UNCTAD Expert Meeting. "Enabling small commodity producers in developing countries to reach global markets"

Transcription

1 UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT UNCTAD Expert Meeting "Enabling small commodity producers in developing countries to reach global markets" Organized by UNCTAD Commodities Branch Web: December 2006 ITC echoupal by Mr. Rohit Bhatla Branch Manager - Rajasthan, e-choupal International Business Division, ITC Limited The views expressed are those of the author and do not necessarily reflect the views of the UNCTAD Secretariat, nor do they imply the expression of any opinion whatsoever on the part of the secretariat of UNCTAD concerning the legal status of any country, territory, city or area, or of this authorities or concerning the definition of its frontiers or boundaries.

2 ITC echoupal UNCTAD Conference, Geneva, 12 Dec 2006

3 Ramdeo speaks for 57% of India s workforce The Farmer! He underscores the imperative of Inclusive Growth in an otherwise Shining India!!!

4 Why are farmers like Ramdeo resigned to fate? Because most of them are small (1.5 ha average holding). they do not have bargaining power Because all of them live in hinterlands (600,000 villages). they do not have access to real time information (prices, weather) Because the circumstance of each one is very different (agro-ecological conditions, resources). they cannot get customized knowledge advise (on farm practices, risk management)

5 Every Area of Strength of Indian Agriculture is Neutralised by a Constraint Large Arable Land X Fragmented farm sizes Rich & Diverse Agro- Climatic zones Strong institutional base in R&D Large domestic consumption base Attractive export Markets X Heavy Dependence on Monsoon X Poor Extension work at the farm level X Numerous Intermediaries X Weak infrastructure &inconsistent Quality

6 Demands of the globalising trade 1. Transition from Supply driven to Demand driven value chains Quality as per customer needs (& changing diets) Traceability to farms & farm practices 2. Competitiveness in Price /Value equation Increased farm yields Lower transaction costs along the chain Further accentuating the need for Customised knowledge Real-time & relevant information Access to quality inputs at competitive prices Effective vertical coordination of the value chain Efficient Price discovery & risk management

7 The Insight - 1 Actually, these numerous intermediaries makeup for weak infrastructure, and deliver critical value in each leg at very low cost But their aggregate cost makes the chain uncompetitive And many times, by blocking flow of information & market signals, they are able to extract more profits for themselves than the value they are delivering A more effective business model must be able to leverage the physical transmission capabilities of these intermediaries, yet disintermediate them from the flow of information and market signals Answer : Leverage the power of Information Technology

8 The Insight - 2 Low Risk Taking Ability Low Margin Low Investment Low Value Addition Low Productivity Weak market Orientation Answer : Leverage the power of collaborative business models

9 The Insight - 3 Information Technology and Collaborative Business Models gave us the power to design a new model But physically reaching the nook & corner of India, and facilitating Net access to the largely illiterate farmers at low cost, and delivering effective service is still a challenge The only historical success stories we could rely on were crossindustry! Wide & Deep penetration of the FMCG retail channel Rapid scale-up of Public Telephone Booths Low cost reach & effective customer servicing by Cable TV Operators Answer: Unleash the power of small scale entrepreneur

10 Our Alternative Solution Theme Provide an end-to-end solution with farmer having the freedom of choice,.. who should be able to take an informed decision which delivers an effective service notwithstanding the fragmentation, dispersion, heterogeneity and weak infrastructure! at low cost!!! This will create substantial incremental value through a virtuous cycle

11 ITC echoupal

12 The echoupal Delivery System ICT Kiosk with Internet Access In the house of one trained farmer, Sanchalak Within walking distance of target farmers Warehousing Hub / Store Managed by the erstwhile middleman, Sanyojak Within tractorable distance of target farmers Collaborative Network of Companies Orchestrated by ITC With a Pan-Indian presence

13 The echoupal Services Relevant & Real-time Information Commodity prices, Local Weather, News Customised Knowledge Farm Management, Risk Management Supply Chain for Farm Inputs Screened for Quality, Demand Aggregation for Competitive Prices & Efficient Logistics Direct Marketing Channel for Farm Produce Lower Transaction Costs, Better Value through Traceability

14 The Imperative Freedom of choice to the farmer, by design, means that we cannot expect a preferential treatment from him just because we are providing information to him! We need to compete for business on merits!! Requiring new value capture mechanisms!!! Another Insight : Unevolved markets in emerging economies provide interesting opportunities Elimination of non-value adding activities Creation of new value through identity preservation Scope for two-way flow of goods & services

