Deloitte Report FoodandAgroProcessing

Sponsored by:

National Manufacturing Competitiveness Council (NMCC) Government of India

Enhancing firm level competitiveness Indian food and agro processing industry Strategies and road map development

August 2009

Content

Foreword Background Objectives and approach Setting the context • Overview of global food processing industry • Characteristics of the industry in developed markets • Indian food processing industry • Characteristics of the Indian Food Processing Industry Tracing the evolution of Food processing industry in Thailand and India Analysis of Indian Food Processing Industry • Factor conditions • Firm Structure and Rivalry • Demand Conditions • Support Industries • Government Support Key Conclusions and Recommendations Annexure: • Results of the Primary Survey (Global Manufacturing Benchmarking Survey) • Trends for the Future

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Title of publication Focus area of publication 3

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NMCC have undertaken a number of studies towards enhancing the competitiveness of manufacturing sector and identify the current strengths and constraints of keysectors, and recommend National level industry/sector specific policy initiatives

Title of publication Focus area of publication 5

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Background

The National Manufacturing Competitiveness Council (NMCC) has been set up by the Government to provide a continuing forum for policy dialogue to energize and sustain the growth of manufacturing industries in India. In this context, the NMCC have undertaken a number of studies towards enhancing the competitiveness of manufacturing sector including identification of manufacturing sectors which have potential for global competitiveness; current strengths and constraints of identified sectors, and recommend National level industry/sector specific policy initiatives as may be required for augmenting the growth of manufacturing sector.

Deloitte Touche Tohmatsu India Pvt. Ltd. (Deloitte) have been engaged by NMCC to submit a report for enhancing the “Firm Level Competitiveness (Strategies and Road Map Development)” for Food and Agro Processing sector This document in the subsequent sections details the Deloitte report on “Firm level competitiveness (Strategies and Road map development)” for the “Food and Agro Processing sector” in India

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Objectives and approach

The objectives of the Deloitte engagement were • Understand the competitiveness of firms across their supply chain – From the results for organizations in each sector, identify the key areas for focus for the organizations based on the critical trends and factors driving success – From the above, provide the contours for strategic initiatives and detail a roadmap for implementation. • Approach – Analyze the performance of organizations based on data obtained through primary and secondary research.

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– In addition to the primary/secondary research of organizations, Deloitte conducted primary research with key stakeholders and experts. The objective was to validate the inputs from secondary research and obtain a perspective on the critical success factors and drivers for competitiveness of the sector. – The results from the above were then be aggregated and analyzed to understand the “Gaps” in their performance with reference to the sector objectives defined by NMCC. – Recommendations based on the “Gaps” identified focusing on the key areas for consideration in each sector and a road map to achieve the sectoral objectives.

Competitiveness of food and agro processing sector

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Global Food and Agro Processing Sector •

The market size of global food, beverage and tobacco products was estimated to be US $ 4,140.3 billion in 2005.

•

The size of the global market is around $ 3660 bn in 2005 (not considering tobacco industry which constitutes about 11%) and estimated to grow to $ 4320 bn in 2010 with CAGR around 3.35%*

Global Food and Beverage Sector – Category wise contribution

Beverages 25.0%

Food products 63.6%

T obacco 11.4%

Global Food and Beverage Industry

5000 4500 4000

3000

% growth

(in mn USD)

3500

2500 2000 1500 1000 500 0 2001

2002

2003

2004

2005

2006E Year

Market Size 10

Growth rate

2007E

2008E

2009E

2010E

Food products are classified into primary and value added products based on the value addition.

Primary Processed Products Milled Grains, Spices Fruits and Vegetables Agriculture

Tea and Coffee Sugar

Value Added Products Beverages, Ready to Eat/Cook/Drink Products, Bakery Products, Processed Dry fruits Confectionery

Edible Oil (Depending on processing level) Milk

UHT Milk, Milk Powder, etc. Icecream

Eggs, Meat

Egg Powder, Packaged Meat and Preparations

Livestock

Fisheries

Processed Aquatic Food (Depending on processing level)

• Primary processed products - Include cleaning, grading, sorting and packaging. The products manufactured generally act as inputs for value added products. • Value added products: - Manufacturing these products involves use of processing techniques like blending, high temperature heating & boiling, chilling, etc. where the use of technology is significant

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Global market for the processed foods follows the economic power of the countries.Developed economies show more inclination towards processed foods due to higher income levels. Rapid urbanization and rising income levels in the developing economies create the demand for processing foods. Low income levels and poor economic growth of the least developed countries create the demand for basic staples and carbohydrates

Consumption Share - Geographic Distribution

Europe 39.0%

Asia-Pacific

31.1%Distribution Consumption Share - Geographic

Europe 39.0%

Rest of the World 9.0%

USA 20.9%

The market can be classified in to four major segments depending on the level of processing and the maturity of the market • Countries like USA, Japan and Australia demand highly organic and functional foods whose preparation involves al Food Demandhigh technology Rest of the World • Quality and hygiene factors are the drivers in the Eastern European countries 9.0% meals and • Developing countries like India, China and Latin America focus primarily on snacks, prepared USA 20.9% processed meat. • Carbohydrates still constitute the major food in the least developed markets. Most of the least developed countries are net importers of food North America, Japan, Western Europe, Australia Evolution of Global Food Demand

Eastern Europe

Diet, f unctional, organic f oods

North America, Japan, Western Europe, Australia

Convenience

India, China, Latin America f oods

Eastern Europe Snacks, Prepared meals

Af rica (Sub Saharan) India, China, Latin America

Dairy, meat, egg, sugar

Surviving

Convenience, Snacking

Mass Market

Quality, Hygiene

Carbohydrate Staples

Af rica (Sub Saharan)

Surviving

12

High Technology

Mass Market

Convenience, Snacking

Quality, Hygiene

High Technology

Asia-Pacific 31.1%

Developed markets are characterized by high demand for the processed foods

US Food Trends Fresh Meat, Poultry & Fish 18%

Others 15% • •

• •

The food processing industry in the USA is considered as a reference for the developed market. There is a very high level of consumption of the processed foods. Nearly 70% of them are highly value added. More than 80% of the food products sold in the USA is packaged and have some brand association. Increasing trend is observed in “Hygienic”, “Better for you”, “Organic” and “Nutraceutical* products” Although the penetration of the processed foods is very high, the growth rate observed for processed foods is not significant but only about 2.4%.

Cooking Aids 10%

Farm Produce 13%

Snacks 6% Bakery Products 4%

Dairy 13%

Beverages 11%

Frozen Foods 10%

U.S. spending on food away from home and on “other food” increases the most with income

Monthly household spending, US$ 900 800 700 600 500 400 300 200 100 0

10-15

15-20

20-30

30-40

40-50

50-70

> 70

Annual household income, U.S. $1,000 Food away from home

Meats

Cereals

Other food

Fruits and vegetables

Dairy

Source: U.S. Bureau of Labor Statistics, Consumer Expenditure Survey (2004-05) for four person household

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Innovation and new product launches are the key priorities for the companies in the food processing industry in the developed countries. Since the growth rate of the market is less companies need to focus on developing new products and acquire new customers. They spend about 4~13% of their revenues in advertising so as to create brand awareness Number of new product launches in US food industry

New Product launches (Nos)

15000

New customers in the existing markets New Product offerings

14000

Volume increase / Incremental growth

13000 12000 11000

New Markets

10000 9000

Price Increases

8000 7000

Strategic Acquisitions

6000 5000 2001

2002

2003

2004

None of these

2005

0

Company Name

Advertising Spend (2007)

% of revenues

Coca Cola

2.8 bn $

9.7

Unilever

5.3 bn Euro

13.1

Kraf t

1.6 bn $

4.1

PepsiCo

1.9 bn $

4.8

Sources: Deloitte Research, Grant Thornton report on Food companies in USA 2007. Table contains the advertising spend of few of the top 25 food companies in the world. Unilever’s Advertising spend includes all its businesses New customers in the existing markets New Product offerings Volume increase / Incremental growth New Markets Price Increases Strategic Acquisitions None of these 0

20

40

60

80

100

Question: How are you most likely to grow sales in the next year?

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20

40

60

80

100

Question: How are you most likely to grow sales in the next year?

Structure of the industry: The market is consolidated from farm to the table. Few large firms controlling the market resulting in intense competition. High levels of concentration in the supply chain characterizes the food processing sector in the developed markets

The companies are Cargill, Archer Daniels Midland, ConAgra and Cereal Food Processors ). •

Similarly, the top 3 firms control 71% of Soybean crushing in USA ( Archer Daniels Midland, Bunge, Cargill ). Similar is the situation in beef packing industry where 83% of the market is controlled by Tyson Foods, Cargill, Swift & Co and National Beef Packing Co.

•

Smithfield Foods, Tyson Foods, Swift & Co, and Hormel Foods control nearly 64% of the pork processing market

Consolidation of Farms: In USA, the number of farms decreased from 5.65 mn in 1950 to 2.17 mn in 2000. During the same period, the average size of the farm rose from 213 acres to 434 acres. The large size of the farms helped in mechanized agriculture and uniform quality of crops Seed Companies: The four concentration ratio in seed companies is more than 70% (i.e. the top 4 companies control 70% of the market) with one player Monsanto having more than 30% share of the market. Large Primary Processors: • The four concentration ratio of the flour milling companies is 63% (as of 2004) (i.e. the top 4 companies control 63% of the flour milling in USA.

Retailers: The top 5 companies in the food retailing have 46% of the US market. ( Wal-Mart, Kroger, Albertsons, Safeway and AholdUSA ) Sources: Agribusiness Consolidation: Squeezing out family farmers and consumers

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In developing countries like India, the share of the processed foods is low compared to that in the developed markets. Non-processed foods account for nearly 50% of the share. High value added products account for only 18% of the total share in India. • • • • •

The total size of the Indian food industry is around US$220 bn in 2005. Of that, primary processed food is around $70 bn and the value added segment is about $40 bn. The remaining share is accounted by non-processed food (commodity based). Annual growth rate of the industry is around 9~12%. Employs around 2 mn people (as of 2005)

The low levels of processing are driven primarily by the food habits of the population. Fresh fruits and vegetables are preferred compared to processed fruits and vegetables

Classification of Indian Food and Agro Processing Industry

Agro & Food Processing Sector

Commodity

Fisheries

Meat & Poultry

Dairy

Sugar

Fish processing

Milk

Food Grains

Others

Milk Products

Spices

Edible Oils

Convenience Food

Beverages

Alcohol

Aerated Drinks Packaged Water Tea and Coffee

Others

Ready to Eat/Cook Processed Fruit & Vegetable Products Bakery and Confectionery

Non-

Indian Food Industry $ 220 bn

Processed commodity $ 110 bn

Primary Processed $ 70 bn

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Processed f ood $ 110 bn

Value Added $ 40 bn

Wastage levels in India Present level of production

Commodity Durables (cereals, pulses and oil seeds) Semi-perishables (potato, onion, sweet potato etc) Perishables (fruits, milk, fish, eggs etc) Total

Quantity (mn ton)

Average Price (Rs/Ton)

Value (Rs. Crores)

%

Quantity (mn ton)

Value (Rs. Crores)

230

10000

230000

10

23

23000

40

3000

12000

15

6

1800

210

15000

315000

20

42

63000

480

11604

557000

14.8

71

87800

Processing levels in India

Processing Level – A Global Comparison

Level of Processing Organised Unorganised

Total

Fruits and Vegetables

1.40%

0.80%

2.20%

Milk and Milk Products

13%

22%

35%

Meat and Poultry Buffalo meat

21%

21%

Poultry

6%

6%

Marine Products

8%

8%

Currently, the processing levels in India are very low and range from 2.2% in fruits and vegetables to around 35% in milk production. Across all segments, the level is around 7% compared to 30% in a developing country like Thailand.

Developed Nations Processing Level (%)

Products

Post-harvest losses

80

Developing Nations

80 70 30

7 Source: APEDA 25Jun 08

©2005 Deloitte. All rights reserved

Given the level of wastage and the processing levels, studying the food processing industry of a country with a similar geographical pattern and economic condition of India and, understanding the growth pattern of the industry would provide us with inputs on the initiatives planned and implemented, critical success factors and therefore some key learnings. Source: Rabobank, CII, Anecdotal evidences Title of publication Focus area of publication 17

Innovation and new product launches are the key priorities for the companies in the food processing industry in the developed countries. However, given the nascent stage of the food processing industry in India, spend on R&D has been significantly low even for large companies in the organised sector •

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For example, the R&D spend of some of India’s prominent companies in the industry are as follows: – Dabur - Rs. 1.24 Crores (USD 0.25 Mn) or 0.06% of the gross turnover

– Britannia Industries Limited - Rs. 3.47 Crores (0.70 Mn) or 0.133% of the gross turnover •

Global organizations however spend significantly on R&D – Nestle - CHF 1.97 bn or 1.80% of the gross turnover – Unilever - Euro 927 mn or 2.29 % of the gross turnover

Hence, both on an absolute basis as well as on a percentage basis, Indian companies have been spending lower on R&D compared to their global peers.

