WORLD BANK DISCUSSION PAPER NO. 368

Work in progress WC P 3 6 3 for public discussion A qqi Public Disclosure Authorized Sri Lanka's Tea Industry is awf(tioli I l t/lb (Woba)zz l( ltt-e(t Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Ridwa;l, I/i I. (/,how/irv I1) //,/(., (I. I.i,t, Recent World Bank Discussion Papers

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Sri Lanka's Tea Industry Succeedingin theGlobalMarket

RidwanA/i YusufA. Choudhry DouglasWLister

The World Bank Washington,D.C. Copyright © 1997 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W Washington, D.C. 20433,U.S.A. All rights reserved Manufactured in the United States of America First printing August 1997

Discussion Papers present results of country analysis or research that are circulated to encourage discussion and comment within the development community. To present these results with the least possible delay, the typescript of this paper has not been prepared in accordance with the procedures appropriate to formal printed texts, and the World Bank accepts no responsibility for errors. Some sources cited in this paper may be informal documents that are not readily available. The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s) and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. The World Bank does not guarantee the accuracy of the data included in this publication and accepts no responsibility whatsoever for any consequence of their use. The boundaries, colors, denominations, and other information shown on any map in this volume do not imply on the part of the World Bank Group any judgment on the legal status of any territory or the endorsement or acceptance of such boundaries. The material in this publication is copyrighted. Requests for permission to reproduce portions of it should be sent to the Office of the Publisher at the address shown in the copyright notice above. The World Bank encourages dissemination of its work and will normally give permission promptly and, when the reproduction is for noncommercial purposes, without asking a fee. Permission to copy portions for classroom use is granted through the Copyright Clearance Center, Inc., Suite 910,222 Rosewood Drive, Danvers, Massachusetts 01923,U.S.A.

ISSN: 0259-210X

Ridwan Alh is division chief of the Agriculture and Natural Resources Operations Division of the World Bank's South Asia Country Department I. Yusuf A. Choudhry is a professor at the School of Management of the University of Baltimore. Douglas W. Lister is senior agricultural economist in the Agriculture and Natural Resources Operations Division of the World Bank's South Asia Country Department I.

Library of Congress Cataloging-in-Publication Data

Ali, Ridwan, 1940- Sri Lanka's tea industry: succeeding in the global market / Ridwan Ali, Yusuf A. Choudhry, Douglas W. Lister. p. cm. - (World Bank discussion papers; no. 368) Includes bibliographical references. ISBN0-8213-4001-8 1. Tea trade-Sri Lanka. I. Choudhry, Yusuf, 1943- II. Lister, Douglas W., 1946- . III. Title. IV. Series: World Bank discussion papers ; no. 368. HD9198.S722A44 1997 380.1'41372'095493-dc2l 97-27490 CIP Contents

Foreword iv CHAPTER3 Acknowledgment v TEA: PRODUCT-MARKETSYSTEM Abstract vi AND COMPETITIVEDYNAMICS

PART ONE IntrinsicBarriers within a Commodity System 69 THE GLOBAL MARKETFOR TEA Forces InfluencingCompetition in the CHAPTER1 Industry 71 TBE WORLDTEA E-CONOMY Factorsthat Enhancethe National CompetitiveAdvantage 77 Production 3 Determinantsof National Competitive Consumption 3 Advantagein Tea 81 The WorldTea Trade I1 Analysisof NationalCompetitive Distribution 13 Advantagein Tea 85 Promobtion 1 Promotion CHAPTER4 18 THE SRILANKAN TEA INDUSTRY: The Standardsfor Tea STRATEGIESFOR CREATINGGLOBAL 19 COMPETITIVEADVANTAGE The Demand-SupplyBalance SWOT Analysisof the Tea Industry 107 19 Definingthe Missionand Objectives Long-TermMarket Projection of the Industry 110 21 The RelevantMarket for Tea 111 IndustryProductivity and The StrategicOptions 120 Profitability Broad Market Strategies 121 Forces DrivingIndustry 26 Narrow Market Strategies 122 CompestDritiongIndusttThe Optionsfor SriLanka 125 Competition SustainingCompetitive Advantage via 26 StrategicIntent 128

CHAPTER2 The Final Analysis 130 MAJORCOMPETITORS IN THE GLOBALTEA MARKET India 29 References 132 Kenya 37 Sri Lanka 44

PART TWO THE PRODUCTIONAND MARKETING OF TEA: STRATEGICISSUES

i.i Foreword

It is now widelybelieved that the tea industryin Sri Lanka, after the deregulationand privatizationof public estate plantations,is now in a positionto reassert its position in the globaltea market.It may, however,take considerableefforts on the part of the new companies,who havejust taken over the managementof the plantations,to restore Sri Lankato its formerposition in worldtea export becauseof the emergenceof some very hefty competitorssuch as Kenya,China and Indonesia.It is necessaryfor these companies to take a strategiclong-term look at the marketfor tea in terms of future patterns of consumptionand importdemands and to find the specialniche where they could be their best.

Thisstudy is a follow up of the report "Sri Lanka Tree Crops Strategy"(Agriculture OperationsDivision, Country Department III, South AsiaRegion, July 5, 1994).It identifiessome of the majorstrengths and weaknessesof Sri Lanka's tea with respect to other major exportersin the world and examinesthe strategicoptions for the Government of SriLanka and privatetea companiesfor enhancingthe country's competitiveposition in the globalmarket. It is hoped that this study willassist policyplanners to createthe necessaryenvironment for the successof the industryand the industryto capitalizeon the opportunitiesthat are still available.

FakhruddinAhmed ActingDirector CountryDepartment 1 South Asia Region

iv Acknowledgements

The authorsare indebtedto the Governmentof Sri Lanka and the Governmentof Kenya for allowingthis researchto be undertakenand for providingcontacts with different agenciesresponsible for the developmentof tea in these countries.They also wish to thank the managementof the plantationmanagement companies in Sri Lanka for assistingwith the field surveys. Specialthanks are also due to GeorgeWilliamson and Company,U.K., Unilever,U.K., Eastern ProduceLtd. Kenya,Brooke Bond Ltd, Kenya, the U.K. Tea Council,and HendersonAssociates of U.K. for their cooperationand help in compilingdata for the study.The authorsalso acknowledgethe valuableassistance providedby the CommodityPolicy and AnalysisUnit of the WorldBank, particularlyin relation to informationon the tea industryin India. The views and conclusionsin the paper shouldbe ascribedto the authors and not to those who providedassistance. The findings, interpretation,and conclusionsare entirelythose of the authors.They do not necessarilyrepresent the views of the WorldBank, its ExecutiveDirectors, or the countriesthey represent.

v Abstract

The global tea industryreached maturity over a decadeago and is now in a criticalperiod where fundamentalchanges are taking place in the competitiveenvironment. The slowing of growth is creating more global competitionfor market share. The transitionto maturity shouldprovoke firms and industriesin differentcountries to concentrateon their core marketsand defend their positionvigorously. This does not seem to have happenedwith the Sri Lankan tea producerswho have and are concedingtheir global market shareto relative new comers. The Sri Lankantea industryhas recentlybeen released from state control and is now in a positionto make importantstrategic moves to restore its competitiveability in the global marketThis may require heavyinvestment in modem facilities and equipment More importantly,the industryneeds to understandthe future trend of consumerdemand in key marketsand providethe products and services desired. The industryhas to move away from mass marketingstrategies to more focused strategiesof differentiationand positioning.Winning the game would require new thinking,new orientationand intelligentmoves becausethe competitorsare equally powerful.Sustaining competitive advantage does not only depend upon exploitingthe national environmentof cheapland and labor, but individualfirms in the industrymust draw on their own home based resourcesto extend and upgrade their competitive advantagecontinuously.

The role of the governmentis to developcritical resources (like manpower, capital, and skill) for high levels of productivityand to assistinnovation and improvementwithin the industry,thereby creating an environmentin which firms can upgrade their competitiveadvantage. A few of the essentialsteps that the governmentof Sri Lanka must take are deregulationof the labor market,removal of unnecessary controls on the industry,and developingthe financialmarket. The governmentshould also assistthe industrywith overseaspromotion and collectionof marketingintelligence.

While the governmenthas the above importantrole in creatingthe factors that would enhancethe industry'scompetitive advantage, the firms in the tea industryhave to assist governmentin shapingpolicy and must put their support behind constructive governmentprograms. They should stay clear of quick fixes that in the long run would underminetheir competitiveability, as for examplesubsidies. They must also look for strategicalliances with firms in other countriesto fill any resourcegap that may be hinderingdevelopment.

vi THE GLOBAL MARKET FOR TEA

*b~~~~~~ ---- . ... CHAPTER 1

THE WORLD TEA ECONOMY Tea is a naturalbeverage that competesin the world marketwith other natural beverageslike coffee,cocoa, and alcoholicdrinks and formulatedproducts like soft drinks.It has two basic forms:black tea and green tea. Its relevantmarket is thus definedby its product market structurewhich representsthe degree of substitutabilitythat exists amongits majorcompetitive alternatives. The prominentalternatives, however, are peculiarto individualcountries. For example,in West Germanyand Kenyait is generally beer, in the UnitedKingdom and the United States,coffee and soft drinks.As such, its product-marketcan not be definedfor the world as a whole and one must considereach region or countryfor its proper definition.

PRODUCTION

The maintea producingcountries of the world are in Asia and Africa,of whichthe six largest are India, China,Sri Lanka,Kenya, Indonesia and Turkey. Other smaller producersare Taiwan,Japan, Malaysia,Vietnam, Laos, Kampuchea,Burma, Thailand, Singapore,Papua New Guinea,Tanzania, Malawi, Mozambique, Uganda, Rwanda, Burundi, Zaire, Zimbabwe,Nigeria, Cameroon, Zambia, Sudan, South Africa,Mauritius, Madagascar,Seychelles, Argentina, and Peru. Althoughall of them have advancedtheir productionlevels over the years, the overallgrowth has been slow in the last decade, interspersedwith a few years of actualdecline. In 1992,production declined by about 5

Table 1-1 Tea Productionof Major ProducingCountries (in millionkgs.) Argentina Bangladesh China India Indonesia Japan Kenya Malawi Sri Lanka Taiwan Tanzania Tufkey USSR( Wad cs 1986 41 38 460 621 130 94 143 39 213 24 15 148 147 2276 1987 35 41 508 665 126 96 156 32 215 26 15 141 120 2340 1988 35 44 545 700 134 90 164 40 228 24 15 166 117 2476 1989 40 39 535 688 141 91 181 40 208 22 17 142 127 2439 1990 43 46 540 720 145 90 197 39 234 22 18 127 131 2523 1991 44 45 542 754 133 88 204 41 242 21 19 135 116 2659 1992 44 49 560 732 147 92 188 28 179 21 18 156 56 2434 1993 46 51 600 760 142 92 211 40 233 21 23 128 30 2561 1994 42 52 588 744 130 86 209 35 244 21 24 134 16 263 1995 30 47 588 754 133 85 245 35 246 22 24 105 1S 2497 Growth 6% 22% 17% 14% 4% -6% 44% -1% 10% -14% 58% -19% -64% 1% Source:ITC Bulletin 1996

3 percentover the previousyear due to severe droughtsin SoutheastIndia, Sri Lanka, and East Africa.Production rebounded in 1993 by about 4.7 percent. The overallgrowth between 1986-1995was 1 percent (Table 1-1).'

The world tea marketis dominatedby fivecountries, Sri Lanka,Kenya, China, India, and Indonesiawhich together export about 80 percent of world tea.2 Productionof blacktea alone has grownby 0.5 percent annually,between 1986 and 1995,to reach a level of 1931 millionkgs. at the end of 1995.3 In 1995, India led the world in tea production(30%) followedby China(24%). Sri Lanka and Kenyaeach producedabout 10 percent of the world total (Figure1-1).

Figure 1-1 1995 Share of World Tea Production

Tanzania_ Malawi Argentina Bangladesh Iran

Turkey Indonesia Kenya

Sri Lanka ~ SS China IndiaS

0%/ 5% 10% 15% 20% 25% 30% 35% 1995 MarketShare

Note:The statistics are roundedto thenearest whole number which is thereason behind someunevenness of the bars. Source:ITC Bulletin 1996.

I The growthwas estimatedfrom a smoothedseries using a two year movingaverage. 2 1994figure, ITC AnnualBulletin of Statistics,1995. 3 ITC AnnualBulletin of Statistics,1996.

4 Figure 1-2 ProductionShare of Five Top Producers of Tea: 1990-1995

I a 19.199595 L! ...... 1

There has been relativelylittle 1994 7% changein the productionshare 1993 33 % of the majortea producingcountries 1992 ... 322 in the past five years.For example, 1991 3 33.1O India's productionhas declined2 percentage 1990 3 .69 point, from 31 percentof world productionin 1990 to 33 percentin 1995. 30.0% 31.0% 32.0% 33.0% 34.0%

|China | 1995 23 5%

1994 - - 23 5%

China's productionshare has gone up} 1993 3 percentagepoint, from 21 percent 1992 =2 23.0% in l990 to 24 percent inl995. 1991 21.2 1990 =M 21. %

19.0% 20.0% 21.0% 22.0% 23.0% 24.0%

Sri Lanka] 1995 99 _. _ ~~1994 _ 1_.7% 1993 _ 91% Sri Lanka's productionshare increased 19 7_4% 1 percentagepoint, from9 percent in l990 to lO percent in l995. _ 1991 ,1 .5% 1990 .3%

0.0% 5.0% 10.0% 15.0%

[Kenya| 1995 _ _ 9.8% 1994 8.3%

Kenya's productionshare has 1993 8.3S increasedby 2 percentagepoints in the 1992 77 past five years, from about 8 percentin 1991 8.0 1990 to 1Opercent in 1995. 1990 7.8

0.0% 5.0% 10.0% 15.0% Indonesia -

1994 .. 5. Indonesia,the fourth largest 9.4% producerof tea in the world 1993 35.6%

decreased its production share 1992 .6.% by approximately1 percentagepoint, 1991 5.2

going down from 6 percent in 1990 1990 5.7 6__=_ to 5 percentin 1995. 4.5% 5.0% 5.5% 6.0% 6.5%

Asia, representedby three giants,India, China,and Sri Lanka has dominated the productionof tea for over a hundredyears. But there has been a declinein its share of productionin recent years as the relativelynewer producersof Africaentered the market with productioneconomies that surpassedthe Asians'. Between 1986 and 1995,Kenya's tea productionincreased 44 percentand Tanzaniaexpanded its productionby 58 percent (Table 1-1). In comparison,India the giant of Asia,increased production by 14 percent and China,the secondlargest producerin the world, had an increaseof 17 percent. Chinahas the maximumpotential for the future and both its productionvolume and productiongrowth rate are high. The third largestproducer, Sri Lanka, had a low increase of growth in the past ten years- about 10 percent -- and Indonesia,the fourth largest, only 4 percent. Amongthe importantAsian producers of tea, onlyBangladesh had an impressive22 percent growth. OutsideAsia, Turkey is an importantproducer of tea. Its production,however declinedby 19 percentbetween 1986-95.The comparative expansionof world tea productionin the major tea producingcountries of the world in the past ten years is shown in Figure 1-3.

Figure 1-3 World Tea Production Production Growth 1986-1995

60%%

ProducffonGrowth 20%- 1986-95 %Ap

Source:ITC Bulletin 1996.

6 The relativeproduction and productiongrowth rate indicesfor the six majortea producersof tea in the world are shown in Figure 1-4. Theseindices measure the relative positionof a countryby productionand productiongrowth rate vis-a-visthe world's largest producer(India) in the past ten years.Kenya, which produces only25 percentof the extent of tea producedby India, achieveda growth of 279 percentwith respect to India between 1986-1995.China, with a relativeproduction ratio of 77 percent had a growth of 126 percent relativeto India. Bangladesh,with a relativelylow productionratio (6%), showed a growth of 111%compared to India. Sri Lanka with about 32 percent of India's productionvolume, lagged behind India in growth withjust about 74 percent of the latter's growth rate. Indonesia's positionwas relativelyweak, with 18 percent of India's output and 11 percent of its growth. Argentinahad the worst positionwith only about 5 percent of India's volumeand 163 percentless growth.

Figure 14 RelativeProduction Volume and ProductionGrowth Rate of Major Tea Producers (1986-1995)

250% inosi JS aa

150% X3-00X2 0 etv rdcinhe

Z-150%nia ii-200%

RelativeProduction Index

lArgentina Bangladesh China India IndonesiaKenya Sri Lanka iRelativeProduction 5% 6% 77% 100% 18% 25% 32% [RelativeProduction Growth -163% 111% 126% 100% 11% 279% 74%0I

Note: RelativeProduction Index is the ratio ofproduction in the country relative to the largestproducer in the industry.Relative Production growth rate is the ratio ofproduction growthin a countryrelative to the growthrate ofthe largestproducer in the industry

Source: Authors' estimation

7 CONSUMPTION

There are pronounceddifferences in the consumptionof tea worldwide.Many of the producingnations consume very little of the product while other countriesimport large quantitiesfor domesticconsumption. Some countries,like the UnitedKingdom and the Netherlands,also import tea for value additionand re-export. Tea is an important beveragein certainWestern countrieslike the UnitedKingdom, the United States, Germany,the Netherlands,and Canada.But it is the developingcountries of Asia,Africa, Middle-Eastand East Europe where its demandand future prospectsof growth are maximum.Tea is the nationaldrink of countriesthat have sometwo-thirds of the world population.The geographicalseparation of principalproduction and consumptionareas providesthe greatest potentialfor futuretrading.

Measurementof tea consumptionworldwide is a difficultprocess involving consumersurveys which are not often availablefrom secondarysources. Under this circumstance,consumption may be imputedfrom data on productionadjusted for import.

Table 1-2 showsthe world consumptionof tea between 1986 and 1995.The highestconsumption in 1995took place in Asia (27%), followedby Africa(16%), the CIS (15%) and U.K. and Ireland (14%). The majortea producingcountries of the world consumedonly 5 percentof the world tea output (Figure 1-5). This was in spite of an averageten-year (1986-95) growth of over 49 percentthere.

Table 1-2 WorldTea Consumption (Mllion Kilograms) 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995

UK & Ireland 182 154 173 174 153 157 156 172 160 147 Restof W. Europe 54 52 54 52 57 58 59 60 56 56 USSRICIS 110 135 134 215 239 166 76 192 127 161 Rest of E. Europe 36 39 41 41 29 21 28 42 40 40 NAmerica/W.Indies 108 93 105 101 92 98 106 100 112 98 LatinAmerica 12 13 12 13 13 14 14 14 16 16 Asia 248 245 272 264 279 319 299 296 275 282 Africa 149 148 173 143 175 163 182 155 155 170 Oceania 28 25 26 24 23 24 22 23 23 22 MajorProd Nations 35 30 36 36 39 47 52 52 55 57

TOTAL 962 934 1026 1063 1099 1067 994 1106 1019 1049 Source:rTC Bulletin, 1996.

Worldtea consumptiongrew by 9 percentin the past ten years, from 962 million kgs. in 1986to 1,049million kgs. in 199S.4However, there were considerablevariations in the regionalgrowths. Asia led the regionalgrowth followedby the fonner USSR/CIS

4 rowzhrate estimatedthrough a threeyear moving average of productionfrom 1986-1995.

8 countries.It is importantto note that whilethe regionalpatterns hide considerableintra country variations,they do indicatemajor blocs of potentialgrowth areas.

The strongest consumptiongrowth was withinthe majortea producingcountries themselves(India, China,Sri Lanka,Kenya, South Africa,Tanzania, Uganda and Japan), whichgrew by almost 50 percentin the past ten years (Figure 1-6).5Asia and Latin Americaeach had 16 percentgrowth, Africa10 percent and WesternEurope without U.K. and Ireland about 10 percent. Growthin the CIS countrieswas 7 percent.The disappointingpicture was in such traditionaltea countriesas the U.K and Ireland where consumptiondeclined 3 percent.Consumption in the rest of Eastern Europe also declined by over 2 percent.

Figure 1-5 World Shareof Tea Consumption,1995

LatinAmerica 2%

Oceania 2%

RestofEEurope 4%

MajorProdNations .5%

VWatemEum pe 5%

N AmericaMWhndies 9%

USSRICIS 15% . Africa 116%

UK& helarid - 14%

Asia 27

0% 5% 10% 15% 20% 25% 30% 1995Share Source:, TC Bulletin, 1996.

Pakistanis the largest consumerin West Asia,taking about 41 percent of this region's consumptionin 1995.Iraq and Iran are also major consumersin this region, althoughIraq's consumptionhave not been directlyreported after the Gulfwar. In East and South Asia,the largest consumptionof the regiontook place in India (5 1%) and in China(36%). After the Asiancountries, the secondhighest consuming region in the world

5 The combinedregional consumption growth rate indicatethe ten year penod growth and includesboth green and black teas. The growthin China and Japan was mainly in green tea.

9 Figure 1-6 RegionalPattern of ConsumptionGrowth (1985-1994)

lSborPRod NatiDm _48%

16%lOceania

Afr--a 10%

Asin 116%

LatinAmerica 116%

NAAmericate.tdies l5%

Restof EEarotE -2%

USSR/CS §7%

Restof W.Europe 110%

K & e Irelaef-3%

-20% -10% 0% 10% 20% 3D% 40S6 50SC 60% Source: nnCsBulletin,1995. is Westen Europe, where the U.K. aloneconsumed 67 percentof the total in 1995. The dastemEuropean regionis third, wi the CIS fiaing 80 percent of the entire regions eonsumpaon.In Africa,the highestconsumption takes place in Egypt (39fo). In North America,the United States leads with over 85 percent of the regions consumption.

Per Capita Consumption

The trend oftea consumptionworldwide becomes clearer if we look at per capita consumption changes in the past ten years. In Western Europe, the heaviest per capita consumptionis in the Republicof Ireland and the UnitedKingdom, where it grew by a paltry I percent and declined by 7 percent, respectively, in the last decade. In two other imnportantcountries, Germany and the Netherlands consumption declied by 19 percent and 16 percent, respectively. France, although not a heavy user of tea, had a very encouraging growth of 28 percent. In Eastern Europe, data from the formnerUSSR and CIS countries are not available in disaggregated form to draw reliable conclusion, but Poland showed a decline in per capita consumption of 14 percent. In North America, per capita consumption in the United States went up 13 percent, but in Canada it declined by 23 percent.

Among the heavy Middle Eastern and Asian users, the United Arab Emirate showeda remarkableper capita consumptionincrease of 71 percent. Jordan's increase

10 was even more phenomenal,around 541 percent.However, this is partiallyexplained by the fact that most of Jordan's suddenjump of tea import after 1990 was reallydestined for the U.N. embargoedIraq and consistedof perhapsa more moderategrowth in its own consumption.Iraq's changingconsumption pattern cannot be examinedbecause of lack of interpretabledata, but this countryhas traditionallybeen a heavyconsumer and is not likelyto changevery much in the future.Among the Asiancountries, Pakistan is a moderatelyheavy consumer of blacktea. However, its per capitaconsumption in the past ten years shows a declineof 6 percent.Asian countries that producetea have generallynot onlybeen rather light users but also a majorityof them have decliningper capita consumption.Countries where per capitaconsumption have declinedsignificantly are Kenya (39 percent), Sri Lanka (12 percent),Uganda (59 percent) and Tanzania(52 percent).Only Chinaand India have shown increasein per capita consumption- 20 percentand 19 percent, respectively.Among African countries, Egypt -- a mediumuser of black tea -- has shown a declinein per capitaconsumption of 39 percentbetween 1986- 95. Sudanalso had a declineof 41 percent duringthe same period.

THE WORLD TEA TRADE

Prior to 1933,the Netherlandsand the UnitedKingdom dominated the supplyof blacktea in the world marketbecause of their control of the majorproduction areas in the Netherlands,East Indies,India, and Ceylon(Forrest 1985).Most of the exportscame to the Londonmarket as "cleancommon" tea. As early as 1928,an oversupplyof tea caused a slumpin the price which resultedin an agreementin 1930 amongthe producers' associationto voluntarilyrestrict production. But the agreementsubsequently failed, and a new agreement(the first InternationalTea Agreement)was concludedin 1933 amongthe three producingcountries for mandatorycontrols through export quotas to be administeredby the InternationalTea Committee.This measure did have someeffect in regulatingsupplies and pushingprices back up. But in time, new growers likeKenya, Uganda, and Malayamade considerableinroads into the marketand boosted overallworld production.The originalTea Agreementlasted until about 1948.Later, initiativesfrom the FAO and UNCTADtried to developa programfor stabilizingtea pricesin the world marketwith no seriousconsequences. Intermittent negotiations have since taken place generallyunder the forum of FAO's IntergovernmentalGroup on Tea. The United Kingdomhas taken leads to evolvean InternationalTea Agreement,but nothingtangible has evolvedas yet.

The world trend for tea export and importbetween 1986-95are shown in Table 1- 3. The almostparallel growth of import and export is due to the fact that most of the tea producedin a year is also sold in the sameyear becauseof its low shelflife in the unpacked state. The overallgrowth duringthis periodwas 8.6 percent.

11 Table 1-3 Trend in World Tea Trade, 1986-95 (MillionKgs.) 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 Import 852.2 933.1 1025.6 1063.2 1098.6 1066.2 993.7 1104.6 1018.5 1047.5 Export 972.4 973.2 1036.7 1124.7 1134.5 1077.7 1015.9 1151.5 1020.1 1079.7 Source:.TC Bulletin,1995.

The Major Exporters of Tea

The top five exportersof tea in 1995were Kenya(22%), Sri Lanka (22%), China (16%), India (15%), and Indonesia(7%) whichtogether exported close to 80 percent of the world tea (Table 14). India, in spite of its large productionvolume exported only28 percent of its tea and consumedthe rest internally.In comparison,Sri Lanka exported nearly 88 percent. The other majorexporters are Chinawhich exportsabout 36 percent of its own production,Kenya whichexported nearly 91 percent, and Indonesia about 88 percent.6 The total value of India's tea exportin 1995was U.S. $352.98million. In comparison,Sri Lanka's export earningswere U.S. $462.60million; Kenya's export earningwas U.S. $365.71million; and Indonesia's export earningwas U.S. $87.7 million.

Table 1-4 Major Importersand Exporters of Tea, 1995 |MPORT [I EPORT|

Volume Percentage Volume Percentage Value (Mn.Kgs.) (Mn.Kgs.) (Mn.$) Asia 282 27% Sri Lanka 235 22% 462.6 U.K. & Ireland 147 14% Kenya 237.5 22% 365.7 Africa 170.3 16% China 168.5 16% N.A (PRC) N. America/W. 97.6 9% India 162.8 15% 353.0 Indies Russian 140.6 13% Indonesia 79.2 7% 87.7 Federation WesternEurope 55.8 5% Argentina 41.1 4% 31.6 Major 56.9 5% All Others 155.6 14% Prod.Nations USSR/CIS 20 2% World 1079.7 100% Total RestE. Europe 39.8 4% Oceania 21.5 2% LatinAmerica 16 2% World Total 1047.5 100%. Source:ITC Bulletin, 1995 e 1994figure, ITC Annual Bulletin of Statistics,1995.

12 The Major Importersof Tea

The largestimport in 1995was also made by Asia (27%),with Pakistanimporting 115.7million kilograms, Iran 30 millionkgs., Jordan 28 millionkg., Syria 20 millionkgs., Afghanistan19.5 millionkgs., and SaudiArabia 13 millionkgs. The secondhighest import was in the UnitedKingdom and Ireland (14%), with the formerimporting 136 millionkg. and the latter 11 millionkgs. Africawas close with 16 percent of the world import, with over 67 millionkgs. going to Egypt and 37 millionkgs. to Morocco.In comparison, importsby other Westernand Eastern Europeancountries were small(4%-5%). However, importby the RussianFederation, however, was up considerablyafter a long period of low demand.

The past ten year regionalimport trend showsthat import by the Asian countries are increasingmuch faster than Europe and elsewhere(Figure 1-7). The growth of income in the Asiannations is a majorfactor behindthis growth.Combined import of the former USSR and the new CIS countriesalso showedconsiderable growth in the past ten years, but this was not consistentfrom year to year due to the instabilityof the currency.

Figure 1-7 RegionalImport Trendsfor Tea 1986-95

3i000 *32000 _l West=mEpe *250.00 *0~''* 4- East Enuopc 2 20.00 _ _ 2o N.America/Widies .° 250000 |. i' E ~ _ - LatinAnmica .2 150.00 . :.. 100.00 Afic

50.00 .4 ' --- Oceania 0.00

Source:ITCBulletin, 1996.

DISTRIBUTION

The principaldistribution channel for tea is shownin Figure 1-8. Predominantly, tea is disposedoff in auctionmarkets through tea brokers.Either brokers or agents appointedby tea buyers or independenttraders bid in these auctionsfor the lowest price. The boughttea is shippedto blendersand packerseither in the home countryor in countriesoverseas (like the UK or the Netherlands).The blenderscombine tea from varioussources, accordingto their markets' needs, and pack them for sale to the ultimate

13 Figure 1-8 The Tea Distribution Chain

/~~~~~~~~~~ :.

\ / ~~~~~~~~~AGENT\

\ / / ~~~~~~~~~TRADER

I *~~~~~~~~~~~IF

Source: UNCTAD1984.

14 consumer.Thereafter, the product moves throughthe standardwholesaling and retailing chainto the consumers.

The auctionsystem has some advantagesand some disadvantagesfor the producersof tea. Its principalbenefit is that it is an effectivemechanism for clearingthe market. However,this efficiencyis up to question.The marketis imperfect,dominated by a few large buyers' brokers, and there have been allegationsin the past of collusionand price fixationby these intermediaries(UNCTAD 1984). The auctionsystem also does not provide much incentivefor value additionby producers,which has long-termeffects on profitability.Just a smallproportion of madetea is sold directlyby producersto blenders and packersoutside the auctionsystem. An even smallerproportion is marketeddirectly to retailers.

The Tea Auctions

Amongthe auctioncenters of the world, London has traditionallybeen large and until 1963 accountedfor 30 percent of world tea salesannually. The volumeof tea auctionedin London started decliningfrom the 1970's as more and more producing countriesstarted buildingup salesthrough their own auctioncenters. Between 1982and 1993 the total quantityof tea sold at the London auctiondeclined almost 49 percent, from a little over 59 millionkilograms to about 29 millionkilograms. Indian and SriLankan producers shiftedtheir trade to the Calcuttaand Colomboauctions mainly. Only Kenya, amongthe major exportingcountries, maintained steady trading through London.In comparison,the Colomboauction center went from handling180.6 million kilograms in 1982 to 215.1 millionkilograms in 1993.The Calcuttaauction center also increasedits share of Indiantea handlingsubstantially. Both Colomboand Calcuttacenters handleonly locallyproduced teas, whereasMombasa handles tea from a number of differentcountries. The diversionof salesfrom London to their own nationalcenters have saved producing nationsa considerableamount of foreignexchange and also enhancedtheir bargaining power becausethey can easilywithdraw from the marketif prices are not favorable. However, the London auction,because of its handlingof tea of many origins,reflects the relative pricesmore accurately.

Tea Brokers

Two types of brokers are involvedin the tea auctionsystem, the seller'sbroker and the buyer's broker or agent.During each auctionperiod, the seller's broker receives samplesof every tea lot in the seller'swarehouse for testing and appraisingbefore printing in the broker's catalogue.The broker may also send samplesto prospectivebuyers or their agents. At the auction,if the bids receiveddo not meet the expectationsof the seller,he has the discretionof withdrawingfrom the auction.The tea maythen be "reprinted,"or offeredat a later auctionafter a statutoryperiod of about two to three weeks (UNCTAD 1984,op. cit.). The producermay also sellthe tea throughprivate sale or the broker may try to securebuyers who previouslydid not receivethe samples.The brokers may also advisethe produceron manufacturingand on price trends in other auction centers.In

15 recent years brokers have also become involvedin helpingproducers sell tea outside the auction.Finally, the brokers guaranteepayment to the sellerseven in the case of buyer's default.The brokerage fee for all these servicesare generallybetween 1 percent to 1.25 percent chargedto the seller.The contractualrelationship between brokers, sellers/producersand buyers/blendersvary from placeto place. In Mombasaand Calcutta, the same broker representsboth the parties, whichhas raised questionsabout conflictof interest.In London, however,separate brokers handlethe seller's and the buyer's business.Sometimes there are corporatelinks between the sellingbrokers and the tea producersin the form of interlockingdirectorships (UNCTAD 1984, op.cit.). There are also connectionssometimes between the buyingbrokers and producers in many countries.

Tea Buyers/Blenders/Packers

The concentrationof buyers in most auctioncenters has traditionallybeen very high and there have been restrictionson auctionparticipation, as well, even through they are open to public.Brokers generally do not take bids from new buyerswith whom they are not familiaras it increasestheir risk. Also, new buyers are disadvantagedby the fact that the tea has to go to blendingand packagingplants most of which are owned by the same companieswho competewith them in the auction.A studyby the UnitedNations Conferenceon Trade and Development(1977) foundthat about two dozencompanies controlledtea buyingin the majorauction centersof London, Colomboand Mombasaand even a smallernumber of firms controlledthe marketfor particulartypes of tea such as CTC.7 Most of the larger firmswere integratedwith producersand/or retailers. In 11 of the 20 majorimporting countries that the study examined,four firmsalone accountedfor 80 percentof the sale of tea. Thesefirms were also the marketleaders of tea worldwide includingBrooke Bonds, Lipton, Lyon-Tetley,and Twinning.There have also been links amongbrokers throughtheir association,although the effect of such links have not been studiedthoroughly. The auctioncenters in India were a little differentbecause of the participationof buyers' representativesfrom countrieswith whom India had bilateraltrade agreements,such as the USSR, Polandand Iraq.

