. The country’s agricultural sector may not be completely open for FDI. If ITC can
persuade the government that it could bring in capital and technologies and make the
government permit the investment, ITC would have the first mover advantage and get
exclusive right in getting the market shares. Volkswagen did the same thing in China ten
years ago for automobile manufacturing, and Komyung Co. Ltd. (a small South Korean
information and communication technology firm) did so in Congo in 2002 for broadband
Internet communication market. How would ITC go about persuading the host
government to open up the country’s agricultural sector to FDI?

2. Is the supply of electricity adequate? How about the telecommunication infrastructure of


the country? Any technical problems or issues that should be addressed before ITC starts
to establish eChoupal (e-agriculture) infrastructure? What are they? What are your (or
your case study team’s) suggested solutions?

3. Where (in which region of the country) should ITC start its investment? And at what
scale (size of investment), assuming that ITC’s investment is encouraged by the host
government?

4. What would be the most likely range of ITC’s expected rates of investment in the country?

5. What are the risks that ITC may face? How could ITC manage (or reduce) its exposure
to those risks?

6. Should ITC find a local partner or not? What are the advantages and disadvantages?

7. What would be the exit strategy for ITC?

8. Address any other relevant questions or issues.


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Appendix A: Glossary of Terms for ITC’s e-Choupal Case

Adatiya A commission agent in the mandi who buys produce from farmers and resells them to
large buyers
Choupal A Hindi word meaning village gathering place
Crores An Indian term for the number 10,000,000
De-oiled Cake (DOC) The residual meal leftover in the process of crushing oilseeds
Ghani A small local crushing plant where farmers get a part of their oilseed produce crushed to
extract oil for use in their homes
Inputs In an agricultural context, this refers to the range of seeds, fertilizers, pesticides, etc.
that are used in the farming process
Kharif One of the two sowing seasons of Indian agriculture. It refers to the season that
coincides with India’s southwest monsoon rainfall (July to October). The kharif crop is
therefore entirely rainfed.
Lacs An Indian term for the number 100,000
Madhya Pradesh A state in central India
Mandi A government mandated market-yard where farmers sell their crops
Metric Ton 1,000 kgs
Paise One hundredth of a Rupee
Quintal One hundred kilograms
Rabi One of the two sowing seasons of Indian agriculture. It refers to the winter sowing
season in areas that have irrigation.
Rupee (Rs.) Official Indian currency
Samyojak The commission agent in his role as a collaborator in the e-Choupal model
Sanchalak The village farmer who runs the e-Choupal and acts as ITC’s representative in the
village
VSAT Very Small Aperture Terminal (VSAT) is the technology used in the e-Choupal to
achieve Internet connectivity
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Appendix B: Other Questions That Are Often Raised by Foreign


Direct Investors (Source: UNCTAD)

Questions to Be Addressed on Investment Climate:


1 Does the (host) government really intend to allow and encourage FDI in agricultural
and/or fishery markets? (If the answer is no, the ITC delegation will pack and leave the
country immediately for another country.)

2 What is the political situation like? Is there stability? Do governments come and go?
Do policies change when governments change? How often and with what kind of
predictability or disruption?

3 What is the current government attitude towards private enterprise and privatization /
foreign direct investment? Are foreigners treated differently from local investors?

4 Is there much FDI? Who has already invested in your (host) country? Who else is
thinking of investing?

5 How well is the local private sector treated? Is it consulted by the government in the
shaping of economic policy? Is it open to doing business with foreigners?

6 Does your (host) country have a double-taxation treaty and an investment treaty with my
(potential or prospective foreign direct investor’s) country? Are there any special
commercial arrangements (automatic visas, preferential trading privileges)? Do our
respective embassies, in your country and mine, provide support to business people?

7 How cordial are the relations between our governments? Are there any ongoing political
or trading disputes?

8 How large are the community of my (potential or prospective foreign direct investor’s)
fellow citizens in your (host) country and the general expatriate population?