Tracing the evolution of Food processing industry in Thailand and India

Why compare Thailand and India? Thailand and India are similar in different parameters in terms of fragmented land holdings, being predominantly agricultural based economies, etc. While Thailand was initially focusing only on rice, has later diversified into processing of fruits, shrimps, etc. (overall processing level is 30%), whereas India while producing different varieties of crops, is not able to increase the levels of processing of the produce beyond 2-3% In the early 80s, the share of processed food exports as a percentage of total agricultural exports was around 65% for both the countries. However, Thailand has since increased the value added share to over 90% whereas India’s processed food exports is around 70% of the total agricultural exports. Among developing countries, Thailand has been a relatively early entrant to the processed food exports. Following rapid growth of export for over three decades, it is now the second largest exporter of processed food among developing countries (after Brazil) India, though possessing vast agricultural resources , is not able to capture the export market. The global share remains stagnant at around 1.1%

Export Share in the World United States of America, 10.57 Netherlands, 7.91

France, 7.72

Others, 55.24 Germany, 6.49

Brazil, 4.5 Belgium, 4.35 Thailand, 1.97 India, 1.17

Source: International Food Safety Regulation and Processed Food Exports from Developing Countries - 2002

The share of processed food exports in total agricultural exports in Thailand has more than tripled since the early 1970s to a level of over 90% currently. Thailand is the leading frozen shrimp exporter accounting for over 25% of total world exports. Exports of frozen poultry and canned food (both fruit and vegetables) have also expanded rapidly over the past two decades. By the late 1990s the processed food sub-sector accounted for 13% of total domestic manufacturing and 4% of GDP In India, food-processing industries accounted for 18% of domestic manufacturing and over 2% of GDP. While India has a long history of exporting processed foods, these exports have shown an increase only from the late 1980s, reflecting the impact of controlled trade regime over the four decades prior to the 80s. In 1997/98, the total value of exports was over US$ 3 billion (40% of total agricultural exports), up from US$ 0.5 billion (10% of total agricultural exports) in 1980.

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While Thailand increased its share in the world agro trade from 1.52% in 1980 to 1.97% in 2004, India’s share rose marginally from 1.09% to 1.17%. Thailand exported $11 bn of agro products in 2004 compared to $4.6 bn of India (including primary processed) Value of processed food exports (in mn USD) (Including Primary Processing) COUNTRIES

19791981

19891991

19992001

2003

2004

% share in the world ( Agri exports) 19791981

19891991

19992001

2003

2004

Malta

21.8

29.1

48.0

95.1

71.9

0.01

0.01

0.01

0.02

0.01

Bolivia

56.3

80.3

355.5

448.5

554.9

0.04

0.05

0.10

0.09

0.10

Italy

3918.0

7863.4

12425.3

16526.9

20267.1

2.58

3.38

3.80

3.94

4.04

Tunisia

134.3

228.8

400.6

340.1

830.8

0.09

0.10

0.12

0.09

0.16

Singapore

1118.3

2051.0

2138.5

2250.2

2714.3

0.67

0.84

0.67

0.49

0.50

United Kingdom

5430.8

8953.5

12791.7

14106.7

18028.9

3.44

3.89

3.68

3.28

3.51

Thailand

2700.7

4943.9

6298.7

8893.6

11040.3

1.52

1.80

1.76

1.96

1.97

Republic of Korea

467.8

719.8

1112.0

1585.8

1835.6

0.26

0.35

0.39

0.36

0.35

Jamaica

101.6

149.9

213.6

230.4

217.1

0.06

0.07

0.07

0.06

0.04

Germany

7703.7

14079.4

18003.2

25210.1

30045.0

4.70

6.29

5.75

6.27

6.49

Greece

920.1

1616.8

1916.2

2214.9

2254.8

0.58

0.80

0.64

0.57

0.52

India

1675.1

2045.9

3310.9

3945.0

4607.8

1.09

0.89

1.19

1.24

1.17

Democratic Rep of Congo

143.3

62.2

16.2

14.8

24.5

0.09

0.04

0.01

0.00

0.01

Kenya

476.8

359.7

558.7

663.5

627.1

0.30

0.21

0.25

0.25

0.21

Peru

259.5

258.7

429.6

472.4

593.1

0.15

0.10

0.16

0.16

0.19

Yemen

21.0

24.2

17.5

53.8

50.4

0.01

0.02

0.02

0.02

0.02

New Caledonia

1.5

0.0

1.4

0.9

1.3

0.00

0.00

0.00

0.00

0.00

Tonga

5.4

0.6

0.7

0.5

1.0

0.00

0.00

0.00

0.00

0.00

Countries with processed food exports in the range 65% to 80% of the total agricultural exports in 1979-81 are analyzed. Source: FAO data, Deloitte Research

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Evolution of Thailand’s Food Processing Sector

Pre-1958

1958 – 1970s

Agriculture based economy: 37% of GDP from agriculture. Rice being the major crop: Area under rice cultivation increased from 8mn rai in 1907 to 26mn rai in 1952 . Rice constituted about 46% of the exports in 1958 Rice export was one of the major earnings for the government – nearly 10% of the earnings through ricepremium tax Food processing technology available within Thailand was limited, and food preservation included only drying, pickling and sugar glazing

1980s – till now

Focus on commercial crops: Crops like kenaf, cassava, maize and sugarcane were exported. Rice exports continue to decline in the overall exports, 14.2% in 1976 and 9.2% in 1986 respectively Export Oriented Agro-processing industry: Initial stages of production of broilers, canned fish and shrimps for exports Initial Incentives by Government:Government offered Investment Promotion Privileges to investors in the food processing industry. This encouraged the transfer of technologies ( The technology to process sweetened condensed milk, canned fruits and vegetable and vegetable oil were then acquired from Taiwan and Japan)

Government’s Focus: First priority for Agro processing sector in the sixth plan (1986-90) and in the subsequent plans. Banks also supported agricompanies by providing loans Evolution of Contract farming: Thai companies in association with foreign firms started contract farming which improved quality and attributed for a surge in the export of frozen and chilled commodities (Shrimp /poultry/ fish products) Later vertical integration happened especially in the poultry sector. In 1984, 17 of the 28 major companies in Thailand were in Agro processing sector. Biotechnology Focus: Focus on the research in bio-technology in the areas of: 1. Rice 2. Industrial and Foods 3. Shrimp 4. Usage of natural resources for agriculture

Thailand - Early beginner Food processing industry in nascent stage

Growth of food processing industry

Sources: The waning of National Developmentalism and the Political Economy of Agri-business in Siam: Case studies of development and restructuring in Thailand’s Agri-food sector – Jasper Adam Goss – 2002, Capitalist development in Postwar Thailand: Commercial Bankers, Industrial Elite and Agribusiness Groups – Akira Suehiro, Evolution of Agrobiotechnology innovation system in Thailand – Pun-Arj Chairatana

Title of publication Focus area of publication 21

Key Conclusions from the evolution of Agro Processing Industry in Thailand Shift in focus from rice to other products: • Till 1960, the focus of Thailand was on rice. Rice exports constitutes about 46% of the total exports in 1958. Rice premium tax was the major source of revenue for the government at nearly 10–15% of the total state revenues during 1960s. •

Post 1960, other crops like cassava, kenaf, maize and sugarcane were grown primarily for exports and the area under rice cultivation reduced gradually.

Technology collaboration with foreign firms: • Companies in the shrimp production, poultry and meat processing sector benefited from technology transfers from foreign companies.

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Access to export markets: • Foreign companies provided the market for the exports from Thailand. Most of the companies were from Japan and USA. Due to these, broiler exports grew annually at 66% from 1975 to 1985. Canned fish exported to USA had a growth rate of 63% annually in the same period. Government support: • Identified as a export oriented sector and provided various incentives and tax holidays to attract investment •

Provided assistance in developing the shrimp production ( in the form of various projects to develop pumping stations for the farms and expansion of the farms)

Evolution of India’s Agriculture and Food Processing Sector

Before 1960s Policies were not directed towards Agriculture: More focus on Industry sector ( esp. capital goods) though 48% of India’s GDP was from agriculture in 1950-51. The need to create a self-reliant and diversified industry sector motivated planners to adopt a import substitution strategy But, in the early 1960s, the GDP growth was only 3.9% against the expected 5%. But population growth was 2.3% against the expected 1.4%. As a result food security of India worsened as India imported cereals worth 28% of its export earnings

1960 - 1990 Focus on Agriculture: Main objectives were self-sufficiency in food grains, reasonable prices for the farmers and affordable prices for the consumers (especially the poor) Green Revolution: Introduction of highyielding variety of rice and wheat, Provision of irrigation facilities and fertilizers and Minimum Support Prices for the crops Creation of buffer stock for food and strengthening of the Public Distribution System Green revolution was successful in bringing the imports to 1.9% of the total export earnings Land Ceiling Act -1972: To provide lands to the landless farmers. Ceiling on the land holding by the farmers

1991 – to date Economic Reforms: Agricultural sector was ignored. Industry-first approach, focusing on removal of industrial licensing, removal of import licensing from all manufactured and capital goods, tariff reductions and relaxation of rules for foreign investment However, post- 2000, government focused on the food processing industry 100% FDI is allowed automatically in food processing sector No industrial license required to start the industry except for a few items like alcohol, beer etc Export Promotion: Food parks and export zones were promoted which provides benefits like duty free imports, profits from export sales are exempt from corporate taxes etc

Restriction on exports: Agricultural goods were restricted from being exported. Also, the prevailing exchange rates did not favour exports

Food Processing Industry in nascent stage Key Conclusions from the evolution of Agro Processing Industry in India Food Crisis and Green Revolution: • Food crisis in India during 1960s forced the government to adopt Green revolution which helped in self-sufficiency in food. Focus on improving the poorer sections of the society: • To improve the livelihood of the poorer sections of the society, land ceiling act was enforced during 1972. • The primary aim is to provide land to landless

Growth of Food Processing industry farmers. It also limits the area of land held by a farmer ( limited to 17 ha – varies in different states)

Focus on Food processing industry after 1991: • After the economic reforms, government focused on improving the food processing industry in India. • Allowance of 100% FDI in food processing industry, export promotion incentives and other schemes to attract investments. • However, investment in this sector has been very low in India. The government has identified food and agro processing industry as one of the ‘sunrise’ sectors that has high potential for domestic demand and export markets

Title of publication Focus area of publication 23

Analysis of indian food processing industry

Porter’s Diamond Framework has been employed to compare the competitiveness of the food and agro processing industries in Thailand and India

Firm Structure & Rivalry

Government • Economic reforms • Incentives for firms • Attracting foreign investments

Factor Conditions

Demand Conditions

• Availability of natural resources for cultivation

• Access to Foreign markets • Local demand Support Industries

• Associations and Institutions

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• Structure of the industry / Vertical integration • Direct access with the farmers • Foreign Direct Investment / Technology availability

Factor conditions– availability of natural resources

Title of publication Focus area of publication 25

While India and Thailand are major producers of agricultural commodities, Thailand has a significant share in the exports of the agricultural produce than India. Thailand is the largest exporter of shrimps, rice, cassava and rubber Thailand : Producer & Exporter

India : Producer

•

•

•

•

•

•

Agriculture in Thailand is about 10% of the GDP with noticeable level of mechanization 27.6% of the land is arable with 7% under permanent cropping and 5 million ha of irrigated land More than 80% of the raw materials used by the country’s food industry are locally sourced at low prices Thailand is the world’s number one producer of natural rubber, rice, canned and frozen seafood, canned tuna, canned pineapples, and cassava − Thailand ranks first in rice production and exports, sharing 4.6% of total production and 36% of total export of the world. − World leader in rubber by constituting 35% of world’s total production and 45% of world’s total export. − Thailand is the top exporter of cassava with 82.5% share of the total cassava export The processed food sector is one of the most advanced sectors in Thailand. It accounts for about 15% of Thailand’s manufacturing output

• •

•

•

• • •

•

India has the 2nd largest arable land (161 million hectares) in the world Largest irrigated land (55 million hectares) in the world Largest producer of wheat (72 million tones), accounting for nearly 15% of global wheat production Largest producer of pulses (15 million tones), accounting for nearly 21% of global pulse production Largest producer of milk (96 million tons), accounting for nearly 17% of global milk production Largest producer and exporter of spices 2nd largest producer of tea, accounting for nearly 28% of the global tea production 2nd largest producer of rice (92 million tons), accounting for nearly 22% of global Rice production 2nd largest producer of sugarcane (296 million tons), accounting for nearly 21% of the global sugarcane production

Sources: Indian Food Processing Industry – Way2 wealth – 2008 Status of Agricultural Engineering Education in Thailand – Asian Institute of Technology, Thailand - 2007

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Fragmented land holding in both the countries owing to the land holding policies which aimed at providing land to the landless farmers to improve the poorer sections of the society Thailand

India

Distribution of land holding - 1999

No of households

Category of holdings – 1995-96

No of Holdings(thousands)

Average Size of holdings (ha)

Without land

454819

Marginal ( less than 1 ha)

71179

0.4

Less than 0.8 ha

565799

Small ( 1 to 2 ha)

21643

1.42

0.8 to 1.6 ha

658060

Semi-medium ( 2 to 4 ha)

14261

2.73

Medium (4 to 10 ha)

7092

5.84

Large ( 10 ha and above)

1404

17.21

Total

115580

1.41

Over 1.6 ha

3908141

Total

5586819

• •

•

•

•

The World bank aided the Thailand Government in the distribution of the land to poor farmers Thailand’s Office of Agricultural Economics estimated in 1995 that the income of the population working in agriculture is about 15 times lower than the income of the population outside the agricultural sector. Average household income in 1999 was 12,729 Baht (or US$318) per month whereas the average income for farming households was no higher than 1,000 Baht (or US$24) per month. Access to land is fundamental to the livelihoods of poor communities in rural areas. Land continues to serve as a means of providing subsistence needs as well as of income generation. Holding land enables family labour to be put to productive use, and provides a safety net for family members who work in temporary or insecure employment elsewhere. This was particularly evident in Thailand during the economic collapse in 1997 when the sudden threefold rise in urban unemployment was mitigated by the absorption of labour in the rural areas.