In recent years privatesales and forwardcontracts have addednew dimensionsto the distributionof tea. For example,in SriLanka about 6 percent of tea salesnow take place through direct channels.In Kenya it is around 10 percent. These modes of sale are preferredby individualproducers because they get their paymentsfaster, have less uncertaintyabout sales and prices, and can avoid warehousingand other costs associated with the auctions.The cost savingscould be substantial.In one estimatethe cost of selling tea in India through the ex-gardentea salewas 70 percentless than the sale in the Calcutta auction(UNCTAD, ibid.). Of course,there is the possibilityof the producergetting a lessernegotiated price throughthe direct ex-farmsale than he could perhapsget at the auction.But this dependsupon the developmentof the systemwhich could becomefairly efficientif manycompeting direct buyers enter the market,which in recent years seemsto be happeningin many countries.The systemis attractiveto buyersalso becauseit

7 Cut, tear, and curl - a methodof processingtea.

16 guaranteesfaster deliveryand thus better qualityof the product received.In the past, governmentsin exportingcountries had fearedthat direct sales encourageundervaluation by unscrupulousexporters and the transferpricing mechanism allows the subsidiaryof a foreign multinationalto transfer products at lower valuesand thus avoid paymentof appropriateduties. Sincethe marketshave been liberalizedand foreignexchange restrictionsremoved in most countries,these apprehensionsare no longer material.

Previouslymost of the tea buyingin developingcountries was done by state corporations.There is now a trend towardsdecentralization of this functionto smaller privatelyowned importers,for example,in Egypt, Syria, Iran and a few East European countries.Most of these privatebuying companies are either subsidiariesof multinationals, or they buy from multinationals.To illustrate,in Egyptthe market leader is the Blue Tea Pot brandwhich belongsto Uni-Lever.Similarly, the Lipton brand is becomingstrong in the East European market.

The final processing,blending and packagingof tea was traditionallydone in developedcountries by a numberof smalland medium-sizedcompanies such as Brook Bonds, Tetley,Premier Brands, Lipton, Redco, Ridgewayand Twining(Abeywickrama Associates 1991).In recent yearsthis pattern has changed,as large multinationalshave acquiredmany of these companies.The BritishUni-Lever Group, today controls about 35 percent of the world trade in tea with acquisitionslike Lipton (USA),Brooke Bond (UK), Salada(Canada), Bushells (Australia), Quality packers (New Zealand),etc. (Government of Sri Lanka 1991).Another big conglomerateis the AlliedBrewery Group whose control of Lyons Tetleyin the UK and CadburySchewepps in Australiahas given it sizablemarket sharein Canada and Spain.Also, PremierBrands in the UK is an example of a merger of many smallercompanies to form a singlelarge company.

Anotherintermediary group has developedto servicethe needs of smalland mediumsized importersin the West. Operatingmainly from Hamburgand Rotterdam, they purchaselots from tea auctionsin producingcountries and after blendingand repackaging,sell them to importersin the United Statesand Europe. This gives small importersconvenience and cost savingsbecause they can buy in smalllots on a frequent basis from close by distributorsrather than going to far off auctionsand makingbulk purchases.

As a result of these dynamics,the world marketfor tea has becomemuch more consolidated,with dominantshares held by a few multinationalcorporations. In New Zealand,the Bell Tea Companyand the Uni-LeverGroup control about 75% of the market.The Australianmarket, likewise,is dominatedby the Uni-LeverGroup and Lyons Tetley.The rest of the market shareis accountedfor by supermarketchains and regional brands, which find it economicalto buy blendedpackaged tea eitherfrom the multinationalsor blendersin Germany.

17 Tea Retailers

Tea is sold through four principaloutlets: supermarkets/grocerystores, specialty stores, departmentstores and institutionalsupply houses. The changingtrend in the retail food industrytowards supermarketsand grocerychains in Europe and Americahas considerablychanged the characterof tea buying.It has created centralizationof buying, heavierbuying by individualbuyers, and bypassingof the wholesalersthrough direct links of the buyerswith tea packers. Verticalintegration of the channeldeveloped as a consequencewith blendersintegrating into the retail system.Typical examples of this were the Co-operativeWholesale Society in the UnitedKingdom, Albert Heyn in the Netherlands,Irma in Denmark,and KooperativeForbundet in Sweden.Some blenders integratedwith cateringorganizations, such as Lyons-Tetleyand J.L. CateringLimited. Therewere instancesof less involvinglinks such as the retail organizationowning a part of the processingcompany or havinginterlocking directorships (I)NCTAD, 1984, op.cit.). Many of the tea producingcountries see this as a major obstacleto developingtheir own channelsbecause the large companies,that are often part of a giant food conglomerate, have the power of creatingeffective barriers to entryfor new entrantsby undercutting them in price virtuallyanywhere or overcomingthem with massiveadvertising. For example,U.K's TwiningGroup of Tea companieswhich controls over 25 percent of the Frenchmarket has been merchandisingits "qualityblends" at fashionablehotels and resorts, notablyin the south of France (Clairmonteand Cavanagh,op.cit.). The fast growth of conglomerateslike this, backedby heavyadvertising and brandedproducts, has madethe entry of smallfirms very difficultin the industry.In fact, the entire beverage industryof the world is now controlledby 50 transnationalconglomerates and the future of the industryis tied to the marketingstrategies of these firms.

PROMOTION

Studieson the internationalmarket promotion of tea show that the leadingtea packers advertisequite heavilyin the westernmarkets (UNCTAD, ibid.). In Japan the advertisingexpenditure was about 8 percent, comparedto 7 percent in Italy, 4 percentin the United States and 2.5 percent in the UnitedKingdom. A lot of trade promotion,such as trade discountsand price promotionsalso takes place in the industry. Smaller companies,on the other hand, rely more on trade discountsthan advertising,often offeringprice discountsto chainstores for carryingtheir brand. Retailersusually add very smallmargins on tea comparedto other products and make it through marginallowances from the packers. Only packerswho have very highvolume of turnovercan affordto provide the discountsover long periods of time.Recently, promotion by the industryhas intensifiedparticularly in the U.K., Canada and the U.S. The health aspect of tea, supportedby medicalresearch, is being stronglypromoted to the health conscious consumersof the Westernworld.

18 THIESTANDARDS FOR TEA

In general,the judgmentabout a tea's qualityis madeby tea tasters in different countrieswhose evaluationcriteria may dependupon the use to which the tea willbe put, such as componentfor a blend or tea bags, etc. Consumers'taste also vary from country to country and somewherethe consumermay like a strong liquoringtea while in another the consumermay prefer a light aromaticblend, etc. Thus it is not easy to set a uniform qualitystandard for tea globally.The developmentof a set of standardsfor tea have been discussedover manyyears now and may emergein the future. However,the immediate concernfor both the producingand the consumingcountries is the settingof minimum standardsfor tea, which will ensure adequatequality and increaseconsumers' satisfaction and demand(FAO 1995-e).The FAO's IntergovernmentalGroup on Tea supportsa minimumstandard for blacktea based on water extract percentage,crude fiber content, moisture content,and the allowablepercentage of certainchemicals like caffeineand theaflavin.

The tea trade has traditionallyused tea tasters to distinguishbetween different qualities,but it has been an extremelysubjective evaluation. Research done in the United Kingdomand varioustea researchinstitutes around the world have founda number of factors relatedto the qualityof tea (UNCTAD1981, Ellis and Cloughley1981). A number of countriesfollow the InternationalOrganization for Standardization(ISO) standardfor tea approvedin 1977 (ISO 3720), althoughit does not necessarilymean that they have made it a law. Theseinclude producing countries like India, Sri Lanka, Kenya,Turkey, and Iran and importingcountries like Australia,Germany, France, Egypt,Poland, Mexico, and South Africa.The United Kingdomhas voluntarilyimposed the ISO standardsince April 1981,but onlyfor tea sold in the London auctions.Some of the large exportersof low pricedtea such as Argentina,Malawi, and Chinaand large importerslike the United States have not adoptedthis standard.Traders in a few countrieslike the UnitedKingdom and Canada havevoluntarily introduced a tea grading systemfor the cateringindustry to encourageits adoption of qualityteas. This does help countriesthat are tryingto establish high-qualityhigh-value added segments for tea in the world market.

THE DEMAND SUPPLY BALANCE

Over the past twenty fiveyears the characteristicsof the world tea supplyhave changedconsiderably with the entry of many new producersin the marketlike Kenya, Malawi, and Turkey. They have addedto the productionbase and some have pursued growth aggressively.Possession of resourceslike land, cheaperlabor and modern technologyhave giventhese countriessufficient competitive resources to cut deeplyinto the markets of traditionalsuppliers like India and Sri Lanka. In the 1940's India and Sri Lanka produced over 80 percentof the Worldtea, but in the 1990's this share declinedto less than 40 percent(Tea Board of India, 1995).

19 World tea productiongrew approximately6 percent between 1986-1995,and consumptionremained below that in most of the years with resultant excess supplyin all the years but 1995 (Figure 1-9).8The demand-supplybalance is generallyin equilibrium becausetea does not have a long shelf-lifeand the marketis clearedmainly through the auctionprocess where any imbalancebetween demand and supplyhas an immediate impacton the price. Figure 1-9 World Supplyand Consumptionof Tea, 1986-95

2600

I-2500

2400

C2300

2200

2100 86 87 88 89 90 91 92 93 94 95

[ Consumption IProduction|

Source: ITC Bulletin, 1995.

Figure 1-10 showsthe price trend for tea at the London auctionsbetween 1986- 95. In real terms, world tea priceshave fallensteadily since the mid 1980s and 1990s.The averageLondon auctionprices for tea during this periodin real terms have been their lowest in 1988 and then againin 1995.The main cause of this declinehas been the continuingincrease in world output with stagnantor decliningimport demand(World Bank 1992).Between 1986 and 1995,world tea productionincreased by 221 millionkgs. India's productionincreased by 133 millionkg., China's by 128 millionkg., Kenya's by 102 millionkg. and Sri Lanka's by 33 millionkg. In contrast, world importsincreased only84 millionkgs. Figure 1-10 AnnualAverage Tea Prices at London Auctions, 1986-95 (Pence/kg.)

1480

0 60 .'.

86g 88 89 90 91 92 93 94 95 Nominal Value Constant Value

Source: llCAnnual Bulletin, 1995.

8 Consumptioncalculated from net tea importedfor consumptionand tea retainedby producingcountries.

20 Why has tea productionincreased steadily in spite of decliningprices? The answer partiallylies in the depreciationof the real exchangerate of manyproducing countries like India, Sri Lanka, and Kenya,which kept the producerprice up in these countries.Also, investmentin plantationcrops is a long-termcommitment and it is difficultfor producers to fine tune output to meet market demandrequirements on a yearlybasis. Most producershave concentratedon increasingoutput and the efficiencyof production,which have again resultedin more intenseprice competitionin the auctionmarkets.

The averageLondon auctionprices for tea in real terms hit their lowest levelsince 1980in 1995 (FAO 1996-a).In July 1995,the averageLondon auction price was 20 percentbelow the sameperiod price in 1994.Even though pricesin differentauction centers variedbecause of local demandand supplyconditions, on the averageprices in all the auctionmarkets were 1.7percent lower in 1995than in 1994.The fundamentalfactors behindthese declineswas increasedproduction of the major tea exportingcountries and reduceddemand from sometraditional big importers.For example,India's production went up by 88,000tons between 1985and 1994, SriLanka's by 30,000 tons and Kenya's by 60,000 tons. Tea output of other East Africancountries have also shown considerable increases.In particular,Malawi's production in 1993 was up by 40 percent comparedto 1992 and Tanzaniawas up by 28 percent. At the sametime, importsby majorconsuming countriesdeclined. For example,imports by U.K. droppedby 7,000tons, the Netherlands dropped 1,129tons, and Germanydropped 2,667 tons between 1986 and 1995.Imports by USSR/CISdeclined by 19,700tons between 1986 and 1992,but have since started pickingup. Due to the U.N. trade embargo,Iraq's direct import also plummetedby over 17,000tons. There are manyreasons for the declineof demandin manywestern markets, but the primarycauses seemto be changesin lifestyleon top of heavycompetition by other beveragessuch as soft drinks.

Price movementsin respectivenational markets differ dependingupon quality differentialsand variety.In 1995,the averageauction market price for tea all over the world was 1.7 percentbelow its 1994 level.But in the Indian marketsit was higherby 9 to 20 percent (dependingon location)because of increaseddemand from the Russian Federationand the CIS countries.Increased demand from these countriesalso pushed the price of Sri Lankan tea by 7 percentin spite of a slightincrease in productionthere. In contrast,Kenya experienceda sharpdrop of 17 percentin price in 1995 due to record productionof tea in that country.

LONG TERM MARKET PROJECTION

Supply

World tea productionin 1995 was expectedto grow 2 percent reaching2,590,000 tons - an increaseof 48,000 tons over the previousyear (FAO 1996-b). Rise of productionin Kenya (17 percent),Indonesia (16 percent), India (1 percent), and Sri Lanka (2 percent) willfuel this growth.Harvest in other Africancountries such as Zimbabweand

21 Tanzaniahave also been very good. The risingproduction trend is expectedto continue over the next few years as expandedareas under tea since 1991 come into bearing.The intermediateto long-termprojection indicates a fair growth from 2.9 billionkilograms in the year 2000 to 3.2 billionkilograms in 2005 with India, China,Kenya, Sri Lanka, and Indonesiabecoming the largest producersin that order.

Demand

The overalldemand for tea continuedto weaken through 1995 as declinesin import by the U.K and USA more than offset increasein import by Pakistan,Russia, and other CIS countries.The U.K. importsfell by 8 percentover the previousyear and in the U.S. importswent down 16 percent. The silverlinings were Pakistan,whose imports jumped 16 percentover 1994 in spite of a 7 percent devaluationand 10 percent import duty, and the RussianFederation plus some CIS countries,where improvedeconomic conditionsand favorabletrading terms providedby exportingcountries raised the level of demandby 20 percent.The globalconsumption of tea is projectedto rise from 1,.1 billion kilogramsin 1993 to 1.2 billionkilograms in 2000 and to 1,300million kilograms in 2005 (Govermnentof Kenya 1995).Developing countries are likelyto account for most of the prospectivegrowth and their shareof importedtea is projectedto grow from43 percent in 1990 to 51 percentin year 2000 (FAO 1992-a).Their net import requirementfor black tea is protectedto reach 626 millionkgs., up 52 percentfrom 1990.Import requirements of developedcountries are projectedto be 601 millionkgs. in the year 2000, or about 9 percentmore than imports in 1990. The biggestincrease in consumptionis expectedto be in Eastern Europe, from 238 millionkgs. in 1993to 297 millionkgs. in 2000 and 355 millionkgs. in 2005. Much of this projectedincrease may in effecttake place if the Russianeconomy continues to strengthenand the country returnsto the world marketas a large buyer. Other significantincrease areas are Pakistan,Iran, Morocco and Libya.Small importincreases are expectedin WesternEurope. However, consumptionis likelyto fall in the U1Kfrom 160 millionkgs. in 1993 to 131 millionkgs. in the year 2000 and 119 millionkgs. in 2005 (Governmentof Kenya,op.cit.). Other countriesthat are also expectedto declineare USA and Canada,South Africa,and SaudiArabia. The expected increasein other traditionaltea importers,such as Ireland,Australia, New Zealand and Canada,are projectedto remainaround their 1990 level(FAO 1996-a).

Demandfor tea is heavilyinfluenced by the varietyand qualityof products and these are also likelyto impact on futuretrade flows and prices.For example,preference for black orthodox tea by Russia and CIS countriesis likelyto keep demandhigh for Sri Lanka's products.But demandfrom U.K.,Pakistan, and Egyptwill impact CTC tea producedby Kenya and others. Similarly,the North Americanmarket's preferencefor light-liquoringand low-pricedtea will affectthe demandfor these types. The qualityfactor has assistedthe export tea from many countriessuch as SriLanka and Kenya. To some extent,this offsetsthe loss of demanddue to other factors. For example,Kenya's exports increasedsubstantially in 1995 spurred by its high qualityproducts, but its revenue increasewas much less becauseof a sharp fallin prices as demandfor CTC tea waned in Europe.

22 Price

On the whole,the downwardprice pressureon tea is likelyto continuefor some time due to weak demandand supplyincreases in a numberof tea exportingcountries (FAO 1996,op.cit.). A reversalof this trend willdepend upon the return of Russia and other CIS countriesto the marketon a substantialscale as well as the increaseof domestic consumptionin India, China,and other producingcountries. On the supplyside, there could be some downwardadjustment in productionin responseto the overallweak prices. However,given the expansionin worldtea acreageand the time frame of 5 years for new tea bushesto reach economicyields, full scale adjustmentsare not foreseeablein the near future.

The future for CTC tea, at least in the Europeanmarket, does not appear too brightat the moment.Reduced demandand large productionincreases in the main CTC producingcountries, Kenya and India, have depressedprices for this type of tea. Orthodox tea, however,seems to hold better promisedue to reneweddemand from Russia and increasingbuying by Egypt, Pakistan,and SaudiArabia. These recent developments suggest that orthodoxtea pricescould stay highrelative to CTCtea prices(World Bank 1966-a).Countries like India and SriLanka are likelyto be the principalgainers if this holds true.

Possible Effects of the Uruguay Round of Agreement on Global Tea Trade

The globaltea trade is relativelyfree. Manyof the majortea importers,like the UnitedKingdom and the United States, have no tariff or other restrictionson tea import. However,many of the developingcountries that import tea levy substantialtariffs on both bulk and packagedtea. Under the UruguayRound Agreementsigned in April 1994,it was agreed that the signatorycountries would convert all import barrierssuch as quotas, variablelevies, and minimumimport prices into tariff equivalentsand then reduce them by certain specifiedpercentage every year (Table 1-5). This action is likelyto increasethe consumptionof tea in countrieswith significanttrade barriers. The FAO's projectedworld demandfor tea in 2005 is 1,355 millionkgs. at an averageannual increase of 5.6 percent comparedwith actualblack tea importsduring the period from 1991 to 1993 (FAO 1995- c). Projectedimport demandin developingcountries is 716 millionkgs. with an annual increaseof 3.5 percent.Demand in developedcountries is likelyto increaseby 1.5percent per year to reach639 millionkgs. by 2005. Reductionin tariffs,however, would add an additional2.9 percentper annumtaking demandto 1,393million kgs. by 2005 (Table 1- 6). Developingcountries would accountfor 82 percent of the net increasedue to trade liberalization.

23 Table 1-5 ExpectedTariff Change on Tea after the UruguayRound Country CurrentRate of Duty Bound Rate of Duty (%) (%) Argentina 50.00 38.00 Brazil 15.00 11.40 Canada 0.00 0.00 Chile 11.00 8.36 U.K. 0.00 0.00 Netherlands 5.00 0.00 Egypt 45.00 35.00 India 10.00 7.60 Indonesia 100.00 40.00 Japan 14.00 8.96 Kenya 50.00 38.00 Republicof Korea 40.00 30.40 Malaysia 30.00 22.80 Mexico 20.00 15.20 Pakistan 45.00 34.20 Syria 20.00 15.20 United States 0.00 0.00 Source:FAQ, 1995.

Pakistanwould have the largest prospectiveincrease in import maldngit the leadingblack tea importerby 2005. Tariffreduction would also increaseimports into Egypt,Iraq, Iran and other Near East countries.

Table 1-6 ProjectedImport Demand for Black Tea After the UruguayRound (millionkgs.) Country Normal projection RevisedProjection Year 2005 Year 2005 Pakistan 228 237.3 Egypt 110 115.1 Iran 57 60.3 Iraq 54 57.1 Canada 13 13.0 U.S.A 92 92.0 France 16 16.7 Germany 28 28.7 Netherlands 16 16.5 U.K 135 135.0 CIS 195 195.0 WORLD 1,355 1,393.0 Source:FAO 1995.

24 On the supplyside, the net exportavailability is projectedto reach 1,415million kgs. by the year 2005, an annualincrease of 2.9 percent,without trade liberalization. About 68 percent of this increasewill comefrom China,India, Sri Lanka,Kenya and Indonesia(Table 1-7). The projectionsshow that the total export availabilitywill increase by 1.2 percent due to the Uruguay agreementto 1,453million kgs. Thus, a relativelysmall increasein price may happendue to a net demandincrease. The projectedexport of India after trade liberalizationwould be 250 millionkgs. Similarly,export availabilityfrom Sri Lanka would be 263 millionkgs, from China195 millionkgs., and Kenya 257 millionkgs.

Table 1-7 ProjectedExport Supplyof Black Tea After the UruguayRound (millionkgs.) Country Normal projection RevisedProjection Year 2005 Year 2005 India 245.8 249.8 Sri Lanka 261.5 262.6 Indonesia 200.0 201.2 China 192.0 195.4 Kenya 254.0 256.8 WORLD 1436 1453 Source:FAO 1995

Major Competitors

The major competitorsin the globaltea marketare India, China, SriLanka, Kenya and Indonesia.Their current and projectedexport sharesof the world market in 2005 is shown in Table 1-8. If the projectionfor the year 2005 holdstrue, Sri Lanka and Kenya will still be vyingfor leadership,although Sri Lanka mayhave a slightedge. India willbe a close third followedby Indonesiawhich willdisplace China as the fourth largest exporter of black tea.

Table 1-8 Black Tea Production,Export and Market Shares, 1995 and 2005 (millionkgs.)

India 162.8 15.1% - 249.8 17.2% China 168.5 15.6% 195.4 13.5% SriLanka 235 21.8% 262.6 18.1% Kenya 237.5 22.0% 256.8 17.7% Indonesia 79.2 7.3% 201.2 13.9% WorldTotal 1,079.8 1,452.7 Source:FAO 1995.

25 INDUSTRYPRODUCTIVITY AND PROFiTABILITY

The productivityof tea variesfrom countryto country. Amongthe majorfour producersin the world, the highestproductivity have been achievedby the tea estates of Kenya.Green leaf yieldsin someof the estates have been around 3,500 kg/ha. (FAO 1995-d).Zimbabwe, even thoughit is a very smallproducer of tea, has shown even more spectacularperformance with a green leaf yield of 7,800 kg/ha. Other smaliAfrican producerslike Ugandaand Tanzaniahave also achievedimpressive yields of over 2,500 kg/ha. However,productivity in the largertea producingcountries like India and Sri Lanka have been poor in comparison.For example,the highestproductivity reached in Sri Lanka's private estatesrecently have been about 2,500 kg/ha. and in India the highest yieldsobtained in SouthIndia have been around2,382 kg/ha.Differences in productivity and the cost of productionhave given rise to widelyvarying degree of profitabilityfor the industryworld wide. Amongthe major countries,the highestprofitability has been obtainedby Kenya (over $2000/ha),followed by India (over $1400/ha),and the lowest by Sri Lanka (about $1100/ha).

FORCES DRIVINGINDUSTRY COMPETMIION

Tea competesmainly with soft drinksin the world market.Normally, product sales depend on three factors: consumerdemography, income, and the willingnessto buy. Demographicfactors such as geographicallocation, occupation, ethnicity and age have been found to correlatestrongly with the consumptionof tea. A study done in the United Statesin the mid 1990sshowed that tea consumptionwas significantlyhigher in urban areas and in regionsthat had a majorityof Asianand Pacificorigin people (FAO 1995-e). Professionalswere also foundto be much higherconsumers of tea than non-professionals. However,income was foundto have little effect on consumption.The willingness-to-buy factor is a little more complex.Consumers' values and lifestyle(VALS) and perceived value of the product seemto have a strong influenceon choice.For example,people on the go who eat outside home more frequentlyare more likelyto prefer ready-madedrinks over tea becausethey require no preparation..Conversely, health consciouspeople may tend to prefer tea that has significanthealth benefits compared to many other drinks. Thus, the perceivedvalue of tea in the minds of consumerscould be evaluatedin terms of benefits(such as health),convenience (such as ready to drink),and economicvalue (such as price). The U.S. study did find significantinfluence of the first two on consumers' choice,but did not find any significantimpact of price on people's decisionwhether to drink tea or not. However,the studyfound that amongpeople who chooseto drinktea, both price and incomeinfluence the allocationof expenditurebetween tea and other beverages.The cross-priceelasticity of tea with respect to milk,fruit, and vegetablejuices suggeststhat these beveragesare complimentaryto tea. The cross-priceelasticity of soft drinkswith respect to tea, however,indicates that soft drinks are a strong substitutefor tea and consumerswill shiftfrom tea consumptionto soft drinksif the price of soft drinks declinedmore than that of tea. Tea and coffeeare neither substitutenor complimentaryto one another and the changein coffeeprice has little effect on tea consumption.Statistics

26 show that coffeeprices have almosttripled in the last two years, but world tea priceshave remainedunchanged and even declinedin this period. The elasticityof expenditureon tea was found positiveand less than unity,which suggeststhat a relativelysmall proportion of additionalbeverage expenditure is spent on tea comparedto soft drinks andjuices. Also, tea consumptionis a generalhabit and no dramaticshort-term achievement could be expectedfrom promotion. Rather, a progressivebuilding of a solid consumptionbase over the long-termwould be more beneficial.

Health concernsare also strong positiveinfluence on the choice of tea as a drink, particularlyin the United States. A concertedeffort is being madeby the tea industriesin all consumingcountries to promotethe healthbenefits of tea to increaseits acceptance amongconsumers all over the world. The UnitedNations has provided 1.7 milliondollars through its CommonFund for Commodities(CFC) to researchand promotethe health aspects of tea. The tea trade of three consumingcountries: the United Kingdom,the United Statesand Canada,have contributedan additional1.9 milliondollars and 700,000 dollarshave been committedby four majortea producers:India, Sri Lanka, Kenya,and Indonesia - to support the project.

The major forces drivingcompetition in the tea industryare productivity,quality and price levelswhich are all interlinked.Higher productivity countries like Kenya are able to lower their cost of productionand thus hold a better competitiveprice position.Quality differentialsbetween different producers are responsiblefor larger or smallermarket shares. Tea buyers are particularlysensitive to the qualityfactor. Price is also determined by the qualityof the tea. as there is a premiumpaid in the wold marketfor qualityteas. The highestprice receivedin the London auctionin 1995was for Indiantea (127 pence/kg.),followed by Kenyantea (109 pence/kg.)and SriLankan tea (95 pence/kg.). There are other importantfactors that raise the price for a country's exportedtea such as value addition.Tea in consumers' preferredform such as packagedtea and tea bags, as well as in preferredtype such as instanttea and flavoredtea, also bringpremium prices.

The processingand distributionof tea in the world marketis controlledby four verticallyintegrated United Kingdom corporations, Unilever/Brooke Bond, Cadbury Schweppes,Allied-Lyons, and AssociatedBritish Foods (Clairmonteand Cavanagh1990). These four have over four-fifthsof the tea marketin many countries.The market strength of the Unilevergroup in the tea industryis comparableto Coca Cola's strengthin the soft drink industry.It suppliesover 30 milliontea bags in 120 countriesdaily. Allied-Lyons is even bigger than Unilever/Lipton/BrookeBond and has a very diversifiedproduct linein the countriesof its operation.Associated British Foods is the parent companyfor Twining Tea which puts out more than 120 blends of tea and coffeefor export to more than 90 countries.

27 _ =-. F-.

FE-

CHAPTER 2

MAJOR COMPETITORS IN THE GLOBAL TEA MARKET

The majortea producingcountries in the world are concentratedin central, south, and southeastAsia and East Africa.There have been considerablechanges in the geographyof productionsince World War 11.The relativegrowth of tea productionin variouscountries is presentedin Figure 2-1.

Figure 2-1 Changesin the Geographyof Tea Production 1949-1967

i ~~~Increase of 1,000per cent

200to 1,000per cent

M*t| | i 0 to 200 percent increase

JaPan~~~~ elowpre-war level

Source:Adaptedfrom Sarkar 1972.

Productionof tea rose more than 1,000percent above the pre-WorldWar II levels in countrieslike Argentina,Tanzania, Brazil, Iran, Uganda, and Peru, between 1949 and 1967 (Sarkar 1972).Kenya, Malawi, and Malaysiaalso experiencedan increaseover 200 percent. The more traditionalareas like India, Sri Lanka,Bangladesh, etc. had more modest increasesof 0 to 200 percent. Thus,there was a significantdifference in post- World War II increasesin tea output amongthe Asian,African and Latin American

28 regions.The characteristicsof each region are distinct,which sets them apart from one another in many differentways.

Traditionally,tea has been producedin plantations,both state owned and private. However, there is a prominentsmall holder sector in many tea producingcountries, such as Kenya and India. In privateplantations, it is quite commonto find holdinginterests of large multinationalcompanies because the finalblending and marketingof tea takes place within a very concentratedindustry group. These corporateentities run the entire operationincluding land development,planting, plucking, and processingby meansof expatriateand nationalmanagers, and local labor. The tea estates are also mostly monocultureswith tea as the onlycrop, althoughin SriLanka one mightfind some intercrossingwith rubber,pepper, and spices.This is primarilybecause of the scale economiesthat large singlecrop plantationsprovide. Also, harvestedtea requires immediateprocessing and plantationswith their own factories can take care of this need much better than growers who do not havetheir own factory.Nevertheless, small holder tea has gainedprominence in the last forty years or so and governmentsin many countries have had to provideinstitutions for collectivizationof the individualefforts.

Among the three majorproducers of blacktea in the world today are India, Sri Lanka and Kenya.Their production, export, and marketingcharacteristics are examinedin the followingsections.

INDIA

ProductionAreas

India's two maintea growingregions are the Northeast and the South consisting of Assam,West Bengal,the foothillsof the Himalayasin the North, and the plateausof the WesternGhats in the South. Climaticand soil variationsof these areas account for differencesin productivityand cultivationculture. In NortheastIndia the principalareas are the AssamValley, the SurmaValley or Cachar,Tripura, Dareeling, Dooars, and Terai. The AssamValley has one of the largest concentrationsof tea in the world with nearlyideal growingconditions. Assam tea sets the standardfor qualityin the world. The land is almost a flat valleythrough which the Brahamaputrariver makesits way slowly from the Himalayasto the Bay of Bengal.The sevendistricts of Darrang, Goalpara, Kamrup,Lakhimpur, Dibrugarh, Nowgong and Sibsagarhave some 168,000high yielding hectaresunder tea on some 655 estates (Forrest 1985).Together, these areas produce half of India's tea.

Tea cultivationin the Surma Valleyis mostlyin a long narrow area calledCachar that runs to the Barak or Surmariver. The tea bearingteelas or jungle hillocksof this area consistof some 31,700 hectares.This area does not have the optimalconditions for tea as in Assam,and a large portion of the gardensare left empty.Most of the bushes are also over 50 years old. Almostall of the tea producedhere is CTC and its auctionprice is

29 lower than tea from other parts of the country.The Tripura growingregion is a continuationof the Surma Valleywith similarterrain but much tougher climaticconditions and droughts are frequent.

The Darjeelingtea areas in the provinceof West Bengalare in the high hills borderingSikkim at altitudebetween 1,000and 6,000 feet. The tea is legendaryin quality with the "first flush" comingin March or early spring and the stillmore prestigious 'second flush' in May or June, followedby the choice 'autumnalflush' in October (Forrest,ibid.). The uniqueflavor and aroma of Darjeelingtea is mostlydue to the particular China/Assamhybrid and its slow growth at high elevation(Harler 1964). However, it has never been easyto work the 18,000hectares of Darjeeling's100 tea estates. The weather is often hostileand a large proportion of the bushes are very old. The yieldsare the lowest in North India.

The Dooars and Terai, further south, are in a narrow strip adjacentto the Himalayasintersected by a number of hill streams.The 61,000 hectaresof tea land are in a favorableagro-climatic zone and the 150 or so estatesthere are highlyproductive. The CTC tea that Dooars producesis fullbodied and very suitablefor blending.The Terai region has about 11,000hectares of highyielding tea in 46 estates.

There are a few other smallertea areas in Northern India, namelythe Bihar tea gardensin Chota Nagpur,the Dehra Dun tea gardensbetween the Himalayasand the SiwalikHills and the KangraValley at the foothillof the Himalayasin HimachalPradesh.

SouthIndia followsthe Assamin the productionof blacktea in India. The main growmgarea extendsfrom Karnatakain the North throughwestern TamilNadu into Kerala in the South and the hills of the Western Ghats. TamilNadu and Kerala have approximatelythe same amount of tea land - about 36,000 hectares each.But the former has almosttwice the output. TheNilgiri hills are very well knownfor high qualitytea and some of the best high growntea in the world comesfrom the famousKana Devan Range in Kerala, about 5000 feet abovesea level.About half the tea plantedhere is the Assam seed type and the other halfis old Chinahybrid. Both CTC and orthodox tea are produced fromthese plantings.In additionto the high-growntea, Kerala also has low-growntea in the centraland southernregions. Wynaad on the slopesof the WesternGhats also has some 12,000hectares of tea.