Questions to Be Addressed on Investor’s Rights and Obligations:


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1. What corporate organization forms are possible?

2. Can I own land/real property? If so, how are my property rights protected?

3. Do you have any limitations on foreign investment entry?

4. Do you have special requirements/limitations as far as foreign equity ownership is


concerned? Do I need a local partner?

5. Are there any requirements for notification, registration, approval or authorization of


foreign investment? If so, how complicated are they? How long does it take from
beginning to end? Do you have a one-stop ship to help me comply with your procedures?

6. Does your country allow free convertibility and repatriation of funds (capital, profits,
royalties and fees)?

7. Are there any special incentives available for certain investments?

8. Can foreign investors access local credit and finance?

9. Do you have any other specific operational requirements – regarding training and
technology transfer, for example?

10. Is there available a set of the laws applicable to foreign investors, in the main working
languages (e.g., English) of international business?

Questions to Be Addressed on Operational Conditions:


1. What is your trade regime like? Are there any conditions, restrictions or requirements
concerning import and/or export?

2. Is there a regime in your country for the protection of industrial and intellectual property
rights (e.g. patents, trade marks)?

3. Are there any conditions, restrictions, or requirements (e.g. for work permits) regarding
the use of foreign personnel?

4. Do you have a minimum wage policy or restrictive labor regulations? Are worker
disputes or strikes common? What is the strength of the trade union movement?

5. What is the average hourly wage rate?

6. Is there any special sectoral policy for the sector in which I (my company) am interested?

7. Do you have specific environmental limitations on industrial production (disposal of


waste, pollution controls, etc.)?
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8. Are international quality standards and quality control procedures applicable in your
country (e.g. ISO 9000)?

Questions to Be Addressed on Administration of Government, the Justice System and the General
Legal Framework
1. How efficient is the bureaucracy? Is there any corruption? How does the justice and
count system work? Is it efficient and independent? Does it tolerate foreigners?

2. Does your country allow recourse to international arbitration?

3. Does the legal system provide for the recognition and enforcement of foreign arbitration
awards?

4. Does your country guarantee foreign investors against nationalization and expropriation?

5. What internationally recognized control agencies operate in your country?

Questions to Be Addressed on Key Business Support Services and Infrastructure


1. What international banks do you have?

2. What international accounting firms do you have?

3. What international insurance companies do you have?

4. How extensive are the local supplier base (availability of raw materials, design and
engineering services, machine maintenance and repair, printing, marketing, advertising,
etc.) and the local supplier network system?
5. Do you have a stock exchange/equity market?

6. Do you have any seaports? If so, do they handle container cargoes? Do you have an
export processing zone?

7. What air links do you have and which international airlines fly to your country?

8. What are the telecommunication services like? Are they reliable? How long does it take
to install a telephone?

9. Do you have stable and adequate power and water supply? How many brown-outs have
there been in the last six months? What re the plans for upgrading these and other utilities?

10. Do you have developed road network and inland transportation facilities? Is so, are they
safe?

Questions to Be Addressed on Economic Conditions


1. What is the foreign exchange rate? Is it fixed or pegged to the dollar or other major
currency? Has it been stable during the last 12 months? Is foreign exchange easily
accessible? If so, at what rate?
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2. What is the debt service ratio of your country?

3. What are the level and the structure of taxation?

4. What is the inflation rate?

5. How productive is the workforce? What basic education and skills does it have?

6. What is the real growth rate? How is the economy doing: is it depressed, stagnant or
expanding? What is the level of unemployment? What has been the rate of migration?
Where do you see this economy 10 years from now?

7. What is the size of the population and what is the GDP per head figure for last year?

Questions to Be Addressed on Quality of Life


1. What are expatriate living conditions like: how are the hotels? Is there an international
school? Do expatriates have easy access to housing? Can foreigners travel freely in your
country?

2. How modern are you healthcare and hospital services? Is the water drinkable? Is the
climate bearable? What are the recreational facilities like?

3. What is the crime rate?