• • •

• •

The ceiling on land holdings was amended on 1971 to: meet the land needs of the landless farmers reduce the inequalities in land ownership so that it may lead to development of co-operative rural economy and, enlarge self-employment in owned land as distinguished from subletting and tenant cultivation. As per the new guidelines, 17 states amended the ceiling legislations. The range of ceiling varied from state to state. For instance, in Andhra Pradesh, the level of ceiling for dry land ranged from 14.16 hectares to 21.85 hectares. Karnataka had the limit of 21.85 hectares for dry land, while Punjab had 20.50 hectares and West Bengal 7.00 hectares. For irrigated lands with two crops, the limit was lower –Andhra Pradesh – 4.05 to 7.28 hectares, M.P, Maharashtra – 7.28 hectares, Punjab – 7 hectares, West Bengal – 5.0 hectares

Sources: Thailand’s Land Titling Programme: Securing land for the poor? Rebeca Leonard and Kingkorn Narintarakul Na Ayutthaya Agriculture census division, Ministry of Agriculture, India. http://www.indiaagronet.com/indiaagronet/AGRI_LAW/agri_laws. htm

Title of publication Focus area of publication 27

Productivity in India is comparatively low primarily due to cultivating techniques, levels of mechanization and quality of seeds. Level of mechanization and technology involvement in Thailand is relatively higher compared to India (explained in the subsequent slides) India • The yield per hectare is very low compared to the world levels. • Thailand has higher productivity in most of the categories compared to India

World

Cereals

Coarse grains

Pulses

Fruits

Vegetables

Sugarcane

3,078

2,980

793

9,563

16,845

65,293

China

4,848

4,399

1,507

8,214

19,158

69,556

India

2,356

1,179

552

11,811

12,898

62,859

Pakistan

2,302

1,008

465

8,590

13,425

47,934

Brazil

3,364

3,568

802

14,232

18,758

72,289

Philippines

2,813

1,802

723

11,650

8,481

67,104

Thailand

2,584

3,702

900

9,210

8,878

66,400

United kingdom

7,030

5,906

3,638

11,794

21,770

–

United states of America

6,033

7,843

1,803

22,934

27,099

77,515

Differential in productivity: India and world average

–23%

–60%

–30%

–24%

–23%

–4%

Importance Factor Conditions

Sources: FAO, Rabobank report

28

Thailand

India

Demand conditions, firm structure and rivalry

Title of publication Focus area of publication 29

While Thailand’s industry primarily constitutes SMEs, India’s food processing industry is characterized by the significant presence of the unorganized sector. This therefore is a constraint for the implementation of technologies and practices which are followed by only a few companies •

• •

•

•

•

Thailand: Thai food processing industry is predominantly SMEs (50 ~100 employees and investment of up to 3 mn $) 98% of all industries in Thailand are SMEs and nearly 42% of the SMEs engage in food processing However in products like Dairy, Shrimp etc., large corporates and the cooperatives have a major share (1997) Government promoted the cooperative movement in the dairy industry by solidifying contracts and subsidies to the farmers and also regulated prices. The number of cooperatives increased from 28 with 7785 members in 1988 to 106 with 19969 members in 1997 in the dairy sector A few companies in Thailand pioneered vertical integration in the poultry sector. Charoen Pokphand (CP) group in the late 1960s integrated the entire poultry chain from producing feedstock, selling feedstock to the farmers, contract farming of poultry and marketing the poultry

Condensed Milk

Market Share

Thai Dairy Industry

58%

Foremost

20%

Nestle

10%

UHT Milk

Market Share

Foremost

50%

Nongpho

25%

Thai Dairy Industry

20%

Structure of Indian Food Processing Industry Organised, 25% Unorganised, 42%

Small Scale, 33%

•

•

•

•

•

India: The industry is mainly unorganized with 75% of the processing units in the unorganized category. The organized category though small, is growing fast. Many of the companies are small scale / medium sized and hence investment in technology, sanitary/Phyto-sanitary measures are unlikely. Unorganized players are not registered and they are household/cottage industries having local presence SSI constitutes around 33% of the total number of companies and are companies with investment less than Rs. 1 Cr in fixed assets Existence of cooperatives in Dairy sector is similar to Thailand due to which the processing level of milk is higher(35%) compared to other products (average – 7%)

Sources: The waning of National Developmentalism and the Political Economy of Agri-business in Siam: Case studies of development and restructuring in Thailand’s Agri-food sector – Jasper Adam Goss – 2002, Indian Food Processing Industry – Way2wealth - 2008

30

Though contract farming was promoted in Thailand only in the 90s, a number of companies in poultry and shrimp production had started contract farming during 1970s. Later, agricultural produce was also done under contract farming. However, in India, contract farming is still in nascent stage with only a few companies practicing them •

•

•

•

•

Thailand: Contract farming was given priority by the government from the sixth plan and it emerged as a major method of production in the country in a lot of agricultural produce Contract Farming in Thailand started more than three decades ago, in poultry, sugarcane, tobacco, pineapple, and vegetables. In poultry, the system of contracting was put in place by the Charoen Pokphand (CP) group in the early 1970s. It also introduced wage and price guarantee contracts for growers in 1976. The CP group also tried contract faming in shrimp production through independent growers and cooperatives in the mid-1980s, with support from the Bank of Agriculture and Agricultural Cooperatives (BAAC). However, since farmers were opposed to the fixed price contracts, the cooperatives were discontinued. Thus, CP no longer practices contract farming system in shrimp and procures from open auction markets and from its own farms By the early 1990s, contract farming was in place in the following crops/commodities in Thailand: poultry, dairying, palm oil, pineapple, tobacco, sugarcane, kenaf, asparagus, maize, maize seed, castor oil, eucalyptus, baby corn, cashew nuts, sunflower, barley, sea shrimp, cotton, tomato, tomato seed, rubber, gherkins, peas, string beans, silkworms, swine, bamboo shoots, ginger, mushroom and fragrant rice. By the late 1990s, almost 100 per cent of commercial production of poultry in the country, especially that meant for frozen chicken exports, was under some form of contract. Later, it expanded to vegetable seeds and crops like tomato

•

•

•

•

•

•

India: The Agricultural Produce Marketing Committee (APMC) Act required that farm produce be sold only at designated government markets through registered intermediaries. Under the Act, the private sector / processing industry was not allowed to buy directly from farmers. The farmers were also restricted from entering into direct contract with any buyer because the produce was required to be channeled through regulated markets. These restrictions acted as a disincentive to farmers, trade and industries. The priority, therefore, was to amend the restrictive APMC Act. The central government drafted a model APMC Act (since agriculture falls under the jurisdiction of state governments) in 2002, which allowed private players to set up markets not regulated by the market committee. Under the new Act, it was not required to bring agricultural produce covered under contract farming to the APMC market / private market; it may be sold directly from farmers’ fields to contract farming sponsors. Several state governments have already initiated legal amendments to the APMC Act, allowing farmers to sell their produce in open markets, and this has given a boost to contract farming. There are a few successful cases of contract farming in India like Pepsi in Punjab, Appachi Cotton Company’s integrated cotton cultivation, Ugar Sugar’s barley cultivation, etc

Source: India’s agrarian crisis and smallholder producers’ participation in new farm supply chain initiatives: A case study of contract farming, Vijay Paul Sharma – June 2007 Contract Farming Ventures in India: A Few Successful Cases Thailand Data : http://www.allbusiness.com/finance/534767-1.html

Title of publication Focus area of publication 31

Many states in India have amended the APMC act to facilitate the direct linkages with the farmer. However only few companies have tapped the potential. More direct linkages and contract farming are expected in the future India • Due to the presence of large number of intermediaries there is an escalation of cost as well as deterioration of quality. • The farmer typically gets only 35% of the value where the majority of the price escalations happen in the hands of the intermediaries Supply chain

Farmer

Village comm. agent

District comm. agent

Wholesaler

Sub-wholesaler

Retailer

Margin% share of final price

35%

15%

10%

10%

10%

20%

Issues

• Non-transparent pricing • Limited financial capabilities • Primitive cleaning sorting & grading facilities

• Wastage rampant • Lack of quality & hygiene consciousness • Lop-sided pricing • Opportunistic profiteering

32

Consumer

• High prices • Limited choices

India’s domestic market has a significant potential for processed foods which is expected to grow more with increasing urbanization, upward movement of salary levels and changing lifestyles •

•

•

Thailand: Thailand’s domestic market for processed foods is estimated to be around $20bn. Domestic demand for processed food goods is showing considerable growth; between 2001 and 2006 sales of ready-to-eat processed meals in Thailand grew 54%, reaching $33 million. As lifestyles continue to change, the demand for convenient and ready-to-eat processed food products is increasing. Additionally, Thailand’s sizeable tourism industry, which attracts over 10 million tourists per annum, is expected to drive further growth for the country’s food processing industry. Exports: Thailand exports around $ 11bn of processed foods and it is the second largest exporter among the developing nations. The encouragement of agro-industry since the 1970s has led to the development of key exports other than rice, such as rubber, sugar cane, and broiler chickens, making it the most important industry in terms of contribution to GDP. Shrimp farming and processing was added in the 1980s, and consequently frozen shrimp exports to Japan and the USA grew rapidly making it one of the largest player in the exports

•

•

•

•

•

Importance Demand conditions and firm structure

Thailand

India

India : The market size for the processed foods is expected to increase from US $110 billion currently to US $330 billion by 2014-15 assuming a growth of 10%. The share of the value added products in processed foods is expected to double from US $40 billion currently to US $88 billion during the same period, growing at the rate of 15%. Rising Income levels: Indian domestic market is one of the most attractive consumer markets in the world with the increase in income levels across the population segments. Food and grocery comprise the largest share (nearly 45%) of the spending pie followed by personal care items, thus offering a lot of scope for the food-processing industry Changing Lifestyles: Increase in the population of working women and increase in nuclear double income families in urban areas are some of the other factors that are influencing the lifestyles. As a result, there has been an increase in demand for processed, ready-to-cook and ready-to-eat food. According to Euromonitor, money spend by Indians on meals outside the home has more than doubled in the past decade to about US $5 billion a year, and is expected to further double in the next 5 years. Exports: India exports around $ 5bn of processed foods in 2007. The major fruits exported are mangoes, grapes, citrus fruits pomegranates, lychees, dried nuts etc. China has opened its market for Indian mango, grapes and bitter gourd. Efforts are on to secure market access for the fruits in Japan, USA and Australia. The long awaited access to the Japanese market for Indian mangoes was achieved in June 2006. The first consignment of mangoes left the Indian shores for USA recently. However, majority of Indian exports are to the developing nations.

Sources: Thai Market Overview – Department of Primary Industries – Victoria Indian Food Processing Industry – Sector Coverage – Way2wealth – 2008, APEDA Website, Science Tech Entrepreneur – October 2007

Title of publication Focus area of publication 33

34

Foreign investment in food processing industry in India is very low compared to Thailand. Foreign companies brought in technology and access to export markets for the Thailand companies. •

•

•

•

•

•

Thailand: Thailand has attracted significant investments in the food processing industry by Japanese and US firms which gave access to the export markets The growing demand for processed foods in Japan forced companies to look for new sources. Since Thailand’s food habits are similar to Japan’s many Japanese companies entered Thailand as early as 1960s Thailand served as a base for USA’s operations during Vietnam War in the 60s, and a lot of companies entered JVs with Thailand companies to serve processed foods to US army in the region In 1962, the Japanese company Sogoshosha Mitsubishi had taken a stake of 49% in Thai Pineapple canning industry cooperation with local partner Phiphattanakit Similarly, Charoen Pokphand (CP) group entered into partnership with Arbor Acres Farm Inc. of US for producing parent stock for chicken breeding; Mitsubishi corporation for breeding large sized (black tiger) shrimp; and the Dekalb Agresearch Co of USA for developing a hybrid variety of maize These multinational companies assisted Thai companies in production technology, and developed new markets for the companies. Japanese companies provided modern technology in slaughtering the chickens to the companies in Thailand and sold the product in Japan

•

• •

India: Foreign investment in India’s food processing industry is very low compared to Thailand’s food processing industry. India attracted just US$456 mn of FDI from 2000 to 2006 Some of the successful ventures from EU countries are Perfetti, Cadbury, Godrej-Pillsbury and Manjini Comaco

Country of Investment

USD mn

Mauritius

229.3

USA

83.8

Switzerland

74.9

Germany

40

Netherlands

28.2

Total

456.2

Sources: Capitalist development in Postwar Thailand: Commercial Bankers, Industrial Elite and Agribusiness Groups – Akira Suehiro, The waning of National Developmentalism and the Political Economy of Agri-business in Siam: Case studies of development and restructuring in Thailand’s Agri-food sector – Jasper Adam Goss – 2002, FDI data – FICCI

Title of publication Focus area of publication 35

Food Safety and HACCP Practices: Level of implementation of SPS standards and HACCP procedures are high in Thailand compared to India. Adherence of these standards are critical for exporting to developed economies like EU and USA. This is the reason for Thailand’s higher exports to EU and USA, whereas India’s major exports going to developing nations •

• • •

•

•

•

•

The SPS (Sanitary and Phytosanitory) standards has been used as a powerful tool to impede international trade and protect domestic producers through unjustified differential requirements in different markets, unnecessary costly or time consuming tests, or duplicative conformity assessment procedures USA: Although exports of shrimps to the US are not subject to tariffs, they must comply with the HACCP of the US. Japan: In case of Japan, exporters are subject to a pre-certification system, Food Sanitation Law, and Standardization and Labeling Law of Japanese Agricultural Standards. European Union: Exports of shrimps to EU are subject to HACCP, European Commission Rules, Green Dot, and ISO 9000. Thailand: To implement the SPS and HACCP requirements, a code of conduct was drafted in 1999 in Thailand by 5 organizations: Department of Fisheries, Thai Marine Shrimp Farmers Association, Thai- Frozen Foods Association, Thai Food Processor's Association, and Aqua-culture Business Club. In a survey of the Thai seafood processing industry, 94 % of the 120 companies obtained at least one quality standard certification - either ISO9000 (30%), HACCP (69%) - or both (28%) About 77 percent of the firms obtained the standard within the first three years. This is evidence of the increasing awareness among seafood processing companies about the need to comply with SPS standards. Large firms have greater incentive to obtain the certification because of the lower cost of compliance per unit of output. There are instances where the farmers and traders pooled in huge amount of money for testing the quality of the food

•

•

•

•

•

India: Indian exports are predominantly to the developing markets. The primary reason for this is the inability of the suppliers to meet the SPS standards. For example, the rejections of Indian shipments by US has increased from 860 during May 1999-April 2000 to 997 during December 2001-November 2002 Most of the producers and exporters being the small and medium enterprises (SMEs) in nature fail to incorporate such standards in their production process due to their limited financial capacity and expertise thus ending up losing export order. Very few companies have implemented these standards. The cost of implementing these standards is approximately $10,000, which small companies may not be able to afford. Lack of technology / quality standards: e.g. While Indian mangoes fetch premium prices in USA, they needs to be irradiated for exports. India has only 1 irradiation center which hinders the growth potential of the export of the mangoes*.