Existingacreage of tea land in India is not sufficientfor meetingits expanding needs.However, there are sufficientpotentials for new development.There is substantial land for growingtea in the Northeast- e.g., Terai of West Bengal and the states bordering Assam.In the traditionalareas there maybe limitationsfor establishinglarge new estates, but there are plenty of undevelopedgovernment land that could be put into tea production.Also, if tea is designatedas a forest crop, additionalforest land could be allocatedto its culture.The domesticconsumption is 75 percent of its annualproduction of about 744 millionkgs. and it is increasingat a rate of eight percentper annum.By the year 2000 its domesticdemand is expectedto exceed700 millionkgs. However, the

30 extent of land under tea cultivationis growingonly at a rate of about 0.8 percent per annum(Tea Board 1995,op.cit.), which would leavethe country with a probableshortage by the turn of the centuryunless eitherland or productivity,or both, is increased substantially.Industry assessment indicates that approximately23,000 hectaresof new land in the existingtea estates could be plantedand an additional26,000 hectares could be reclaimedand developedfor tea. Some 45,000 hectaresof forest land could also be convertedto tea plantationwith additionalinvestment. The net additionin this way could approximatelybe 94,000 hectares or about 22 percentof the existingbase. Besides,in the non-traditionalareas of tea, adjoiningAssam, over 60,000 hectaresmay be available, which if developedwould add another 14percent to the productionbase. With 36 percent potentialnew acreage,and assumningthe same averageproductivity of 1752 kg/ha., a net additionof 270 millionkilograms of new tea could be expectedwith land development alone. This could boost productioncapacity from 744 millionkgs. to 1014 millionkgs.

Production-Consumption and Export Trend

In the last forty years there has been significantgrowth in the area under production(Table 2-1) the volume,and the yieldof tea in India (Governmentof India 1996).The growth of production(171 percent)outpaced the expansionof area over five times. Most of the growth camefrom productivityenhancement which stood at 105 percent.Domestic consumption also grew at a dizzypace to over 1000percent in 40 years, far outstrippingthe productiongrowth, with a resultantfall in export which actually declined28 percent.

Table 2-1 India's Tea Productionand Consumption 1953-193 Year Area (ha) Production Yield Export Domestic Q4illionkg.) (kg/ha) (Millionkg.) (Millionkg). 1953 318,642 278.7 875 227 51.7 1995 421,910 753.9 1795 163.7 595.1 % Increase 32% 171% 105% -28% 1051% Source: Tea Board of India, 1996.

In spite of its impressiveinternal demand growth, India has still one of the lowest per capita consumptionrates amongthe leadingtea producingcountries. The estimated Indianconsumption is 0.62 kg. per year, muchbelow Kenya's 0.82 kg., Japan's 0.97 kg. and Sri Lanka's 1.41 kg.

The compoundgrowth rate of productionand internalconsumption in the last 43 years (1951-1995)are estimatedat 2.23 percent and 4.88 percent,respectively (Tea Board of India, 1995,op.cit.). Assuming this rate to be consistentin the coming 15 years, the estimatedproduction and consumptionwill be 910 millionkg. and 756 millionkg,

31 respectively,in the year 2000.By the year 2010, these will change to 1174 millionkg. and 1150 millionkg., respectively.

The Tea Board of India's projectionsshow that the future per-capitaconsumption rate is not likelyto increaseat the same pace as before, due to changingsocio-economic conditionsand competitionfrom other beverages- it will probablystay at around0.69 kg. per year by the year 2000. The total productionof blacktea is also likelyto be 1224 millionkg. by 2105 after taking into account all availableland for expansionand increase in productivity.These estimates show that India's production-consumptiongap is likelyto narrow sufficientlyto wipe out any surplusfor export in the next 20 years, after whichthe countrymay very likelybecome a net importerof blacktea.

India producessome of the world's finest tea. The low temperaturein the hills of Darjeelingaids productionof the famousDareeling tea.. High grown tea of South India is also of excellentquality. Other areas, with their diverseagroclimatic conditions, produce a medleyof tea suitedto many differenttastes. Assamteas are well knownfor their strong, brisk and fullbodied liquorand the Nilgiriteas are famousfor their delicateflavor, strength,and brightness.

India's tea export declinedfrom 195 millionkg. in 1951to 163 millionkgs. in 1995 (Table 2-2). The declinewas persistentfrom 1981to 1995. On this basis,predicted export in 2001 is 146million kgs. (Figure2-2).9

Table2-2 India's Tea Export 1951-1995 (Mn.kg.) 1951 1961 1971 1981 1991 1995 Export 195 206 202 242 202 163 Source:Government oflndia, 1996.

Figure 2-2 India's Tea Export: Predictionfor 2001

Source: Governmentofindia, 1996.

Estimated on the basis of exponentialgrowth rate between 1991 and 1995.

32 IndustryStructure

Organization:The tea industryin India was not the outgrowthof indigenousfarming efforts.It was pioneeredby the British- both individualsand companies,who developed the industryin comparativelylarge units or plantations.Plantations generally require large investmentswith long pay-backperiods as the trees have to grow and maturebefore yieldingresults. The areas of the tea estates in India vary in size but there are also very large smallholdings in manyareas. The estates are broadlyclassified into fivemajor groups:

1. Smallholdings ranging from 1/2 to 10 hectares ownedby proprietors. 2. Smallgardens below 200 hectaresunder sole proprietorshipof partnershipfirms with or without processingfactories. 3. Estates owned by privateor publiclimited companies. 4. Estates owned by FERA companies. 5. Estates owned by governmentagencies.

Productivity: The averagetea yieldin India has gone up in the past 40 years. But there is a considerablevariation across differenttea growingregions (Table 2-3). In North India, certain areas likeLakhimpur and Darjeelinghave shownvery low productivitygrowth. There is ample scope for increasingproductivity in many regionsof India such as Kamrup, Naogaon,Karbi, Anglong,North Kachar,Barak Valleyand Tripura (Governmentof India 1996,ibid.). There are also substantialyield gaps withindifferent areas of particulartea estates also, becauseof the age and qualityof bushes,soil conditions,etc.

Table 2-3 India's Tea Yields,1961-1995 (kg./ha) Region 1961 1971 1981 1991 1993 1995 Assam 1,123 1,227 1,503 1,717 1,770 1,701 Assam Valley 1,224 1,328 1,616 1,818 1,812 1,792 WestBengal 1,043 1,176 1,365 1,523 1,619 1,593 North India 1,064 1,175 1,416 1,631 1,697 1,643 SouthIndia 1,091 1,398 1,645 2,541 2,373 2,443 ALL INDIA 1,070 1,221 1,461 1,794 1,819 1,787 Source:Government oflndia, 1996.

Profitability and Margins: The industry's profitability has declined since 1994 mainly due to a fall in tea prices and the loss of the formerUSSR market (Governmentof India 1996, ibid.).However, sales of value-addedtea have increasedboth in the domesticand export markets.Today, about 36 percentof domesticsales are in value-addedform, an increase of 9 percentfrom 1991.Value-added tea also constitutes35 percent of tea exports. The trend is thus favorablefor future profitabilitygrowth.

33 The projectedcost of tea productionin 1996 was Rs. 60.20 per kg. At an expected incomeof Rs. 64.58 per kg., the pre-tax marginwould be Rs. 4.38 per kg. The cost of productionvaries from regionto region.Broad estimatesof these costs are given in Table 2-4. The highestcost of productionis in Dajeeling - almostfour times the cost elsewhere. Darjeelingtea, however,is the premiumIndian variety and fetches a high price in the world market. The lowest costs are encounteredin South India, Terai and the Cachar districts.

Producers' marginson tea grown in differentparts of India also varies. The best is obtainedin Assamvalley where the marginshave been between 10 to 25 percent of sales in the years 1990-94(Table 2-4). The marginsin the other prominentareas of tea productionhave not been very strong, even going into negativeterritory in a number of years (Figure2-3).

Table2-4 IndianTea: Cost of Productionand Producer Margin, 1990-94 (Rs./kg.) Region 1990 1991 1992 1993 1994 Assam Valley Cost 35.12 40.17 47.34 51.42 51.07 Income 46.95 50.17 54.66 60.79 56.78 Margin 11.83 10.00 7.32 9.37 5.71 Cachar Cost 27.30 29.91 34.05 47.02 40.97 Income 36.06 34.96 40.36 56.97 40.65 Margin 8.76 5.05 6.31 9.95 (0.32) Darjeeling Cost 91.77 105.35 123.00 127.38 154.41 Income 102.64 111.01 114.98 110.69 145.47 Margin 10.87 5.66 (8.02) (16.69) (8.94) Dooars Cost 35.80 38.20 43.74 46.11 46.08 Income 39.17 37.56 40.92 46.74 40.43 Margin 3.37 (0.64) (2.82) 0.63 (5.65) Terai Cost 30.88 34.56 41.04 44.11 41.06 Income 38.36 35.74 41.33 46.32 39.90 Margin 7.48 1.18 0.29 2.21 (1.16) South India Cost 35.05 38.19 46.28 43.40 41.83 Income 43.78 42.65 88.80 47.41 38.04 Margin 8.73 4.46 42.52 4.01 (3.79) Source:Government of India, 1996.

34 Figure 2-3 Producer's Marginin DifferentTea Regionsof India, 1990-1994

AssamValley Cachar

15.15

10~~~~~~~~~~~~~~~~~~~

1990 1991 1992 1993 1994 -

Dareeling Dooars

20 4 -10 | g 0 1 g g | g N E | X 2 10 tR2'

-20| | g |2 S

40 [ ~~~~~~Terai Sot rIndia|

I10 s_,,gg 1*60_ 10 0o _!1 120

'5 ~~~~~~~~~~~~0

-5 productinandTmrkeigota(oenetomni 20 96I) These coe nthfr C '

Source: Government oflndia, 1996

Taxes and Subsidies

The Indiantea industryis subjectedto a numberof direct and indirecttaxes on productionand marketingof tea (Governmentof India 1996-11).These comein the form of centraland state governments'levies on tea. The centralgovernment charges a tea cess on the productionand sale of tea. The state governmentscharge green leaf cess, land revenue,sales taxes and octroi duty. The centraltea cess variesin amount fromRs. 0.08 to 0.15 per kg. dependingupon the administrativedistrict. Central excise dutieson loose tea, packet tea and tea bags, were abolishedin 1993,but instanttea stillhas an exciseduty of 25 percent ad valorem.Certain establishments, such as cooperatives,have a much reducedtax structure.Tea exported,both in bulk formsand in value-addedform, receivea numberof rebates.

35 Each state taxes tea on the basis of its own schedule.In West Bengal the salestax on tea variesfrom 1 to 4 percentThe Assamgovernment has a flat 2 percent sale tax on tea sold through the GouhatiAuctions. Private sales are assessedat a rate of 7 percent. In TamilNadu, the basic salestax rate is 5 percent.There are some additionalsurcharges, also.

Marketing

One of India's major problemsin tea marketingis the lack of an adequate transportationinfrastructure. The tea estates of Assamand Cachar do not have easy accessto the sea port of Calcutta.A sea route down the Brahmaputrais not possible becauseof the absenceof transit rights from Bangladesh.Most of the shipmentsreach Calcuttaby road. In SouthIndia as well, transportationis hampereddue to a lack of inland waterwaysand inadequacyof land roads.

The majortea auctioncenter of India is Calcuttawhose developmentfollowed the need of Britishinvestors in the early days of the empireto establishmanaging agents in India who would supervisethe-production and disposalof the crop on behalf oftheir U.K. principals.The most importantof these agencyhouses, as they are called,are Messrs. GillandersArbuthnot, Balmer Lawrie, Begg Dunlop,Duncan Brothers, ShawWallace, etc. After the independenceof India in 1947,the Calcuttaauction center became prominentas an Indianinstitution and slowlytook overmuch of the auctiontrade from London. The other auctioncenters of India in the North are in Gouhati and Siliguri,the former mainlyfor Assamtea and the latter for Dooar tea. Auctioncenters in the South are Cochin, Coonor,and Coimbatore.

Government Regulations

Quite a few laws and regulationsgovern the tea industryin India. The Tea Distributionand Export Control Order of 1957 regulatedthe export of tea through an Export Licenseand a ShippingLicense, presumably to ensure qualityrequirements. The shipmentlicense was done away in 1995.The Tea Waste (Control) Order of 1959 was institutedto prevent the mixingof tea waste withgood tea by merchantsand to make sufficientquantity of denaturedand undenaturedtea waste availablefor manufacturing caffeineand instant tea, respectively.The Tea (Marketing)Control order of 1984 regulates the salesin auctions.The tea producersare lobbyingto repeal this order against oppositionfrom the tea buyers and exporters.The Tea WarehousingLicensing Order of 1989 requiresthe identificationof baileesof tea prior to taking the tea to the public auctions.Besides these piecesof legislation,a host of broader laws, such as the Essential CommoditiesAct, MinimumWages Act, and PlantationLabor Act, also affect the tea businessin India.

Imported tea processingand packaging machineryare taxed at rates varying between5 percent and 20 percent.The duty on tea baggingmachines is 15 percent ad valorem.The importduty on tea packagingis between25 percentand 30 percent.

36 KENYA

Main Production Areas

Tea was first introduced in Kenya in 1903, and by 1945 about 4,500 hectares of land were developed for tea on large-scale commercial estates around Limuru and Kericho.Today, most of Kenya's tea is grown in the sevendistricts east of the Rift Valley including Kirinyaga, Embu, and Nyeri, and eight districts west of the Rift Valley including Trans-Nzoia,Kakamega, and Kisii.Three types of organizationsare involvedin its production,large privateestates organizedas the Kenya Tea Growers Association (KTGA),small holder farms under the supervisionof the Kenya Tea Development Authority(KTDA), and governmentrun estates knownas the 'Nyayo Tea Zones' run by the Nyayo Tea Zones Development Corporation (NTZDC). Large estates dominate productionwest of the Rift Valley,while smallholders dominate the area east of the Rift Valley(Government of Kenya 1995).In 1990,26 percent of the total land area under tea was held in the west by large estates and another 26 percentby the smallholders in the west. Figure 2-4 Share of Total Area and Production of Tea in Kenya, 1995 Area Production NTZDC NTZDC 2% ~~~~~~~~~0% 21 29%_

| b l , b E"~~~~~~~~~~43% Small s ,D ~~~~~~~~~~~~Holders_l Snall 57% 71% . Source: The TeaBoard of Kenya, 1996.

In the east, only 5 percent of the land was held by the estates, but a hefty43 percentby the smallholders (World Bank 1996-11).The share of area under tea in 1995 was 29 percentfor the large tea estates, 71 percentfor the smallholders and 2 percent for the governmentowned NTZDC (Figure24 and Table2-5). Tea producedin the estates accountedfor 43 percent of the production,and smallholder tea 57 percent. The Westem estates, where the yields per hectare are much higher than the Eastern estates, have contributedsignificantly to the growth of Kenyantea.

There is abundant land in Kenya for the expansion of tea. Current utilization of land under tea is onlyabout 10 percent (Governmentof Kenya 1992). The total tea area has been expandingsteadily and is expectedto rise from 76,751ha. In 1994 to 84,000 ha. in 2004 (Governmentof Kenya 1995, op.cit.).Most of the tea is grown at an altitude above6,000 feet where there are not manypossibilities of growingother types of crops. Tea growers also obtainmuch higherreturn from tea than any other crop in these areas and the incentiveto expand cultivationis high (USDA 1995). Creditfacilities to the

37 Table2-5 Changesin Kenya's Tea Production, 1990-95

CultivatedArea (ha) 1990 1991 1992 1993 1994 1995 1995(%/6) Estates 29,980 31,000 31,340 31,750 32,070 32,360 29% Smallholders 67,040 68,800 72,160 73,110 73,840 78,960 71% Total 97,020 99,800 103,500 104,860 105,910 111,320 100%

Production (tons) Estates 87,012 90,900 88,260 98,630 90,340 105,580 43% Smallholders 109,997 112,700 99,810 112,530 119,080 138,950 57% Total 197,009 203,600 188,070 211,160 209,420 244,530 100%

Yield (kg. perha) Estates 2,902 3,184 3,033 3,339 3,013 3,404 Smallholders 1,641 1,982 1,730 1,942 1,776 1,996 Average 2,031 2583 2382 2641 2395 2700

Source: ri) Kenya CentralBureau of Statistics- EconomicSurvey, 1996; (ii) WorldBank, Kenya AgriculturalSectorReview: Tea Industry, 1995. smallholdersprovided by the KenyaCommercial Bank (KCB)is facilitatingnew development.West of the Rift Valley,where the large estates are concentrated,ideal weather and soil conditionsfacilitate the growingof tea in large scale.The tea areas in this regionare betweenaltitudes of 1,700meters and 2,300 meterswith well distributed rainfillaveraging about 1,200millimeters per year. The soil is deep, free draining,and acidicof volcanicorigin, which is perfectfor tea. Topographyand climatethus give Kenya a big advantagein the cultivationof tea. The terrain and weather conditionswhich make pluckingeasy, add to the productivityand give the country additionaladvantage over the tea growersin India and Sri Lanka.

Production-Consumptionand Export Trend

The total area under tea in 1995was 111,320hectares, whichis only 17 percent of the potential664,103 hectares suitable for tea (Brown 1963). Thisindicates the tremendousproduction potential of the country. In 1995,the area under the large estates was 32,201 ha. (29%), comparedto 80,355ha. (71%) under smallholders (Figure 2-5).

The total area under tea in the smallholder sector increased40 percent,from 56,505 hectares to 80,355 hectaresbetween 1985 and 1995.In comparison,the estate sector tea holdingsincreased only 19 percent,from 27,332 hectaresto 32,201 hectaresin the same period. The smallholders today, however,control over 71 percent of the total land area (112,556 ha) under tea in Kenya and 56 percent of the output. The NTZDC have also expandedtheir tea hectaresto over 3000 hectares since 1986.

38 Figure 2-5 Estate and SmallHolder Areas Under Tea:1985-95

90000 80000. 70000. 60000; io-o 50000

85 86 87 8 89 9 9'1 92 93 94 9

Source: The Tea Board of Kenya, 1996.

Productionhas grown rapidlyin the last 10 years, rising67 percent(from 147 millionkilograms to 245 millionkilograms) between 1985 and 1995. The large estates dominatedproduction until 1987when the smallholders surpassedthem (Figure2-6). Even with a lesser area the estate sector produced 105.58million kilograms of tea in 1995, comparedto the smallholders' 138.95 million kilograms, due to higheryields.

Productivty: Productivityin Kenya's large tea estates is amongthe highestin the world. Estate sector yield is around3279 kglha comparedto the smallholders' yield of 1729 kg/ha. (Figure2-7). The estates are managedby some of the best tea companiesin the world, such as Unileverand GeorgeWilliamson, which are very good at maximizingthe use of resources.

Figure 2-6 Estate and SmallHolder Production, 1985-95

140

120 .. '..' ..Smali~~~~Holdens

.2~~~~~

40

1985 1986 1987 1988 1989 1980 1991 1992 1993 1994 189

Source:Kenya TeaBoard 1996.

39 The small-holdersector, managedby the Kenya Tea DevelopmentAuthority (KTDA) has not yet reachedtheir level of productivityyet, althoughthey have shown quite impressive productivitygrowth in recent years. For example,in 1984,they could only achieve35 percent of the yieldsobtained in the estates.In 1994,they narrowedthe gap substantially to reach 59 percent of the estate yields(Government of Kenya,op.cit.). They have also grown in size by over 40 percentin the last ten years, and are presentlyproducing above 56 percent of Kenya's tea. Both the yield and land area in the estates have grown by 2.8 percent annuallybetween 1984 and 1994.But yield growth in the smallholder sector in this periodhas been faster than the growth in tea area. The country's 5.6 percent per year productiongrowth was thus predominantlyled by yield growth rather than area growth.

Figure 2-7 Estate and SmallHolder Yield Growth, 1985-95

3500 3000.

985to 1 1985 ki198lio 987mi 1981989 1990 199 1992ne 1uit3 199ly4erart 1995 4 millionkilograms in 1995(Figure 2-8). Most ofthe declinehas taken place after the decontrolof prices and the trade liberalizationof 1992.There are no specificresearch data on the causes of such low consumptionand the respectivemarket shares of all beverages in the market,but consumptionis expectedto remainlow unless aggressivemarketing changesconsumer preferences.

Eiport: Tea is the most importantexport product of Kenya and it accountedfor 19.3 percent of the value of all commoditiesexported in 1995,compared to 16 percent for coffee.But in spite of the rise in the valueof exports (6.6 percent) and the quantity exported(24.6 percent) between 1994and 1995,it experienceda 14.5 percent drop in prices. This comparesto only 0.5 percent drop in coffeeprices and 7.3 percent drop in all horticultureproducts, in the same period (Governmentof Kenya, 1996).1OTo some extent this reflectsoverproduction by tea producers.But it is also indicativeof the dynamicsand

10 Govenment of Kenya (1996), Economic Survey Table 7.8., p. 106.

40 constraintsof the internationalmarket place and the need for sophisticatedmarketing of a product that has long been "sold" as a commodityrather than "marketed"as a specialty good. The prices of many agriculturalcommodities in Kenya are controlledby the government,but tea pricesare determinedby internationalmarket dynamics.

Figure 2-8 Kenya: Tea Production,Consumption, and Export, 1985-95

250.00 ~~~~~~~~~~~250.00

200.00 200.00

E 150.00 150.00

.2 100.00 100.00

50.00 50.00

0.0 0.00

| consunmption Export U Production

S3urce:Kenya Tea Board 1996.

Kenya produces highquality teas, thoughnot on the same scale as India or Sri Lanka. The fetish for high qualityin the KTDAhas forced smalltea growers of tea in Kenya to maintainthe qualityof their pickingby stayingwith the two leaf and a bud practice.Estate farms have also strived for higherquality in the past to maintaintheir position in the qualitytea segmentsof Europe.However, the push for higherand higher productionlevels has extendedthe pickingto coarser leaf and eroded the qualityof Kenyantea (USDA, op.cit.).Two other factorsthat have contributedto the fail in quality of Kenyantea are inadequatefactory capacityand poor road and transport conditions.The industry's inabilityto handlethe ever increasingproduction coupled with delaysin leaf deliveryto the factorieshave lowered qualityof the final product.

Industry Structure

Organization:As discussed earlier,the Kenyantea is produced in three types of farms, large private estates, smallholderfarms and governmentrun estates. The KenyaTea Growers Associationrepresents the privateestates while the smallholder interestsare looked after by the Kenya Tea DevelopmentAuthority (KTDA). The governmentestates are managedby the Nyayo Tea Zone DevelopmentCorporation (NTZDC). The private estates own and manage their factoriesfor processingtea and the smallholder tea

41 factories are managedby KTDA. TheNTZDC uses KTDA's factoriesprimarily and some privateestate factoriesaround Kericho.

The KTDA is a parastatalorganization with representationfrom the government, the Tea Board, elected representativesof smallgrowers, and a representativeof the CommonwealthDevelopment Corporation (CDC) in its 20-memberBoard. The organizationis supposedto operate on a commercialbasis and as a whole functionswith reasonabledegree of independencefrom governmentalcontrol. It has evolvedwith substantialinputs from the smallholder farmersit serves. Its managementis considerably decentralizedat the zonal and factory levels.It has many problems,however. Lack of coordinationamong differentunits are often cited. The state's presenceinherently takes away a lot of privatesector initiativesfrom it. It also receiveshidden or indirect subsidies from the government,tax exemption,and other perks of the government.

The other prominentorganizations in the Kenyantea sector are the Kenya Tea Board, the Kenya Tea PackersLtd. (KETEPA),the East AfricaTea Trade Association (EATTA),the Tea BrokersAssociation, and the Tea Buyers Association.The Tea Board is the primarycontrol organ of the tea industryand is responsiblefor licensingof growers, factories,the regulationof productionand processing,marketing and export control, and tea research. The KETEPAis a packer/blenderof tea for the domesticmarket and the largest supplierof packetedtea in the country. The EATTAis an associationof all tea operators, individualsand firms,whose purpose is to promotetea trade and foster orderly marketingdomestically and internationally.Its membershipis extendedto other countries like Uganda,Tanzania, Rwanda, Burundi, and other Africantea producingcountries. The Tea Brokers Associationis a group of all tea brokers in Kenya.Brokers are appointedby producermembers, the KTGAand KTDA. The Tea Buyers Associationis a buyers group with local and overseasmembers. Their role is to foster the interestof tea buyers.

Profitabilityand Margins: Profitabilityfrom tea in almostall growingregions is high. The gross marginfor tea in the East ranges from Kshs 43,433 to Kshs 75,967 per acre/year (Governmentof Kenya 1995,op.cit.). Thesemargins are exceededonly by coffeeand high value horticulturecrops such as tomatoes,snow peas and Frenchbeans. In the Westem districtsthe gross marginper acre on tea ranges fromKshs 12,288to Kshs 36,894. Tea ranks first in Trans Nzoia and Kakamega,and secondin Kisii(after Bababs) in gross marginper acre. The overallprofitability of tea cultivationin Kenyais therefore high.

The net unit profit of tea export fromKenya in 1993 was Kshs 16.51per kilogram which gave it a profit marginof 16.17percent (FAO 1995-Ill, op.cit.). This compares with a 14 percentmargin obtainedin Tanzania,12 percent in Zimbabwe,and 1.6 percent in UgandaUTGC. Amongfactors that affectprofitability are internationalprices obtained for specifictypes of tea. Qualityis a majorfactor in price determinationand there is a premiumfor high qualitytea in the world market.The highest and the lowest prices receivedfor Kenyantea at the Mombasaauction in 1994were US $2.13 and US $1.54, respectively.On the supplyside, Kenya's cost efficiencywas a majorfactor behind profitabilityof tea export in 1994.Agricultural production cost in Kenya (KTDA) in this

42 particularyear was 25 percent of the total cost of tea export, comparedto 28 percent in Zimbabwe,and 36 percentin Tanzania.Manufacturing cost, however,was high in Kenya. This cost, includingthe cost of collectinggreen leaf, energy,interest payment, labor, management(overhead expenses), packaging and other manufacturingexpenses, was 72 percent. Comparativemanufacturing costs in Tanzaniaand Zimbabwewas 49 percent (FAO 1995,ibid.). Finally, marketing costs includingtransportation of madetea from factoriesto the auction center,warehouse fees, brokeragecommission and other selling expenseswas 7.94 percentin Kenya,compared to 14.5percent in Tanzaniaand 21.8 percent in Zimbabwe.Overall, the tea exportfrom Kenya is profitable.

Labor Force: There is a shortageof labor in the smallholder sector for regular plucking rounds of tea bushes. Thisis a major factorbehind the relativelylower productivityof this sector in comparisonto the estate sector. The labor shortageis heightenedduring the harvestingof normalfood crops, which coincideswith one of the main pluckingflushes. The labor shortageoccurs primarilybecause wages in the smallholder tea sector are low. Generallypluckers are paid Kshs. 2 per kg. duringflush months and Kshs. 60 per day duringlow crop months.However, coffeepays muchmore - as much as Kshs. 15 per can.

Marketing

Kenya's tea is mostlysold throughthe Mombasaand the London auctions. However,a significantamount of direct salesalso takes placeto overseastraders and packers (Governmentof Kenya 1992,op.cit.). Kenya's principal export marketsin 1995 are as follows:

ImportingCountry Export(Mnkg % of Total Export

UnitedKingdom 76.27 32.1% Pakistan 72.41 30.5% Egypt 42.29 17.8% Afghanistan 7.39 3.1% Sudan 6.71 2.8% All others 32.53 13.7% Total 237.50 100% Source:ITC Bulletin, 1996.

The UnitedKingdom and Pakistanare the two largest importersof Kenyantea, totaling over 62 percent of the overallexport. Other smaller,but importantimporters are Egypt, Afghanistan,and Sudan.In the MiddleEast and the CIS the market is strong for orthodox tea and in the Far East and North Africathe preferenceis for green tea, neither of whichKenya produces.The total dollar exportin 1995was 365.7 million.

Kenya Tea PackersLimited (KETEPA) is the largest domestictea marketing agencyin Kenya with 75 percentof the market share in 1994 Governmentof Kenya 1995, op.cit.). There are an additional20 or so other smalltea packers who enteredthe market

43 after the marketliberalization of 1992which ended KETEPA's monopoly.But KETEPA stillobtains its suppliesdirectly from the Kenya Tea DevelopmentAuthority and the Kenya Tea GrowersAssociation (KTGA). All other packershave to buy their tea from the auctionspaying additional transportation and warehousingcharges.

The Tea Board of Kenya (KTB), whichis the major agencyfor promotingexport, also does somelocal promotionin the market.This is quite smalland has fallenover the years. For example,the total promotionalbudget of KTB droppedfrom 38.49 million shillingsin 1992-93to only 2.03 millionshillings in 1993-94.Domestic market promotion also dropped from 369,320shillings to 214,729shillings in the same period (Tea Board of Kenya 1994).The Tea Board canceledits membershipto the USA, Canada,U.K, and GermanTea Councilsin 1993.Some promotionalefforts were made in 1995 towards the marketsof Sudan,Egypt, and the UnitedArab Emirates.

The major channelof distributionfor Kenya's tea is the Mombasatea auction which suppliesboth the domesticand the export markets.The agent for smallholdertea distributionand sale in the auctionsis KTDAwhich operatesthrough a numberof appointedtea brokers.The larger tea estates also market most of their output through their own brokers in the auction.A certainpercentage of tea is also sold privatelyto buyersabroad or to localdealers.

SRI LANKA

ProductionArea

The tea growingareas of Sri Lanka are characterizedby their height, with low- grown areas up to 2,000 feet above sea level, mid-grownareas from 2,000 feet to 4,000 feet over sea leveland high-grownareas over 4,000 feet. The high-grownareas of central Sri Lanka, consistingof such areas as Dimbula,Dickoya, and Nuwara Elia are the second largest of the three with about 37 percentof the total tea area, comparedto 38 percent of the area for mid-grownand 25 percent for low-grown.The output of low-growntea areas is the largest of the three (118 millionkilograms in 1994),followed by high-grown (77 millionkilograms) and mid-grown(47 millionkilograms). The high-growntea was the leader prior to 1983,when the rising demandfrom the MiddleEast (Iraq and neighboring countries)for heavyliquoring teas grown in the low areas surpassedthe demandfor the former.

Most of the tea growingregions of the west depend on the south-westmonsoons between May and September.This has been rather erraticin the recent years leadingto periodsof severedrought and loss of production.In the east, the Uva and the Pussellawaareas generallyare served by the north-eastmonsoon during October to Januaryand produce a varietyof extremelymellow flavor tea (Forrest,op.cit.). The soil,however, is not extremelyfertile in Sri Lanka and demanda considerableamount of fertilizationfor

44 bearinggood yields.Coupled with the prevalenceof considerableamount of old tea bushes,it is a major retardantto highproductivity.

The total area under tea in SriLanka in 1992 stood at 221,836hectares, of which 61,371 hectares (28%) are smallholdings of less than 20 hectares.The rest (160,465hectares or 72%), is in the tea estates, either ownedby privatecorporations or operated by the newly formedmanagement companies (ITC, 1995).There has been almostno expansionin the total cropped area in the last ten years, althoughthe smallholdersector has grown marginally(Table 2-6). Most of the tea processingfacilities and storage warehousesare owned by the estates.

The area plantedwith tea has gone down over the years in Sri Lanka. For instance, in 1970 the total area under tea was 242,000hectares with 237,000hectares in private holdingsand 5000 hectaresunder the state. In 1993,the area under tea stood at 193,000 hectareswith 88,000 hectaresunder the privatesector and 105,000hectares ownedby the government.Much of the area is plantedwith the older seedlingtea. Since 1989, some replantinghas replacedthe older tea with the newer vegetatively-propagated(VP) tea. In

Table 2-6 Sri Lanka: AreaUnder Tea 1985 1986 1987 1988 1989 1990 1991 1992 Estates 175,384 165,659 163,482 163,060 162,853 161,883 161,018 160,465 SmallHolders 56,266 57,246 58,018 58,623 59,257 59,875 60,673 61,371 Total 231,650 222,905 221,498 221,683 222,110 221,758 221,691 221,836 Source:ITC Bulletin 1995.

1989,about 1,141new hectaresof tea were addedand about 2,090 hectares replanted.At the same time a certainamount of derelicttea landswere abandoned.Since then, new plantingand replantingefforts have been consistentthrough 1994.

Sri Lanka is endowed with somevery favorableagroclimatic zones that produce high qualityteas. High grown areas of Sri Lanka produce many famousvarieties of tea like the Best Western,Uva and NuwaraEliyas. Somegood quality"leafy" tea is also grown in the lower regions. SriLanka's concentrationon the productionof orthodox tea also enhancesits qualityimage, as most qualityteas are producedby the orthodox method.All these give Sri Lanka a strong positionin the qualitysegment of the world market.

