Professional Documents
Culture Documents
S. Sivakumar (Shiv), CEO Agribusiness of ITC, was intrigued to see what he could learn from
a 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 eChoupal
system. ITC was already purchasing cereals directly from over 3 million small farmers, having
introduced pricing based on quality, rather that the traditional weight-based pricing from
middlemen.
Over the last two years, through Enterprise Solutions to Poverty (ESP) Innovation Group for
Agribusiness in India, which Shiv helped create, Shiv had been working with agribusiness CEOs
of five other Indian giants. Together, they were building a major fruit and vegetable initiative with
small farmers in India. Leaders of these companies were now traveling to China to see major
fruit and vegetable companies of China, also engaged in ESP. Shiv knew that each of
agribusiness leaders and their companies brought different experience, company cultures and
strengths 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’s
largest and most respected conglomerates. TCL’s revenues approach US$3 billion, largely in
fertilizers and inorganic chemicals. TCL has built a successful agricultural input distribution
system using its fertilizer output as the core. In 2007, Tata Chemicals entered into a 50:50 joint
venture with Total Produce PLC, one of Europe’s largest fresh produce providers. The joint
venture, Khet-Se Agriproduce, is geared to leveraging TCL’s relationship with farmers and
presence in rural communities to create a state of the art supply chain and wholesale operation in
fresh fruits and vegetables. TCL is focused on building solid production in bananas for domestic
and export sales, in building out value chain operations with small vegetable producers for
domestic wholesale, with a focus on building productivity, quality and earnings of smallholder
farmers As an international joint venture, Tata Khet-Se is precluded from retail sales and is
pursuing measures to mobilize push cart venders as a formal-informal sector alliance, building on
the traditional mode of retail purchase in India.
Mahindra and Mahindra, with US$6.8 billion in annual revenues, mainly from tractors and
other automotive established MSSL as its agribusiness arm in 2000 with an initial focus on grape
exports. 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 first
to receive GLOBALGAP certification. Mahindra is using its tractor financing company to build out
broad-based rural finance. At the same time, Mahindra had closed down its capital intensive hub
and spoke agricultural input operations. Mahindra management was uncertain on how much of its
resources to commit to agribusiness. MSSL is now focusing on pomegranates and seed potato
operations.
Bharti, with its US$1.3 billion in revenues coming largely from having become India’s largest
mobile phone provider, is a new entrant to fruits and vegetables. Bharti is pursuing local and
export sales of fresh and processed fruits and vegetables under a joint venture with Del Monte
and is the Indian partner of Wal-Mart. As an international joint venture, Bharti-Wal-Mart is
pursuing 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 ten
years.
ITC is one of India’s largest companies with 2008 revenues of over US$5 billion, nearly US$1
billion in its Agribusiness Division. ITC is considered by all to be the natural leader in this group
of six industry leaders in agribusiness with small farmers. ITC has 30 years of experience
working with small farmers in tobacco. ITC has invested in understanding the dynamics of small
farmers and rural markets; its e-Choupal and Choupal Sagaar systems co-opted many traditional
middlemen to become operators of ITC’s information service and hub and spoke platform for
sourcing and distribution of agricultural inputs. ITC has been a leader in applying information
technology to build efficient rural distribution platforms. 6500 e-Choupals reach 40,000 villages
and 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 moving
consumer goods in rural areas. And having built solid early fruit and vegetable operations in
mango, green vegetables and seed potatoes with its Choupal Fresh operations and small format
stores, 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 to
participate in the China trip. The annual revenues of Reliance exceed US$34 billion, is India’s
largest conglomerate, with major operations in oil and gas, petroleum and petrochemicals, and
mobile telecom. Reliance was the first Indian giant to enter into “farm to fork” fruit and vegetable
operations three years ago. Reliance had assumed that its unmatched executing capabilities in
rolling out petrochemical plants and mobile phone distribution would translate into value chain
operations with small farmers, with RIL’s CEO having targeted doubling the income of 10 million
small farmers through Reliance’s disruptive business models over ten years. Early frustrations
for Reliance included resistance by small shopkeepers, local politicians and consumers as it
rolled out its small format Reliance Fresh stores before having organized procurement of quality
produce.