Sources: SPS and Thailand's Exports of Processed Food, Bhanupong Nidhiprabha, An Appropriate Manufacturing strategy for the Thai Food Processing Industry – Pongpattanasili, Food Safety in a Globalizing World: Opportunities and Challenges for India, Environmental Standards in Food Processing Industry: Impact on South Asian Exports – 2006 * - Anecdotal evidences

36

The structure of the industry has had an impact at the firm level. Indian companies have very low levels of collaboration with the customers in key areas like production planning and transportation planning which in turn has an effect on their operational efficiency of inventory turns and on-time delivery.

pl an n

nt or y r ep l

ve

tio

od

uc

ot om

In Global average Indian Food Processing Industry

en Tr an ish sp m or en ta t tio n pl an ni ng Co st re Qu du ali ct ty io im n pr ov em en t

ng ni

in g an n n pl

io

d m

an Pr

Pr

ng ni an pl te gi c ra

ep

len

St

ve

nt or

y r

tio uc

od

In

De

ng Tr an ish sp m or en ta t tio n pl an ni ng Co st re du Qu ct ali io ty n im pr ov em en t

ni

ng

n pl an

ni an n pl Pr

ot om Pr

De

m

an

io

d

pl an ni ng

ni lan c p te gi ra St

pl an ni ng

5 4.5 4 3.5 3 2.5 2 1.5 1

ng

% of companies

% with medium to high collaboration 100.% 90.% 80.% 70.% 60.% 50.% 40.% 30.% 20.% 10.% .%

European Region High Performing companies

Source: Primary Survey conducted by Deloitte

As discussed in the earlier page, Indian companies score low on the on-time delivery. The on-time delivery of the global and high performing companies are in more than 98% whereas the on-time delivery of Indian companies are in the range of 95~97%

100.%

90.%

90.%

80.%

80.%

50.% 40.% 30.% 20.%

70.% 60.% 50.% 40.% 30.% 20.%

10.%

60.% 50.% 40.% 30.% 20.% .%

.%

< 93.5 % 93.5 - 95 % 95 - 96.6% 96.6-98.1% > 98.1%

70.%

10.%

10.%

.%

High Performing On Time Delivery

100.%

% of companies

% of companies

60.%

Regional On Time Delivery

% of companies

Global On Time Delivery

< 93.5 %

93.5-95 % 95-96.6 % 96.6-98.1% >98.1 %

< 93.5%

93.5-95 % 95-96.6 % 96.6-98.1%

>98.1%

Percentage of shipments that meet customer request date (for the different peer groups). Global a verage Indian F ood Processing Industry

European Region High Perf orming companies

Source: Primary Survey conducted b y Deloitte

Title of publication Focus area of publication 37

Collaboration with the suppliers is also low compared to the global and high performing companies.

m len ep

or

y r

ta tio

ish

an pl

Tr

an

sp

or nt

ve In

en t n pl an ni ng Co st re Qu du ali ct ty io im n pr ov em en t

ng ni

ng ni an od

om

uc tio n

p l

ot io n

d an m

Pr

Pr

ng ni an pl gi c te ra St

De

ish ns m po en rta t t io n pl an ni ng Co st re du Qu ct ali io ty n im pr ov em en t

ng

Tr a

In

ve

nt

or

y r

ep

len

pl

an

ni

g an ni n Pr

od

uc tio n

n pl

ot om Pr

De m

an

io

d

pl an ni ng

ni lan c p te gi ra St

pl an ni ng

5 4.5 4 3.5 3 2.5 2 1.5 1

100.% 90.% 80.% 70.% 60.% 50.% 40.% 30.% 20.% 10.% .%

ng

% of companies

% with medium to high collaboration

Global average European Region High Performing companies Indian Food Processing Industry High Performing companies from an emerging nation Source: Primary Survey conducted by Deloitte

Supplier delivery rates in India are significantly low at about 75% which could primarily be due to the low levels of supplier collaboration

Supplier on-time delivery %

Regional On Time Delivery %

100.%

90.%

90.%

80.%

80.%

80.%

70.% 60.% 50.% 40.% 30.%

% of companies

100.%

90.%

20.%

70.% 60.% 50.% 40.% 30.% 20.%

10.%

.%

< 68 %

68-75.9 % 75.9-83.9% 83.9-91.8 % > 91.8%

< 68 %

68-75.9 % 75.9-83.9% 83.9-91.8 % > 91.8%

Number of ontime deliveries/total number of deliveries (in %) Global a verage Indian F ood Processing Industry

European Region

High P erf orming companies High Performing companies from an emerging nation Source: Primary Survey conducted b y Deloitte

70.% 60.% 50.% 40.% 30.% 20.% 10.%

10.%

.%

38

High Performing On Time Delivery %

100.%

% of companies

% of companies

Global Supplier Delivery %

.% < 68 %

68-75.9 % 75.9-83.9% 83.9-91.8 % > 91.8%

The low levels of customer and supplier collaboration results in the organizations being forced to stock high levels of finished goods and raw materials impacting inventory turns and therefore profitability Inventory turns

60.%

60.%

50.%

50.%

100.%

40.% 30.% 20.% 10.%

% of companies

90.%

% of companies

% of companies

High Performing turns

Regional turns

Global turns

40.% 30.% 20.% 10.%

.%

80.% 70.% 60.% 50.% 40.% 30.% 20.% 10.% .%

.%

< 6.7 6.7 - 12.5 12.5 - 18.4 18.4 - 24.2 > 24.2

< 6.7 6.7 - 12.5 12.5 - 18.4 18.4 - 24.2 > 24.2

< 6.7 6.7 - 12.5 12.5 - 18.4 18.4 - 24.2 > 24.2

(Annual cost of goods sold) / (average total on hand inventory) Global a verage Indian F ood Processing Industry

European Region

High P erf orming companies High Performing companies from an emerging nation Source: Primary Survey conducted b y Deloitte

Due to the fragmented nature of the food processing industry in India and there are only a few large companies, the product range offered by the companies are limited compared to their global peers. Also, lack of vertical integration limits the expansion capabilities and scale economy •

The product range of Indian companies is relatively less compared to the multinational companies. Global companies like Kraft Foods operate in various segments whereas Indian companies like Britannia still have a single/few product lines

•

Large companies which are vertically integrated increase efficiency and reduce costs. This also provides them the power to control the market Global Companies

Semi-finished Industrial Products

Nestle Cargill

Beverages

Dairy / Ice Creams

X

XXX

XXX

XXX

Kraft foods ADM

Bakery

Meat / Fish

Prepared Foods / Snacks

Edible Oil

Sugar and Confectionary

XX

XX

XX

XXX

X

XX

XXX

XXX

X

Prepared Foods / Snacks

Edible Oil

Sugar and Confectionary

XX XX

XX

XXX

X

XXX

Unilever

X

XX

X

XX

Indian Companies

Semi-finished Industrial Products

Bakery

Beverages

Dairy / Ice Creams

GCMMF Nestle

X

XXX

XXX

Hindustan Unilever

XX

XXX

X

Britannia

XXX

Tata Tea

Meat / Fish

XXX

X XX X

XX X

X XXX

Data of some of the top 25 global and Indian food processing companies X – low presence in the category XXX – high presence in the category Source: Rabobank, Anecdotal evidences Title of publication Focus area of publication 39

Consolidation of the industry leading to larger firms which controlled the value chain and focus on operational efficiency Impact of Firm Structure: Example of US Poultry and Meat Industries

1920s – 1980s

1980 – till now

Meat / poultry processing industries were located near the production centers due to the lack of transportation facilities.

Per capita consumption of meat decreased in 1980s which meant that sales volume growth could occur if only one firm acquired the shares of other firms (Meat and poultry consumption changed very little over 1972-92, rising incrementally from about 168 pounds per person in 1972 to about 175 pounds in 1992 on a retail boneless-equivalent basis)

Government also prevented the major processing companies from engaging in retail sales or use of their distribution channels for purposes other than distributing their own meat and dairy products.

For firms competing in markets for semi-processed goods, such as meat packers and processors, this meant that plants had to compete on selling prices, putting pressure on their own wage and operating costs.

However, post world war II, reductions in transportation costs resulted in large processing firms far from the production facilities.

This encouraged firms to employ larger plants with more sophisticated equipment designed to handle much greater throughput, but requiring continuous production. In the process, highly competitive meatpacking and processing industries emerged. US food industry statistics by company structure, 1997 Ownership

Number of Share companies (%)

Number of employees

Share (%)

Value of shipments (US$ billion)

Share (%)

Corporations

15,135

68.9

1,309,912

89.3

378.94

89.9

Sole proprietorships

4,705

21.4

26,499

1.8

3.59

0.9

Partnerships

1,436

6.5

39,145

2.7

9.98

2.4

Other non-corporate forms

682

3.1

91,400

6.2

29.23

6.9

All establishments

21,958

100.0

1,466,956

100.0

421.74

100.0

Source: US bureau of the census, 1997 Census of manufacturers 1972

1977

1982

1987

1992

1997

Meat packing

26

21

29

39

50

57

Poultry processing

17

17

22

29

34

40

Sources: Structural Changes in the Meat, Poultry, Dairy and Grain Processing industries – Micheal Ollinger, Sang.U. Nguyen, Donald Blayney, Bill Chambers and Ken Nelsen – US Department of Agriculture - 2005

40

Supporting industries

Title of publication Focus area of publication 41

Institutions in Thailand provided all the necessary support for the industry and helped in making it one of the largest exporter of the processed foods

Organization Universities like Kasetsart, Majoe

Roles • Higher education in the areas of agriculture research and related science • Agriculture is one of the top 10 fields of research in Thailand

Agriculture Research Development Agency (ARDA) Laboratory Center for Food and Agricultural Products Co., Ltd (LCFA)

•Providing funds in the areas of Agricultural research • Directly under the Ministry of Agriculture and Cooperatives • Centralized laboratory facilities service and export reference lab service • Issues “Health Certificate” under various bodies like Department of Livestock Development, Fisheries and Agriculture - “One Stop Service” • Information support for agricultural and food product exporter

National Science and Technology Development Agency / National Center for Genetic Engineering

• Funding more than 200 research projects related to plant, animal and human biotechnology

Thai Frozen Food Association

• Exports Problem Solving Committee ( to solve the quality problems faced during exports) • Data and Information Committee ( to provide news and information about fishery products) • North America Shrimp Exporters Group ( to negotiate shipping costs with the liners. The group members enjoy cheaper freight rates)

Sources: Evolution of Agro-biotechnology innovation system in Thailand – Pun-Arj Chairatana ISI Emerging Markets -Thailand Industry Research– 4Q 2007 report

42

There are numerous institutes providing support for the food and agro processing industry. Institutes like CFTRI provides technical support whereas APEDA , MPEDA etc promotes export of the products

Organization Central Food Technology Research Institute (CFTRI)

Roles • Research and Development in the areas of food science and technology • The focus is on developing low-cost technology , utilization of indigenous raw materials, biofriendly technology and food safety and nutrition • Linkages with organizations like FAO, UNICEF, World bank etc • Also provides process engineering and plant design for the entrepreneurs •Provides more than 300 testing services to facilitate export requirements • Has more than 200 faculty in various research areas and provides training in the areas of food technology, biochemistry, microbiology etc

National Dairy Research Institute

• Research in the areas of Dairy Production, Processing, Management and Human Resource Development • To develop Dairy Farming Systems for different agro-climatic conditions and demonstrate models for transfer of technology

Indian Council of Agricultural Research

• ICAR is the apex body for coordinating, guiding and managing research and education in agriculture including horticulture, fisheries and animal sciences in the entire country

Agricultural and Processed Food Products Exports Development Authority (APEDA)

• To promote export of agricultural products

Marine Products Exports Development Authority (MPEDA)

• To promote the export of marine products, specifying standards, processing, marketing and training

National Institute of nutrition

• Conducts research on improving the nutrition level of the people especially children and women

• To provide, undertake and promote consultancy services in the fields of education, research, training and dissemination of information in agriculture, animal husbandry, fisheries, home science and allied sciences. • Data on international trade of agriculture and processed foods; Importers and Exporters list; Financial assistance schemes; Food regulation in various countries and provides the list of recognized labs

• Providing Nutritive value of Indian foods,: Energy requirements of various demographic profiles Sources: Websites of the organizations, Anecdotal references

Title of publication Focus area of publication 43

Though there are numerous institutions providing support for the food processing industry, there is very little evidence of coordination between them which results in the lack of synergy for the promotion of the industry • • • • • • •

• •

•

•

Operating under various ministries result in lack of coordination: CFTRI is part of Council of Scientific and Industrial Research (CSIR) under the Ministry of Science and Technology, National Dairy Research Institute (NDRI) is a deemed university governed by Indian Council of Agricultural Research (ICAR) which falls under the ambit of Ministry of Agriculture National Institute of Nutrition (NIN) is governed by Indian Council of Medical Research (ICMR) which is under the Ministry of Health. Limited interaction with leading global institutes in terms of exchange of faculty / research personnel or students: Interaction with global institutes is important, keeping in view the nascency of the Indian food industry. Global institutes work closely with industry compared to Indian institutes, leading to a higher degree of understanding of the latest trends in demand for foods and beverages. This allows for greater interaction between students, research personnel and industry, and leads to a more application-oriented approach. Extent of commercialization of indigenously developed products: There is limited synergy between academics / teaching and research, leading to lack of adequate industry interface and also lack of high quality personnel. The low interaction with industry leads to limited focus on applied research. This in turn leads to low commercialization of indigenously developed technologies. Multinational companies typically have an in-house global network of R&D professionals but are willing to explore working with Indian institutions for developing India-specific products and processes. This provides an opportunity for the institutions. Today, these companies utilize the research institutes primarily for routine testing such as basic product composition, trace metal analysis, pesticide and antibiotic residue testing etc. In most cases these tests are undertaken to validate internal research, thus highlighting the restricted usage of these facilities.