Production-Consumption and ExportTrend

The shrinkageof the globalmarket demandfrom the seventiesthrough the early ninetieshas been quite traumaticfor SriLanka. Tea has long been the main source of its foreignexchange earnings. It provided26 percentof the country'stotal export earningin 1987.In 1995,however, this amountedto only 12.6percent.(Central Bank of Sri Lanka 1995). Over the period from 1970 to 1995,the world pricesfor tea, in real terms, also fell

45 over 67 percent (Figure2-9). This took a heavytoll on Sri Lanka's export earningsand the tea industryas a whole (World

Figure 2-9 World Tea Prices in Constant1990 Dollars

~400 ~300

~100 0 1970 1980 1985 1990 1992 1993 15

Source: WorldBank, 1996.

Bank 1996,op.cit.). This situationwas worsenedby the harshmacroeconomic policies adoptedby the country,which paralyzedthe tea sector and endedwith a gradual loss of competitivenessto other producersin Asia and Africa.The global market share of Sri Lanka fell from 40 percentin 1970 to 20 percentin 1990. Some recoverytook place after the privatizationof managementof state owned plantationsin 1993 raisingthis levelto 21.8 percentin 1995.But for the most part of the decade(1986-1995) the sharehas remainedrelatively flat, in sharp contrastto Sri Lanka's biggest competitorKenya whose sharein the same period rose prominentlyfrom 12 percentto 22 percent (Figure2-10). Kenya,thus becamethe largest tea exportingcountry in the world in 1995 overtakingSri Lankaby 0.2 percent of the market.

Figure 2-10 ChangingGlobal Market Share of Sri Lanka in Comparisonto Kenya 1986-1995

20%

15%

i. 0%

5%

19see 1987 1988 198 1990 199 1992 1993 1994 1995 F- SriLanka - Kenya Source: ITC Bulletin, 1996.

46 After stayingmany years below the 215 millionkilogram level, SriLanka's tea output rose to almost 227 millionkilograms in 1988 (Figure2-11). There was a slumpthe foliowing year and then a steadyrise to 240.7 millionkilograms in 1991.Another slump,created by wide spread drought,pushed output to its lowest levelin over a decade(179 million kilograms).

Figure 2-11 Sri Lanka:Tea Production 1985-94

250,000 . .. **** .

* 200,000 - .... E 150,000 ...... dZj~~~~~~~~~~~~~~~~~~~.~:'~ ~ ~ ~ ......

100,000__.

~-50,000.

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994

Source: Governmentof Sri Lanka,Plantation Sector Statistical Pocket Book, 1995.

In 1993,the countrymade a significantrecovery after the previousyear's drought and increasedproduction by 30 percentto 232 millionkilograms, aided by private management,trade liberalization,and favorableweather conditions (FAO 1995-11, op.cit.). Againin 1994,Sri Lanka achieveda record crop of over 242 millionkilograms under the momentumgenerated by the privatemanagement companies. Production increasedby 2 percent over the previousyear to hit a high of 246 millionkilograms in 1995 (FAO 1996, ibid).

Of the total area of 221,836 hectaresunder tea cultivationin Sri Lanka, 61,371 hectares(28 percent)was under smallholders of less than 20 hectares in 1992.The remaining160,465 hectares (72 percent)was owned by the state. The state lands produced 74 percentof the tea in 1985 and the smallholders 26 percent (Figure2-12). This pattern has changedover time and in 1990 the contributionof the state sector declinedto 63 percent, and the balance37 percentwas producedby the smallholder sector. In 1992,most of the governmentestates were leased out to privatemanagement companies,who produced56 percent of the output in 1994,compared to 38 percentby the smallholdersand only 6 percentby the state. Smallholder tea has thus madegradual inroadsinto the overallproduction base.

47 Figure 2-12 Tea Productionin State, SmallHolder and ManagementCo. Estates 1985-1994

FIIdus 1985 26% - [ 1990

37%

\ << ~~~~~~~~~~~~~~te*x 3sS Maug. IbI~HDdm utrCo. _ | s38% 56%

Source: Governmentof Sri Lanka:Plantation Sector Statistical Pocket Book, 1995.

It is difficultto estimatethe extent of domestictea consumptionwithout data on inventoryholdings each year. Under the assumptionthat the amountretained after export was consumedinternally, the averageconsumption of tea between 1985-1994was 13 millionkilograms per year, or about 5 percent of gross output. This amountsto a per capita consumptionrate of about 0.72 kilogramsper year. Future growth trend (Figure2- 13) also shows only a modestincrease of about a millionkilograms per year."

Figure 2-13 Sri Lanka:Tea ConsumptionTrend, 1985-1994

30,000. 25,000DrOO7 ~W4

20,000

5 15,000 ..... ***.. .

10,000 -

5,000

Source:Sri LankaPlantation Sector StatisticalPocket Book; 1995.

Sri Lanka's tea export trend has been relativelyflat in the last decade,hovering aroundthe 220 millionkilogram mark (Figure2-14). The year 1992,however, was a disastrousyear for Sri Lanka's tea. The industrywas hit with a severedraught for the

11 Forecastbased on linear regressiontrend between 1985-94.

48 greater part of the year which reducedoutput by almost30 percent (Forbesand Walker 1992). Projectionsin June 1992 indicateda drop from 53,800 tons recordedin 1991to 37,66 tons in 1992 (FAO 1992).The droughtalso affectedmany other tea exporting countries,like India, Kenya,and Malawi.

Figure 2-14 Sri Lanka's Tea Export Trend 1986-95

250000 %4 .*vN*)

2U 100000

50,000

1986 1987 1988 1989 1 990 1991 1992 1993 1994 1995

Source:Sri Lanka PlantationSector StatisticalPocket Book, 1995.

The world demandfor tea also fell in 1992.Changes in the former SovietUnion (FSU), in particular,affected Sri Lanka's export quite adversely.Russia used to buy substantialamount of highquality tea from Sri Lanka.But after its disintegrationand mountingeconomic problems, it divertedits purchaseto lower grade tea from other sources. Shipmentto the FSU totaled only5,000 tons in 1991,down markedlyfrom the 14,100tons recorded during 1990.Iraq, another large buyer of SriLankan tea, was absent from the market in 1992 - due to the UN trade embargo - and ended up buying low priced tea throughJordan. Many large MiddleEast buyersalso cut back their purchasesin 1992. Iran, one of the biggestbuyers of Sri Lankantea, cut back almost 7 millionkilograms. Jordan, the biggest buyer of Sri Lankantea in 1991,went down from 31.4 million kilogramsto about 21.8 millionkilograms and the United Arab Emirates,which had purchasednearly 10 millionkilograms in 1991,bought onlyabout 4 millionkilograms in 1992.

Export recoveredin 1993,rising by 18 percentto 210 millionkilograms. However, the slumpin world price produceda declinein the nominalexport unit value of 8.3 percent (FAO 1995,op.cit.). The overallvolume of the world tea trade declinedby about 10 percent in 1994.In spite of the sluggishmarket, however, Sri Lanka's export continuedto increase,reaching a record of 224 millionkilograms - about 7 percent higherthan the previousyear. The weak import demandworld-wide continued in 1995 but Sri Lanka experiencedincreases in both volumeand pricesof exportresulting in higherexport revenues.This increase,however, came mainlyfrom export to one particulararea - the CIS, whichincreased its import of Sri Lankantea from 12.7 millionkg. in 1994to 37.99

49 millionkg. in 1995.From the past three year's perspectives,therefore, Sri Lanka has performedquite well in the decliningworld market (Figure2-15).

Figure 2-15 Sri Lanka's Tea Export Relativeto WorldExport, 1993-95

240000 1180000 235000 1 OD6O 1140000 . 230000E 2 ~~~~~~~~~~~~~~1120000 225000 1100000 220000 1080000 215000 1060000 .1210000 102ooo 205000 1OD00D 200000 980000 195000 980000 1993 1994 1995

|=Sri Lanka_Word

Source: FAO, Tea Market Development Report 1996 and ITC Bulletin 1996..

The directionof trade from 1989 to 1994showsstrong exportperformance by Sri Lanka in countrieslike the USSR/CIS,Jordan, the UnitedKingdom, Saudi Arabia, Syria, and the United Arab Emirates(labeled G-1 countries).Both the tea export growth index'2 and the tea exportvolume indexl3 for all these countrieshave been positiveand strong, respectively(Figure 2-16). Not onlyhave the importof tea of these countriesfrom Sri Lanka been high,but the importshave shown positivegrowth over the years. In the countrygroup (labeledG-2) consistingof Egypt,Iran and Pakistan,the export volumehas been high but the growth rate negative.Export performancein the third countrygroup (labeledG-3) consistingof Canada,USA, Italy,Libya, Kuwait, and Yemenhas been poor both in terms of volume and growth. The fourth group (labeledG4) consistingof Germany,the Netherlands,Japan, and Australiahave shown positiveimport growth, althoughtheir volumesof import of SriLankan tea have been small.

The compositionof tea exportedfrom SriLanka have slowlyshifted from bulk tea to more value addedforms. In 1980,bulk tea accountedfor 83 percentof its total export. In 1994,this figuredeclined to 68 percent(Figure 2-17). At the sametime, export of packet tea went up from 17 percentto 27 percent.The export of tea bags also went up from less than 0.1 percent in 1980to 3 percentof total tea export in 1994.

1 2 The export growth index is the annual export growth to a countly detennined through a linear regression trend line respective to the average annual export growth to the top 20 importers. Index = (Export growth to country X I Average export growth to 20 top importers of Sri Lankan tea) x 100. 13The export volume index is the volume of imports of a countly respective to the average imports of the twenty top importers of tea from Sri Lanka. Index = (Export to countly X / Average exports to 20 major importers from Sri Lanka) x 100.

50 Figure 2-16 Relative Export Volume and Export Growth of Major Sri Lankan Tea Importers

1500 1000 5 ~500

0D5 -500

-1500 G3

G-1 G-2

-15M ~ 15 CanadaU.S ItalyLibya Kuwait Y em e n Gmayi t edJvrAtr VolumeoIndexGrowthIndex 25510 45 199629 39889 248 95949 1342 -Ia,# 19~80-99 ... Mg Growth Index -184 -9 -46 -60 -95 -69 2 Source:A uthors'estimate. Figure 2-17 Composition of Tea Exported from Sri Lanka, 1980-1994

205

150______

100

1980 1985 1901994 * u To153.04 138.86 133.44 152.18 * Pbekste31.13 56.13 76.33 64.39 E3OhealeTeas 0.82.85 5.86 8.52

Source: Sri Lanka PlantationSector Statistical Pocketbook, 1995

5 1 Industry Structure

Institutionsand Environment: Tea was one of the major agriculturalcommodities that spurred Sri Lanka'seconomic growth after independencein 1948.However, the path of its developmenthas been somewhatlike that of a rollercoaster, rising and fallingaccording to changesin the politicalideology at home and economicforces in the international marketfor most of the period that followed.The first downturn started withthe declineof pricesin the world marketfor tea and rubberin the mid-fifties,which considerably weakenedits economicand financialperformance. A second seriesof events, covering most of the seventies,culminated in an ideologicalmove towardstight state control which created a huge governmentbureaucracy that almost chokedoff any developmentof the tea industry.

Except for a brief period of liberalizationfrom 1968 to 1970,the government's interventionin the productionand marketingof tea was pervasiveuntil about 1977.The Land Reform Laws of 1971and 1975limited private holdings to a maximumof 20 ha. and led the governmentto takeover more than 500 tea, rubber, and coconut estates from privatelandowners. It placed 532 of these estates under two state corporations,the Janatha Estate DevelopmentBoard (JEDB)and the SriLanka State Plantation Corporation(SLSPC), which together controlled110,000 ha. of tea (50% of the total) as well as more than 400 factories.The tea industrythus broke up into two segments:the state plantationsegrnent consisting of all the nationalizedtea estates over 20 hectares and the smallholder segmentconsisting of producerswith less than 20 hectare (nearly 160,000 individualholdings). The nationalizationplaced just over halfthe tea land under state control,and its powerfulinfluence shaped the industrydynamics for the next two decades. Between 1972 and 1992,misdirected sectoral planning and policies,combined with total governmentcontrol over productionand marketingof tree crops, left the sub-sector completelywithout directionfor future growth and internationalcompetitiveness. Under these conditions,neither the state nor the private sectorcould functionefficiently. In 1985, a MediumTerm InvestmentProgram, co-financed by the InternationalDevelopment Association(IDA) and the AsianDevelopment Bank (ADB),was implementedto rehabilitateand improvethe decliningproductivity of the publicestates. Under this program,the Fourth Tree CropsProject was completedin 1992.A similarproject, titled the Tea SmallHolder Development Project and targeted towards the privatesector, was started by the ADB in 1989.

In 1992,449 Governmenttea, rubber and coconutestates were detachedfrom the two State Corporationsthat managedthem and consolidatedinto 22 governmentowned regionaljoint stock companies,each holding20-25 estates. Taking a 99 year lease of the land, these companiesstarted operatingin June 1992 with a six-memberBoard of Directorsappointed by the Government.Simultaneously, the staff and facilitiesof 11 of the 12 RegionalBoards of JEDB and SLSPCwere transferredto these companies.The managementof these companieswere in turn contractedout to 22 privatecompanies under a profit-sharingplan. The initialcontract periodwas for 4 1/2 years expiringin December 1997.The intentbehind this restructuringprogram was to begin the

52 privatizationof the sectorin stages,starting with managementcontracts and eventually movingtowards full divestiture(Government of Sri Lanka).

After the break up, the two state corporationswere also left with 52 non-viable estates, covering19,288 hectares. These estates were considerednon-viable because they had lossesin each of the previous5 years and the yieldsof tea and rubberwere below 1000kg/ha in each year duringthe sameperiod.

The changeover to privatemanagement did not yieldthe anticipatedimprovement on the output and productivityfront for the first two years due to a number of constraining factors. The most importantconstraint was the taking awayof the companies'power to deal with labor problemsby continuousGovernment dictation of wages and other employmentterms. Labor constitutes65% of the cost of productionin the tree crops industriesand increasingwages withoutproductivity enhancement was bound to depress profits and any incentivesfor new investment.The other major problemwas the ambiguityof propertyrights. The 22 regionalcompanies were fully ownedby the state and the managingcompanies were merelytheir operatingagents, not directlyresponsible for financingcapital development or the ongoingoperations. This left the sector without any source for developmentand maintenancefinance outside of Governmentcontribution, whichwas precarious.The short-termcapital requirement of these companieswere met from bank overdrafts,which by the end of December1992 had run up to 640 million rupees.14 With a lack of accessto developmentcapital, nothingoutside the bare essential maintenanceand daily operationswas undertakenin the estates.

In 1995,the governmentstarted privatizingthe 23 estate firmsby selling51 percent of the sharesof the firmsthrough open bids. By May 1997, 14 companieswere sold and the stocks of six of these were trading in the stock exchange.The sale of the remainingfirms were expectedto be completedby the end of 1997.

Productivity:The estates have the best tea producingland in Sri Lanka and they produced 62.5 percent of the country'stotal output of tea in 1994 (Table2-7). In spite of this advantage,their averageproductivity was only 1323kg/ha comparedto the smallholder productivityof 1481 kg/ha, in 1994.

Table2-7 Estate and Private Sector Output and Productivity Year 1990 1994 1994 Share 1994 '000 kg '000 kg Productivity

Estates 147,200 151,300 62.5 % 1323kg/ha Private SmallHoldings 85,900 90,900 37.5% 1481 kg/ha TOTAL 233,100 242,200 100% Source: PlantationSector PocketBook; 1995.

14 Minutesof Meetingof PRUwith WorldBank Mission (1993),dated March 11.

53 Productivityon the scatteredtea holdingsin Sri Lanka shows extremes.The governmentestate plantations,located mostlyin the upper and middlecountries, have much lower productivitythan privatesmall holdings in the low country (Table 2-7).'5 The publicestates' averageyield in 1991 was about half of that of privateholdings. The intakesper pluckerwere also about half. Clearly,estate laborersunder publicmanagement had performedwell below capability.The loss of productivityin the estates, due to many differentcauses, was quite substantialbetween 1991 and 1993.After privatization,the estates did show a recoveryback to the productivitylevel of 1991(1260kg/ha in JEDB managedestates). The productivitylevel further increased in 1994 to 1323 kg/ha, but was stillbelow major internationalcompetitors. Of course,it must also be understood that the

Table 2-8 Tea Productivityand Profitability,1991 Sri Lanka and Other Major Producers Sri Lanka N. India S. Kenya17 Indonesia Zimbabwe1' India16 State Private* Yield (kg /ha) 1,268 2,442 1,643 2,443 3,500 1,645 7,800

Intake per man- 13.52 24.59 26.22 25.24 55 NA 68 day

Labor per ha 3.21 2.70 2.67 2.50 2.20 NA NA

COP ($/kg) 1.8719 1.54 1.52 1.39 1.44 NA 0.64

Labor Cost (as 50 NA 39 50 NA NA NA % of COP) Revenue 2574 4957 4318 4669 4338 NA NA $/ha)20 GrossProfit 203 1196 1085 1472 2438 NA NA ($/ha) NA = not available. * Low grown only (75%of privateproduction). Source:FAQ 1995-b, Tea Board oflndia 1995, WorldBank ConsultantHenderson Report, TableK; FTCP PCR, 1992, Annex-I, Table18; PlantationSector Statistical Pocket Book; 1993, USDAAnnual TeaReport, 1992.

15 Thelow country yields are higherprimarily because of predominanceof the vegetativelypropagated (VP)variety of tea as comparedto mostlyold seedling variety in the up and midcountries. 16Data source: Tea Boardof India, 1995and Government of India1996. 17Based on FAOstudy of fourAfrican tea producers,1995. The averagesmall holder tea yieldin Kenya in 1994 was 1,811 kg/ha (KTDARestructuring Study 1995). 1]bid 191991state sector COP = Rs. 79.55= $ 1.87 20FOBprice in 1991 was $2.03/kg.

54 averageproductivity figures hides a lot of variationamong different types of plantation land. For instance,the highestyield received in 1994at the Watawalaestates exceeded 2,500 kg/ha,whereas the yield obtainedat the MaskeliyaKoslande estates was only 348 kg/ha.

Tea yieldsin Sri Lanka are amongthe lowestin the world (Table 2-8). However, accordingto a 1991study, the yieldson some of Sri Lanka's privatesmall holdings have long exceededthose of their closest competitors,India and Kenya (Figure2-18). For instance,the averageestate yield was only31 percent of the averageyield in Kenya's estate sector, 59 percent of the averageyield in North India, and 40 percentof the average yield in South India. In comparison,Sri Lanka's smallholder yields were 83 percent of the smallholder yields of Kenya,92 percentof the averageNorth Indianyields and 63 percent of the averageyields in SouthIndia. 21

The low productivityin the estates is partiallydue to the nature of their vegetative stock. These plantationsare located mostlyin the upper and middlecountries with a preponderanceof the old-seedlingvariety of tea. Onlyabout 37% of the bushes are of the high-yieldingvegetatively-propagated (VP) variety.In contrast,most of the private sector tea lands are in the low country;which have been plantedwith the VP stock. Other productivityenhancing measures such as timelyand proportionateapplication of fertilizer and proper agronomiccare of the tea bushes have also been lacking.Some of these problemsare now being addressedby the privatizedplantation companies.

Figure 2-18 Tea Productivityin Major CompetingCountries, 1994

3500 3000 2,852 3,013 2500 2,386 2,395

2000 1,609 1,696 1,776~~~~~~,88

1000 500

~~O4~~ ~

Source:IYC 1995,India Tea Board 1995,KTDA Restructuring Study 1995.

21 Datasources: lTC 1995, Tea Board of India 1995, KenyaTea Development Authority Restructuring Study1995.

55 Cost of Productionand Profitability

Profitabilityof Sri Lanka's tea industryis determinedby internationalprices, domesticcost of production,and taxes and tariffs.International prices have been extremelycompetitive in the past 10 years, due to the emergenceof low-cost producers such as Kenya.The averageLondon auctionprices for Sri Lankan tea have been lower than the averageprice of tea from all countries since 1987 (Figure2-19).

Figure 2-19 London Tea AuctionPrices 1985-94

160 140 1111120

~40 20 0

SriLanka Tea | Teafrom Al Countries Source:Sri Lanka PlantationSector Statistical Pocket Book, 1995

Prices for Sri Lanka's volume-tradedtea goingthrough the Colomboauction have also been low comparedto directlymarketed packaged value-added tea (Table 2-9).22

Table 2-9 Export Price of DifferentTypes of Tea 1980 1985 1990 1991 1992 1993 1994 BulkTea 32 56 87 78 76 84 80 PacketedTea 41 68 95 89 81 90 96 Tea Bags 78 100 165 180 209 236 245 InstantTea 103 211 283 299 355 428 427 GreenTea 65 90 63 68 94 116 Other High Value Teas 99 90 75 88 58 143 240 Source:Sri Lanka PlantationSector StatisticalPocket Book 1995

The high cost of productionis perhapsone of the most criticalissues for Sri Lanka's tea industrybecause it has two profoundeffects on future prospects.First, it makesthe industrynon-competitive in the world market.Second, it lowers profitabilityfor the producersand thus deters new investments.

22 See also SectionI of the BackgroundPaper for the Sri Lanka Tree Crops SectorReport, SA1AG, WorldBank, September1993

56 In the period 1980 to 1988,the averagecost of productionof private and small- holdertea producerswas substantiallyless than the governmentestate sector (Tables 2-10 and 2-11). For example,in 1988 the private/smallholder cost of production(Rs 36.89 per kg) was 32 percentless than the estate sector. The privatesector also had positiveincome marginsin most of the years duringthis period,but the publicmanaged state sector had just the opposite.Thus, despitethe generalfailure of the industryto containproduction costs, the privatesector did quite well and maintainedits competitivenesswith the rest of the world.

In the post liberalizationperiod after 1992when the privatemanagement companiestook over, they facedthe immenseproblems of risingwages and stalled productivity.Their effortsto increaseproductivity through changesin plantingcultures and better husbandryproduced better results,but the cost of productionincreased due to governmentinterventions in the labor market.After 1992,the net sales averagesalso improved,but the marginsstill remainednegative. This points to the fact that besides productivityimprovements, the plantationshave to enhancethe salesvalue of their product, either throughbetter marketingor throughbetter breeding.

To a large extentyield determinesthe marginof profit obtainedfrom a unit of land, which is importantfrom an investmentperspective. 23 Table 2-8 shows the profit from a hectare of land in SriLanka comparedto India's in 1991. Sri Lanka'sestate sector profit per hectareof land was less than one third of India's. After 1992, however,many of the plantationsunder privatemanagement have shownpositive profit increases,which indicatesthat the profit potentialof the sector is stillgood. With appropriatemanagement and infusionof correcttechnology backed by strong marketing,the sector could be very profitable.

FactorsAffecting the Cost of Production

Yields:Increasing yields per hectare lowersthe cost of productionby reducingthe unit overheadcost. Excludingland rent (whichis less than 1% of productioncost), 24 the main fixed cost elementon state plantationsis indirectlabor (around 50% of production costs).25Since the numberof workers and work days in SriLanka's tea estates is constant regardlessof output, almostall labor has to be treated as fixed. The averagecost of productionis thus influencedheavily by fixedlabor costs. Researchdone in the past by

23 Higheryield means higher revenue and higher gross margin per landunit. SinceGross Margin, or the differencebetween revenue and vanable cost, goes to meetfixed costs and profit, if thefixed cost is very low,margin equals profit, and higher marginequals higherprofit per unit of land. 2 4 Estimatedland rent,in line withGOSL general practice of charging4% of the marketvalue of undevelopedland, is Rs. 650per hectare.See Maxwell Stamp, "Sri Lanka Taxation and Lease Rent Study",SA3AG Division, World Bank, January 1992, p.58. If the outputis 1,268kg/ ha, the costof land utilizationis Rs. 0.51/kg. 25 Indirectlabor, in generalaccounting terms, is laborused for generalpurposes not relatedto a specific output.It is an overheadcost.

57 Table 2-10 Private-Sector Cost of Production and Margins 1980-88 (Rs/Kg) Year Cost of Net Sales Producer Difference Production Average* Margin State vs. Private 1980 12.94 17.73 4.79 >200% 1981 14.03 17.71 3.68 >200% 1982 18.29 22.52 4.23 >200% 1983 21.74 36.96 15.22 30% 1984 29.69 46.45 16.76 70% 1985 31.48 35.39 3.91 166% 1986 31.59 30.28 -1.30 81% 1987 33.95 38.06 4.11 184% 1988 36.89 41.59 4.7 163% * Net SalesAverage is the averagesales price of teafrom differentsources. Source: ADB, Crop ProductionIncentive Study, 1990, Chandramani,1991.

Table 2-11 Sate-Sector: Cost of Production and Margins, 1980-94 (Rs/Kg) Year Cost of Net Sales Producer Production Average Margin State Corporations 1980 17.94 17.42 -0.52 1981 19.03 17.53 -1.5 1982 23.28 22.85 -0.43 1983 28.41 40.13 11.72 1984 34.45 44.30 9.85 1985 38.32 32.43 -5-89 1986 38.07 31.20 -6.87 1987 42.22 37.38 -4.84 1988 48.83 41.30 -7.53 1989 56.41 57.08 0.67 1990 60.4 62.08 1.62 1991 61.0 56.09 -4.91

Management Companies 1992 81.63 66.45 -15.18 1993 77.56 66.15 -11.41 1994 74.23 64.40 -9.83

Source: Chandramani,1991; ADB Crop ProductionIncentive Study, 1990, Sri Lanka PlantationSector StatisticalPocket Book, 1995.

58 the Ministryof PlantationIndustries has shown that higherlabor output could result in big reductionsin the cost of production(Figure 2-20).26 Some yield improvementhave brought down the per unit cost of productionin the privatemanaged or owned estates in the recent years.27

Figure 2-20 Factor Costs and YieldRelationships in SriLanka's Tea Estates FACTORCOSTS & YIELDRELATIONSHIPS 25 Cost:Rs*kg- Labor Fertlileer Others | 20 I-0-4--

15_ _

10

5

0 420 875 1225 2550 Yield: kg/ha. Source: Authors' estimate.

A comparisonof the estate-sector'syields and costs of productionbetween the pre-liberalizationperiod of 1985 to 1992shows that yield growth declinedat 1.63 percent and the cost of productionwent down by a scant 0.03 percentper annum(Table 2-12). The scenariochanged quite a bit after the privatemanagement companies went into operationin 1992.Between 1992and 1994, averageyields went up 15 percentand the cost of productiondeclined 14 percent,indicating the effectivenessof the privatization.

Table2-12 Yields,COP and LaborProductivity in Estate Plantations 1985-1994 Groyth Rateb GroAh Rate 1985 1986 t987 1988 1989 1990 1991 I99 1993 191985-1992 1992-1994 Yled (kgha) 1206 1205 1197 1257 1182 1226 1224 960 1271.0 1323.0 -1.626% 15% RealCOP (RsIkg) 36.0 33.9 33.6 345 34.6 32.7 30.5 363 30.9 27.3 -0.031% -14% Ouw per Employe.(kg) 356.6 357.7 354.7 372.9 338.8 353.1 354.8 280.3 409.1 443.4 -1.968% 22% Real Wages 24.5 24.3 24.0 27.5 27.4 26.8 25.9 27.5 28.8 29.4 -0.082% 3%

Source:Plantation Sector Statistical Pocket Book, 1995 and CentralBank of Sri LankaAnnual Report, 1995

26 The resultsare basedon a 1986 study of productionpatterns in the private sector. 27 In the small holder sector,where labor has a large variablecost component,the effectof yieldson the cost of productionmay be less pronounced.

59 Labor Force: Size and Wages:Between 1985and 1991,while the plantationswere still under state management,the total labor force increasedat the rate of 12.8 percent per annum,from 220,296to 389,549. After 1991,however, when the private managerstook over, the numberof workers declinedby about 6.6 percent per annumto 310,553 in 1994 (GOS 1995).28Labor wages also went up 3 percentper annumin real terms duringthe later period and real wage rates for both male and femaleworkers rose Rs. 3.6 per day. In fact, real wage rates have been fairlystable between 1985 to 1994,rising only Rs. 4.9 in the 10-yearperiod. Employee productivity, however, grew at an impressiverate of 22 percentper year (Table 2-12).

Labor Productivity:Relative to a wage increaseof 3 percent, the productivityof labor in state plantationsrose at a phenomenalrate of 22 percentper annumafter privatization. Prior to 1992,the growth rate of output per employeewas negative1.97 percentper annumbetween 1985-1991.The leaf intake per plucker on state plantationsin 1991 was about 13.52kg per person day, comparedto 24.59 kg. for private sectorworkers (Table 2-8). In 1991,the intake per plucker on Sri Lanka'splantations are about half of that of India and Kenya,as well as the private smallholdingsin Sri Lanka itself This is because the pluckingnorms were set too low, in a joint agreementbetween the CeylonEstates EmployersFederation and Labor Unions,with no relationsto varyingproductivity of differentestates and no discretionof estate superintendentsto adjustthese norms.- Moreover, a 1987 studyshowed that only29% of the standardplucking norm was actuallyachieved by JEDB.29

Low labor productivityadds to low yieldsand raises the cost of production.In South India, where the agro-climaticconditions and the productivestock are similar,the averageyield is 2,127 kilograns per hectare,compared with Sri Lanka's 1,323 (achieved in 1994). Some of the other reasons are a failure to use soundagricultural practices, poor or improperreplenishment of the productivestock (tea bushes), and insufficient investment.30

Yield versus the Cost of Production

The reason behindthe differencein estate and privatecost of production(COP) is that in the estates most of the labor cost is fixed (indirectlabor) due to mandatory employnmentrules imposed by the government.In the privatelands, however,labor cost is mostlyvariable since the smallholders depend mostlyupon familylabor and onlypartly upon hired labor for specificcultivation periods.

Since the cost of productiondecreases with increasingyield, due to the large indirectcomponent of labor cost, it is indicativeof a significantscale economywithin the

28 Governmentof Sri Lanka (1995), Ministry of Public Administration, Home Affairs, Plantation Industriesand Pariamentary Affairs, Plantation Sector Statistical Pocket Book. 2 Studyby R.K. Nathaniel cited in the CoreGroup's Report (1989). 30 Governmentof Sri Lanka, Report of the CoreGroup on Improvingthe Viability of the Estate Plantations(1989).

60 industry(ADB 1990,op.cit.). Research done by the Ministryof PlantationIndustries in 198631shows that the maximumreduction in the cost of productionis associatedwith better labor use with higheroutput. Thisis shown in Table2-13 and Figure 2-20. The studyconfirms that labor cost is not entirelyvariable in estate plantations.32 This fixed componentof labor cost comesfrom factors like guaranteedsix-day weeks, which pays people even if there is no work for them. Dependingupon the nature of the estate, its size, and labor force, the cost of productioncould be decreasedsignificantly with higher yields.

Table 2-13 RelationshipBetween Yield and Factor Costs AverageYield Level 420 875 1225 2550 (kcg/ha)

Labor Cost (Rupees/kg) 19.80 15.65 13.91 10.93 FertilizerCost (Rupees/kg) 3.15 3.38 3.73 2.79 Other Cost (Rupees/kg) 2.25 1.31 1.17 0.86 Source:Authors' estimates.

Taxes and Subsidies

Before the abolitionof export duty and ad valoremtax in December1992, the entire tree crop subsectorin Sri Lanka bore heavydirect and indirecttaxation. Today, the onlyremaining commodity tax on tea is the tea cess, a levy that producerspay for the government'sfinancing of activitiesbenefiting the sector (R&D, tea promotion,subsidies for replanting,replacement of plant and machineryand administrationof the Tea Board). The current cess is Rs 2.35 per kg., leviedas the Tea Board cess (Rs.2) and the Medical Aid cess (Rs. 0.35). Some of the cess goes to smallholders in the private sector as subsidies.State plantationswere not eligiblefor subsidiesbecause they had accessto favorableloans from internationalfinancial institutions.

The subsidiesfall into four categories(ADB 1995, op.cit).

* Field rehabilitationand developmentsubsidy, for long-termupgrading of production facilities,such as new planting,replanting, and infilling.

* Factory developmentsubsidy, for increasingthe efficiencyof tea processingand convertingfrom orthodox to CTC varieties.

* Short-termproduction subsidy to meet, for example,falls in tea price or rises in input costs. Theseinclude a tea fertilizersubsidy and one for green leaf supply.

3 Resultsare basedon a studyof productionpattern in the privatesector. 32 This'fxed cost'component of laboris apparentfrom the chart in Table5-12. The interceptof the labor costcurve with the y-axisis the fixedlabor cost

61 * Marketingsubsidies, in the form of tea promotiongrants, import duty rebates,Export DevelopmentBoard grants,and the like.

The subsidyscheme, financed entirely from the cess, is tax neutralsince revenues are fed back into the subsector.However, its equityand efficiencyare open to question. The cess is collectedfrom all producersbut paid out to onlythose meetingcertain criteria. Moreover,the failure to allow the marketplaceto allocateresources is an inefficiencyin itself.The cess onlyfunds a smallpart of spendingon replantingand factory conversion; the rest comesfrom the government's budget. Also, the cost of administeringthe cess- subsidyscheme is high.