15 Bottomline for the Farmer Higher Incomes through Increased Yields Improved Quality Reduced Transaction Costs. Power of Scale to the Small Farmer. Customised Knowledge despite Heterogeneity. Real-time Information despite Distances

16 The Other Innovation: Who Pays? Not the farmer! Information & Knowledge are free of cost Transactions only if the farmer chooses at free will Not subsidised! ITC shareholder looks for a competitive return, like all shareholders do No Government money involved Instead, latent value in the typically unevolved markets of an emerging economy is captured

17 705 Transaction Costs in APMC Chain Soybeans Example Rs per MT Farmer Incurs Trolley Freight to Mandi = 120 Labour = 50 Kacchha Adat = 150 Handling Loss = Processor Incurs Commission to Agent = 100 Cost of Gunny Bags (net) = 75 Freight to Factory = 120 Handling at Mandi =

18 Transaction Costs in Choupal Chain Soybeans Example Rs per MT Farmer Incurs Trolley Freight to ITC Hub = 120 Labour = 50 Kacchha Adat = 150 Handling Loss = Processor Incurs 50 Commission to Sanchalak = 100 Cost of Gunny Bags (net) = 75 Freight to Factory = 120 Storage & Handling at Hub = 40 Cash Disbursement Costs =

19 Bottomline for ITC Better supply chain for ITC s Food & Agri Businesses Costs, Quality, Traceability Access to the Underserved Rural Markets Through a Virtuous Cycle created by Larger Incomes, and founded on Trust that is built New ITES Business Opportunities Health, Education, Entertainment, egovernance Shareholder Value through Serving Society Also, the infrastructure serves as a reliable delivery mechanism for resource development initiatives (e.g. water management)

20 The Roadblocks in Execution Convincing farmers (Weighment, Mandi Prices) Aligning Middlemen (Cost, Effort, Risk Vs Margin Equation) Sanchalak Capability Building (IT, Communication, Entrepreneurial) Changing Government Regulations (APMC) Dealing with Poor Infrastructure (Power, Connectivity) Empowering the Frontline (Loner on the field, Subjective Decisions) Dealing with Competition (Computers Vs Motorcycles)

21 The New Commodities Business

22 From trading commodities to sourcing raw material for select customers Customer-specific structured offers based on arbitrage opportunities in any or all of aggregated or disaggregated lot size delivery point storage time pricing mechanism quality segregation credit etc. Soybeans, Wheat, Coffee

23 From selling what is produced to help producing what is wanted through demand driven value chains traceable to farms and farm practices in the high value segment in the agri produce portfolio Aquaculture Horticulture Organic products Dairy with appropriate intermediate processing activity at the hub

24 Leveraging Capacity of existing echoupal areas to expand presence in additional commodities produced in those agro-climatic zones, e.g. Maize Millets Sorghum Pulses Mustard etc. No additional infrastructure is required for these, and our interface with the farmers will also be year round

25 Beyond Commodities

26 the journey takes another turn

27 From Trading Commodities to Laying Highways The Story in Short Part 1 Our ringside view of rural India, while we were trading commodities, gave us some key insights The resultant business model, ITC echoupal, is transforming our traditional commodity trading business into a commodity services business delivering more stable profits through higher margin & lower risk business portfolio on an increasing volume base

28 From Trading Commodities to Laying Highways The Story in Short Part 2 The 3 layers x 3 elements echoupal infrastructure, managed through 3 business principles, has built a Universal Business Platform that can efficiently carry any product / service into & out of rural India that offers an increasing returns network orchestration opportunity to ITC

29 The 3 Business Principles Information & Knowledge Free of Cost Freedom of Choice in Transactions Only source of income for the Sanchalak is a fee on transactions

30 The Size Launched in June 2000, 'e-choupal', has already become the largest initiative among all Internet-based interventions in rural India. 'e-choupal' services today reach out to more than 3.5 million farmers growing a range of crops - soyabean, coffee, wheat, rice, pulses, shrimp - in over 36,000 villages through nearly 6400 kiosks(e-choupals) across nine states

31 The Resultant Network Organisation 1. Empowerment of the Community through realtime information & customised knowledge 2. Community responsive grassroots organization through freedom of choice and local management with self interest 3. Efficiency through competition 4. Power of Scale through Virtual Aggregation 5. Benefits of Specialisation through Collaboration 6. Increasing Returns Ecosystem because of anchor business support by ITC, the Network Orchestrator

32 Vision ,000 Villages

33 echoupal Shareholder Value through Serving Society Thank You