Importance

Thailand

Supporting industries / Institutions Sources: Rabobank , Websites of the organizations, Anecdotal references

44

India

Few Examples of the best practices in the linkages of the institutes with the Industry: Consulting services, technical assistance to the industries and student study tours are some of the best practices that are followed by institutes in other countries

Organization Institute Tecnologicoy de Estudios Superiores Monterrey-Campus Querétaro (ITESMCQ)

Center for Advanced Food Technology (CAFT), University of Rutgers, USA

Areas of focus • Recruits international experts which helps facilitate international research projects. • It also participates in research by exploring various aspects of dairy science, from food safety issues to cross-country comparison of dairy industries through linkages with Babcock Institute for International Dairy Research and Development, University of Wisconsin Madison, USA • Includes student study tours and internships, as well as planned training programs for dairy cooperatives in Mexico • Has a technology extension program, serving as an incubator, wherein direct technical assistance is provided to SMEs in the areas of developmental manufacturing, quality assurance, leasing of space/equipment/personnel and training courses

Title of publication Focus area of publication 45

Government support

46

The Thai government had played a major role in supporting the food processing industry by providing various incentives for the companies. Government of India has also declared food processing industry as a sunrise sector due to its potential for growth Thailand government played a major role in developing the food processing industry in the country

•

•

• •

• •

Food processing sector is treated as a export oriented industry Encouraged high vale added product from local raw materials aimed at export market Development of quality control for food products to ensure safety in both domestic and international markets

•

• Government provided support exclusively for shrimp exports. During the sixth plan(1986-91) it provided more than $ 84 mn to encourage the shrimp culture The seventh plan (1992-96) promoted the contract farming with emphasis on export promotion

•

•

•

•

•

•

Creation of zones 1, 2 and 3 ( Bangkok – zone 1; and regions closer to it are zone 2 and farther from it are zone 3). Based on the zones incentives were provided ranging from tax holidays for 8 years and 50% for the next 5 years, duty free technology and raw material imports, exemptions from export, income and sales tax and tax credits for export performance. Double Deduction on Taxable Income of Water, Electricity, and Transport Costs for 10 Years from Date of First Sale, 100% Import Duty Exemption on Machinery Foreign Companies can own Land for Residential and Business Purposes

•

• •

The Indian government is providing various incentives to promote the food processing industry in the country after liberalization (1991- 1992) A few of the measures are: FDI up to 100% is permitted under the automatic route in the food infrastructure (food park, cold chain/warehousing) Automatic approval to FDI up to 100% equity in Food Processing Industry excluding alcoholic beverages and a few reserved items No industrial license is required for almost all of the food & agro processing industries except for some items like: beer, potable alcohol & wines, cane sugar, hydrogenated animal fats & oils etc. and items reserved for exclusive manufacture in the small-scale sector. Up to a maximum of 24% foreign equity is allowed in SSI sector Income tax rebate allowed (100% of profits for five years and 25% of profits for the next five years) for setting up of new agro-processing industries to process and package fruits & vegetables Fruits & vegetables, and dairy machineries are completely exempt from excise duty. Central excise duty on preparation of meat, poultry and fish, pectin and yeast is also completely exempt. Customs duty on refrigerated goods transport vehicles has been reduced form 20% to 10%. Excise Duty of 16% on dairy machinery has been fully waived and excise duty on meat, poultry and fish products has been reduced from 16% to 8%.

Sources: An appropriate manufacturing strategy model for the Thailand’s food processing Industry – 2004 The waning of National Developmentalism and the Political Economy of Agri-business in Siam: Case studies of development and restructuring in Thailand’s Agri-food sector – Jasper Adam Goss – 2002, Ministry of Food Processing Industry - India, India’s Processed Food Industry – Way2wealth - 2008

Title of publication Focus area of publication 47

Schemes offered by the ministry of food processing industries:

Schemes

Description

Income Tax Relief

•Tax deduction for 100% of profit for five year and 25% of profits for the next five years in case of new agro-processing industries set up to process, preserve and package fruits and vegetables.

Excise Tax Relief

•Exemption limit of excise duty for Small Scale Industry (SSI) raised from Rs.1 crore to Rs.1.5 crores •Excise duty on reefer vans (refrigerated motor vehicles) reduced from 16% to 8% and on dairy machinery has been fully exempt for promotion of dairy processing industries •Excise duty on condensed milk, ice cream, preparations of meat, fish and poultry, pectins, pasta and yeast , soya bari (food supplements) and ready to eat packaged foods, on vanaspati fully exempt. •Excise duty on ready-to-eat packaged foods and instant food mixes like dosa and idli mixes reduced from 16 percent to 8 percent.

Customs Duty Relief

•Custom duty reduced from 7.5% to 5% on food processing machinery, 20% to 10% on refrigerated vans, 65% to 50% on sunflower oil (crude), 75% to 60% on sunflower oil (refined) •Customs duty on packaging machines reduced from 15 percent to 5 percent.

Scheme for Infrastructure Development

•Food Parks, Packaging Centres, Modernizing Abattoirs, Integrated Cold Chain facilities, Irradiation facilities, Value added centers – at an estimated budget of Rs. 2613 Cr •Scheme for Technology Up-gradation/Establishment/ Modernization of Food Processing Industries at an outlay of Rs. 600 Cr

Scheme for Quality Assurance, Codex standards and R&D

•Food safety and quality assurance mechanisms, Strengthening Codex cell, Continuous R&D, Setting up/up gradation of quality control laboratories, Promotional activities such as participation in exhibition/ fairs/supporting seminars/workshops/ studies and surveys, Generic advertisement, Preparation of short films and publicity material for different events at an expense of Rs. 250 Cr

Scheme for Human Resource Development

•Setting up of Food Processing Training Centres (FPTCTC), Imparting training to update skills, Entrepreneurship Development Programme (EDP), Facilitating Universities/Institutions for running degree/diploma courses at an expense of Rs. 65 Cr

Scheme for strengthening of institutions

•Rs. 325 Cr is allotted for strengthening of institutions, setting up Wine Board and Meat and Poultry Processing Board

Sources: Website of Ministry of Food Processing Industries

48

Action plans of department of animal husbandry, dairying and fisheries

Department

Project

Description

Animal Husbandry

National Project for Cattle and Buffalo Breeding

• To arrange Artificial Insemination service to the cattle farmers in order to develop quality cattle •Two phases: Allocation of Rs 402 Cr in the phase 1

Assistance to fodder block making units

•During 2007-08 (up to 31.12.07) an amount of Rs 21.25 lakhs was released

•25% of the investment needed will be provided

Grassland development (including reserves)

• To improve degraded grasslands and rehabilitation of saline, acidic and heavy soils through vegetation cover • A 10 hectare land would be provided and up to a maximum of Rs 10 lakhs for development

Fodder seed Production & Distribution Programme

•To produce high yielding varieties of fodder. • 75% of the procurement price is provided for the purchase of fodder seeds from the farmers • The state government furnishes a firm commitment for purchase of fodder seeds from farmers

Biotechnology Research Projects

• Research projects in the areas of feed and fodder can be undertaken in collaboration with research institutes / agricultural universities etc. •100% central grant is provided by the government • However, during 2007-08 no funds were released since there were no suitable projects

Poultry Development

• Assistance to state poultry / duck farms with a maximum of Rs. 85 lakhs for each farm •During 2007-08, Rs. 14.15 Cr was released and 201 farms were benefitted

Livestock Insurance

• 100 selected districts across the country were covered with an approved outlay of Rs. 120 Cr •This scheme will also popularize rearing of quality breed of animals

Sources: Department of Animal Husbandry, Dairying and Fisheries

Title of publication Focus area of publication 49

Department

Project

Description

Dairy Development

Intensive Dairy Development Program

• Dinput evelopment of milch cattle, increasing milk production by providing technical services • 84 projects have been approved in 206 districts with Rs. 480 Cr covering around 15 lakh farmers • Rs. 30 Cr has been allocated for strengthening infrastructure for quality and clean milk production

Dairy / Poultry Venture Capital Fund

• Assistance is provided in areas of milk processing at the village level, quality upgradation and technology •Rs. 25 Cr has been allotted for the same

Fisheries

Strengthening of Cooperatives

• NDDB allocated Rs. 1000 Cr for strengthening of the cooperatives in the areas of improving infrastructure, productivity enhancement, quality assurance and creation of national information network

Development of Inland Fisheries and Aquaculture

• During 2006-07, additional area of 22,984 ha was brought under fish culture and 37,923 personnel were trained in the improved production practices

Development of Marine Fisheries, Infrastructure and Post Harvest Operations

• Subsidies for motorization of traditional crafts, assisting the small scale mechanized sector by subsidizing the excise duty on fuel

Welfare Programs for Fisherman

•A sum of Rs. 20 Cr was released during 2006-07

• Setting up infrastructure for safe landing, berthing and post harvest operations etc. • Welfare of Fisherman: Development of model fishermen villages, Group Accident Insurance for Active Fisherman and schemes to provide financial assistance during lean fishing season • Fisheries Training and Extension: To provide training to the fishery personnel in upgrading the skills

Other Schemes

• Strengthening of database and information networking • Assistance to Fisheries Institutes

In addition, various schemes are proposed to the government in the areas of increasing entrepreneurship in poultry farming, developing small ruminants, piggery, schemes for utilizing fallen animals and carcasses, establishments of rural slaughterhouses, salvaging and rearing of male buffalo calves etc Most of the schemes offered by the ministries are aiming to promote entrepreneurship, building economies of scale etc. however, the effective implementation of these schemes needs to be ensured by the ministries. Sources: Department of Animal Husbandry, Dairying and Fisheries

50

Indian government has taken a number of steps to promote the exports of the processed foods •

Export Promotion: •

•

•

•

Food-processing industry is one of the thrust areas identified for exports. Free Trade Zones (FTZ) and Export Processing Zones (EPZ) had been set up with all infrastructures. Also, setting up of 100% Export Oriented Units (EOU) is encouraged in other areas. They may import free of duty all types of goods, including capital goods. Capital goods, including spares up to 20% of the CIF value of the capital goods may be imported at a concessional rate of customs duty subject to certain export obligations under the EPCG scheme. Export linked duty free imports are also allowed. Units in EPZ/FTZ and 100% EOUs can retain 50% of foreign exchange receipts in foreign currency accounts. 50% of the production of EPZ/FTZ and 100% EOU units is saleable in domestic tariff area.

Importance

•

•

All profits from export sales are completely free from corporate taxes. Profits from such exports are also exempt from MAT. Setting up of 60 agricultural zones for end-to-end development for export of specific product from same geographies 53 food parks approved to enable small and medium food and beverage units to set up and to use capital intensive common facilities such as cold storage, warehouse, quality control labs, effluent treatment plant, etc.