International Competitiveness

The averageprice of Sri Lankan tea in the London auctionshas remainedwell below all major competitorsexcept Chinaduring the period 1985to 1994 (Figure2-21). The exchangerate of the Sri LankanRupee is a majordeterminant of this price. The Rupee was overvaluedby 15 percentagainst major currenciesuntil October 1989,which amountedto an indirecttax of Rs. 5.50 per kilogramon tea exports (ADB 1990, op.cit.).33 The Rupee declinedin valueagainst the U.S. dollarby 6.4% in 1992 and its effect on competitivenessof tea pricesis evident(Table 2-7). Further adjustmentsin 1993 have brought it closerto the equilibriumrate and the problemis no longer significant.

Figure 2-21 AnnualAverage Prices of Tea at London Auctions,1985-94 200+

180 I 100 =_ 140 120

0

-+-hdi ndSri Lanka -Kenya !xChina Source. 1TCBulletin, 1995.

Productioncosts are the basis for determiningthe comparativeadvantage of a particularcommodity, as measuredby the domesticresource cost (DRC) ratio.34 The

33 Theforeign exchange cost of inputswas about 20%, toosmall for anysubstantive benefit of an overvaluedcurrency. 34 The DRC is the economicvalue (in shadowprices) of domesticresources (primary, not traded factors of production)in the productionof a commodityto the domesticvalue added. Comparativeadvantage exists only if DRC is less than 1.

62 DRC ratio for Sri Lanka's state plantationsis 0.80 and for privateholdings 0.63.35 Accordingto these estimatesof DRC, the plantationsare operatingvery close to their thresholdof internationalcompetitiveness. Any significantmovement in pricesor wage rates could push the ratio over 1 and makethe sectornon-competitive. As shownin Figure 2-22, the DRC would approach 1, if priceswere to fall 15 percent.The same is likelyto happenif pricesfail 10 percent and concurrentlywages rise 10 percent.The iso- curves in Figure 2-22 show that the DRC ratio is more sensitiveto pricesthan wages.

Figure 2-22 Effect of Price and Wage Changeson the DRC.

1.3

1.2 _ _

DRC 1.1 _

0.8

0.7 cwrent Prie Down5% Down10% Down15%

Curr. Labor up 10% Up20% Up30%

Source:Authors' estimates.

Marketing Margins

Tea has been sold for years throughinternational auctions in places such as London,Colombo, Calcutta, and Mombasa.Theoretically, auctions provide the most efficientmechanism for price determination,if the marketis efficientand totally free. This is not the case for tea where a few large multinationalscontrol the marketthrough local buyingagents. For other smallbuyers, the transactioncosts of participatingin auctionsare prohibitive.Thus the marketis in a state of virtual monopsonywith sellersno longer able to get the most efficientprice.

Thiscan be seen in the spread betweenauction prices and export pricesof tea at the Colomboauctions from 1980to 1994(Table 2-14). The differencebetween the two priceshas been escalatingrecently and has been as highas 86 percent in the past. Even after makingadjustments for export duties,36 the differenceis far in excess of the normal downstreammargins in many consumergoods industries. The governmenthad further

35 1994estimates. 36 The export duty on tea was Rs. 1.50 per kg., at the time of its abolitionin December1992.

63 encouragedinefficiency in distributionby requiringthat most tea be sold at Colombo auctionsthrough authorizedbrokers. Thesebrokers charge a 1 percent fee for their services,which manysellers do not use or whichthe brokers do not provide efficiently (Governmentof Sri Lanka 1991,op.cit.).

Table 2-14 ColomboAuction and Export Prices (R/g) Year Auction F.O.B.Price Difference Percentage Price

1980 18.36 33.48 15.12 82.3 % 1981 18.06 33.54 15.48 85.7 % 1982 23.43 35.02 11.59 49.46 % 1983 43.27 52.60 9.33 21.56 % 1984 62.79 77.21 14.42 22.96 % 1985 39.01 60.72 21.71 55.65 % 1986 30.68 44.53 13.85 45.14 % 1987 39.30 52.97 13.67 34.78 % 1988 42.77 55.95 13.18 30.81 % 1989 54.61 66.91 12.30 22.52 % 1990 70.97 91.82 20.85 29.38 % 1991 58.27 84.03 25.76 44.21 % 1992 61.75 81.57 19.82 32.09% 1993 68.88 91.04 22.16 32.17% 1994 65.12 91.32 26.20 40.23% Source: PlantationSector StatisticalPocket Book, 1995.

Industry Prospects

The future of Sri Lanka's tea industrydepends much on world marketsin the 1990sand beyond.World demandfor blacktea is expectedto rise from 1,862,000tons in 1990 to 2,548,000tons in 2000 - a growth of 3.2 percentper annum(FAO 1992,op.cit.). The supplyof blacktea, on the other hand, is expectedto grow at about 2%, which holds promisesof better prices overall.Sri Lanka's future also dependson the existingstrength of the industryand the speed at which it overcomesits weaknesses.In 1990, only4,500 hectaresof tea land (2%) had tea bushesunder 5 years of age. Considerablereplanting has been planned- about 14,000hectares from 1987 to 1997.This would increaseyields substantiallyand probablyachieve a target growth of 2.5 percent a year. If this is realized, black-teaproduction is estimatedto reach 264,000tons by the year 2000.37The narrow surplusof demandover supply,however, could of course disappearif producerscut back fertilizerand other inputs under extremeprice competition.

37 Ibid.

64 The demandgrowth for blacktea is basicallygoing to be in developingcountries (4.2% per annum),particularly Egypt, Iraq, and Pakistan.This augurs well for Sri Lanka becausethese countrieshave traditionallybeen its biggestbuyers. In June 1996,the averageprice for all teas in the London auctionswas US$ 1.71 per kilogram.However, orthodox tea was trading at US$ 1.85perkilogram around the sametime at the Colombo auctions.Demands from Russia particularlyhave been strong lately. The high price for orthodoxtea reflectsthe high demandfrom countrieslike Russia,Egypt, SaudiArabia, and Pakistan.Recent World Bank projectionsare good for orthodoxtea becausedemand is likelyto stay ahead of supply.

Sri Lanka also grows a considerableamount of high qualitytea such as Uva, NuwaraEliya, and Oolong,which command premium prices in the marketsof the west as well as Japan.Excellent packaging, branding, and product differentiationare critical marketingtools for these markets,which offertremendous opportunity for Sri Lankan producerswho want to shifttheir focusfrom the Colombomass auctionsto direct marketingof value-addedproducts. 38

Tea pricesare more difficultto assessin the longterm because of volatilityof the market,but it is not very brightfor traditionalbulk tea. Growersand exportersshould go for more value added and qualityteas, backed by strong promotionof the positivehuman health aspectsof tea consumption.

38 See also the PositionPaper on Tree CropSubsector Strategy for SriLanka

65

THE PRODUCTION AND MARKETING OF TEA: STRATEGIC ISSUES

CHAPTER 3

TEA: PRODUCT-MARKET SYSTEM AND COMPETrITVE DYNAMICS

The worldwidemarketing of tea involvesmany dffferentindustries and many differentprocesses that constitutethe value chainwhere specificvalues are added at each link of the chain.The physicalcommodity thus flows fromthe basic stage (greenleaf) through the intermediatestages (processedleaf) to the final stage of end product (packed tea). Each of the stage is associatedwith a particularindustry. For examnple,in the manufacturing,processing, and marketingof tea as mianyas eight differentchannel membersmay be involved(Figure 1-9). At the first levelthere is the grower who may sell the leaf to a tea factorythat would processthe green leaf and sellthe manufacturedtea in the auctionto a buyer/blenderthrough brokers or agents. The buyer may then sellthe tea to a packer who, after packagingthe tea in appropriatepackages, may sell the final product throughwhole sale distributorsand retailersto the end consumers.Accompanying the abovephysical commodity flow, there maybe other flows in the production- consumptionchain such as informationflow, financial resources flow, and ownership rights flow.

Most commoditysystems consist of a numberof horizontaland vertical structural elements.The formerrelates to the entry and competitivesystem prevailing within the industryand the latter relates to the channelthat movesthe products through the production-processing-distributionsystem. Coordination of variousfunctions is an importantaspect of commoditysystem management, particularly when it becomes necessaryto linkvarious individual units to accomplisha commongoal. For example,it is absolutelynecessary to link individualtea producerswith intermediatefactory processors and the marketers(including brokers and exporters)to have a smoothlyflowing system with optimalefficiency. In some countriesthe task of vertical coordinationis performedby the govermnment,as for examplein the smallholder tea sector in Kenya.The form and extent of governmentinvolvement may vary across countries.The KTDA, for examnple,is a quasi-governmentinstitution where the smalltea producershave a stake in the governance.

INTRINSIC BARRIEERSWrITHN A COMODITY SYSTEM

Commoditysystems in developingcountries, in general,face a numberof intrinsic barriersthat produce many adverseeffects on the flow of physical,financial and informationalresources (Jaffee, Steven and Gordon 1992).The most importantof these

69 barriersand the way they affectthe efficientproduction and marketingof tea are shown in Table 3-1. Table 3-1 IntrinsicBarriers in the Tea Production-MarketingSystem

Barriers Physical Financial Informational ______:____ RFlow Flow Flow Product Characteristics

Bulkiness v Perishibility v

ProductionSupport Characteristics

Geographical dispersion J 4 4 Unstableproduction v 4 Long gestationperiod 4 J Publicgoods nature of marketand technicalinformation

Processingand DistributionCharacteristics

Publicgoods nature of transport and 4 communicationinfrastructure

Source:Adaptedfrom Jaffee, Steven and Gordon,1992.

Tea is a highlyperishable commodity both before and after processing.The green leaf cannot be stored more than over six hours without adverselyaffecting its quality. Processed tea has a shelflife of about a year before serious loss of quality.These constraintsreduce the marketingstrength of the producerin additionto creatingrisks of product loss or declinein valueduring transportand storage. Transactioncosts also increasewith the passageof timebecause the product may require repeat grading and sortingfor maintainingquality differentials.

Tea is grown in many geographicallydispersed areas and by a large numberof smallfarmers. This impairsthe abilityof the marketingsystem to move the product efficientlyin the absenceof good transportinfrastructure. The cost of agglomeration, sorting,transportation, and distributionis also highwhen manyproducers are involved. Underdevelopedfinancial markets in almost all the producingcountries also make it difficultfor such smalland dispersedenterprises to obtain credit on reasonableterms. Problemsof informationdeficiency and asymmetryare also accentuatedin this type of market.Geographically-dispersed producers frequently face the problemof monopsonistic

70 trade with a limitednumber of buyers participatingin the market.This is quite commonin the tea marketsof most developingcountries.

Like most agriculturalcrops, the productionof tea is significantlyaffected by climaticand weatherconditions. In Kenya,Sri Lanka, and India, occasionaldroughts have affectedtea yieldssubstantially and increasedthe financialrisk of investment.Instability of productionis heightenedby the difficultyof maintainingcontrol over productionand inventoryover shortertime horizons.The long gestationperiods for bringingnew tea bushesin the productionstream also add to the financialrisk of investment.

Some of the infrastructureand informationresources needed for effective production-marketingof tea are only availablethrough publicinvestment (thus making them publicgoods) or through naturalmonopolies having large economiesof scale (Jaffee and Gordon, ibid.).For example,new constructionof roads for transportingtea from the gardensto the factorieswill not be undertakenby individualproducers unless they have large scale operationsand are reasonablyassured of keepingthe benefitsof their investmentfor themselves.Otherwise, these investmentshave to be made by the governmentfor the benefitof the industryand the economyas a whole. The same is true for informationalflow withinthe system.Marketing and technicalinformation are not likelyto be sharedby firmswithin a systembecause they are in competitionwith one another.Industry wide promotionis not popularbecause of the 'free rider' problemwhere sometraders get the benefitwithout contributingto the cost.

FORCES INFLLUENCINGCOMPETITION IN THE INDUSTRY

The global marketfor tea is subjectedto a web of underlyingforces generatedby its characteristicsystem of production,sale, value adding,and retail distribution.The industrydynamics are influencedby five majorforces, illustratedin Figure 3-1 below.

In general,the collectivestrength of these five forces indicatesthe intensityof competition and the profit potentialsin the industry(Porter 1979).

Threat of New Entrants

New entrantsto an industrycreate additionalcapacity and comewith an urge to gain market share and consumerfranchise. In the process,prices are pushed down and marginsreduced, resulting in reducedindustry profitability in the long-run.In the global tea industry,the large-scaleentry of Africanproducers in the 1970sadded capacitywhich has led to the excess beingwitnessed in the industrytoday. Some of the producing countriesmay not have the comparativeadvantage for producingtea and may actuallybe pushingthe industrytowards prolonged recession. How could the traditionalproducers have discouragedthe entry of inefficientproducers? Partly by creatingentry barriers.

71 Figure 3-1 Five Forces ShapingCompetition in the GlobalTea Market

The first entry barrier is economiesof scale,through whichmajor competitorsin the industrycreate favorable unit cost economiesfor themselvesnot only in production but also in researchand development(R&D), marketing and general administration.There is no evidenceto suggestthat the traditionaltea producingcountries did any of these to deter new entrantsand maintaintheir competitivepositions in the market.

The secondmajor entrybarrier is product differentiationthrough which individual producersof tea can create a perceiveduniqueness for their products in the minds of the buyers.There is no evidenceyet of any such effortsmade by any producerof tea.

Anotherentry barrier is createdby governmentpolicies that protect the internal marketand providegenerous subsidiesto domesticproducers. This seemsto have happenedin countrieslike India, which did not allow tea imports and providedsubsidies of manykinds to their local tea industryfor a long time.However, the effectivenessof this barrier is reduced if the same policyis adoptedin other countriesas well. The barrier in itself is economicallyinefficient since it insulatesthe industryfrom globalcompetition, makingit vulnerablein other fronts. The tea industryin practicallyall countries of the world have been supportedby governmentwith almostendless funds whichhas in effect erodedthe effectivenessof this entry barrier.

72 The fourth barrier to entry is termed"brinkmanship" which meansmajor playersin the marketcould send strong signalsto a prospectiveentrant, through price cutting or other means,to cautionit about strongretaliation. But sincethe price of tea is generally determinedin the auctionmarkets by the buyers,there was very little that producerscould have done in the past to implementthis strategy.

BargainingPower of Buyers

The ultimateaim of buyersin a commoditymarket is to lower the price as far as will go, to transferprofit fromthe producersto themselvesto the maximumextent possible.In the tea marketthe bargainingpower of buyershas been elevatedbecause of the concentrationof a few large buyersin an auctionsystem where pricescould easilybe fixedby collusiveactions. There is a high degree of concentrationin the later stages of tea processingand marketingand the producershave no meansof breakingout of the system without an extremelyheavy investment. The almostundifferentiated or standardized nature of products sold throughthe auctionsystem has contributedto the bargaining power of the buyers.

BargainingPower of Suppliers

If the suppliersof a commodityhave enoughleverage over the distributionsystem they can control pricesand profitability.This usually happens when the suppliersare large, relativelyfew in numbers,or are in some kind of agreementto limitsupply to the market, or the products are in high demandor involvehigh switchingcosts. Crude oil was one commoditythat fulfilledall these conditionsin the 1970sand hencethe strong bargaining positionsof their suppliersin the seventiesand eighties.Tea, on the other hand, has been at a disadvantagein all these aspects.The industryworldwide is characterizedby an agglomerationof smallproducers - all tryingto increaseoutput with the expectationof enhancingrevenue regardless of the effect on price . In the older producingcountries, like Sri Lanka and India, substantialinvestments have alreadybeen made in the sector and it supportssignificant employment. It is therefore simpleto understandwhy they are such easy price takers. Also, tea is not a product with high switchingcosts and consumerscan easilyswitch to alternativebeverages. Commodity agreements over tea betweencountries, as a meansof stabilizingprices through creationof stockingcapacity, have been seriously debatedbut have never been ableto materialize.

Threat of Substitute Products

Producers in an industryconstantly compete with firmsin other industries producingsubstitute products. The presenceof substituteslimits the potentialreturns by limitingprices. Substituteproducts can be identifiedby looking at the primarydemand at the product-classlevel, such as the drinkmarket where soft drinksmay be a substitutefor

73 tea.39 Substituteproducts that deservethe most attentionare those that are likelyto improvetheir price performancequickly in responseto marketdemand.

The major substituteproducts for tea are soft drinks, fruitjuices, coffee, and alcohol.Intra-industry rivalry between these products differsfrom marketto market. Lookingat the U.K. market, as an illustration,about 95.4 percent of the populationthere consumessome kind of drink everyday(U.K. Tea Council1995). The consumptiontrend

Figure 3-2 Drink ConsumptionPattern in the U.K., 1983-1995

100 80._. 60 .. |..i. 40 e 20 0 1983 1992 1993 1994 1995

|-i- Coffee-*-Tea -x-Alcohol o Soft Dnnks

Source:U.K TeaCouncil, 1995. for differentbeverages shows that the percentageof the populationhaving a distinct preferencefor soft drinkshas gone up steadilyin the past 12 years, from 38.3 percent in 1983to 57.7 percentin 1995 (Figure3-2). The percentageof tea drinkersdeclined slightly from 78.7 percentin 1992 to 77 percentin 1995.Coffee took a bit hit in the U.K. where the percentageof the coffee drinkingpopulation has declinedfrom 56.9 percentto 53.7 percent in the same time period.In terms of per-capitaconsumption, however, there has been very little change for coffee,tea, and alcohol,but soft drink consumptionhas gone up significantly.It seems,thus, that the mainthreat of substitutionfor tea in the U.K. comesfrom soft drinks.

Fruit juice is another substitutefor tea. World trade in fruitjuice has exceededfive billionU.S. dollarsper year and the growth is expectedto continuefor sometime (Kortbech 1991).However, almostall the import of fruitjuice takes place in five countries of the world, includingthe United States,Germany, the United Kingdom,the Netherlands, and France. All of these are importanttea consumingcountries also. The growingtrend of fruit juice consumptionis probablydue to the growinghealth consciousnessin developed countries.This industryhas also been buoyedby new product developments,such as new flavorsand blendedjuices. Convenientpackaging and aggressivepromotion have helped increaseconsumer preference for these types of drinks.

39 A productclass is a categoryof productsthat satisfy the sameneeds or samefunction.

74 In the United States,with a huge marketfor drinks,there is a larger assortmentof substituteproducts. The relativemarket share of differentbeverages between 1986-1995 show againthat soft drink consumptionhas gone up significantlyin the last ten years (Figure3-3). In contrast, coffeeand beer both lost market share.However, tea maintained a fairlyeven keel.

Figure 3-3 DrinksMarket Share in the U.S. 1986-95

30.0

2100

15.0 .

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995

+-Soft Dnnks- Coffee- Beer - Milk -- Tea

Source: Beverage Industry, Annual Manual 1995-96, New York

Drink consumptiondata from a few selectedcountries for 1993(Table 3-2) show that in a majorityof the countriesof the world, soft drinksare clearlythe marketleader, followedby beer, and then the other beverages.

Table 3-2 Per Capita Consumptionof Drinks, 1993. Tea Coffee Cocoa (kg) Soft Drinks Beer All Spirits (kg) (kg) (litre) (litre) (litre) Australia 1.1 0.8 1.9 165 115 1.3 Canada 0.5 4.7 1.9 145 83 2.6 Chile 0.8 0.1 Hong Kong 1.6 0.8 44 21 7.1 India 0.6 0.4 0.2 Israel 0.5 3.2 1.1 11.5 1 Malaysia 0.5 0.8 0.4 12 0.3 New Zealand 1.5 0.7 115 1.7 Pakistan 0.3 South Africa 0.7 0.4 48 1.1 Taiwan 0.8 0.7 46 34 Source: Eoromonitor: Marketing Data and Statistics, 1993.

75 CompetitiveIntensity Among Competitors

Thisis an extremelypotent force capableof affectingthe industry,both positivelyand negatively,in a sizeablemanner. On the positiveside, it can provide competitivepressures to rationalizecosts and bring about product and processimprovements. On the negative side, it has the potentialof drivingdown prices and hurtingthe entire industry.Some of the factors that createintense rivalrybetween competitors are industrymaturity, excess capacity,high fixed costs, lack of differentiationand the absenceof switchingcosts. Tea is a classicexample of a matureindustry where very little market expansionis takingplace and the onlyway for competingcountries to gain marketshare is by taking it away from others.Also, the world tea industryhas had excesscapacity for a long time and the drive to disposeoutput has compelledproducers to accept whateverprices they have been offeredin the auctions.Lack of differentiationhas renderedthe product to the status of a commoditywhere buyerscan easilyshop aroundfor the best price. Switchingcosts have also been low for tea in the beverageindustry, because of its non-essentialnature. The former SovietUnion, which used to be a verybig marketfor tea, almost droppedto half of its size in 1992, comparedto the pre-1991years, becauseof economicproblems and a shortageof hard currency.Finally, many producingcountries with high strategicinterest to sustaintheir industryhave concededto unreasonablylow profit margins(and even losses),which has again contributedto the downwardpressure on prices and profitability.

In summary,the mainreasons for the intensecompetition in the globaltea industries have been:

o Competitorsare numerous,and many of them are roughlyequal in sizeand power, such as Sri Lanka and Kenya,India and China,and Malaysiaand Thailand. o Market growth has been low, and sharegains at the expenseof the competitors have been the only avenuefor growth. o Products have been essentiallyundifferentiated. O The cost of buyers switchingfrom one supplierto another have been low. Because of the dominanceof the auctionsystem, producers have not developedways and meansto tie their customersinto long term relationships. o The perishabilityof the product has created the need to cut pricesfor clearing stocks. o The industryhas been plaguedby prolongedperiods of overcapacity. O Producers remainin the marketin spite of low profits becauseof sunk investments and the lack of other opportunities.

It is importantto assess the competitiveforces in the industryin terms of what is presentedby the external environmentand what is possiblewithin the industryto enhance its position.The followinganalysis of the tea industryfocuses on the intra-industry conditionsand the specificfactors that enhancea nation's capacityto compete.

76 FACTORS THAT ENHANCE THE NATIONAL COMPETITIVE ADVANTAGE

Neoclassicaltrade theory explainsthe competenceof a nation to produce a certain good in terms of its factor endowmentand the opportunitycost of resourcesused to produce the good. DavidRicardo improved upon Adam Smith's proposalfor nationsto competeon the basisof low cost by recognizingthat marketforces will allocatea nation's resourcesto their most productiveuse. Unfortunately,this theory of comparative advantagegot miredin the notion that a country'sexisting factor endowments,like land, labor, naturalresources, and capital,determined its capacityto becomea low cost producer.Forgotten, or perhapsignored, was the fact that comparativeadvantage based on these four factors could be exceedinglyfleeting as cost structuresare constantly changing.The resourcecost advantageof one country could be taken away with the use of new technologyby another country (Porter 1990).In short, countrieswho tie their competitiveability to existingfactor cost advantageswith no strategyof movingbeyond themwill face a continualthreat of being overrunby nationswhere technologyis advancingproductivity. They will also createthe abilityto lower the cost of production without foregoingattractive wages and returnsto capital.Consequently, policies that myopicallytarget staticfactor comparativeadvantages to attain nationalsuccess in an industrywill most likelyfail. For instance,subsidizing an industryto lower its cost of productionwill have little effectwhere competitionis based on quality,rapid product development,and productivityenhancement.

Comparativeadvantage has generallybeen measuredby the DomesticResource Cost (DRC) ratio.40 The DRC is a static measureof the domesticfactor costs at shadow prices involvedin generatinga unit valueof export at internationalprices. It does not take into account the possibilityof changethat could alterthe comparativeadvantage in the future and therefore does not provideany insightinto the dynamiccomparative position of a country.In the past, a few studieshave tried to capturethis perspectiveby decomposing changes in the DRC ratio over time into its componentssuch as relativeprice changes, changes in factor use, and changesin total factor productivity(Nishimizu and Page 1986). This approach allowsfor examiningthe level,the change,and the sources of changein measuredcomparative advantage. Findings of the studiesshow that changesin price competitivenessand changesin total factor productivityare the major source of changesin intemationalcompetitiveness. In other words, an increasein output pricesrelative to prices of intermediateinputs and improvementin total factor productivityreduces the DRC ratio.

The questionthat now arisesconcerns what strategiesa country should adopt to create this dynamiccomparative advantage that will sustainits marketposition in the long run. The answeris partlyprovided in competitivestrategy literature that indicatesthat onlyby buildingcompetitive advantagecould a nation continueto attain successin the globalmarket (Porter 1990,D'Aveni 1994,Day 1990,Bartmess and Cemt 1993). Competitiveadvantage is said to exist whenthere is a matchbetween the distinct

40 A DRCratio of lessthan 1 indicatesthe presenceof comparativeadvantage.

77 competenceof an organizationand the factors criticalfor success in an industry.These factors have been presentedin the form of a national"diamond" which determinea nation's competitiveadvantage (Porter 1990,op.cit.) as shown in Figure 3-4 below. They includefactor conditions,demand conditions, presence of related and supporting industries,and the firm structure,rivalry and strategy,reinforced by the governmentand chanceconditions. The systemwithin which these factors operateis highlyinteractive and activityin any point of the diamondaffects all others and vice versa.

Factor Conditions

Among factor conditionsthat create competitiveadvantage are humanresources, physicalresources, knowledge resources, capital resources, and infrastructureresources. The qualityof workers in the industry,their skills,and the overallwork ethic constitute a nation's humanresource factor. For example,countries with high skillsof plantation workers and competitivewages will have an edge over countrieswhich do not. The availabilityof qualityland, water, and other physicalresources also provide a competitive edge to one nation over the other in the productionof tree crops. For example,Kenya's abundanceof highlyproductive land for tea growingcoupled with naturalrainfed irrigationmakes it a very efficientproducer of tea. The presenceof technicaland

Figure 34 The NationalDiamond: Determinantof CompetitiveAdvantage

...... Organization Chance1i # ~Strategy,Structure ~~ T.: ~~~~~andRivalry

FactorCornditior6m DemandCornditions

x Relatedand ; sLipporungIndustiebs ......

Source:Porter, 1990.

78 managerialskills in the countryalso providea competitiveadvantage. The Kenyantea industry,a significantpart of whichis drivenby multinationalfirms, has gained tremendouslyfrom the superiorknowledge of these organizationsin productionand the marketingof tea globally.The availabilityof capitalis another factor that gives competitiveadvantage to a nationbecause of the long-termnature of the investment.

The tea industryin Sri Lankawas stagnantfor a considerableperiod of time for lack of adequateinvestment capital. Only recentlyhave the privatecompanies started to put serious investmentin productionand marketingand acceleratedthe growth of the industry.Infrastructure resources are also criticalto tree crops industriesbecause of the vastnessand separationof the productioncenters from the processingand marketing centers.For example,lack of adequateroads have miredKenya's tea industryas the growers cannotget the green leaf to the factory in timefor processing.

Sometimes,competitive advantage on some factor may be createdby a nationthat suffersa disadvantagethrough technologicalchange. For example,the low productivityof labor in Sri Lanka has drivena numberof tea companiesto use mechanicalharvesters, thus replacingless efficientlabor with more efficientcapital .

Demand Conditions

Home demandconditions are also importantfor an industrybecause they determinethe rate and nature of improvementmade by firmsin the industry.The developmentof an industryfor world class competitionin a global marketdepends stronglyon demandconditions at home.Three characteristicsof home demandare parti.ularlyimportant to creationof competitiveadvantage - composition,size and pattern of growth, and the meansby whichthe home marketpulls the nation's products into foreignmarkets (Keegan and Green 1997).

The home demandfor a product can set the qualitystandards and give local producersa better understandingof buyers' needs ahead of their major rivals in the world market.Firms are generallymore responsiveto domesticconsumers' needs and this can translatequickly to the foreignbuyers needs as well. India's tea industrywas innovativein producingtea of manyvarieties for the domesticmarket and later findingniches for them in foreignmarkets. The size and pattern of home-demandgrowth affectsthe competitive abilityof firmsin the industry.This is becauseeconomies of scale and the speedyride up the learningcurve which exists in a large and growinghome market.The perceivedrisk of investmentin plant and R&D is also reducedwhen a strong home market existsfor the product. Again,India providesa good illustrationof a countrythat has made some investmentin developingbetter clonesfor tea.

Lastly,the conditionsthat favor the movementof a product from the home market to an overseasmarket also create competitiveadvantage. For example,the tremendous growth of demandfor tea in the MiddleEast has been spurredby demandemanating from a large and growingexpatriate population in those countries.

79 Related and Supporting Industries

Related downstreamindustries can provide strong support to the growth of a primaryindustry, by providinginputs to or by absorbingthe output of the latter. The growth of the local packagingindustry in India and Sri Lanka has boosted their abilityto export packagedand brandedtea. Efficientintegration of downstreamindustries comes fromboth proximityand cultural similarity.Contacts and coordinationwith suppliersand strong linkagesthat developwithin the local marketare hard to crack by foreign suppliers, and thus become the sources of competitiveadvantage both at home and abroad.

Organization Strategy, Structure and Rivalry

Differencesin managementstyle, organizationalskills, and strategicperspectives create either advantageor disadvantagefor firmnsvis-a-vis their competitors.In plantation industries,management style is criticalto success sincethe nature of the work force is quite differentfrom the averageindustrial work force. In Sri Lanka and India, for example, generationsof plantationworkers have lived and worked in the tea and rubber estates and labor managementhas alwaysbeen a key factor behindenhancing labor productivity.The standardmethods of hiringand firingalso do not apply in the case of plantationworkers.

The rivalrybetween domestic producers have a powerfulinfluence on competitive advantageof firns becauseit keeps the industrydynamic and exertsconstant pressure for innovationand renewal.In Sri Lanka,when the estate plantationswere under government control,practically no innovationemerged from eitherthe tea or the rubber industries. Since the privatizationmoves of the earlynineties a varietyof new tea offeringsand new ways of exploitingforeign market opportunities have been surfacing.

Government

Governmentis not a determinantof competitiveadvantage but it is an important influenceon its creation. The effectof governmentpolicy on trade, taxation,labor, marketingand distribution,etc. is weli known on the developmentof an industry.The tree crop industryof Sri Lankahad sufferedvery longthrough inappropriategovernment policiesthat took awayits competitiveadvantage in the seventiesand eighties(World Bank 1994).By reinforcingand supportingthe factorsthat create competitiveadvantage, the governmentcould vastly improve the competitiveposition of the firmsand the nation as a whole in the globaleconomy. Evidence of this is clear from the support Kenya receivedfrom its governmentthrough the KTDA and its emergenceas the foremost exporterof tea in the world.

Chance Factors

Lastly, chanceevents sometimes play a role in shapingthe competitiveadvantage of a nation. Theseevents occur outsidethe controlof the firm, industryor the government.They can create majordiscontinuity that canbe either advantageousor

80 disadvantageous.For example,the collapseof the formerUSSR and the economicchaos that ensuedliterally destroyed the vast marketfor tea in this region.Major suppliers,like India, lost quite a bit of their competitiveedge due to this event.

DETERMINANTS OF NATIONAL COMPETIrIVE ADVANTAGE IN TEA

Both internationaltrade and competitivestrategy literature recognize that comparativeand competitiveadvantage are the products of policy,technology, human resources,infrastructure, and managementfactors. Furthermore, lessons of experience have shownthat any commoditysystem 4l needs to be competitiveon two fronts: first, it must be competitivewithin the country and second,it mustbe competitiveagainst similar commoditysystems or industriesfrom other countries(Alavi 1990).The systeminvolves a seriesof interdependentproduction and marketingactivities linked through a network of exchangerelations and other coordinatingmechanisms. There are differenttypes of commoditysystems throughout the world, each characterizedby its individualstructures includingcompetitive conditions, entry barriers, contractualor ownershipintegration, and governmentinfluence on the system(Goldberg 1974, Morrissey 1974,Marion, et al. 1986).

Jaffeeand Gordon (1992, op.cit.) have identifiedfive criticalfactors related to the successfulproduction and export of high-valuefood crops in a number of developing countries:natural resourcesand humancapital; macroeconomic and sector policies; physical,social and technicalinfrastructure; market demand; and micro-marketingand coordination.These correspondclosely to Porter's 'diamond' discussedearlier. In operationalterms, these boil down to a numberof specificfactors that influencea commoditysystem competitiveness and growth,as shown in Figure 3-5.

Natural Resources and Human Capital

Natural resourcesand humancapital endowment are key elementsin the theory of comparativeadvantage and are a very importantbasis for gaugingthe competitive advantageof a nation.Many of these.endowmentsmay be grown or acquiredover time. For example,the managementexpertise needed for plantationadministration could either be developedin the countrythrough experienceor brought in from other countriesthat have a lead in the technology.During the early days of privatizationof Sri Lanka's tea estates, many firmsbrought in technicaladvisors from other countriesto help in the managementprocess.

Macroeconomic and Sector Policies

Fiscal and monetarypolicies, exchange rate policies,trade and licensingpolicies, price policies,and labor policieshave strong influenceson the incentiveto investin a

41 A commoditysystem is a "smalleconomic system ... incorporatingan interdependentarray of organizations,resources, laws, and institutions involved in producing,processing, and distributingan agriculturalcommodity," (see Marion et al., 1986).