Challenges
These industry leaders have recognized that if they are going to succeed, they will need to
find ways to shorten the value chains and deal more directly with producers. In their desire to fill
their small format stores, several companies fell back on purchasing from the traditional
government markets and middlemen. The result was low quality, low freshness, and no price
advantage. The ESP Fruit and Vegetable initiative involves commodity-specific approaches to
increase quality, productivity and efficiency of direct procurement from small farmers. Key
components are different aggregation models, include producer companies; collaborations with
banks to enable small farmers to make the needed investments in green housings, shade nets
and irrigation; and introduction of crop insurance, tracing, and certification measures.
While ESP and agribusiness leaders of India realize that these measures will provide a solid
base from competitive operations, in many cases doubling the incomes of participating small
farmers, there is a sense that greater innovation in business models will be important in creating
rapid growth and competitiveness in fruits and vegetables. ESP, which also works with leading
agribusinesses in China, has organized a trip in September 2009, to explore what methods and
lessons can be learned for Indian fruit and vegetable operations.
Percentage of farmers with Over 80%, 87 million small Over 80%--farmers had given
under 1 hectare of land holdings accounting for 52% of about 0.3 to 0.5 hectare of
fruit and 61% of vegetable land for rights of use by
production. Large farms government.
average 7 hectares.
Annual growth in fruit and 6% pa growth since 1990, from Exponential growth: 146
vegetable production, ten 76 million mt to 170 million mt in million in 1990 to 502 million in
years 2008. Second only to China in 2004.
output and growth.
COFCO, on the Fortune 500 list since 1994, is the large import-export government-controlled
agribusiness with US$ billion in revenues in 2008. In 2005, COFCO purchased controlling
interests in Tunhe, a leading tomato paste producer operating in thinly populated northwest
China. COFCO Tunhe has forged highly effective collaboration with Heinz and other leaders in
tomato production and processing. In 2007, COFCO Tunhe purchased 2.2.million metric tons of
fresh 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 taken
advantage of the available large tracks of government land to move rapidly to one third large
plantation farming, one third contracting with farmers for efficient production on COFCO
controlled land, and one third in integrated operations with small farmers. Productivity on large
farms has been double that of yields from small holdings.
The Wumart Group, Beijing’s largest retail chain, has grown rapidly, with over 104
superstores and 330 mini-marts and revenues of US$1.4 billion at end 2008. .Piloted over the last
two years, Wumart is moving from traditional reliance on fruit and vegetable wholesalers,
launching its direct sourcing model, primarily in Shandong province. This direct procurement
operation works with specialty cooperatives and the small farmers associated with these
Guang-You Sweet Potato and Food Products in Sichuan and Huasheng Apples
in Shaanxi. Guang-You uses its proprietary technology to extrude vermilli pasta directly from
the sweet potato. Huasheng is China’s leading fresh apple exporter, with China now producing
over 70% of the world’s apples. Both companies use efficient, relatively simple methods for
processing or packaging. Huasheng works with over 600,000 small apple growers and Guang-
You works directly with over 400,000 small sweet potato producers. Both pride themselves on
successful, t simple hub and spoke systems to work directly with small producers in upgrading
productivity and quality through extension services, improved inputs, seeds and saplings.
Tingbo Kiwi. Mr. Zao, a successful lawyer and serial entrepreneur from Sichuan, has
established a 700 hectare kiwi plantation in Sichuan. When Mr. Zao established these operations
in 2007, he had no prior experience in agribusiness. He has built a tight collaboration with the
leading kiwi company of New Zealand. His strong connections with the Sichuan government
enabled Mr. Zao to lease a relatively large tract of land from 3,000 small farmers, with lease
payments set to equal how much the farm family would have earned growing maize, the
dominant local crop. Tingbo hired back about 1,000 of the farmers to cultivate segments of this
large holding under tight supervision from Tingbo; those farmers that are not able to achieve the
required quality and productivity will be replaced by other farmers. Tingo has provided these
farmers with leasing fees, housing, and a flat rate during the three years needed for the kiwi
plants to bear fruit. The farmers will now be moved to compensation based largely on yields and
quality.
• All the aggregation models in China could be adapted to Indian realities, with some
requiring government policy change and support
• On the output side, the objective is to build competitive value chains that have a positive
impact on productivity and net incomes of large numbers of small farmers. Shiv believes
that the means are combinations of any or all of the following: higher productivity, lower
costs, lower risks, and better quality.
• Different crops have different optimal levels of aggregation at different points in the value
chain e.g. some crops require heavy investment and high technology at different stages
while others require labor-intensive care.
Shiv sees three broad business models: companies work with small farmers, companies lease
and farm the land, and companies adopt a hybrid model leasing the land and then allocating it
back to farmers as entrepreneurs on contiguous plots of economic scale.