India: Late Start in Government reforms Thailand

India

Government support

Source: Ministry of Food Processing Industry, India’s Processed Food Industry – Way2wealth - 2008

Title of publication Focus area of publication 51

Key conclusions and recommendations

52

Factors Impacting Indian Food and Agro Processing Industry

• Presence of various institutions

• Tax holiday for new food processing units • Liberalized overall policy regime

• However, no significant evidence of coordination among the supporting bodies

• Availability of natural resources • One of the top agricultural producers in the world • However, the processing levels are low • High level of wastage

• Industry is highly fragmented

• Rapid urbanization • Rising per capita income

• Very low FDI in food processing sector in India

• More than 10% growth predicted

Factor conditions Related and supporting industries

Firm strategy, structure and rivalry

Government

Demand conditions

Indian Food Processing Industry

Title of publication Focus area of publication 53

Key conclusions

Parameters Factor Conditions

Importance

Availability of Raw Materials Structure of the Industry / Vertical Integration

Demand Conditions and Firm Structure / Rivalry

Access to Foreign Market Local Market Demand Direct linkages with Farmers

•

54

Supporting Industries

Institutional Support

Government Support

Tax Policies / Incentives

Thailand’s factor conditions are better than India’s especially in the areas of Yield per hectare. Contract farming and direct linkages with farmers have provided significant advantages to Thailand. Contract farming is still in the nascent stages in India. Though many states have amended the APMC act, there are only a few successful cases of integration with the farmers

•

Foreign companies played a major role in the exports of processed food in Thailand. In India, FDI in food processing sector is very low and Indian industry is predominantly domestic market oriented. However the government is providing support for the industry to cater to the domestic and international demand

Thailand

India

The following recommendations would help the Ministry of Food Processing Industry to achieve its ambitious targets for the year 2010 and 2015

Targets for processing levels ( % of total production) Category

2004

2010

2015

Fruits and Vegetables

1

4

8

Marine Products

11

15

20

Meat

21

28

35

Poultry

6

10

15

•

Improve competitiveness of the firms in the sector through cluster based initiatives – Promoting a cluster based approach among the companies. • Promote Direct linkages with farmers: • Government should promote contract farming and should facilitate direct linkages of companies with the farmers. • Private-Public Partnership in establishing primary processing centers near the production zones • Wastage levels in India are high due to the inefficiencies in transportation, storage etc. Primary processing centers near the harvesting sites will reduce the wastage levels. It would also facilitate easy storage • Cooperative approach in the fruits and vegetable processing

•

• • • •

Facilitate the formation of co-operatives in fruits and vegetables which would reduce the wastage levels of the produce and increases the economies of scale Primary processing by the cooperatives should be allowed for preservation of fruits and vegetables Purchases from co-operatives can be linked to incentives Measures to increase the processed foods exports from India Promotion of the implementation of SPS / HACCP measures to tap foreign markets

All the above initiatives by the government would improve the processing level and reduce the wastage level of the agricultural produce in India.

Title of publication Focus area of publication 55

Improving cost competitiveness through value chain efficiencies:

Initiative

Likely Stakeholders

Expected Results

Promoting a cluster based approach among the companies.

Industry associations and export promotion councils

Easy transfer of the best practices among the companies which improves their operational efficiencies, costs and collaboration with customers and suppliers

Organizations can be grouped into small teams within and across regions Ideally, one or two organizations can be aligned to a cluster in a mature industry and learn from the leaders in planned cost declines and efficiencies. These organizations can then be leaders who disseminate the learnings to other members through specific clusters Implementations of best practices in manufacturing technologies (value engineering) and manufacturing (lean manufacturing, costing systems etc.)

Operational performance of the companies will improve which results in better quality and delivery

Promoting visits by leaders of cluster organizations to other industries to understand management and financial practices

Adoption of best practices from other industries helps in improving operational and financial efficiency

Efficiency through multiple forms of relevant consolidation in the backward supply chain of processing companies:

Activity

Likely Stakeholders

Expected Results

Amendment of APMC act and abolition of Mandi tax

State Governments

Corporates can directly purchase from the farmers

Promote Contract farming

State Governments, Large Corporates

Improvement in quality of the produce. Since companies provide all the necessary support, the consistency of the produce is also high. Better price for the farmers Direct linkages with the farmers increase the efficiency of the entire supply chain. Some of the initiatives like ITC’s e-Choupal have benefitted both the farming community (by improving the livelihood) and the company (by the availability of consistent quality of produce at lower prices)

56

Example – Indian poultry sector An overview

Poultry is one of the subsectors where contract farming and vertical integration played a major role in improving the competitiveness •

•

•

•

•

Poultry meat is the fastest growing animal protein in India. The poultry industry is a Rs. 40,000 crore industry, providing direct and indirect employment to over 4 million persons 20 million agricultural farmers are also dependent for their livelihood on poultry industry, especially the maize and soya growers, 75% to 80% of the cost of production in the poultry industry consists of agriculture products, like maize and soya It has grown at a CAGR of 12% in the last 11 years and is expected to continue growing at similar rates in the near future. With an annual production of over 53,000 million eggs, India ranks second in the world in egg production. The broiler production is estimated at 3,1 million tons of chicken meat and India ranks 3rd in the world. Organized poultry production stands at around 70% and the unorganized sector is around 30% − High level of organized players had reduced the prices of poultry in the last few years

•

Regional Demand: − Southern region has the highest per capita consumption of poultry due to the following reasons (per capita poultry consumption in South India is about 4 kgs, about four times the national average): − High incomes and urbanization in the Southern parts of India − Low poultry prices in South India, due largely to the prevalence of poultry integrators in the region − The same are the factors for higher growth in the western markets − The northern region, where the poultry industry is not growing as rapidly as in the South or West, does, however, have areas of high income and urbanization, particularly in Delhi, Haryana, and Punjab, that can support growth in poultry demand. − Eastern region with its low income levels and low urbanization seems to offer only limited potential

Indians still prefer fresh slaughtered poultry compared to chilled / processed poultry. However, the market for the processed poultry products is increasing, especially in the urban regions Market Preference: • The Indian broiler sector operates almost completely as a live-bird market, with poultry retailed as live birds and slaughtered for customers in retail shops. • Consumers have more confidence in the quality of fresh poultry meat that is slaughtered in their presence • Even when refrigeration is available, consumers lack confidence in chilled or frozen meat because of the unreliability of electrical power. The preference for fresh meat also extends to the belief that it is superior in taste and texture. • Processed poultry products, including chilled or frozen poultry, as well as further processed items, currently account for a small share of urban household consumption and a negligible share of rural consumption. FDI in Poultry sector: • Only 2 foreign companies are in the segment producing and distributing feeds for the sector. No company is in the poultry production and distribution

Title of publication Focus area of publication 57

The vertical integration of the companies has resulted in the reduction of prices of the poultry due to the increase in efficiency in the supply chain and the increase in the technology adoption Industry Structure: • Large-scale integrated producers are most prominent in the southern and western regions. •

•

Most integrated firms also have some presence in retail marketing Smaller, independent, and sometimes partially integrated producers account for most poultry production in the northern and eastern regions.

Role of Integrated Poultry Production: • Poultry integrators have been expanding most rapidly in southern India, where, integrators account for more than 75 percent of production and consumption. •

58

In southern India, the process of integration began in the mid-1990s and accelerated rapidly as independent growers found the guaranteed returns of contract farming preferable to the vagaries of market returns

•

As integration expanded, some formerly independent hatcheries and feed millers found it necessary to become integrators themselves or risk going out of business.

Results of the integration: • Lower average costs of production through improved technology and management practices •

Lower retail prices for poultry meat, which has been a key demand stimulus in the southern and western regions

Source: India’s Poultry Sector – Development and Prospects – USDA, Poultry Sector Snapshot, Annual Report of Venky’s Hatcheries

Best practices: Example of US poultry and egg industries

•

•

•

Vertical coordination refers to the synchronization of successive stages of production and marketing, with respect to quantity, quality, and timing of product flows. Methods of vertical coordination include: Open Production (also referred to as open, or spot, markets) – A firm does not commit to selling its output before completing its production Contract Production – production for future delivery. There are 2 types of contracts

•

•

•

Marketing Contracts – Contractor and Producer agree on delivery schedule , pricing method and product characteristics Production Contracts – Contractor engages in many of the producers’ decisions and retains ownership of important production inputs Vertical Integration - A single firm controlling the operations of two or more successive stages of production

Control Offered to Contractor / Integrator Most

Least

Open Production

Marketing Contract

Production Contract

In the broiler industry, production contracts have been the preferred method of vertical coordination since 1950s. The terms of production contracts will specify that the processor will provide the baby chicks, feed, management and veterinarian services. The grower provides the labor and the chicken houses and is paid for raising the chicks

Vertical Integration

The egg industry also functions in the same manner, with grower providing labor and facilities and contractor providing all the production inputs. The grower is paid a fee based on the number of eggs produced along with performance incentives

Poultry and eggs produced under contracts and vertical integration Percent 100

80

60

40

20

0 1955

65

75

77

94

1955

65

Vertical integration

Marketing contracts

75

77

94

Eggs

Broilers Production contracts

Title of publication Focus area of publication 59

Efficiency through multiple forms of relevant consolidation in the backward supply chain of processing companies: ( Fruits, Vegetables)

Activity

Likely Stakeholders

Expected Results

Creation of primary processing centers near the cultivating zones

State Governments, Companies, CFTRI,

Wastage levels would be reduced (Since a lot of wastage happens during transportation, poor storage etc) The produce can be stored for prolonged time period if primary processing is done. In case of low demands, the produce can be converted to semiprocessed stage and can be stored for catering to the future demand These primary processing centers can directly supply to the large companies there by improving the quality levels and consistent quality levels

Promotion of Co-operatives in fruits and Vegetable Processing:

Activity

Likely Stakeholders

Expected Results

Co-operative approach for fruit and vegetable processing

State Governments, NMCC, Companies

Co-operatives ensure that the farmers are paid nominal rates for their produce. Currently farmers are being paid only 35% of the value of the produce that enter the factory gate Hub and Spoke model can be adopted in the collection of fruits and vegetables from a location The co-operatives can also set up the primary processing centers that process the produce so that the produce lasts longer Cold storage facilities can also be started by co-operatives at a later stage so as to reduce wastage The co-operatives can directly link with the corporates in selling the produce / semiprocessed items so that they can bargain higher price. The companies also benefits since they can buy the required product from a single agency rather than from hundreds of farmers. Also the quality of the produce will be consistent

60

The Mandis in every district could be encouraged to form a cooperative. These cooperatives can aggregate the produce and sell directly to the companies. They can establish cold storage facilities and primary processing centers to reduce wastage. This could also result in branding of products. Regional specializations can also be tried out ( E.g. Chilies in Guntur, Mangoes in Salem, Oranges in Nagpur etc can be branded and sold through cooperatives) Benefits obtained from Cooperatives: Netherland’s fruit and vegetable cooperatives

1887 - 1933

Starting of the cooperative movement: First vegetable auction center was established in 1887. Growing dissatisfaction among growers with traditional sales structures that were insufficiently equipped to exploit the opportunities of growing demand in western Europe Quality and quantity demanded were not fully passed on to growers and also, in a timely manner (information asymmetry between growers and wholesalers)

1934 – 1970s

Growth of the cooperative movement: In 1934, ‘Auction Law’ was enacted containing an obligation that farmers need to sell only through cooperatives. In 1945, there were 162 auction cooperatives in Netherlands, However post 1945 the number of cooperatives started declining due to mergers. The main aim of these cooperatives was to improve the market position of growers vis-a-vis Buyers Other functions of cooperatives: Logistics services, quality inspection and classification of the produce, insurance against buyer defaults

1980s – 1990s

Disadvantages of Auction Cooperatives: • Purchasers had become too large to purchase from a single auction center; they needed to send agents to several regional auction centers • Retailers requiring large quantities of produce which drives up the price • Large retailers demand stable prices which the auction cooperatives could not guarantee • Increasingly difficult to negotiate with the producers about special packaging requirements

Title of publication Focus area of publication 61

Conclusions from Netherland’s cooperative movement: Cooperatives can be initiated by governments to benefit from economies of scale and reduce inefficiencies in the supply chain. Adoption for India: The Mandis in every district could be encouraged to form a cooperative. These cooperatives can aggregate the produce and sell directly to the companies. They can establish cold storage facilities and primary processing centers to reduce wastage. This could also result in branding of products. Regional specializations can also be tried out ( E.g. Chilies in Guntur, Mangoes in Salem, Oranges in Nagpur etc can be branded and sold through cooperatives) Merging of all auction cooperatives to form new market oriented cooperative to benefit from economies of scale and inter-auction competition

After 1990s

Merger of Auction Cooperatives into a single entity Auction Cooperatives in different areas New Producer Organizations

All the existing auction cooperatives were merged to form Voedingstuinbouw Nederland (VTN) and combined all assets and activities into one central marketing firm called ‘The Greenery’. The main reason to set up a separate firm to carry out the commercial activities was to give the management more freedom to operate. The goals of new marketing cooperative were to reduce costs, increase scale of operation, enhance market orientation and improve coordination in the production and distribution chain The greenery had a turnover of more than 1.5bn Euro in 2002 and sold more than half of all the vegetables produced in Netherlands

Few large growers and innovative growers (invested in technology) left the traditional auction cooperatives and founded new bargaining associations Between 1993 and 2000 a total of 74 new bargaining organizations and marketing cooperatives were formed Most of these new cooperatives have linkages with foreign growers to meet the seasonal demand of fruits and vegetables. Some of them have production facilities abroad (predominantly in Spain) A few of them have created brands.

62

Critical Success Factors of a Co-operative movement - Lessons from cooperatives in Netherlands and Canada

Critical Success Factors

Description

Structure of the Cooperatives

• For large co-ops, concentration on a core set of activities is critical to success • For smaller co-ops, success is linked to undertaking a set of activities that are closely linked or are narrowly focused • Co-ops tend to be more successful if they provide immediate and significant benefits to their members.

Member commitment

•Ability for farmers to share in profits •Ability to network with other farmers •Work towards common goal - often economic

Member Heterogeneity

• Co-ops are focusing their activities and/or are adopting an umbrella or multiple string structure (Various regional co-operatives under the same management / brand) •Geographical location less important

Member Awareness and Control

Innovation

•Education about the best practices • The sense of common goals among members (which is influenced by member heterogeneity) • Ability to innovate in the globalized economy ( E.g.. Netherland’s individual cooperatives merged to form a larger identity to manage the larger retailers)

Source: Canadian Agricultural Co-ops: Critical Success Factors in the 21st Century

Cooperatives for mango processing – A viable option ? Why Mango? India is the largest producer of mango in the world and produces around 100 lakh tonnes per annum from an area of 16 lakh hectares. There is a huge potential for exports of mango/mango products Major Mango Production States: Andhra Pradesh, Gujarat, Bihar, Karnataka, Maharashtra, Tamil Nadu, West Bengal and Uttar Pradesh are the major producers of mango in India •

•

Andhra Pradesh is the leading producer of mangoes. Krishna is the leading mango producing district in Andhra Pradesh followed by Chittoor, Adilabad, Khamam and Warangal districts and others.