81 Figure 3-5 Factors Determining Competitive Advantage in the Global Tea Industry

PORTER'SPARADIGM COMPETITIVEFACTORS JAFFEE& GORDON PARADIGM Land,Water Quality of Tea Bush FactorConditions [ Tea> Yield NaturalResources & Factor Conditions Workers HumanCapital Literacy

EconomicGrowth M Sector Investment Mectoomic & ExchangeRate Sector Policies Tradeand Taxes Price Regime LaborRegulation

\ > ~~~~~~~~~~~~~infrastructure Transport Communications Marketing R&D DemandConditons MaktEviomn

MarketSize & Growth Income& Growth Price Competition TradeBarriers

Related& Supporting Production Micro-Marketing& Industries > Marketing Coordination Local Processing& Unked industries QualityControl Risk Sharing ManagementSkill Organization Cost Structure Strategy,Structure, TechnicalStrength Rivalry MarketingStrength ProductInnovation

Source: Authors 'formulation.

82 sectorbecause they affect costs and returns.Enhancement of productivity,development of markets,and the abilityto meet internationalcompetition is seriouslymired by the absence of a conducivemacroeconomic environment.

Infrastructure

Physical,technical, and socialinfrastructure provide the basic mechanismfor interlinkingmarkets with suppliers.Their inadequacyresults in productioninefficiency, lack of knowledgeabout markets,and a generalfailure to adapt to and serviceclients' needs competitively.

Market Environment

The size and pattern of demand,both withinthe domesticmarket and the internationalmarket, affect the abilityof suppliersto produce and distributeefficiently. The size and growth of demandare relatedto income,particularly with regard to discretionarypurchases. The suddendecline in the demandfor tea in the former Soviet Union right after its breakup and economicslump is illustrativeof this situation.Demand for a product is also affectedby changingconsumer tastes and preferences,change in work and livingpatterns, and technologicaldevelopments. For instance,the changing structure of the familyand work involvementhas made tea bags a popular deviationfrom the earlierloose tea sold in packages.

Micro-Marketing and Coordination

This involvesthe managementof resources- physical,logistical, and human.The coordinationof productionand distribution,including activities such as processing, storage and transportation,product development,quality control for sales and market power, interlinldngfunctions, risk reductionthrough risk betweenpartners, market researchand promotionand efficiencypricing, is importantfor a dynamicallycompetitive market. Thesemanagement and coordinationfunctions establish efficient interface betweenmarkets and producersand determinethe levelof productivity,product quality, and transactioncosts.

The tea industryall over the world faces a numberof problemslimiting effective coordinationof the production-marketingsystem. These include high production and marketingrisks, inadequateor asymmetricinformation flow, high transaction,logistics and marketingcosts. The bulky and perishablenature of the product leads to highunit costs of movingit through the distributionchannels. Perishability creates highrisks for producers and processors alike.In Kenya,large quantitiesof green tea leaves perish due to lack of adequatetransportation resulting in a highrisk in handlingthe product. The general short shelflife of processedtea (outside of vacuumpackaging) makes the sellersjittery and severelylimits their bargainingcapacity vis-a-vis the buyersat the auctions.Again, the qualityof tea is not an easilymeasurable factor and is generallydetermined by a very

83 subjectiveevaluation. This limits the efficiencyof grading and probablycreates informationasymmetries that preventsefficient information flow withinthe market.

Certainproduction characteristics of tea also limitthe effectiveintegration of the production-marketingsystem. One of these is the spread of productionover a large geographicalarea creatingthe involvementof a large numberof smallproducers which makesit difficultand costlyto exchangeproduction and marketinginformation. The dispersionof productioncenters add to logisticcosts and the interruptionof physical flows.The smallsize of the producingunits deter investmentin storage and distribution infrastructureby the private sector.Monopsony also developsin the presenceof a large numberof smalland geographicallydispersed producers since not many buyers are willing to operate in this type of market.The growth of a few relativelylarge processorsamong a large numberof producersin most tea producingcountries attests to this (UnitedNations 1984,op.cit.). Also, the fact that tea plantshave long gestationperiods rangingfrom six to ten years before production,makes them vulnerableto a shortageof long-term financing.

Marketingand distributionsupport is criticalfor maintainingefficiency and growth of production.For the majorproducers of tea, the bulk of the market is overseas and the receipt of intemationalmarket and technicalinformation becomes a key requirementfor competitiveness.Marketing enterprises are likelyto providethese servicesto the producersif they could appropriatethe benefitof such actionthemselves. However, in every country that producestea, the primarymarketing is done through auctionswhere the buyers actuallybenefit from the gap in the producer's knowledge.Even if this were not so, in the absenceof direct linksbetween the producersand marketers,any informationsupplied by the latter assumesa publicgood propertywhere everybody benefitswithout contributingto its cost. This free-ridingcould also arise whenindividual producersacquire the informationfrom one buyer to sellto another competingbuyer. This deters privatedevelopment of an informationsystem. Distribution infrastructure likewise, such as farm to market roads and bulk storage and transport facilitieshave either public goods characteristicsor support the growth of naturalmonopolies due to the heavy investmentand the economiesof scale involved.Financial requirements for marketingtea are also highbecause of the costs of establishingcontacts, handling, transportation, storage, and inventory.Private firmsin all producingcountries have found it difficultto obtainboth long- and short-termcapital from the financialmarkets that are shytowards agriculturalinvestment.

In a study of high-valuefood commodityexport, Jaffeeand Gordon (op.cit.)found that the inherenttechnical and economiccharacteristics of food products interferedwith their physicalflow and the informationaland financialflows withinthe systemthat existed. These genericbarriers arise in the production-marketingof tea as shown in Table 3-3. This impliesthat the governmenthas very specificroles in fillingthe gaps or bottlenecks created by the absenceor inefficiencyof these flows.Public programs developed to remove externalitiesor instancesof marketfailures (such as changesin trade policies

84 affectingthe tea sector or lack of producers' knowledgeabout the activitiesof major buyers in the world market) shouldreduce the investmentrisks in the sector.

Table 3-3 Barriersto CommoditySystem Flows found in the GlobalTea Industry

Barriers to Barriers to Barriers to Physical Information Financial Flows Flows Flows Product Characteristics Bulkiness High Perishability(Tea) High Heterogeneity High

ProductionCharacteristics GeographicalDispersion High High High Long GestationPeriod High PublicGoods Nature of Technical High Medium Information

DistributionCharacteristics Public Goods Nature of Transport Medium Infrastructure PublicGoods Nature of Communications Medium Infrastructure PublicGoods Nature of Marketing High Medium Information

Source:Adaptedfrom Jaffee and Gordon(1992).

ANALYSISOF NATIONAL COMPETITIVE ADVANTAGEIN TEA

The factorsthat create competitivenessin a global industrywere discussedearlier. In the followingsection, we attempt to analyzethe respectivepositions of three major producersof tea in the world, India, Sri Lanka, and Kenya,on these factors. Table 3-4 providesa summaryof the findings.

Natural Resources and Human Capital

Land: The abundanceof land, its quality,and its cost are all importantfactors for the developmentof tea. The largesttea areas in the world are in China(1.13 millionhectares), India (0.42 millionhectares), Sri Lanka (0.19 millionhectares) and Kenya (0.11 million hectares).India has considerableconstraints for lateralexpansion of tea as optimum utilizationof land has alreadybeen madewithin the tea estates. There are a few potential

85 areas in the Northeast, but these are limited.Even thoughthere is a possibilityof putting some undevelopedgovernment land under tea, the overallland availabilityis low.

Table 3-4 The GlobalPlayers in the Tea Industry: CountryPosition on CompetitiveFactors

India SriLanka Kenya

Natural Resources & Human CaDital Land Average Weak Strong Water resources Average Strong Strong Quality of tea bushes Weak Weak Strong Yields Average Weak Strong Availability and quality of workers Average Average Weak Literacy rate Low High Average

Macroeconomic Environment Macroeconomic and sector policy Weak Average Strong Sector investment growth Weak Average Strong Exchange rate regime Strong Strong Strong Trade and tax regime Weak Strong Average Price regime Weak Strong Strong Labor regime Weak Weak Strong

infrastructure Transport and communications Weak Average Weak Marketing Average Weak Strong R&D Average Weak Average Extension Average Weak Strong

Market Environment Key market's size and growth rate Strong Average Average Income and growth of income in key Weak Average Strong markets Price position in key markets Weak Strong Strong Competitive strength Weak Average Average

Micro-marketina and coordination Production/Marketing coordination Strong Weak Strong Local processing and linked industries Strong Strong Average Quality control Strong Strong Risk sharing Strong Strong Technical financial & managerial skills Weak Average Strong Cost structure Average Weak Strong Marketing strength Average Average Average Product innovation Strong Average Weak

Source:Authors' estimates.

86 Kenya has considerableland for expansionof tea and presentlyonly about 10 percentof the potentialland area has been exploited.This, combinedwith the fact that tea providesa good return on investmentin growingareas where there is not much opportunityfor other crops, makesit easyfor encouragingthe lateral expansion.

Of the three major producersof tea in the world, only Sri Lanka is goingthrough a contractionin the extent of land under tea. The total area under tea there has fallenfrom 222,000 hectaresin 1992 to 187,000hectares in 1995 (CentralBank of Sri Lanka 1995, op.cit.).There is not much scope for further expansionin spite of governmentsubsidies for new planting.

Water:India faces a few minorproblems with the availabilityof water for growingtea. Indiantea is predominantlyrain-fed. Excess rain during the monsoonscreates drainage and soil erosionproblems and drought duringthe winter seasonnecessitates irrigation. About 0.19 millionhectares require drainagein Dooars, Terai, Cachar and Assamvalley areas and 0.15 millionhectares require irrigation in the East, Northeast, and South India. However,proper investmentin drainageand irrigationcould removeany water problem for tea productionwithout difficulty.

In Kenya,the productionof tea is susceptibleto periodicdrought. Otherwise,the annualrainfall provides enough moisture for growingtea.

Water is abundantin SriLanka for tea plantation,except occasionallywhen it faces prolongeddrought. Rainfall provides natural irrigation for tea. The eastern side of the islandstarts gettingdry in July and August,but the western side receivessteady rainfallduring much of the growingseason.

Quality of tea bushes: India has significantproblems with its agingtea bushes. Over 60 percent of India's plantedarea has bushesaged 30 years or more (Chiranjeevi1992). Technically,the economicage of a tea bush is about 30 years, which meansthat over half of India's producingstock is past the economicage. The rate of replantingis not high enoughto replacethem with new stock.

Sri Lanka has problemssimilar to India. Old seedlingtea are stillthe dominant productionstock there, althoughefforts are underwayto replantwith the higheryielding vegetativelypropagated tea.

Tea bushesin Kenya are considerablyyounger than in India or SriLanka. There have been considerableplanting of highyielding clones in the state sector. But the older seedlingtea stock has also providedvery good yieldsprobably due to better cultivation methodsand higherinputs. rwlds:India's tea yieldsare substantiallybelow those of Kenya,partly due to the age of its tea bushes. The averageyield in 1994 was 1752 kgha. in comparisonto 2,028 kg/ha obtainedin Kenya.There is considerabledifference in yield betweenNorth and South

87 India, with the North averagingabout 1616 kg/ha. and the South 2382 kg/ha. (Tea Board of India, 1995).However, North India, with its substantiallarge holdings,produces the bulk of India's tea (76%).

Kenya's tea yieldsare high comparedto most other countries,even though they declinedsomewhat in 1994.The 1993yields were 2,273 kg/ha. comparedto the 1994 yield of 2,028 kg/ha.Partly, this declinewas due to adverseweather conditions, but poor infrastructureand capacitylimitations contributed. Productivity in the larger estates is more than 40 percent higherthan the smallholdersector (Governmentof Kenya 1995-II). In Kenya's smallholdersector, tea bushes are relativelyyounger. But relativeyields, comparedto the estate sector, are low becausethe smallfarmers cannotput in the kind of inputs put in by the estates (such as fertilizers)to obtainthe high yields.Furthermore, estate plantationsput a lot of emphasison improvedcrop management,including proper fertilizerapplication and better weedingand husbandry.

Among the majortea producers,Sri Lanka has the lowest averagenational productivityin productionof tea. This average,however, hides the performanceof some of the better holdingswhose productivity is comparableto Kenya or SouthIndia (World Bank 1994, op.cit.).The estate sectorproductivity, however, is low even after its takeover by the private sector. The averageproductivity is around 1366 kg/ha.42 - less than 50 percent of the Kenyanestates.

Availability and quality of workers:India's growingentrepreneurial class has shied away from plantationcrops like tea perhaps becauseof the risks involvedand excessive governmentcontrol. However, institutionalrequirements for the developmentof human resourcesare presentin the sector. Educationand trainingcenters such as the Plantation ManagementInstitute and the TrainingCenter for SmallGrowers and Manufacturers have contributedto the upgradingof knowledgeand technologyto some extent.The southerntea estates have considerabledifficulty in obtainingand retainingworkers and managementbecause of their isolationfrom majorurban centers.The rapid economic developmentof the south has also attracted manyof the childrenof traditionalplantation workers to better payingjobs elsewhere..

In Kenya,the availabilityof workers is a majorproblem for smallholders,but not for the estates. Althoughsmallholders depends mainly on familylabor, they have seasonal labor needs that are difficultto fillbecause of generallabor shortageand competitionwith the larger tea estates. The coincidenceof the main tea pluckingseason with the harvesting of maizeexacerbates the labor shortage(World Bank 1989).Coffee harvesting also attracts labor awaywith higherwages (Govemmentof Kenya 1995,op.cit.). Overall, labor constraintsare a major obstacleto the growth of smallholdertea in Kenya.

Considerablechanges are likelyto take place in Sri Lanka's plantationwork force. Literacyand educationwill eventuallymove potentialworkers away from the plantations

42Estimated from a surveyof the 22 plantationcompanies in August1996.

88 to better jobs outside.Presently, however, the densityof workers in the plantations(2.85 per ha.) is higherthan SouthIndia (2.70 per ha.) and Kenya (2.20 per ha.). Management resourcesin many of the plantationsunder new privatemanagement are being upgraded. Changesin managementstyle are taking place in manyplantations, including such innovativemeasures as participativemanagement, customer orientation, strategic focusing for global competition,and the JapaneseKaizan style of management.43 Some managementcompanies have started workers' skillupgrading programs with the help of the Tea ResearchInstitute (TRI). Others have forgedjoint ventureswith foreignpartners to bring in the necessaryexpertise from abroad.

Literacy rate: Adult literacyin India is 48 percent as comparedto 69 percent in Kenya and 88 percentin Sri Lanka (WorldBank 1995).The opportunityfor technological improvementand overallcompetitive excellence are thereforemuch less in India than the other two majorproducers of tea.

Macroeconomic Environment

Macroeconomicand sectorpolicy: The Indiangovernment has supportedthe tea industry through extensivefinancial assistance schemes that have coveredalmost 10 percent of the cost of developmentof tea plantationsand factories(Tea Board of India 1995,op.cit.). Other measuressuch as generous loans and subsidies,training and demonstrationof improvedmethods of tea cultivation,supply of plantingmaterials from state run nurseries, and the establishmentof cooperativetea factoriesare some of the governmentaids to the industry.Tax concessionsto sick firmsin the industryare also given by the states. However, constraintslike hightaxation of the plantationcompanies, and high import tariffs on tea machineryhave also worked againstthe industry.Both the subsidyschemes and the fiscaland trade policieshave cost the industryin terms of its competitiveability with the rest of the tea producingworld.

The macroeconomicenvironment has generallyfavored the developmentof tea in Kenya.The liberalizationof the market and unshacklingof pricesin early 1992boosted the industry's performance.The sector has been freed from governmentprice control and is now responsiveto internationalmarket prices, unlike other agriculturalcommodities in Kenya.After 1992,more than 40 new companieswere given licenseto buy tea fom the auctions,pack and redistributethem to the localmarket. The governmrentalso provides indirectsubsidy to the smallholdertea industryby undertakingthe supplyof fertilizer through KTDA.As a parastatalorganization, KTDA also receivesindirect financial subsidiesthrough guaranteedloans.

Improvementsin the macroeconomicenvironment and sector policyreforms, startingin 1992, have turned the tea industryaround in SriLanka and taken it to its peak productionof 246 millionKgs. in 1995.Much of the positivebenefits have comewith the removalof export duty and ad-valoremtax, depreciationof exchangerate, reductionof

43 -Kaizan" managementemphasizes continual improvementon a self assessmentbasis.

89 controls on marketing,and the transfer of state owned plantationsto the private sector (partiallycompleted by end 1996).However, problems still remain, such as the government'sreluctance to relinquishcontrol on labor matters.However, the government is slowlywithdrawing from this inflexibleposition and the labor market is turning towards a more free systemof collectivebargaining. A few subsidiesalso remain,including a tea plantingsubsidy, a factory developmentsubsidy, a CTC tea conversionsubsidy, and a tea baggingdevelopment subsidy.

Sector Investment growth:Between 1988 and 1992,about 14,750hectares of new tea land was developedin India, which addedless than 1 percentto the growth. The country has plansto replant21,000 hectaresand infillabout 52,500 hectaresof land between 1995-2000.Apart from these, there are not manynew investmentstaking place in the sector. Tea manufacturingcapacity, particularly in Nilgirisregion, is inadequate.New investmentin factory developmentis not takingplace due to the high cost of term loans.

In Kenya,the averageexpected growth fromthe estate and smallholdersectors between 1994 and 2005 is 3.6 percentaccording to KTDA's projection(Table 3-5). If this growth takes place,Kenya's tea output willrise from 209 millionkgs. to 308 million kgs. Table 3-5 ProjectedGrowth of Tea Productionin Kenya, 1994-2005 (millionkg.) Sub-sector 1994 2000 2005 Av.Growth Smallholder 119.1 155.21 187.08 4.20% Estate 90.3 108.5 121.4 2.70% Total 209.42 263.72 308.48 3.6 Source:KTDA, 1995.

The three importantfactors related to this high growth are KTDA's infilling program,emphasis on crop management,and lateral expansionof the tea area. The infillingprogram has succeededin graduallyreducing the gap betweenthe recommended densityof bushesper hectare(8,611) and the actual. This effort is expectedto continue, and with it the gap will narrow to only5 percentby 2004-2005.Along with the infilling program,KTDA's extensionsupport for improvinggrowers' managementpractices is likelyto expand.With increasingemphasis on improvedfertilizer application, higher pluckingrounds, and better weeding,green leaf yield is expectedto rise from the present nationalaverage of 0.91 kg./bushto 1.25 kg./bushby the year 2005. The projectedarea expansionwill increasethe tea growingarea from 76,751 ha. in 1995 to 84,000 ha. in 2005. In comparisonto increasesin productionof green leaf, requiredinvestment in tea processingfacilities has been low. This has contributedto a declinein the qualityof KTDAteas. Processingdelays have been exacerbatedby unevenleaf deliveryto the factoriesduring the year.However, considerableinvestment have been made to increase factory capacityfrom 455 millionkgs. in 1995 to 675 millionkgs. by mid-1997,which will removethe undercapacityproblem until the end of the century.

90 In Sri Lanka, sector investmenton tea has been growingsince the start of the privatizationprogram. From 1992-1994,the managementcompanies have increasedthe extent of replantedareas by over 5750 hectares.Other investmentshave gone into increasingefficiency of productionand into new factoriesfor CTC tea production.Now that the governmenthas given out fifty-yearleases on the estates,the plantation companieswill most likelyincrease investments in the sector substantially.To aid this, the governmenthas arrangedover U.S. $100 millionof capitalfor the privateplantation companiesthrough the ADB ($60 million)and OECF ($40 million).

Exchange regime: From the beginningof the 1990sIndia's exchangerate policieshave helpedmaintain the competitiveposition of the tea sector. The countryhas persistently adjustedits exchangerate over the past years (Table 3-6) and there is not much difference at presentbetween the marketand the officialexchange rate. This has addressedthe past problemsof overvaluationof the rupee which was detrimentalto the tea trade.

Table 3-6 ForeignExchange Rates of PrincipalTea Producers 1989-94 PerUS $ 1989 1990 1991 1992 1993 1994 India Rupee 16.23 17.50 22.74 25.92 30.49 31.37 China RMB 3.77 4.78 5.32 5.51 5.76 8.62 Sri Lanka Rupee 32.27 34.57 36.60 38.95 39.57 40.21 Kenya Shilling 20.57 22.92 27.51 32.22 58.00 56.05 Source: IMF, InternationalFinancial Statistics

The devaluationof the Kenyanshilling, by over 160 percentbetween 1989-1994, has also maintainedthe competitivenessof its tea in overseasmarkets. However, short- term appreciationof the currency,as between 1993-1994,could create majorsetbacks for the industry.

The Sri Lankan rupee was devaluedby over 25 percentbetween 1989-1994.This steadyexchange rate adjustmenthas been very beneficialfor the tea industry.The average price of Sri Lanka's tea in the London auctions,between 1989-1994,has steadilydeclined comparedto Indianand Kenyantea (Figure3-6). This has increasedSri Lanka's competitiveness. Figure 3-6 LondonTea AuctionPrices 1990-1995 (vence/k2) 140.00

20.00 * 0.00 India IL 40.00 ' --- Kenya 20.00,_ 1990 1991 1992 1993 1994 1995 Source:ITC Bulletin, 1996 .

91 Trade and tax poficy: Althoughpast macroeconomicand sectorinvestment policies have not been helpfulto the Indiantea industry,recent changesin the trade regimehave removedmany of the distortionsmaking the industrymore competitive.For example, export and exciseduties on tea were abolishedin the early 1990sand onlythe tea cess remains.The government,however, has frequentlyimposed export curbs to contain domesticprices which have worked againstnew investmentin the sector (Chiranjeevi, ibid.).Also, the incidenceof taxes on growing,manufacturing, and sellingtea have been very high, rangingfrom 54.4 percentin Assamto 60.4 percentin West Bengal,in comparisonto about 46 percent in most other industries(Tea Board 1995,op.cit.). The governmentof India does not allowtea importsinto the countryand has imposedexport curbs from timeto time to containdomestic prices (Chiranjeevi, op.cit.). This has caused uncertaintyamong tea exportersand deterredactive efforts to developthe overseas market.

There are no substantivetrade barrierson tea in Kenya.There is no export duty or restrictionon export of any kind.However, there are a numberof legal and regulatory constraintsto the growth of competitivenessof the industry.Many of them are a product of the old Tea Act (Cap 343). For example,this law restrictsthe growingand manufacturingof tea through a licensingmechanism, which was primarilyintended for statisticalinformation and for raisingcess funds to financethe Tea Board. But it also empowersthe governmentto intervenein the processing,grading, blending, and marketingof tea in excess of the normalregulatory requirements. It imposesa dated procedurefor the marketingand promotionof tea by the Tea Board, and limitsnon- auctionsale by individualproducers to less than 50 percent of their total output. The governmentalso mandatesa minimumof 55 percentof the sale of tea through the auction system.There is also a 30 percent import duty on tea. This could hinderblending and processingfor the manufactureof value-addedtea outside of the export processingzones.

The Sri Lankantea industry-hasbeen free from all major export restrictionsfor a numberof years. Only a few cesses remain,fundamentally to financethe Tea Board's operationand to providenominal subsidies to smallgrowers.

Price policy: Tea pricesin India have been unstablebecause of the uncertaintyof supply in relationto demandin the domesticmarket and the uncertaintyof demandin the internationalmarket. Periodic slumpsin tea priceshave occurreddue to oversupplyand increasedstock in internationalmarkets (Tea Board of India ,1995, op.cit.).The restrictionon the import of tea for domesticconsumption also creates a lot of volatilityin the market.

Kenya's deregulationof the tea industryand free export marketpricing has aided the industry's competitiveness.There has been only a minorinfringement on this environmentthrough the mandated 10 percent saleby everyproducer to KETEPA,which suppliesthe domesticmarket at a price below the border price.

92 Tea prices in Sri Lanka are not subjectto any form of direct governmentcontrol. However, the requirementto channela substantiveportion of the output throughthe auctionmarkets may have some effect on the prices.

Labor policy and issues: The government'sspecification of statutorybenefits for plantationworkers in India has kept the cost of plantationlabor high. There is also a seriouslabor shortagein the tea estates of the South due to the rapid pace of economic developmentthere and the reluctanceof the childrenof the plantationworkers to work in the plantations.In addition,getting managers to stay in the remote areas is difficult.

In Kenya,there are no governmentmandated labor policiesthat affect the growing and processingof tea. Labor contractsin tea estates are determinedon the basis of negotiationwith the unions.

Governmentlabor policyhas been a majorobstacle to the growth of efficiencyin Sri Lanka's tea sector. State mandatedpay increases,minimum employment days, restrictionson relocation,restrictions on layoffs,etc. have seriouslyundermined the competitivenessof the industry.However, the government'srecent policyseem to break away from many of these. It is tryingto disassociateitself from interventionin wage determinationand lettingcollective bargaining determine this, and has reducedits oppositionto relocationof labor across estates. The labor marketmay be movingtowards a freer environment,but the finaloutcome is still uncertain.

Infrastructure

Transportand communications: India's roads and transport infrastructurein the tea growingareas, althoughnot weli developedis adequatefor the present volume of trade. The communicationssystem is also old but major efforts are underwayfor its upgradation.

There are severestresses on the roads and ports infrastructuresupporting the tea industryin Kenya.The poor conditionof accessroads fromproduction areas to the factories causes serious delaysin green leaf deliveryto the factorieswith resultantleaf losses,lowering of the qualityof tea producedand efficiencyloss in the factories.The governmenthas plannedsome improvements in major trunk roads and there has been a change of managementin the port of Mombasa.The shortageof processingcapacity in the smallholdersector is also a serious problem.The utilityinfrastructure is also weak and the availabilityof gas and electricityis erratic. The rural telephoneservice is poor, blocking communicationbetween the growers and factories.The extensioninfrastructure for small tea growers is quite good and capableof providingsound technical directions (Governmentof Kenya 1995,op.cit.). The infrastructurefor providinginput supplies through the KTDAis also good.

Physicalinfrastructure support for the tea industryin Sri Lanka is lackingin a numberof ways, such as poor rail transport facilities,high costs for road transport, and aging vehiclefleets withinthe plantations.The power and telephone systemsare also

93 inadequateand cause frequent interruptionof services.The infrastructurefor export, however,such as shipping,finance, and insuranceare well developedwith modem communicationsfacilities (DeSilva 1994). The industryis well supportedby the Colombo Tea Traders Association,a body of producersand shippers.

Marketing: India's tea marketinginfrastructures for both internaland internationaltrade are quite good and facilitatemarketing, including direct garden sales, auctionsales, and forward sales(Mitra 1991).However, there is no formalmechanism for providingmarket informationto growers and processors.This has affectedthe industry'sability to perform well in product development.

Tea is a popular drinkin Kenya and about 80 percent of the Kenyanpopulation preferdrinking tea becauseit is cheaperthan other beverages(USDA, op.cit.).There are many dominanttea packers and local suppliersof tea in Kenya like the Kenya Tea Packers, AfricanHighland Company, and Brooke Bond. The marketinginfrastructure is also strengthenedby the presenceof the KenyaTea Growers' Association,which has prominentglobal tea companieswithin its membershipsuch as Brooke Bond, George Williamson,James Finlay, and Eastern Produce.Additional forces in the marketingarena are the East AfricaTea Trade Association(EATTA), the Tea Broker Association,the Tea Buyers Association,and the Warehouseman'sAssociation. But, governmentinvolvement in the provisionof such publicgoods as market informationand exportpromotion is low. The estate firms,however, have good accessto foreignmarket informationand their intemalmarketing information system is well developed.International distribution is also fairlysmooth for these firms, althoughdomestic marketing is hamperedto a degreeby the quota set for KETEPA.

Sri Lanka may not be in as advantageousa position as its other two major competitorsin the globalmarketing of tea. A majorityof the manufacturersdo not have direct linkswith overseasbuyers, relying mostly on the auctionsystem to selltheir products.Efforts are being madenow to changethis. A few privatemanagement companieshave started to linkup with buyers abroad, mainlysmall resellers in Japan, WesternEurope, the CIS countries,Poland, Middle East, and the United States. Some value addingis done by tea traders in Colombo,including blending, packaging, and branding.Some tea companieshave their own brand in the marketand some are starting to introducebranded tea in marketsabroad. The emphasison increasingthe output of value added tea is strong.

R&D: India has a numberof well knowntea researchcenters includingthe Tocklai Experimentalstation of TRA and the Tea ResearchInstitute of UPASI. The tea industry supportedNational Tea ResearchFoundation (NTRF) undertakesresearch on different areas of tea production.The Tea Board also providesfunding to technicalinstitutes such as the Indian Institute of Packagingfor specificresearch on tea. OverallR&D, however,is weak; onlyabout 0.2 percent of the industryturnover is spent on tea research, as comparedto an averageof 0.64 percentin all other majorindustries (Tea Board 1995, op.cit.).Lack of adequateresearch funding has hinderedthe type of sophisticatedresearch

94 needed for a world-classindustry.AIn addition, the researchwork is fragmentedand there is little interactionbetween the differentagencies (Tea Board, 1995,ibid). Someprivate estate companieshave now started their own tea research.

The qualityof tea researchin Kenya,financed by the industrythrough a cess on production(World Bank 1987), has not been aboveaverage. Coordination of tea research by the Kenya AgriculturalResearch Institute has partlyaddressed the issue of fragmentationof researchin many institutions.The Tea ResearchFoundation (TRF) has been developingnew clonesand improvedtechnology for production.However, the work of the institute has onlybeen on productionof improvedclonal varieties, nutrition, tea bush management,and harvesting.Research in manufacturingprocesses are lacking..

The pace of the developmentof tea technologyin Sri Lanka is low (WorldBank, 1994).New clonalvarieties developed by the localresearch institutes have not been successful.The R&Dwork is fragmentedand not extremelyfield oriented. The Tea Research Institute (TRI), althoughwell funded,has lost a lot of researchworkers to forces of migrationand is becomingincreasingly marginalized. Work on adaptiveresearch to fit clones developedelsewhere to Sri Lanka's needshave also been neglected.

Extension: In India, limitedextension for tea is undertakenby TRA and UPASI-TRI through their network of advisorycenters (Tea Board, op.cit.).The Tea Board provides some fundingto the AssamAgricultural University for extendingadvisory services to the tea gardens.

Tea extensionservices in Kenya providedby the KenyanTea Development Authorityare quite good. KTDAprovides good transport and housingfor its extension staff.Field staff also spend a lot of time in tea nurseries,and on supervisingthe timely collectionof green leaf, whichhas contributedto the high qualityof Kenya's tea.

The National Institute of PlantationManagement (NIPM) in SriLanka has not been very effectivein providingtraining to field workers. Its main problemis a dearth of qualifiedpermanent training staff. In the smallholdersector, the Tea Smallholdings DevelopmentAuthority (TSHDA)- provides a fair amountof extensionservices. Overall, however,the extensionservices are weak (DeSilva,1994).

Market Environment

Key markets' size and growth rate: Market demandconditions are almost idealfor tea in India. Domesticdemand is risingat rate of 5 percent per annum(Tea Board 1995, op.cit.). The per capita consumptionis, however,low at 0.62 kg. comparedto 3.22 kg. in Ireland (the highestin the world), 2.61 kg. in the UK,2.14 kg. in Turkey, and 1.23 kg. in Sri Lanka. Internationaldemand for highquality Indian tea is also good even though the countryis unableto meet this demandbecause of its own internalneeds. Exports to new marketslike Poland, West Asia and the MiddleEast have gone up even though the formerlystrong SovietUnion markethas been weak (Table 3-7). The latter, which used to

95 import 32 percent of India's tea, has reducedits import drastically(19 percent per annum) - from 115.7 millionkgs. in 1989 to 46.46 millionkgs. in 1994.This is a big loss for India, which has reduced its competitivestanding from numberone to numberfour in world export of tea, after Kenya, Sri Lanka, and China.Among the other major export markets, U.K. (18 percent of total ) has maintaineda fairlyeven growth of 5 percent; but both Poland (14 percentof the total) and UAE (9.8 percent of the total) have increasedintake by 25 percentper annum.Thus, about 23.8 percent of the internationalmarket is growing at 25 percent per annum,while the shape of at least 32 percent of the marketis uncertain in the future.

Table 3-7 Directionof India's Tea Export, 1989-94 (MillionKilograms) 1989 1990 1991 1992 1993 1994 Growth' CIS 115.74 128.6 106.5 47.07 71.96 46.46 -19% U.K. 21.89 21.68 23.75 28.93 25.83 26.52 5% Poland 5.69 6.98 9.31 15.32 14.96 20.57 25% UAE 4.19 4.77 7.44 5.28 11.93 14.39 25% Source: IYC Bulletin, 1995. ' Growth estimatedfrom the slope of the regression line.

With changingconsumer income and taste globally,there is a good potentialfor the export of qualitytea from India. The sale of instanttea, tea bags, and other packet teas had very robust growth in the 1980s.In the 1990s,even though the absoluteexport level fell, the valuesrealized were in excess of 9 percent(Chiranjeevi, op.cit.). The extent of value-addedtea exportedfrom India in recent years has been around 35 percent of the total export. The trading environmenthas becomeconsiderably liberal with the abolition of export duties, exciseduties, and dual exchangerate arrangementunder the Liberalized ExchangeRate ManagementSystem (LERM), the reductionof the interestrate of rupee export credit, and the exemptionof exportprofit from incometax. However, a few existingconstraints, such as high import tariffson tea packagingmachines are likelyto reduce the competitivenessof the industry,especially since it affectsthe export market directly.

The size of Kenya's domesticmarket for tea is approximately25 millionkgs., or roughly 12 percent of its production.44The averagegrowth of the markethas been practicallynil and the per capita consumptionof 0.70 kgs. per annumis alreadyhigh from most developingcountry standards to suggest significantexpansion in the future. The country'stea export is about 184 millionkgs. per year. The principalmarkets are the UnitedKingdom (40%), Pakistan(29%), and Egypt (14%).45Import trends in these markets show that tea salesto the UK, the largest market,have declinedby about 2 percent per annumsince 1989 (Table3-8). In Pakistan,the secondlargest marketfor

44 Based on 1994 productionand retentionof tea in the country,lTC Bulletin 1995. 45 Data source: Tea Board of Kenya,Annual Report and Accounts,1993-94.

96 Kenya,growth has been about 2 percentper annum,which is fairlylow. Part of the slow down in Pakistan's import is due to its trade imbalancewith Kenya.Thus about 70 percent of the marketfor Kenyantea is at best in doldrums.The only encouragingpicture seems to be in Egypt where the import of Kenyantea is growingat a verybrisk pace of 21 percent per annum,even thoughthe absolutequantity is low. In addition,major markets like the former SovietUnion and the MiddleEast, which have a traditionalpreference for orthodox teas, are outsideKenya's target marketsbecause its orthodox tea productionis miniscule.The future marketpotential for Kenya appearsto be onlyin the high quality CTC segment.

Table 3-8 Directionof Kenya's Tea Export 1989-94 (MillionKilograms) 1989 1990 1991 1992 1993 1994 Growth United Kingdom 80.2 83.4 82 75.7 81.7 72.5 -2% Pakistan 41.3 48.6 45.7 43.6 52.4 44.4 2% Egypt 5.8 18.6 21.0 24.4 31.7 29.9 21% Source:ITC Bulletin, 1995.

Sri Lanka's domestictea consumptionis only8 percentof its output as 92 percent is exported.Its major marketsin 1990 used to be Egypt,Iraq, Iran, the U.K., the USSR/CIS,and Syria.By 1995,the marketmake-up had changed,with the leading importersbeing the CIS, Jordon,Egypt, the U.A.E., Syria,and the U.K. in that order (Table 3-9). In terms of growth, the largestmarket for Sri Lanka is the CIS where its main competitoris India. SriLanka's exportto the CIS in 1995 (40.37 millionKg.), however, was very closeto India's export to that country in 1994 (46.46 millionKgs.). The CIS market has a distinctpreference for leafytea which is the dominantproduct of the low grown areas of Sri Lanka.

Table 3-9 Directionof Sri Lanka's Tea Export 1989-95 1989 1990 1991 1992 1993 1994 1995 Growth Egypt 33.9 29.62 20.4 16.8 12.42 16.6 16.85 -15% Iraq 24.17 18.82 0.91 0 0 0 0 -27% Iran 12.63 24.76 31.65 24.48 8.51 5.11 5.89 -18% UnitedKingdom 12.32 11.67 11.7 10.52 13.55 17.49 12.88 4% USSR/CIS 11.22 14.13 5.14 4.1 25.03 12.66 40.37 23% Syria 10.1 16.32 9.93 14.44 17.76 22.86 16.7 9%b Jordon 3.96 6.52 31.41 21.81 24.02 25.77 18.12 14% U.A.E 5.82 7.91 10.65 4.78 17.64 21.58 16.83 200/o Source:ITC Bulletin, 1995 and Forbes and Walker(Sri Lanka) TeaReview 1995.

97 The MiddleEast marketstill dominatesSri Lanka's export (57%).46 The UAE is the second largestgrowing market for Sri Lankawith an averagegrowth of 20 percent in the past six years. The onlycompetition there is from India, whichtrails Sri Lanka in market share.However, the UAE import is mainlyfor trade and not for consumption. Jordan is the third largest marketafter the CIS and the UAE Between 1989-1994this marketgrew about 14 percent.Most of its purchaseis value addedtea (over 69% in tea packets).Jordan is probablyan intermediaryin buyingtea for Iraq which is stillunder the UN embargo.The marketin Egyptwas lost to Kenya in 1991.Egypt's import from Sri Lankain 1994was stillaround 16 millionkilograms a year. The partial loss of the Egyptianmarket could be attributedto a shiftin consumerpreference there from value- added to bulk tea. But the main reason is probablyan aggressivepush by Kenyawith its CTC tea, which Sri Lanka does not produce in substantialquantities.

Income and income growth in key markets: The four major markets for Indian tea are the CIS countries(46.5 millionkgs.), the U.K. (26 millionkgs.), Poland (20.5 million kgs.) and the UAE (14.4 millionkgs.). 4 7 In the CIS, real incomegrowth has been negative in the past few years and thus tea consumptionhas been reducedsubstantially. Income growth in the UAE was also negative between 1980-93.48In Poland, the average annual growth of incomehas been less than one half of a percent. Only in the U.K. did income grow over 2.5 percent.From this perspective,the traditionalmarkets for Indiantea do not hold great promisesfor future expansion.There has been somerecovery in the CIS countriesin 1996,but the demandthere is still uncertainfor Indiantea.

Amongthe major marketsfor Kenya's tea, the U.K., Pakistan,and Egypt have all had positiveper capitaincome growth of 2.5 percent, 3.1 percent, and 2.8 percent, respectively.This is a positiveindicator for future growth of tea consumptionin these countries.The U.K. marketmay, however,be at its saturationlevel and then no change could be expectedunless some structuralchanges were to take place in consumption behavior.

Sri Lanka's main marketsin 1995 were the CIS, Jordon,Egypt, and the UAE. Income growth in the former SovietUnion/CIS countries, between 1980-1993,was -0.4 percent. In Egypt, incomegrowth in the same periodwas 2.8 percent and in the UAE it was -4.4 percent.However, the CIS countriesare recoveringfrom their previous economicdecline, and the countrieswith whichthe UAE is trading have sound economies. The futurepotential for tea consumptionin these countriesremains strong.

Price conditions in key markets: Market success depends in large part on an organization'sability to deliverthe benefitsdesired by customerseffectively and efficiently.Such abilitiesare calledpositional advantages and are the sources of competitivesuperiority for each tea producingcountry. Pricing is a major factor in creatingpositional advantage.

46 See Forbes & Walker (Sri Lanka), AnnualTea Review1995. 47 1994 exportfigures, ITC Bulletin, 1995. 48 See World Bank, World Development Report, 1995.

98 The price of bulk tea at the auctionsin variouscountries are determinedpartly by their qualityand partly by their offer prices.Comparing average prices of tea from nine countriesat the London Auctionsduring 1985-1994(Table 3-10), the price advantage seemsto be on the side of China,Indonesia and Sri Lanka, enhancingtheir positional

Table 3-10 AnnualAverage Prices of Tea at the LondonAuction (Penceper Kg.) 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 India 198.5 141.9 122.5 122.5 144.8 142.3 132 116.6 131 115.2 China 74.9 65.2 ...... 76.1 85.7 91 74.4 SOLanka 155.7 115.7 105.2 99.3 125.6 112.3 100.3 107.4 104 93.7 Kenya 176.6 156.5 117.8 103.7 123.4 112.4 101.1 115.6 123.9 125.6 Indonesia 87.8 99 84 83.4 ...... Bangladesh 155.7 114.4 72.2 88.5 111.4 78.6 ... 89 93.4 ... Malasa 120 106.1 78.8 75.6 97.6 79.1 78.3 84.6 94.2 101.8 Tanzania 149.3 124.9 95 89.9 112.2 102.3 89.3 95.7 109.4 104.3 Rwanda 153.2 149.4 107.5 112.9 146.9 184.1 148.7 139.3 144.5 161.3 Source:ITC Bulletin, 1995. advantage.The highestpriced teas came fromKenya and Rwandamaking them non- competitiveto a degree. Of course, the qualitydifferentials must be factored out from these figuresto get the true picture.

The price of Indiantea in the CIS, Poland,and the U.K. declinedbetween 7 to 9 percent between 1989-1994(Table 3-11). The drop was less (-3%) in the United Arab Emirateswhich imports about 10 percent of India's exportedtea. The averageprice receivedfrom the UAE was also higherthan those obtainedin the other majormarkets.

Table 3-11 Price of IndianTea in Major Export Markets (U.S. Dollarsper 1000kg.) 1989 1990 1991 1992 1993 1994 Change CIS 2.52 2.98 2.33 1.96 2.07 1.92 -8% U.K. 2.22 2.96 2.50 2.18 1.90 1.79 -7% Poland 1.98 2.51 1.83 1.53 1.84 1.27 -9% UAE 2.67 3.03 2.75 2.89 2.60 2.37 -3% Source:ITC Bulletin, 1995

Statisticsshow that on averagethe price of Kenyantea in the U.K. has been less than India's in the past. Between 1989-1994the price increasedby only2 percent per annum(Table 3-12). Higherprice increases(4%) were realizedin the other two major countriesof export, Pakistanand Egypt. The WorldBank forecastsan increasein the averageprice of Kenyantea by 27 percent in real terms between 1987 and 2000 (World Bank 1987).This is indicativeof continuedstrong marketposition of Kenya in the future.

99 Table 3-12 Price of KenyanTea in Major Export Markets (U.S. Dollarsper 1000 kg.) 1989 1990 1991 1992 1993 1994 Change

UX. 1.70 1.71 1.60 1.81 1.67 1.92 2% Pakistan 1.53 1.64 1.62 1.89 1.80 1.85 4% Egypt 1.44 1.19 1.50 1.59 1.64 1.54 4% Source:ITC Bulletin, 1995.

Between 1989-1994the averageprice of Sri Lankantea declinedin all its major markets.However, the CIS markethas shown an upward trend in pricessince 1992.This marketimported about 40 percentof SriLanka's packet teas and 12 percent of its tea bags, at premiumprices in 1995 (Forbes& Walker,op.cit.). In 1995, Sri Lanka's average exportprice to the CIS was Rs. 107.34compared to the nationalaverage FOB price of Rs. 101.76. Thismarket holds a lot of potentialfor Sri Lanka.

Table 3-13 Price of Sri LankanTea in Major Export Markets (U.S. Dollarsper 1000 kg.) 1989 1990 1991 1992 1993 1994Change USSR/CIS 2.03 2.60 1.82 1.57 1.75 2.26 -2% Jordon 1.54 2.46 1.75 1.39 1.54 1.48 -6% Egypt 1.62 1.90 1.59 1.56 1.52 1.50 -3% U.A.E 1.70 2.29 2.17 1.81 1.87 1.77 -2% Source:ITC Bulletin, 1995.

Export pricesto Jordan have declinedin recent years becausethe countryhas reducedits purchaseof value-addedtea. In 1995,about 69 percent of Jordan's tea import from Sri Lankawas in packet form, down from 77 percent in 1992.Prices of Egyptian export have also declinedfor the same reason.In 1995, only25 percent of Egypt's import from Sri Lanka was in the form of value-addedtea whereas in 1980 this numberwas 85 percent.However, pricesin the U.A.E. markethave been fairlystrong.

Extent of competition in the key market: The main competitor of India in the CIS market is Sri Lanka, which exported 10.38million kgs. to the CIS in 1994 (12.4% of CIS import) comparedto India's 33.87 millionkgs. (41% of CIS import).The secondlargest competitorwas Germany,which exported7.86 millionkgs. (9.5% of CIS import) to the formerRussian Federation. In the U.K., India's main competitoris Kenya,which has more than double of India's market share.

The major competitorsof Kenya in the U.K. are India and Sri Lanka. In 1994, U.K. imported72.5 millionkgs.(39.6 %/O) of tea from Kenya,33.6 millionkgs. (18.3%) from India and 16.3 millionkgs. (8.9%) from Sri Lanka. In 1993,the ratios were 42% (Kenya),15% (India),and 6.5% (Sri Lanka).The importantthing to note here is that

100 whileKenya's share of the market has been dropping,the marketshares of both India and Sri Lanka have been going up in the U.K (Figure3-7). Figure 3-7 Tea Export of Major Competitorsto the U.K., 1989-1994

90 80 70 InuPakisa,Kn'60 opto Indonesia, which hKenya 50 U- oercent.thetrend6O lIo for bot Kenya and Inonesia are doIndiaJ -DwardsE3040r Sri Lanka(FigueSu3 Lanka 20 10 0 'S 1989 1990 1991 1992 1993 1994

Source:ITC Bulletin, 1995

In Pakistan,Kenya's main competitoris Indonesia,which had 22.2 percent of that market comparedto Kenya's 41.7 percentin 1994. Sri Lankawas a distant third with 9.2 percent.However, the trend for both Kenyaand Indonesiaare downwardswhile it is upwardsfor SriLanka (Figure3-8).

Figure 3-8 Tea Export of Major Competitorsto Pakistan, 1989- 1994

60.00 k

~40.00 s Kenya

30.00 SSSS:...-uIndonesia

~20.00 .. :..Sd Lank 10.00

Source:ITC Bulletin, 1995

In Egypt, the main competitorof Sri Lanka is Kenya which took away the leadershipfrom Sri Lanka in 1991 and has sinceconsolidated its position.By 1993 Kenya secured 52 percent of the Egyptianmarket that was previouslyheld by SriLanka. By 1994, Sri Lanka's share of the market droppedto less than 20 percent. However, since

101 1994,its position has improvedsomewhat and Egypt still holdsgood promise for Sri Lanka.

Figure 3-9 Tea Export of Major Competitorsto Egypt, 1989-1994

40.00 35.00 30.00 ..- ° 25.00 . Lankan 20.00 -u- Kenya 1000 . S C | _-_1& India

500 E. 000 1989 1990 1991 1992 1993 1994

Source:ITCBulletin,1995

Micro-marketing and Coordination

Production/Marketing Coordination: In India, the coordination of production and marketingtakes place throughwell developedchannels that facilitatespot or forwardsales and publicauctions in six auctioncenters. Efforts are also underwayfor improving internationalmarket research, new products for new segments,and for establishing packagingand qualitystandards for the marketplace.The averageprice of Indiantea has been relativelyhigher than major competitors',partly because of its protected domestic market.For instance,in 1993the averageprice of Indiantea was US $2.03 per kg., comparedto $1.86 for Sri Lanka, $1.71 for Kenya,and $1.26for Indonesia.

In the Kenyantea estates, run by large multinationalcompanies, production and marketingare well integrated.The smallholdersector, managed by KTDA, has excellent facilitiesfor gettingthe producer's output to the auctioncenters, but not much is available for increasingthe value added componentof the export.

The coordinationof productionand marketingin Sri Lanka's estates were weak until privatemanagement companies took over in 1992.The situationhas improvedsince then and most of the productioncompanies are tryingto developmarketing channels outside the traditionalauction markets. Although its majorform of export is stillbulk tea, there is a strong move towardsincreasing the proportion of valueadded export. Response to internationalmarket demandfor tea in sachet, aluminumfoil soft packet, box board cartons, economypacks, canisters,bags, etc. has been quite good. Manufacturersare also respondingto demandsfrom specificbuyers for instant tea, organic tea, flavoredtea, etc.

102 Localprocessing and linked industries:The processingof value added teas like instant tea, tea bags, and packet tea has grownrapidly in Indiawith good support from the linked packagingand advertisingindustries.

In the Kenyantea estates, productionand processingare integratedand efficient. In the smallholdersector, KTDA has providedthe integratedservices of supplying plantingmaterial, credit, extension,leaf collection,and marketingof made tea. These contributeimmensely to the industry'scompetitiveness. The export of value addedtea in differentforms, however, is not the forte of Kenya.Its instanttea export, after reachinga peak of 1.22 millionkgs. in 1992,declined to 1.02 millionkgs. in 1994.

Local processingof tea into value addedform is very good in Sri Lanka. The countryproduces packet tea, tea bags, instanttea, manyforms of flavoredtea, vacuum packed tea, etc. Supportingindustries like packaging,advertising, and export management are availablewithin the country.

Quality control: Qualitycontrol is fairlygood and institutionalizedin the Kenyantea estates. Infrastructurefailure and inadequateprocessing capacity, however, have reduced the qualityof Kenyantea from the smallholdersector. The KTDA in the past had maintainedfairly strict qualitystandards in acceptinggreen leaf from its membergrowers, but againthe failureof the transport systemand delaysin processinghave resultedin qualitydeterioration of madetea.

Qualitycontrol withinthe tea industry,in SriLanka is quite good and the image of Sri Lanka's tea in the world marketis very positive.

Risk sharing: The smallholdersector in Kenya is well supportedby KTDA and thereby has marginalrisks of productionand marketingfailure.

In Sri Lanka, the smalltea growers have accessto factory processingservices ownedby the estates. Most factoriesalso buy green leaf from non-estategrowers for fillingcapacity. These reduce the risks for the smallholders considerably.

Technical/Financialand ManagerialSkills: Technicaland managementstrengths within the Indiantea industryare inadequatefor meetingchallenge from majorinternational competitors.The productivityof researchis particularlylow becauseof inadequate funding.The financialstrength of the industryis also low. The capitalmarket has not supportedthe industryand onlymeager externalfinancing has been possiblethrough a few financialinstitutions. Short-term financing from commercialbanks is availableat highrates of interest.

The Kenyantea estates are well endowedwith technical,financial, and managementstrength of well establishedcompanies. Even in the smallholdersector, KTDAhas performedquite well. It is financiallystrong despite very little subsidyfrom the government,except for some guaranteedloans at below market rates from agenciessuch

103 as CDC (Governmentof Kenya 1992).Its technicaland managementcapacities have been good in the past, but are inadequatefor the future. It is now under considerablepressure to restructure and reorient its functions.

Technicaland managementstrengths are lackingin many of the privateplantation companiesin Sri Lanka. They, however,are tryingto upgrade these skillsas quicklyas possiblethrough training and joint-venture programs with foreignpartners.

Cost structure: The averagecost of productionof tea in India today is about U.S.$ 1.20 per kilogram.49The COP in Kenya is approximately46 shilling/kg.or roughlyU.S. $ 1.00. The COP in SriLanka variesfrom $ 1.85/kg.in the estate sector to $ 1.21 in the private sector. 50Kenya,thus has the lowest COP, followedby India, and then Sri Lanka.

Marketing strength: India relieson some product differentiationand brand promotionfor internationalmarketing of tea. A particularadvantage of the country is its abilityto produce both orthodox and CTC teas. In general, orthodoxtea priceshave been better than CTC tea (Chiranjeevi,op.cit.), but today the percentageof orthodox tea producedin India is only 11. The countryhas been expandingits productionof value addedteas like instant tea, tea bags, and packet tea. The marketingchannels for tea export from India are well established.Generally, producers have accessto four differentchannels: ex-garden salesto domesticand foreignbuyers, direct consignmentto London auctions,sales at domesticauctions, and forwardsales (Mitra 1991).

The India Tea Board promotestea throughits foreignoffices in London, Brussels, New York, Dubai, and Moscow.It also has a brand promotionfund that providesinterest free loans to exportersfor introducingnew brands. It has placedthree brandsin overseas marketsfor its Darjeeling,Assam, and Nilgiristeas. It also promotesvalue-added teas like packet tea, tea bags, and instanttea. It supportsgeneric tea promotionas well throughthe U.K. and Germantea councils.

Internationalmarketing by the estate sector of Kenya is quite strong sinceit is managedby multinationalcompanies. Most of KTDA tea sales take place at the Mombasa auctionthrough 20 brokeragefirms. Private sales, basicallyfor obtainingbetter prices,are also handledfor KTDAby the brokers (GOK 1992).KTDA's own marketingdivision obtainsmarketing information directly rather than gettingit throughthe brokers. Heavy relianceon the auctionsystem has kept back the developmentof modernmarketing techniquessuch as market segmentationand positioningfor increasingcompetitive advantage.Product differentiationis also poor. Almostall tea producedin Kenya is of the CTC variety,with the exceptionof a smallamount of instanttea (1 millionkgs.) marketed to the U.S., the U.K., Germany,and Italy. Kenya is, however,targeting the North African and MiddleEastern countriesbecause of their increasingconsumption, although the demandthere is mostlyfor orthodoxtea. After the collapseof the InternationalTea

49 From India Tea Board (1995) estimatedcost of productionconverted at exchangerate ofRs.35/U.S. S. 50 Data source: SriLanka Plantation SectorStatistical Pocket Book (1995),Rupee value convertedat exchangerate of Rs.40 per U.S. $.

104 PromotionAssociation a few yearsback, Kenyawithdrew its membershipat the U.K. Tea Council.At presentit promotesits tea unilaterallyin Pakistan,Egypt, and the UAE.

Sri Lanka's marketingstrength lies in its recentlyprivatized tea companies.Some of these companieshave strong track records in managingsuccessful business. Most of them have shown strong entrepreneurialdrive. SriLanka has the highestratio of value addedexport - currentlyaround 35 percent of the majortea exportersof the world.

Product innovation: One of India's main strengths in the intemational market is its diversityof products and processes.It producesboth orthodox and CTC teas and many of its factorieshave dual productioncapacity. It has also been directlyexporting consumer packagesin varioussizes and specialtyteas like instanttea.

Product innovationin Kenya's tea industryhas not been notable. Sinceover sixty percentof the tea producedthere comesfrom the smallholdersector, managed by KTDA, there has not been much effort in developingnew varietiesof products to suit different marketneeds. Furthermore,the industry'sgrowing share of the internationalmarket has desensitizedit to the need for product differentiationfor retainingcompetitive advantage. Kenya does not export any significantquantity of value addedteas. The onlynew product developmentshave comefrom the estate sector in the form of vacuum-packedtea, and some new light blends.

New product developmentin SriLanka has been quite insignificantin the past three years, except for the developmentof the Ortho-CTCvariety. 5' Althoughcompanies are lookingto diversifytheir market,the main effort is stilltowards marketingthe existing product linesto new markets.

51 From surveyof managementcompanies, August 1996.

105 -...... *5 ...... o .S.,. . --- ....- . ., ...... :

; ::...... ------sXATTD- CHAPTER4 THE SRI LANKAN TEA INDUSTRY: STRATEGIES FOR CREATING GLOBAL COMPETITIVE ADVANTAGE

The most importantconcept of competitivenessat the nationallevel is national productivity.Sustained productivity growth requiresthat an industryconstantly upgrade itself in terms of product quality,new desirablefeatures, improve product technology, and boost productionefficiency (Porter 1990,op.cit.). The variousfirms in the industry must also developthe capabilityto competein more and more sophisticatedmarkets and industry segments.Human resources freed up in the process of improvingproductivity can be retrainedfor diversionto other value-addingactivities. It is importantto understandthat cheap labor and 'favorable' exchangerates are not the absolutedefinition of competitiveness(Porter, ibid.). Competitivenessalso lies in supportinghigh wages and commandingpremium prices in intemationalmarkets, and most importantof all, developingan advantagethat is dynamicand evolving.

Even though companiesand not nations are on the front line of international competition,the responsibilityof the nation is not lessened.The environmentwithin the home country shapes the abilityof companiesto innovatetechnology and methodsthat places them in the forefrontof global competition.The most importantsources of the national advantageneed to be nurturedand advanced.Simple reliance on low wages and price control will not make a nation competitiveand keep it there. Internationally successfulfirms constantlyseek out new advantagesand strugglewith rivals to protect them.

Lessons of experienceshow that even though differentorganizations may use different strategiesto accomplishtheir goals, they all tend to manifest some common underlyingbehavior. In general,five principlesseem to explainthe reason for sustained competitiveadvantage in globallysuccessful firms (Porter, ibid). These principlesare:

o Competitiveadvantage grows fundamentallyout of improvement,innovation, and change; o Competitiveadvantage involves the entire value systemencompassing the value chain of firms, suppliers,channels, and buyers; o Competitiveadvantage is sustainedonly throughrelentless improvement; o Sustainingadvantage requires that its sourcesbe continuallyupgraded; o Sustainingadvantage ultimately requires a global approachto strategy.

The long-termchallenge for firms in Sri Lanka is to put themselvesin position where they are most likelyto perceiveand thus best able to addressthe imperativesnoted above.

106 The process could be started by assessingtheir strengths and weaknessesin the domestic and global markets, gettingan early insight into the forces of the environment, understandingthe needs and trends of the markets,and gettinga head start for creating meaningfulinnovation. Some of the ways in which they could createthe impetusfor innovationare (Porter,ibid.): o Sellingto the most sophisticatedand demandingbuyers and channels. Thesebuyers and channelswill stimulatethe fastestimprovement because they are knowledgeable and expect the best performance. o Seekingout buyers with the most difficultneeds. These buyerswill provide the challengefor upgradingperformance and R&D. o Providingquality and servicebeyond the norms of standardsproducts. O Seekingout outstandingcompetitors as motivators.

SWOT ANALYSIS OF THE TEA INDUSTRY5 2

Once the forces affectingcompetition have been identified,the industrywill be in a positionto identify its strengthsand weaknessesto overcomethe threats and cash in on the opportunities.An understandingof the strengths,weaknesses, opportunities, and threats facing the Sri Lankan tea industrytoday is the first step towards creatinga long- term strategyfor enhancingits position in the global market. Foregoingdiscussions of the production-marketingsystem and the relativepositions of the main suppliers of tea to the global market on major success factors shown in Table 3-4 provideus with the following pictureof the SriLankan tea industrytoday:

Strengths

* SriLanka holds a dominantposition as a leading exporterof black tea and has a strong presencein major marketssuch as the RussianRepublic and CIS countries, Jordan, Egypt, and the UAE. * It has a reasonablydiversified product line, producingboth orthodox and CTC tea. It has recently developeda type of Ortho-CTCtea with some of the more desirable featuresof both forms. * It has made some progressin the productionand export of differentforms of value added tea such as decaffeinatedtea, instant tea, and flavoredtea. Many of the private producershave targeted the health food segmentof the world with their organically- growntea and are trying to establishdirect sales linkageswith overseas end distributors. * The Sri Lankan tea industryis operatingin a diversifiedgeographical market which gives it the strengthto sustainfuture demandfluctuations. * Quality control withinthe industryis good. * SriLanka's image is strong in the internationaltea market.

52 A SWOT,or strengths-weaknesses-opportunity-threatanalysisexamines the enterprise's intral strengthsand weaknesses and external opportunities and threats. It is groundedin the principlethat a strategymust produce a strongfit betweenthe organization's intenal capability and external enviromnent

107 Weaknesses

* The total area under tea in Sri Lanka is shrinkingwithout much improvementin productivity,in contrastwith Kenya where both land area under tea and productivityis on the rise. * The facilitiesfor the productionof tea have becomeobsolete. The growingstock is old and has lost productivity.Factory modernizationis slow and there is an imbalancein the productionratio of orthodox and CTC teas. The country has been slow in exploitingthe potentialof the tea-bag marketby falling behind in CTC production.In the instanttea market also, despite its earlier lead, Sri Lanka has fallen behindKenya and India. * Its productivityis very low comparedto other internationalproducers. * The availabilityof qualityworkers is on the decline. * The exportdistribution network for tea is weak. Most of the tea is still channeled through commodityauctions. * Technicaland managementskills are lacking. a The sectoris financiallyweak. * Unit costs are high, relativeto key competitors. * The coordinationof productionand marketingis weak and international marketingskills are below what is requiredfor a marketleader. * The rate of product innovationis low.

Opportunities

* Worlddemand for blacktea is expectedto grow at a rate of 3.2% per year.53 A substantialpart of this demandis likely to come from developingcountries, particularlyin the MiddleEast, and from CIS countrieswhich have a preference for orthodoxtea. The CIS countriesare also likely to continueto be strongbuyers of high qualitytea as there are indicationsthat the market there has started to recover from its earliereconomic problems. • The demandof tea in the west is likelyto becomevery selectivefor specialtytea such as instant tea, organicallygrown tea, and flavoredtea. Sri Lanka has strong potentialsfor exploitingthese premiumprice segments. * The future consumptionpotential in other key marketsis high. * The price trend in major marketslike the CIS and the UAE are strong. * The world marketfor beveragesis fast becomingsegmented due to changing lifestyle and consumerpreferences, as well as intensive marketpromotion by beveragemanufacturers. Sri Lanka is placed better than most of its competitorsto take advantageof this segmentation. * SriLanka produces a wide array of tea, from high qualitylight tea to strong dark tea. It can exploitthis abilityto expandthe product line and diversifyinto related products. * There is a good potentialfor Sri Lanka to achieve forwardintegration of its marketby establishingdirect linkageswith overseasbuyers and consumers.The

5 3 FAO,Trade Projections t 2005

108 private tea companiesin the countryare already exportingbranded tea and packagingis developing. * Deregulationand recent governmentactions in freeing up the production- marketingsystem extend good opportunitiesto the private sectorto install new productionprocesses that enable cost efficiencyand foster increasedprice competition. * The favorableexchange rate regimeholds good potentialfor future price competitiveness.

Threats

* Almost all countriescompeting with SriLanka have higher productivityand productivitygrowth rate. * Kenya has overtakenSri Lanka as the world's largest exporterof tea. * The pace of technologydevelopment and product innovationis low. * Government'scontrol over the labor marketstill threatens to destabilizethe industry. * Sri Lanka's lack of CTC productioncapacity is likely to make it lose some extremelylucrative markets like Pakistan,which is slated to becomethe leading importerof black tea by the year 2005. * Changingdemography and buyers' needs and taste are likelyto replacethe demandfor traditionalbulk tea with differentiatedtea in the world market. * Stagnantinfrastructure development may decreasethe industry's abilityto competeinternationally.

An effectivecompetitive strategy involves offensive or defensiveaction in order to create a defendableposition against the five competitiveforces shown in Figure 3-1. For the Sri Lankan tea industry,this may involve a numberof possibilities(Porter 1980, op.cit.):

* Using the industry's strengthsto position it in a way that createsthe best defense against the array of competitiveforces. * Influencingthe balance of forces through strategicmoves to improveits operating environment. * Anticipatinglikely shifts in the factorsunderlying the forces and respondingto them before the rivals recognizethem.

Positioning

The first approachfor the industryis to match its strengths and weaknessesto the market and industry structureand find positionswhere the forces are the weakest.For example,the industrymay only sell products that are not vulnerableto competitionfrom substitutesto the powerfulbuyers in the tea auctions.

109 Influencing the balance

The balance of competitiveforces are partlycontrollable by the organization.For example,product innovationor brandingcould create the necessarydifferentiation for warding off the threat of substituteproducts. Capital investmentin large scale facilities or forward integrationwith packersand exporterswould create entrybarriers. Structural analysis couldbe used to identifythe key factors and the places where strategicactions to influencethe balance shouldbe applied.

Pre-empting change

Long-rangeforecasts, through carefulanalysis of the industry-markettrend, can provide projectionof the changingtrends that could be used in long-termplanning. This is one way of stayingahead of the competition.The industry'score competencylies in its product image and the abilityto servedifferent market segmentsfor black tea with differentiatedproducts. These core competenciesshould be constantlyreassessed in the terms of futuremarket needs and new methodsshould be plannedto addressproblems beforethey arise.

Long-termplanning for the tea industrywould involve a number of steps, starting with a clear definitionof the industry'smission and objectivesand endingwith tactical plans.

DEFINING THE MISSION AND OBJECTIVES OF THE INDUSTRY

It is perhapswidely acceptedwithin the tea industryin Sri Lanka that its mission should be to produce high qualitytea for maintainingprofitable growth and a leadershipposition in the global market.The four main objectivesfor firms in support of this mission are shown in Table 4-1.

It is importantto note that there may be some built-in conflictswithin these objectivesand that long-rangegoals for profitabilityand increasedsales may require short-runsacrifices. The process of developingan integratedstrategy therefore has to be based on:

* Examiningthe environmentalthreats and opportunities; * Selectingobjectives that are consistentwith these threats and opportunities, and with the core competenciesof the industry;and * Acquiringany additionalcompetencies required for successful implementation.

110 Table 4-1 Sri Lanka's Tea Industry:Probable Objectives for the Millenium

PROFITABILITY * Net profit as a percentof sales - Set target * Net profit as a percentageof total investment- Set target * Net profit per share of commonstock - Set target VOLUME * Market share - Set target • Percentagegrowth in sales- Set target * Sales rank in the market- Set numberby market segments * Productioncapacity utilization - Set target STABILITY * Variancein annual sales volume - Set target * Variancein seasonalsales volume - Set target * Variance in profitability - Set target NONFINANCIAL * Improved image for qualityand reliability- Set target * Enhancementof technologyfor productand process innovation- Set target * Improvementof manpowerresources - Set target

Source: Authors 'formulation.