Country-wise share in the World Mango Production

Others 25.0% India 40.0% Indonesia 5.0% Mexico 5.0% Pakistan 6.0% Thailand 6.0%

China 13.0%

Tamil Nadu is another major producer of mangoes with Krishnagiri, Theni, Vellore and Thiruvallur districts producing nearly 60% of the mangoes in Tamil Nadu Title of publication Focus area of publication 63

Establishment of Cooperatives in two districts (One in Andhra Pradesh and one in Tamil Nadu)

•

• •

• •

APEDA has identified Chitoor-AP and Krishnagiri-TN as potential clusters for mangoes Primary Processing – to be done by the cooperatives Contractual agreement with a processing major ensures quality and consistency of product beyond price guarantee Marketing and Brand building should be focused Performance should be monitored

State Cooperatives can be linked form a nationwide mango cooperative movement

Establishing similar cooperatives in other Mango cultivated areas of the state (One in each district)

• •

• • •

Cooperatives in a State can be liked with each other Best performing cooperative can act as a leader in disseminating the best practices to others Common brand name should be adopted Cooperatives can start producing value added products Cooperatives can start exporting the products

Source: Mango Profile – Safal National Exchange of India Ltd, APEDA

64

Stage 3

Stage 2

Stage 1

•

• •

•

State cooperatives can be merged to form a nation-wide mango cooperative movement This brings economies of scale and market power to the cooperatives Cooperatives can tap the value added products market catering to tastes of various regions in the country Export of the value added products can be aggressively pursued by the cooperatives

Example of a successful co-operative movement in India – Operation Flood •

•

•

•

•

• •

Milk and Milk Products sector is the second largest subsector in the food processing industry next to commodities (pulses and cereals). Indian dairy industry is about 16% of the Indian food industry with an output value of Rs 1179 billion (2004-05) India is the largest milk producer in the world (about 100 million MT) and consists of nearly 1/5th of the world bovine population However, only 15% of the processing takes place through organized sector and around 20% through unorganized sector. The remaining milk is consumed without processing.

After 2002, Private sector investment in the dairy sector has increased significantly Source: Website of AMUL, UNFAO Presentation on emerging changes in the Indian Dairy Industry

Cows are the source of regular income for the farmers and milk generates about 1/3rd of the income for the farmer. Livestock is treated as a security against poor monsoon (asset to be sold in times of crisis) Dairying is a part of the farming system and the cows are fed mostly by the residual from crops Indian cattle possess very low productivity, around 1000 kg/year(world average 2038 kg/year) − key factors for low productivity are the presence of large number of unproductive animals, low genetic potential, poor nutrition and lack of services

Emergence of Cooperatives: • Production of milk stagnated during 1960s which led to high demand and increase in price of milk & milk products • The Operation Flood (OF) programme implemented by the National Dairy Development Board (NDDB) from 1970 to 1996 played the key role in bringing about the transformation in dairy development in the country. The operating model of AMUL is as follows: • decentralized milk production by the small milk producers • milk procurement by the village-level dairy cooperative societies • centralized milk processing by the district-level unions • marketing of milk and milk products by the statelevel federation

Title of publication Focus area of publication 65

Key issues in the dairy sector in India

Breeding: • Only small percent of the cattle is covered by Artificial Insemination Program, and the rest is dependent on natural breeding

•

Farmer owns two to four animals on an average which means low milk generation quantities per household

•

Low productivity, large no. of unproductive animals, poor genetic resources, low affordability of feed etc. affects the generation capacity

Feed: • Availability, quality and cost of feed is a major issue.

•

Farmer has low interest in dairying at times when crops are good

•

•

Many areas do not have access to cattle health and breeding services

•

•

Artificial Insemination Program is well covered in the areas with good cattle population

Cattle feeds on land which is largely rain-fed or dry land (70%), low output of dry fodder − Lack of availability of land for fodder grass Subsidized feed is available through co-ops, but quality and affordability are major deterrents

Credit: • Poor access to institutional credit •

Production: • Dairying is treated as a part of the farming system, not as an enterprise

66

Credit through informal channel has very high loan rate, and results in exploitation of farmer

New age cooperatives – Mutually aided co-operative societies (MACS)

New age cooperatives were tried out in the state of Andhra Pradesh during 1998 Emergence of Mutually Aided Co-operative Societies (MACS) • Two tier operation (village level and union level) • No government control in administration • Democracy at the village and union level • Freedom in setting prices • Accountability and ownership at the village/union level • Strong governance and internal audit system The model has been implemented in Andhra Pradesh. • Collecting milk from 650 villages in the district • Milk collection is 60,000 liters per day, likely to go up to 1,00,000 in the coming 2-3 years However, MACS model is most practiced only in AP, the other states have yet to implement this model Source: UNFAO Presentation on emerging changes in the Indian Dairy Industry

Title of publication Focus area of publication 67

Comparison of Private companies, MACS and state cooperatives: Cooperatives at the village level(MACS) are providing substantial benefits to the farmers

Private Companies

MACS Cooperative

State Cooperative

Input Supply

No provision for input supply except for loans given to farmers sometimes

• Breeding and health services tie up with NGO/state dept. • Own manufacturing of quality feed at subsidized rate • Organized thrift and credit cooperative for credit for animal purchase • Medicines available at cost/Farmer meetings for extension

• Limited Breeding and health services • Feed available at subsidized rate through village society • Not much facility for loans • Medicines available at cost, availability is sometimes a problem

Milk Purchase from the farmer

• Done through the agent (governance issue) • Agent decides what price he will give, usually competition with agents of other companies • Testing is done in very few cases, that is also not transparent

• Done through Village MACS society (democratic functioning) • Prices declared by the Union, higher than Co-op pricing • Testing of milk through electronic milk-o-testers

• Done through village society (Society president has a lot of power) • Prices declared by co-op (lowest prices) • No testing, average prices for cow and buffalo milk, strong dominant people in community get better prices

Primary Processing and transportation

• Clean milk practices at village level • Efficient transportation • Good infrastructure for bulk coolers/Chillers

• Clean milk practices at village level • Efficient transportation • Has developed a very good infrastructure for bulk chillers

• Limited attention to clean milk practices • Inefficient transportation • Has not availed of the government funds to develop this infrastructure

Processing / Quality / Variety of products

• ISO certified plant meeting all quality requirements, • Has a variety of quality products catering to children and younger generation (yoghurt, flavored milk) • Selling mostly in metros, market expansion in urban areas

• Good quality products, but no certification as yet • Traditional products • Tapping the rural markets as well, through village societies (small packets, 250 ml)

• Quality of products is an issue, though has improved • Traditional products • Tapping only the urban market

Source: UNFAO Presentation on emerging changes in the Indian Dairy Industry

68

New age cooperatives use information and extensive marketing of their products. They have contractual relationship with the farmers and focus on value added products Traditional Agriculture • Commodities; spot markets • Farms carry out many activities • Independent product chain stages • Price and production risk • Concerns about monopoly pricing • Money and assets prime source of control

New Age Agriculture • Differentiated products; negotiation, contracts • Specialization; separation of production stages • Focus on a system; stages seen as interdependent • Relationship risk; food safety and health • Concerns about access to information • Information as prime source of control

Traditional Co-operatives • Sell generic products • Multi-purpose co-ops serving diverse members • Co-ops concentrated near farm level • Major supporters of price supports • Investment in physical assets; little investment in intellectual capital

New Age Co-operatives • Contractual relationship with members • Greater specialization; focus on niche products • Device for farmers to network with rest of system • Vehicle for farmers to avoid relationship risk • More attention paid to providing farmers with information and using the information farmers possess

Measures to increase the processed foods exports from India:

Activity

Likely Stakeholders

Expected Results

Promotion of the implementation of SPS / HACCP measures to tap foreign markets

State Governments, APEDA, MPEDA, Industry Associations, UNIDO and companies

Companies in a locality / similar products can be clubbed and assistance in the implementation of HACCP standards can be provided Cost of the implementation of the certification can be subsidized by the government Companies which have implemented HACCP requirements can be provided incentives / treated as “trusted suppliers” for export markets

Title of publication Focus area of publication 69

Annexure

Global Manufacturing Benchmarking Survey: •

The Global benchmarking methodology conducted by Deloitte is followed. The GBS questionnaire is administered to the companies in the food processing industry in India and the response is collected and analyzed.

•

The analysis consists of data from four sets of companies along with the Indian Food Processing Industry

Peer Groups

Geography

Revenue

Industry

Sample Size

Global

Global

$200 - 600 Million

Food & Beverages

30

Europe

Europe

$200 - 600 Million

Food & Beverages

22

High Performing

Global

All revenue ranges

Food & Beverages

32

Company from an Emerging Economy

Turkey

Food & Beverages

1

Chart Color

Global peer groups are defined as all respondents within the closest match of industry and revenue range segments as Indian Food Processing industry. European peer groups are the respondents from Europe in food processing industry High Performing peers are selected as the upper quartile of global respondents when ranked by performance in the survey. A company from Turkey has also been considered for the analysis

70

Primary Survey The responses from 12 companies are collected in the primary survey

Sector

No. of Companies

Annual Revenue (Rs. Crores)

No. of Companies

200

2

Region

No. of Companies

Approximate number of employees

No. of Companies

South

3

1000

2

Title of publication Focus area of publication 71

Business performance

72

Indian companies score higher on customer satisfaction and loyalty whereas the scores for profitability and ROA are lower than high performing companies in the food sector Performance against goals

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5 4.5 4 3.5 3 2.5 2 1.5 1

Global average Indian Food Processing Industry European Region High Performing companies

More than 60 % of the companies generate 5% or more profits while the profit margins of Indian companies are less than 5%. This is explained by the various factors ranging from supply chain issues like lack of collaboration, visibility of the supply chain, implementation of tools and methodologies to improve efficiencies and, adoption of technology

60% 50% 40% 30% 20% 10% .% Negative (net loss)

Global average Company from an emerging nation Indian food processing industry

Peer group distribution of profitability percentage: EBIT (earnings before interest and taxes) in last fiscal year.

Title of publication Focus area of publication 73

Supply chain priorities

74

Sourcing, Quality and Customer service are the key priorities of Indian companies whereas logistics and customer service are top priorities for a company in another emerging economy

5 4.5 4 3.5 3 2.5 2 1.5 1

Product innovation

Sourcing

Time to - market

Manufacturing Quality

Global average European Region High Performing companies Company from an emerging nation Indian Food Processing I ndustry

Manufacturing Lead time

Manufacturing productivity / cost

Customer service

Logistics

Supply chain cost

Scale 1 = not important 5 = highly important

Title of publication Focus area of publication 75

Collaboration

76

A few Indian companies collaborate with suppliers on cost reduction and quality improvement. However, on an overall basis, collaboration with suppliers is significantly low

% with medium to h igh collaboration 100.% 90.% 80.% 70.% 60.% 50.% 40.% 30.% 20.% 10.% .%

5 4.5 4 3.5 3 2.5 2 1.5 1

Global average European Region High Performing companies Company from an emerging nation Indian Food Processing I ndustry

Scale 1 = not important 5 = highly important

Title of publication Focus area of publication 77

Due to the low collaboration, adherence to the delivery dates by the suppliers is low. While majority of the global, high performing companies have their suppliers delivering more than 90%, suppliers of Indian companies adhere to the delivery dates to around 70% Number of on-time deliveries/total number of deliveries (in %) Global Supplier Delivery % 100.% 90.% 80.% 70.% 60.% 50.% 40.% 30.% 20.% 10.% .% < 68 %

68 -75.9 %

75.9 -83.9 % 83.9 -91.8% > 91.8 %

Regional Supplier Delivery % 100.% 90.%

Global average European Region High Performing companies Company from an emerging nation Indian Food Processing I ndustry

80.% 70.% 60.% 50.% 40.% 30.% 20.% 10.% .% < 68 %

68 -75.9 %

75.9 -83.9 % 83.9 -91.8% > 91.8 %

High Performing Supplier Delivery % 100.% 90.% 80.% 70.% 60.% 50.% 40.% 30.% 20.% 10.% .% < 68 % 78

68 -75.9 %

75.9 -83.9 % 83.9 -91.8% > 91.8 %

Very low levels of involvement is seen in the area of collaboration with the customers. This results in the poor adherence to the delivery dates by Indian companies. Customer collaboration and benefits achieved

% with medium to high collaboration

100.% 90.% 80.% 70.% 60.% 50.% 40.% 30.% 20.% 10.% .%

Benefits Gained

5 4.5 4 3.5 3 2.5 2 1.5 1

Global average European Region High Performing companies Indian Food Processing Industry

Scale 1 = not important 3 = moderate benefit 5 = highly important

Title of publication Focus area of publication 79

Due to poor collaboration with the customers and the suppliers, the adherence to the delivery dates by Indian companies is lower than the global and high performing companies. While majority of global companies adhere to 98% of the delivery schedules, Indian companies are in the range of 95~96%

Global On Time D elivery 60.% 50.% 40.% 30.% 20.% 10.% .% < 93.5 %

93.5 - 95 % 95 -96.6% 96.6 -98.1% > 98.1 %

Regional On Time D elivery 100.% 90.% 80.% Percentage o f shipments that meet customer request date (for the different peer g roups).

70.% 60.% 50.%

Global average European Region High Performing companies Indian Food Processing I ndustry

40.% 30.% 20.% 10.% .% < 93.5 %

93.5 - 95 % 95 -96.6% 96.6 -98.1% > 98.1 %

High Performing On T ime Delivery 100.% 90.% 80.% 70.% 60.% 50.% 40.% 30.% 20.% 10.% .% < 93.5 % 80

93.5 - 95 % 95 -96.6% 96.6 -98.1% > 98.1 %

Order fill rate is inline with the global and High performing companies. Companies follow their despatch schedule and ship the items which is required for the shipment. Mixing of orders rarely occur. Global Order Fill Rate 100.% 90.% 80.% 70.% 60.% 50.% 40.% 30.% 20.% 10.% .% < 80 %

80 -85 %

85 -90 %

90 -95 %

> 95 %

Regional Order Fill Rate 100.% 90.% 80.% 70.%

Percentage of line items shipped with the original order (for the different peer groups).

60.% 50.%

Global average European Region High Performing companies Indian Food Processing I ndustry

40.% 30.% 20.%

Company from an emerging nation

10.% .% < 80 %

80 -85 %

85 -90 %

90 -95 %

> 95 %

85 -90 %

90 -95 %

> 95 %

High Performing Order Fill Rate 100.% 90.% 80.% 70.% 60.% 50.% 40.% 30.% 20.% 10.% .% < 80 %

80 -85 %

Title of publication Focus area of publication 81

Visibility

82

Internal visibility of Indian companies is on the higher level compared to the visibility of suppliers and customers. This is primarily due to the lack of collaboration with the suppliers and customers.

5 4.5 4 3.5 3 2.5 2 1.5 1

Supplier Visibility Internal Visibility Customer Visibility Product Customer Customer Customer Delivery Supplier Inventory Capacity retention forecast capacity FG dates Production Product Supplier Customer Customer cost schedule inventory service inventory

Global average

Scale

European Region

1 = no information available 3 = some information available 5 = information is readily available

High Performing companies Company from an emerging nation Indian Food Processing Industry

Title of publication Focus area of publication 83

Flexibility

84

Indian companies are quite low in flexibility where rapidly changing product mix, volume and make or buy decisions are key components. This could be due to the low levels of collaboration with the suppliers and customers and the poor visibility along the supply chain. Current Capability 5 4.5 4 3.5 3

Scale

2.5 2

3 = equivalent capability 5 = strong advantage

1.5 1 Product mix

Production volume

Custom orders

Change in Delayed Make/buy Shift manufac. prod. spec differentiation decisions load

Importance in Next 3 Years 5 4.5 4 3.5 3 2.5

Scale

2

1 = not important 5 = very important

1.5 1 Product mix

Production volume

Custom orders

Change in Delayed Make/buy Shift manufac. prod. spec differentiation decisions load

Global average European Region High Performing companies Company from an emerging nation Indian Food Processing Industry

Title of publication Focus area of publication 85

Product innovation

86

Indian organizations have product innovation as a major priority. However, they do not plan to improve the time to market capabilities in the same breadth. Current Capabilities 5 4.5 4 3.5 3 2.5 2 1.5 1

Product innovation

Time-to -market

Innovation P riorities 5 4.5 4 3.5 3 2.5 2 1.5 1

Product innovation

Time -to -market

Global average

Scale

European Region

1 = not important 5 = very important

High Performing companies Company from an emerging nation Indian Food Processing Industry

Title of publication Focus area of publication 87

Currently 20~30% of the revenues are from new products for Indian companies. Only the large companies have their development teams whereas small and medium scale businesses do not have a separate R&D team. The R&D spend by Indian companies are quite low. But companies have indicated a higher priority for R&D in the next 3 years

Regional

European Region High Performing companies Current Revenue

3 Year Goal

Current Revenue

3 Year Goal

Regional

Current Revenue

3 Year Goal

High Performing

R&D Investments (% o f revenue)

16.% 14.% 12.% 10.% 8.% 6.% 4.% 2.% Current Revenue

3 Year Goal

Current Revenue

Global

Company from an emerging nation Indian Food Processing Industry

88

Global Global average

Global

.%

Average Product Development Cycle Time 40 35 30 Months 25 20 15 10 5 0

Revenue From N ew P roducts 90.% 80.% 70.% 60.% 50.% 40.% 30.% 20.% 10.% .%

The time taken to launch a new product by Indian organizations is about 25 months as against the median value of 8 months. Realising the goal of revenue from new products would be difficult if the average product development cycle time is not brought down significantly.

3 Year Goal

Regional

Current Revenue

3 Year Goal

High Performing

Company from an emerging nation Indian Food Processing Industry

High Performing

A very few percentage of companies use cross functional teams and involve customers and suppliers in developing a new product. However, organizations who have collaborated have achieved benefits. % with Some to Extensive Implementation

100.% 90.% 80.% 70.% 60.% 50.% 40.% 30.% 20.% 10.% .%

5 4.5 4 3.5 3 2.5 2 1.5 Common parts

Outsource Supplier PDM engineering software product design Program Supplier PLC software management Customer structure collaboration product design

Cross functional design teams

Program methodology

Global average

1

Common parts

Outsource Supplier PDM engineering software product design Program Supplier PLC software management Customer structure collaboration product design

Cross functional design teams

Program methodology

Scale

European Region High Performing companies Company from an emerging nation Indian Food Processing Industry

This Indian companies follow the trend that most of the companies have reduced their new product launch time by 10% over the last 3 years. They are planning to reduce the time-to-market by 10-20% in the next 3 years Reduction Achieved in Last 3 Years

Reduction Targeted in Next 3 Years

100.%

60.%

90.%

50.%

80.% 70.%

40.%

60.% 30.%

50.% 40.%

20.%

30.% 20.%

10.%

10.% .%

.% < 10%

10 - 20%

20 - 30%

30 - 40%

40 - 50%

>50%

< 10%

10 - 20%

20 - 30%

30 - 40%

40 - 50%

>50%

Global average European Region High Performing companies Company from an emerging nation Indian Food Processing Industry

Title of publication Focus area of publication 89

Operational excellence

90

High performing global companies have a lower frozen time fence which makes the production process flexible to deal with variability in customer requirements effectively. Indian companies, on average have about a week as the frozen time Global Peers 60.% 50.% 40.% 30.% 20.% 10.% .%

< 2.8

2.8 -5.6

5.6 -8.4

8.4 -11.2

> 11.2

No. of days Regional Peers 60.% 50.% 40.% Global average

30.%

European Region 20.%

High Performing companies Company from an emerging nation

10.% .%

Indian Food Processing Industry < 2.8

2.8 -5.6

5.6 -8.4

8.4 -11.2

> 11.2

8.4 -11.2

> 11.2

No. of days High Performing Peers 100.% 90.% 80.% 70.% 60.% 50.% 40.% 30.% 20.% 10.% .%

< 2.8

2.8 -5.6

5.6 -8.4

No. of days

Title of publication Focus area of publication 91

Scores for Indian companies in the functional areas are lower compared to global companies and high performing companies. Organizations have indicated the maximum benefits from manufacturing related initiatives % with a Some to Major Implementation

100.% 90.% 80.% 70.% 60.% 50.% 40.% 30.% 20.% 10.% .%

5 4.5 4 3.5 3 2.5 2 1.5 1

Global average European Region High Performing companies Company from an emerging nation

92

Scale

In spite of very low levels of supplier on-time delivery, very few organizations have scorecards for supplier management. Even from an internal perspective, very few organizations have implemented methodologies like lean manufacturing which improve efficiency of operations. % with Some to M ajor I mplementation

100.% 90.% 80.% 70.% 60.% 50.% 40.% 30.% 20.% 10.% .%

5 4.5 4 3.5 3 2.5 2 1.5 1

Global average

Scale

European Region High Performing companies Company from an emerging nation Indian Food Processing Industry

Title of publication Focus area of publication 93

Very few companies in India have implemented methodologies and concepts that improve efficiency such as TPM and warehouse optimization. % with Some to Major Implementation

100.% 90.% 80.% 70.% 60.% 50.% 40.% 30.% 20.% 10.% .% Focused factory

Total prod maintenance

Theory of constraints

Distribution Warehouse planning optimization

Theory of constraints

Distribution planning

Product data mgmt

5 4.5 4 3.5 3 2.5 2 1.5 1 Focused factory

Total prod maintenance

Global average European Region High Performing companies Company from an emerging nation Indian Food Processing Industry

94

Scale

Warehouse optimization

Product data mgmt

Technology penetration in Indian food processing industry is low. Same is the case of best manufacturing practices. While a majority of global and high performing companies have implemented ERP / QMS and CRM only a few companies in India have implemented these best practices / technologies. % with some to extensive implementation

100.% 90.% 80.% 70.% 60.% 50.% 40.% 30.% 20.% 10.% .%

5 4.5 4 3.5 3 2.5 2 1.5 1

Global average

Scale

European Region High Performing companies Company from an emerging nation Indian Food Processing Industry

Title of publication Focus area of publication 95

Outsourcing the production and logistics are the major practices followed by Indian companies whereas global companies are reducing the work force and rationalizing their product portfolio % with Some to Major Implementation 100.% 90.% 80.% 70.% 60.% 50.% 40.% 30.% 20.% 10.% .%

5 4.5 4 3.5 3 2.5 2 1.5 1

Global average European Region High Performing companies Company from an emerging nation Indian Food Processing Industry

96

Scale

Manufacturing non-conformance rate of Indian companies is quite higher compared to global and high performing companies indicating the low levels of adoption of modern manufacturing techniques Global Non -conformance 100.% 90.% 80.% 70.% 60.% 50.% 40.% 30.% 20.% 10.% .% < 2 %

2 -4 %

4 -6 %

6 -8 %

> 8 %

Regional Non-conformance 100.% 90.%

(Scrap + rework + reject) / production volume.

80.% 70.%

Global average

60.%

European Region

50.%

High Performing companies

40.%

Company from an emerging nation

30.%

Indian Food Processing Industry

20.% 10.% .% < 2 %

2 -4 %

4 -6 %

6 -8 %

> 8 %

6 -8 %

> 8 %

High Performing Non-conformance 100.% 90.% 80.% 70.% 60.% 50.% 40.% 30.% 20.% 10.% .% < 2 %

2 -4 %

4 -6 %

Title of publication Focus area of publication 97

Very few companies in India have adopted tools for defects and quality management like SPC, TQM and Six Sigma. % with Some to Major Implementation 100.% 90.% 80.% 70.% 60.% 50.% 40.% 30.% 20.% 10.% .% Design for quality

Quality

SPC

TQM

SPC

TQM

Six Sigma

5 4.5 4 3.5 3 2.5 2 1.5 1 Design for quality

Quality

Global average European Region High Performing companies Company from an emerging nation Indian Food Processing Industry

98

Scale

Six Sigma

Inventory turnover of the Indian companies is less than 6.7. For most of the companies it is nearly 4. This indicates that companies are stocking nearly 3 months of requirement. This could primarily be due to the low levels of collaboration across the supply chain which reduces visibility and flexibility of the companies. Global Turns 60.% 50.% 40.% 30.% 20.% 10.% .% < 6.7

6.7 -12.5 12.5 -18.4 18.4 -24.2

> 24.2

Regional Turns 60.% 50.%

(Annual cost of goods sold) / (average total on hand inventory)

40.%

Global average

30.%

European Region High Performing companies

20.%

Company from an emerging nation

10.%

Indian Food Processing Industry

.% < 6.7

6.7 -12.5 12.5 -18.4 18.4 -24.2

> 24.2

High Performing Turns 100.% 90.% 80.% 70.% 60.% 50.% 40.% 30.% 20.% 10.% .% < 6.7

6.7 -12.5 12.5 -18.4 18.4 -24.2

> 24.2

Title of publication Focus area of publication 99

Trends for the future:

According to a Deloitte research on good and beverage industry, some of the future trends that could shape the sector are as follows:

Some of the trends that would shape the food processing industry in the near future

Explanations

Quick fix foods

Demand for easy to prepare, open and pre-cooked foods

Natural goodness

Higher consumption in fresh fruits, vegetables and salads

Premium food products

Higher growth in premium beverages like wine, tea, etc.

Farm friendly

Increasing demand for organic foods

Flavorizing

Demand for international flavors set to rise

Grab and go value foods Low fats, transfats, carbs Functional food

100

Growth in foods which provide value by clubbing health with convenience Demand for low fats, calories, Transfats and allergen free foods Demand for ‘healing’ food products like nutraceutical food products

List of abbreviations

APEDA APMC APS bn C.F C.P CAGR CIF Cr. CRM EDI ERP FAO FDI GDP ha HACCP M.P MAT mn MPEDA PDM PLM QMS R&D ROA Rs. SME SPC SPS TMS TQM UHT UNICEF US/USA USD WMS

Agricultural and Processed food products Export Development Authority Agricultural Produce Marketing Committee Advanced Planning and Scheduling Billion Contract Farming Charoen Pokphand Compounded Annual Growth Rate Cost Insurance Freight Crore Customer Relationship Management Electronic Data Interchange Enterprise Resource Planning Food and Agriculture Organization Foreign Direct Investment Gross Domestic Product Hectare Hazard Analysis and Critical Control Points Madhya Pradesh Minimum Alternate Tax Million Marine Products Export Development Authority Product Data Management Product Lifecycle Management Quality Management Systems Research & Development Return on Assets Indian Rupees Small and Medium Enterprises Statistical Process Control Sanitary and Phyto-sanitary measures Transport Management Systems Total Quality Management Ultra High Treated United Nations Children's Fund United States of America United States Dollar Warehouse Management Systems

Title of publication Focus area of publication 101

Contacts

102

Title of publication Focus area of publication 103

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