For example,even though world demandfor blacktea is growing, so is the volume of production.This requires a carefulstrategy of matchingbuyers' needs with the abilityof the industryto servethe needs within its core competency.The growingCIS marketfor high qualityorthodox tea providesSri Lanka with the right product-marketfit because of its strength in productionof high qualityorthodox tea. However,a significantamount of future demandwill be of CTC tea, particularlyin strong marketslike Pakistan. Sri Lanka's capacityfor the productionof CTC tea is presently20 millionkg/year or about 8 percent of its total capacity.In comparison,Kenya's CTC productionis over 95 percent and this has enabledit to get a strong footingin Pakistan. SomeMiddle Eastern countries, like Egypt, have also become CTC tea buyers and this is costing SriLanka market share in those countries.The strategy,therefore, has to assess future marketpossibilities in these countriesand perhapsadd capacityfor CTC production.

THE RELEVANT MARKETFOR TEA

There are many different productsthat serve the same need as tea. The competing alternativesfor tea could be classifiedat three differentlevels. First of all, there are competingproduct classesthat serve the same genericneed as tea, such as hot beverages, cold beverages,and alcoholicbeverages. Second, there are competingproduct forms within a product class, such as withinthe hot beveragesclass there are tea, coffee, cocoa, chocolate,etc. Thirdly,there are competingsuppliers (or types of tea) within a product

111 form such as Kenyan tea, Indian Tea, orthodoxtea, CTC tea, tea bags, and lose tea in packets. The principalmarket structure54 for tea is shown in Figure 4-1.

Figure 4-1 The Market Structurefor Tea

Source: A uthors 'formulation.

Competitiveproducts for tea, both in the hot and cold beverage product class, are soft drinks,juices, beer, coffee, cocoa, and chocolate.However, the substitutabilityof these productstends to vary across markets.In the U.S., for example,soft drinks are a strong substitutefor tea, but coffee is not (FAO 1995,op.cit.). Also, juices are complementaryto tea in the United States. There are not enoughconsumer research data from other countriesof the world to draw inferenceabout the substitutabilityof tea for differenttypes of drinks, but averageconsumption data fromthe United Kingdomshow that soft drinks may be the main competitorof tea in that market,also.

The per-capitaconsumption of soft drinks is rising in many parts of the world in comparisonto tea and coffee.5 The global marketfor fruit juices is around $10-12billion a year (Clairmonteand Cavanagh1990, op.cit.). The dominantsubsector is orangejuice, accountingfor two-thirdsof the market.Apple juice ranks second,followed by grapefruit juice, and other minorjuices. The industryis dominatedby major multinational corporationssuch as Coca Cola, Procter & Gamble,RJR Nabisco, Allied-Lyons,Cadbury Schweppes,Pernord Ricard, Suntory,Tchibo, and Oetker, which put out millionsof dollars for promotingthat industryevery year. Therehas been a spectaculargrowth in 54Te marketstructure detenrines the degree of substitutabilityamong a setof products. 55Datasource: TheU.K. Tea Council(1996).

112 this industry in the past ten years, makingit one of the world's major agro-based businesses(Kortbech 1991).Even though the averageper capita consumptionof juices worldwideis still low, it is going up graduallywith increasingconsumer consciousness about health.There is a good prospectof high growth in the developingcountries in the future, but at present a smallnumber of developedcountries including the United States, Germany,the UnitedKingdom, the Netherlands,France, Canada,Japan, Belgium,Italy, Sweden,and Switzerlandaccount for the major portion of fruit juice import.

Consumptionof alcoholicbeverages, on the other hand, is barelygrowing in most developedcountries (Standard and Poor 1996).Many firms in the wine and spirit industry are restructuringand downsizing.The futurefocus of this industryseems to be on product innovation,repositioning of product portfoliotowards premium products, and capitalizingon opportunitiesin developingcountries.

Analysis of Primary Demandfor Tea

The demandfor blacktea in the world is growingat less than one percent per annum. This demandis influencedby climate, populationdensity, cultural tradition, and other factors that vary accordingto regions. Sizeablegrowth has taken place in the last ten years in countrieslike India, Pakistan,Syria, Morocco, and Jordan. Both Asia and Latin America showed a growthrate of 16 percent, duringthe period 1986-1995(Figure 1-7).

Demographyand lifestyle characteristics(also calledpsychographics)are importantdeterminants of tea consumptionas much as they reflect the way of modern urban living.The cultural and historicalpattern of tea consumptionin the world has changedsignificantly in the last two decadesbecause of changes in beverage consumptionhabits of youngergroups influencedby heavy promotionof soft drinks all over the world. Per-capitatea consumptionin the United Kingdom,the world's largest tea consumingcountry, fell from a peak of 4.50 kilogramsin 1961to 2.53 kilogramsin the period 1993-1995.56On the other hand, populationand incomegrowth have contributedto a rapid increasein tea consumptionin the Middle East, North Africa, SouthAsia, and the CIS countries.Between 1985and 1995,annual tea consumptionin Jordan increasedby 21.9 percent, in Dubai by 9.8 percentand in Syria by 5.7 percent. In India, tea consumptionincreased at an annual rate of 3.7 percent and in China by 3.6 percent. In the former USSR-RussianFederation-CIS, the averagegrowth was only2 percent. Growthin the later half of 1990s,however, has been very strong there, indicating a return of the earlierhigh-demand characteristic of this region. The overall demand growth in Europe, barringthe U.K., was around 0.9 percent. As Figure 1-6 shows,the highest consumptionin 1995 took placein Asia (27%) followedby Africa(16%). The highest regionalconsumption was in the CIS-RussianRepublic (15%). Overall,the CIS and RussianRepublic, the MiddleEastern and African countrieslike Egypt, Morocco, and Jordan,'and Asian countrieslike Pakistanand probablyIndia in the long-termhold the greatestpotential for SriLanka's exportof blacktea in the coming decade.

ITCr Bulletin, 1996.

113 If we break the rate of consumptionand the growth of consumptioninto three levels, high, medium,and low, and classifythe main tea consumingcountries along these dimensions,the result could be representedin the 3x3 matrix shown in Figure 4-2. The country cluster in each cell represents a particularlevel of future potentialmarket for tea. The three cells in the upper right cornerare the star cells representingthe maximum future potential.In contrast,the three cells in the lower left cornerrepresent minimum future potential.The countriesin the diagonalof the matrix hold good promise for the future, but could have a reversalalso.

Countrieswith high levels of per-capita consumptionand high growth rate of consumptionhold the maximumpotential. These countriesare the UAE and Jordan.57 Countrieswith high consumptionbut low growthrate are the U.K. and Ireland.Among medium consumptionand high growth countriesare Syria,Poland, and Chile. India, Sri Lanka, Japan and the CIS are medium-consumptionmedium-growth countries. Among countrieswhere the consumptionlevel is fairly low at present,but growingstrongly are Chinaand France. The medium-consumptionbut low-growthcountries are the Netherlands,Pakistan, Iran, SaudiArabia, Kenya, South Africa,Egypt, and Australia. Finally,countries with simultaneouslow consumptionand low growthrates include Germany,USA, Canada,Tanzania, Uganda, and Sudan.

Analysis of the SelectiveDemand for Tea

Selectivedemand is the demandfor a specifictype of tea, such as green tea, instant tea, and herbal tea. In analyzingselective demand, one must understandhow buyers make choices from the alternativesuppliers. Choice is a functionof the buyer's needs and the buyer's perceptionof the alternativesin the context of a specificusage situation.Because needs representinternal drives and motives,which are difficult to observeand measure,one could use the conceptof benefitsought to explainthe need. The functionaland psychologicalbenefits that buyers hope to receive generallyreflect these underlyingneeds. Frequently,attributes are used interchangeablywith benefits. Attributesgoverning choices are not entirelyrelated to the physicalform of the product but may includebroader expectationssuch as consistency,and reliability.

PrincipalMarket Segmentsfor Black Tea

The world marketfor tea has two broad segments:green tea and black tea. In 1995,over 80 millionkilograms of green tea were exported,accounting for about 7.5% of all the exportedtea.5 8 Green tea, the dominantproduct of China,has its marketlargely in East Asia and North Africa(mainly Morocco). Black tea is primarilymanufactured in two forms, orthodoxtea and CTC59 tea. Other forms of black tea are oolong(partially fermentedtea), instanttea, flavoredtea, organicallygrown tea, and decaffeinatedtea.

57 Demandfor tea in Jordanmay be deriveddemand from Iraq which is currentlyunder UN iaadeembargo. "InternationalTea Comniittee,Annual Bulletin of Statistics(1990). 59 CTCstands for Crush (or cut), Tear and Curl. It is a particularprocess of manufacturingthat yields heavy liquoringand more cuppage.

114 Figure 4-2 Per capitaTea Consumption:Volume vs. GrowthMatrix

China Poland United Arab Emirates France Chile Jordan Syria

India Sn Lanka Japan CISlRussian Republic

Genmany Netherlands United Kingdom USA Pakistan Ireland Canada Iran Tanzania SaudiArabia Uganda Kenya Sudan SouthAfrica Egypt Australia Note: C = Per Capita Consumption, G = Per Capita ConsumptionG owthRate High consumption> 2 kg/capita;Medium consumption>0.S kg/capita, High growth >10% P.A; Medium growth >5%P.A. Source:JTC Bulletin, 1996.

Orthodox and CTC Segments: The traditionallystrong consumersof orthodoxtea are the East Europeancountries and the Middle East, althoughthe latter is shiftingtowards CTC tea in bags (notablyEgypt). The countriesof the European Community(EC) have been, and continueto be, the dominantbuyers of CTCtea. They are expectedto import 142,000tons of CTC tea by the year 2000 (69% of their total imports).A 1992FAO projectionhad placed the productionincrease of blacktea at 2,638 millionkgs. by the year 2000, of which 47 percentwas expectedto be orthodoxand 53 percent CTC tea (FAO 1992,op.cit.). The same projectionhad placed world consumptionof blacktea in the year 2000 at 2,548 millionkgs., of which 46 percentwas expectedto be orthodox and 54 percent CTC. Table4-2 showsthe projectedvalues of production,internal demand, and export availabilityof orthodoxand CTC teas by major producersin the year 2000. The top three suppliersof orthodoxtea in 2000 are expectedto be Sri Lanka with a 32

115 percent shareof the market,China with a 26 percent share and Indonesiawith a 24 percent share.Kenya is expectedto becomethe largest supplierof CTC tea by 2000, supplyingnearly halfthe world demand.India would be a distant secondwith 23 percent of the market share. SriLanka and Indonesiaare each expectedto have about 5 percent of the market.

Table 4-2 ProjectedSupply of Orthodoxand CTC Tea in Year 2000 (millionkgs.) Orthodox CTC

I ntenal Export I nternal Export Country ProductioDerend Avai1iity EAIIR ProductionDenmd Avai1!iiity EA/IR India 120 25 95 14% 846 725 121 23% Si Lanka 240 18 222 32% 24 0 24 5% Kenya 3 0 3 00/o 247 22 225 43%0/ China 205 25 180 26% 0 0 0 0%/0 Indoneia 180 9 171 24% 24 0 24 5% Turkev 200 180 20 3% 0 0 0 09/h Total 948 257 691 98% 1141 747 394 75% EA = ExportAvailability; IR= World ImportRequirement Source: FAO, 1992.

The highestsale of orthodoxtea in 2000 is expectedto be to the Near East (Egypt, Libya, Iran, Iraq, SaudiArabia, Syria, Yemen,etc), Eastern Europe (CIS, Poland, etc.), and the Far East (Pakistan,Hongkong, Malaysia, etc.). The respectivedemands of the different regionsare shownin Figure 4-3.

Figure 4-3 ProjectedDemand for Orthodoxand CTC Tea in 2000

3~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ LatinAmenca 18 ICTCF. I Afnca 21 FarEast 124 Near East 11A Oceania&20 EastemEurope 158 OtherWEC 44 EC _142

NorthAmenca

Source:FAO 1992.

116 The expecteddemands from major tea importersfor orthodoxand CTC teas are shown in Figure 4-4. The largest importersof orthodoxtea in 2000 are expectedto be the CIS, Pakistan,Egypt, United States,Iraq, and Iran. The largest importersof CTC tea are likely to be Pakistan,CIS, Egypt, the United States,Iran, and Iraq, in that order. These six countrieswill be the main marketsfor both orthodoxand CTC tea in the years to come.

Figure 4-4 The Top Six Markets for Ortho and CTC Tea in 2000

Ortho C raq Iaq Irani~~~~~~~~~a 8% Cs2 9

11% Egypt Pakistan Palistan 17% 19% 46%

Note: Figuresindicate market share. Source:ITC Bulletin,1996.

The Specialty Tea Segments: Oolong and other specialtyteas are producedfrom plants grown in special areas. The hills of Assam,Niligiris and Darjeelingin India and the high country of SriLanka producethese high-gradeteas, which commandpremium prices in the Americanand WesternEuropean markets.Instant tea catersto convenience-oriented consumersmainly in the United States and Europe. Product differentiationis a major marketingtool in these markets.In the United States,tea has long been positionedas a softer alternativeto coffee, as it has about one third less caffeine,and it has performed better than coffee in the health conscious1990s. The primarytarget has been women overthe age of 25. Supermarketsales of coffee in the U.S. declinednearly 7% in 1992, whereas sales of tea bags and loose tea grew by about 1%(The Wall Street Journal 1993).In the intensely competitivemarket of the United States,where product differentiationis the key to marketshare, companiesare differentiatingtheir productsin many different ways. For example,Tetley introduced round tea bags in place of the traditionalrectangular bags, backed by $35 million of promotion.But relative to carbonatedbeverages, the preparationof tea is time consumingand inconvenient.Also, tea is not sweet enoughto lure young consumershooked on carbonateddrinks. To overcomethese obstacle,major tea makers are pushingready-to-drink iced-tea products with sugar added.Lipton has teamed with PepsiCoInc. to sellLipton originaltea, while Nestle SA has joined forces with Coca-Colato sell ready-to-drinktea. Celestial Seasoningshas a line of bottledherbal-tea products. All these indicatethat the futureof tea marketinglies in product differentiationand positioningto take advantageof the growing diversityof consumertaste.

117 The import trend for instant tea in some of the majortea importingcountries is shown in Figure 4-5. In the USA, the major importerof instant tea, demandfell in 1995 after stayinglevel for almostthree years. The German demandpicked up in 1995,after a year of decline.In Italy the trend is up but in Japan it is down. Overall,the demand for this type of tea is likely to improve,depending upon the intensityof marketingefforts.

The share of the instant tea market,in 1990 and 1995,for the three big producers, India, Sri Lanka, and Kenya, in the major marketsof the world are shown in Figure 4-6. Kenya held almost the whole of the U.K. marketwith 94 percent share in 1995.In the past five years it has gained a 5 percent share at the expense of India. Sri Lanka has maintainedits smallmarket share of 5 percent.In the giant U.S. market, India dominated with 65 percent of sales in 1995,up from 59 percentin 1990.The six percentagepoint gain came from Sri Lanka's loss of 2 percentof the market and a 4 point loss in Kenya's share. Most importantly,note that Sri Lanka totallylost the marketfor instant tea in the U.S.A. in 1995.In Germany,the secondbiggest marketfor instant tea, Kenya has seized the market leadershipfrom Sri Lanka and now has 63 percentof the market,gaining 41 percentage points over its 1990 share. Sri Lanka lost 44 percent of the market going from 77 percent in 1990 to 33 percent in 1995. India gained a 3 percent share in this period going from 1 percent in 1990 to 4 percent in 1995, also at the expense of Sri Lanka. In the Italian market, India almost had a monopoly in 1990 with 99 percent of the market.

Figure 4-5 Instant Tea Import Trend in Major Countries (kgs.)

1,800,000 1,600,000 1,400,000 1,200,000 1,000,000 - 800,000 600,000 400,000 200,000 - =

1990 1991 1992 1993 1994 1995

1-*-UK -Germany -Italy -- USA -o-Japan Source:ITC Bulletin1996.

But it lost this monopoly to Kenya and ended up with only a 35 percent share in 1995. Kenya's gain in Italy is phenomenal, going from 1 percent of the market in 1990 to 65 percent in 1995. Sri Lanka has no presence in the Italian instant tea market. In Japan, India held the leadership with 61 percent of the market in 1995. But it has lost almost 26

118 .;~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~r

4)4

L) .Wq.~~~~~~~~~......

0 percentof the market since 1990.This is the only marketwhere SriLanka has made a headwaysince 1990: its share has risen from 13 percentin 1990 to 39 percentin 1995,all at the expense of India. Kenya does not have any share of this market.

THE STRATEGICOPTIONS

Creatinga defendableposition in the market place and coping successfullywith the five competitiveforces, describedearlier, should define Sri Lanka's competitive strategyin the global tea industry.A combinationof three generic strategies,at the broadestlevel, could help it createthis defendableposition and outperformits competitorsin the long-run(Porter 1980).

1. Overall cost leadership. 2. Differentiation. 3. Focus.

The two main sources of competitiveadvantage in any industry are low cost and differentiation.A combinationof these two sourcesof competitiveadvantage with the scope of the target marketserved (narrowor broad) yields four generic strategies,namely cost leadership,product differentiation,cost focus, and focuseddifferentiation (Figure 4-7). These strategiesare internallyconsistent and can be used either singly or in combination.

Figure 4-7 GenericStrategies for Tea

STRATEGIC ADVANTAGE

BroadMarket N

STATGICTARGET

NarrowMarket

Source:Porter, 1990.

120 The industry has to decide on the type of competitiveadvantage it seeks, based on cost or differentiation,and the marketscope, that is the size and extent of the marketit seeks (Porter 1985).These decisionsare helpedby an analysis of the industry's competitivestrength and the marketopportunities offered in the long-run.

BROAD MARKET STRATEGIES

Overall Cost Leadership

This strategyis useful when an industryis able to establishitself as a low-cost producerfor servinga broadlydefined market.In general,to implementthis strategythe industrymust constructthe most efficientfacilities (in terms of scale or technology), vigorouslypursue cost reductionsfrom experience,impose tight cost and overhead control,and obtainthe largest share of the marketto achievethe lowest cost per unit of production.These advantages push the industryup the experiencecurve which then leads to more refinementof the entire process of production,delivery, service, and further loweringof cost. A low-cost positionalso providesdefense against powerful buyerswho drive down prices to the level of the next most efficientcompetitor. It provides substantialentry barriers and makesthe industrystrong enoughto combatsubstitute products from competitiveindustries. A low-cost strategy,therefore, protects the industry against all five competitiveforces that affect the industry(Figure 3-1). Cost leadership eventuallybecomes the basis of lower pricesand more value offeredto customersin the later, more competitivestage of the product life cycle.But it is only sustainableif sufficientbarriers exist to prevent competitorsfrom achievingthe same low cost. Rapid technologydevelopment through R&D is one meansof achievingthis end.

Obtaininglow overallcosts may require a high relative marketshare and other conditionslike higherproductivity and a lower factorcost per unit of production.It may even require a wider product line to spread cost and the servicingof major customer groups to build volume.Implementing the strategyrequire major investmentin a state-of- the art processingsystem, aggressive pricing, and start-uplosses to build market share. The cost structureof Sri Lanka's tea industry,shown above, does not lend itself to the adoptionof the cost-leadershipstrategy easily. This country has one of the highest costs in the global tea industry createdby low productivity.The low productivityarises from a lack of investmentin agriculturalinputs, a lack of replacementof aging growingstocks and factories,absence of proper R&D, and low worker motivation.Unless each of these problemsare addressed,it is difficult for the countryto adopt the overallcost-leadership strategy.However, there may be marketniches where Sri Lankan producerswould be able to realize cost advantagesrelative to competition.

Differentiation

The secondgeneric strategyis to differentiatethe industryofferings and create a line of productsthat are perceivedindustry-wide as unique products.The strategycould be extremelypowerful in copingwith the five environmentalforces in a differentway

121 than the cost leadershipstrategy. It providesinsulation against competitiverivalry because of customers' brand loyalty and resultinglower sensitivityto price (Porter 1980, op.cit.).It automaticallygenerates entry barriersbecause competitors have to overcome the uniquenessof the productto gain consumerpreference. Differentiation yields higher marginswith which the industry could deal with suppliers'power. Buyers' power is also diminishedby an absenceof substituteproducts to satisfyconsumers' desire. The threat of substituteproducts is diminishedas a naturalsequel to differentiationunmatched by rivals in the industry.

To build differentiation,the industryin Sri Lanka has to match its natural advantagesand strengthsto the characteristicsof the marketthat allows differentiation. The challengecould be met in many differentways: throughtechnology that would create the desiredproduct, quality,brand image,and featuresthat consumerscrave, and developa marketingnetwork. As seen in the previous analysis,Sri Lanka is strong in the productionof orthodoxtea, which appealsto a particulartype of marketlooking for flavor, brightness,leafiness, etc. The convenienceand cuppage of CTC tea is also a growingconsumer preference in many markets.The traditionaldividing lines between these two inherentlydifferent market segmentsare now being blurredby new technologicalinnovation such as Ortho-CTCtea that possessesfeatures from both. The high mountainblends of Sri Lanka have a certain uniquenessin their characteristicsthat suit the desire of light tea drinkersin Europe. In the U.S market, product differentiation has mainlybeen designedaround the type of brew rather than the qualityof the drink. The United States has been a vast marketfor instant tea and ready to drink tea, both high on conveniencebut low on quality.There is, however,a gap in this market for high quality,good flavortea in ready-to-drinkform. Sri Lanka has productsthat meet this demandfor qualityand convenienceat the same time. This could providethe differentiationneeded to fulfill the needs of the quality-convenienceniche. The image of Sri Lanka's tea is fairly strong in the world market.There has been little effort, however, to enhancethis image and to extendit to a largerportion of the tea drinkingpopulation. This image needs to be advanced,beyond the gourmettea segment,with forceful and creativemarketing, something which Columbia's coffee industryhas been able to do very well in the past.

NARROW MARKET STRATEGIES

Cost Focus and Focused Differentiation

A narrow focus strategy, which targets a narrowly defined market, has the ability to create more customer value from a better understanding of customers' needs and wants. The entire focus strategy is built to serve a particular target very well and has a distinct advantage if the competitors are working in much broader markets. Benefits of both differentiation and lower cost are possible with this strategy since concentrating on providing products to serve a particular segment's needs is a form of differentiation and it is possibleto achievelower cost with specialization.It must be noted thoughthat the low cost is not fromthe perspectiveof the whole marketbut withinthe narrow markettarget.

122 The focus strategy imposes a limit on the overall market share achievable because it involves a tradeoff between profitability and sales volume.

A narrow focus strategy can be combined with either cost-leadership or differentiation strategy. The first results in a cost-focus strategy where the industry pursues a narrow target market with a low-cost strategy, offering the market lower prices than the competition. The second yields afocused-differentiation strategy that offers a narrow market the perception of product uniqueness at a premium price. As indicated above, cost leadership is a sustainable source of competitive advantage only if there are enough barriers to prevent competitors from achieving the same low costs. Sustained differentiation depends on continued perceived value and the absence of imitation by competitors (Porter 1980, op.cit.). Several factors determine whether focus could be sustained as a source of competitive advantage. First, a cost focus is sustainable if the competitors are defining their target markets more broadly. Second, a differentiation focus is sustainable only if competitors cannot define the market even more narrowly. Third, focus can be sustained only if competitors cannot overcome barriers that prevent imitation of the focus strategy and if consumers in the target segment do not change over to other segments that the focuser does not serve.

The global tea market holds numerous opportunities for Sri Lanka to follow both cost focus and focused differentiation strategies. The main action necessary is to select the right target markets and to concentrate on them. Earlier on we had analyzed the principal market segments for black tea. There are many ways in which these segments could be further refined. For example, secondary segments could be defined in terms of consumers' needs and desires, usage rate, values and lifestyles, etc. Many sophisticated marketing tools and techniques (such as conjoint analysis) are available for formation and profiling of segments based on these factors. However, detailed consumer research data are necessary to do this scientifically. A few tentative market segments that could be defined with available secondary data are:

Benefit Segments

Benefits sought by consumers who drink tea varies widely from region to region and country to country. For example, most consumers in Europe look to tea as a light substitute for soft drinks and other non-alcoholic beverages. Demand for lighter Sri Lankan tea such as the Uvas, the Nuwara Eliyas, Udapussellawas, and other high grown tea is strong in Germany, the Netherlands, France, and other European countries. Herbal tea and flavored tea are popular in the United States and Europe where the consumers are willing to pay a lot more for these varieties (Peel 1996). In the Middle and Southern European markets, herbal tea plays a much greater role than plain black tea (Spethmann 1994). The benefit seen in herbal tea is largely medicinal. Flavored tea, particularly with the essence of tropical fruits, is extremely popular in Europe and America and is expected to grow in market share in future years (Sturdivant 1996). The leafy low-grown teas of Sri Lanka have a good market in the Middle East because buyers there prefer the stronger body and taste.

123 Values and Lifestyle Segments

There is a strong influenceof values and lifestyles on the consumptionof tea in developedcountries. This allows for the creation of segmentsknown as values and lifestyle segments(VALS) for marketing.Some of the importantVALS profiles and how these affect tea consumptionare:

* Nutritionally concernedpeople: These make up 46 percent of the over-50 populationin developedcountries. This group believesthat what one eats and drinksaffects how one feels (Sandor 1994).Tea as a naturalbeverage whose nutritionalvalues are recently comingto consumers' attentioncould be a very appealingbeverage for these people.

* Fast and health conscious individuals: They are also concerned about health and nutrition,but are more interestedin convenience.They tend to cook only when the family is together and rely heavily on time saving devices like the microwaveoven. Even thoughthis group may believe in the health benefits of tea, the inconvenienceof preparationmay turn them away. To attract this segmentand get them hooked on tea, it is necessaryto developnew product formulationsthat will providethe convenienceof preparation.Instant tea is one such product offering.Tea bags are another.Microwavable tea packages may again be an alternativefor the future.

* The convenient drink seekers: These are mostly people on the go who desire their beveragesin convenientready to drink form such as canned cold drinks,available in convenientlocations such as supermarkets,vending machines,candy stands, etc. Soft drinksare the most preferredbeverage for these individuals.Iced tea, packed and sold like soft drinks, have made considerableinroads into this marketlately and could grow tremendously with proper marketing.The most importantconsideration for Sri Lankan producerswho want to tap this segmentis to differentiatetheir productsfrom the existingline of iced teas sold in Europe and America.The mass producersof iced tea in these marketsare marketingthem with very little tea contentand very large promotionalcontents for mass consumption. The high grown teas of SriLanka have a naturaladvantage for preparationof ready to drinkteas that also have good flavor and taste. This opens up a favorableniche in the marketfor iced tea that could be addressedvery effectivelywith a focused-differentiationstrategy. By concentratingon the high-valueseeking iced tea drinkersin Europe and America and by providinga highly differentiatedproduct made with its light high-grown teas, the Sri Lankan industry could capture a chunk of the premium-priced ready-to-drinktea segmentin these countries.

124 Behavioral Segment

The most commonbehavior used to definethis segmentis the consumptionrate. Consumersdiffer in the rate of their consumptionand for most consumergoods about 20 percent of the segmentpopulation consumes 80 percentof the product. Thus,the market could be divided into a heavy-consumerend and a light- consumerend. Naturally,heavy consumersare of the greatestinterest to marketerswho try to understandtheir characteristicsin order to influencetheir desirefor more of the product.Earlier in the analysiswe had identifiedcountries where per-capitaconsumption of tea is the highest (Figure4-3). In this categoryare the UAE, Jordan, the United Kingdom,and Ireland. However,if we divide the marketin terms of absolutelevel of consumptionby combiningper-capita consumptionand population,other countriesjoin the rank such as the CIS countries,Pakistan, the United States, and Egypt. Amongthese countries, Pakistanis a big consumerof CTC tea where Sri Lanka has been behindthe other top producers.However, Pakistan is also a big buyer of orthodoxtea. The strategyfor Sri Lanka would therefore be to concentrateon the orthodoxsegment of Pakistan's market with a cost-focus strategy with the attempt to become a low-price provider of orthodox tea. Some difficultymay initiallybe encounteredto preventthe current segment populationto switchto CTC, which provideslarger cuppagefor the same amount of tea used. This could be preventedif SriLanka is able to retain the segment's loyaltythrough aggressivelow pricing.This meansthat Sri Lankan producersmay have to accept lower profitabilitygoals initiallyin price sensitivemarkets such as Pakistanand Egypt to maximizelong-term gains.

The industry must also recognizethose exportmarkets where the absolutelevel of consumptionis not high but the intake is growingat a high rate. Thesemarkets provide the best opportunity for cost-focus strategy orfocused-differentiation strategy. Prominent countriesin this class are China,France, Poland, Chile, Syria, UAE, and Jordan (Figure 4-3). Investingto developa loyal consumerbase in these countriestoday will help ward off competitionthere in the longrun.

THE OPTIONS FOR SRI LANKA

Consideringall the possiblegeneric strategies discussed above, which set of strategiesshould the tea industryin Sri Lanka adopt? This decisiondepends upon the nature of the specificmarket served by the industry.The directionpolicy matrix shown in Figure 4-8 providesguidelines for implementingstrategies in different markets.This matrix relates the competitiveposition of the industrywith the market's attractiveness. Multiple factor indices may be used to quantitativelydefine both dimensionsof this matrix as shown in Table 4-3.

125 Figure 4-8 The Directional Policy Matrix

Competitive Strength |STRONG | MEDIUM WEAK

Market L _ ] Attractiveness m L

Source:Hussey, 1978.

From an assessment of the overall strength of Sri Lanka's tea industry and the attractiveness of the potential markets of CIS, Egypt, Pakistan and USA (Table 4-3), the use of three basic strategies shown in Figure 4-9 could be suggested. But additionally, each market needs to be targeted with one or more of the three generic competitive strategies, i.e., cost leadership, differentiation, and focus.

The CIS market is extremely attractive for Sri Lanka and given the tea industry's medium strength in that market, the best strategy to follow would be:

* Challenge the leader (India) with differentiated products for meeting the demand of quality-conscious buyers. X Segment the market and identify niches for cost focus and focused differentiation.

The Egyptian market is gradually moving towards CTC tea. However, its orthodox tea segment is still large. Given the high level of market attractiveness and medium competitive strength of Sri Lanka in Egypt, the best strategy would be to:

* Overcome weaknesses that are providing edge to the major competitor (Kenya), such as increasing production of CTC tea. * Create product differentiation, by adding the Ortho-CTC product line in the market.

126 Table 4-3 Evaluating Competitive Strength and Market Attractiveness for Sri Lanka's Tea in Four Major Countries CIS Egypt Pakistan USA

1. Market share Medium Medium Low Low 2. Management skills Medium Medium Medium Medium 3. Modem and efficient facilities Medium Medium Low Medium 4. Innovation technology Medium Low Low Low 5. Product image High High Medium Medium 6. Cost advantage Low Low Low Low 7. Quality of distribution Medium Medium Low Low Overall Competitive Strength Medium Medium Low Low

1. Global industry sales-growth rate in the High High High Medium market 2. Attractiveness of market size High Medium High Medium 3. Projected market growth rate Medium High High Medium 4. Consumer loyalty Medium Medium Low High 5. Government-created barriers Medium Low Medium Low 6. Overall potential for profit High High Medium High Overall Market Attractiveness High High High Medium Source:Authors 'projections.

Figure 4-9 Basic Strategies in Key Markets

Country Strategy

I CIS ChallengeLea.de,r,,.,.

Pakistan l

A ~~~OvercomeWeakness8 J US * ~~~~~~Finda Niche

Source:Authors 'formulation.

127 * Analyze the orthodox tea segment of this country to determine what changes are taking place in consumers' preferences and develop new products to meet these needs.

The overall attractiveness of Pakistan's market is high but Sri Lanka's competitive position there is low. The strategies best suited for this market are therefore:

* Overcome weaknesses. * Differentiate the product. * Find a niche for developing consumer loyalty. * Follow a low-cost focus strategy.

The U.S. market is very strong for ready-to-drink and convenient packed tea. Presently, it holds medium attractiveness for Sri Lanka and the industry's competitive strength is low because it does not possess the capability of producing a diversified line of tea and its marketing strength is low. Some of the recommended strategies for this market would therefore be:

* Address some of the critical weaknesses that are preventing a major entry into this market. Form joint venture enterprises both for producing packaged ready-to-drink mixes and marketing them in the United States. * Segment the market for instant tea and iced tea and develop a well differentiated product line to fill the niche for high quality, good flavored tea where competition is non-existent at this time.

SUSTAINING COMPETITIVE ADVANTAGE VIA STRATEGIC INTENT

The three generic strategies presented in this chapter are alternative, viable means of addressing competitive forces in the tea industry world-wide. Firms or industries that fail to develop their strategy in at least one of these three directions are likely to lose out to competition. These organizations will lack market share, investment returns, the resolve to become efficient low cost producers and effective marketing skills that provide well-differentiated products with value in the eye of their customers. These organizations almost guarantee low profitability, losing either the high-volume customers who demand low prices or giving up profits to grab business from low-cost competitors. They also lose high-margin businesses - the cream - to firms who have focused efficiently on high- margin target markets with highly differentiated products.

Sustaining competitive advantage is yet another dimension of the competitive game that the Sri Lankan tea industry must understand well if it expects to be strong in the future. Competitiveness is a function of the pace at which an organization implants new advantages deep within itself. Thus, there has to be a strategic intent, growing out of ambition and an obsession for winning. Few competitive advantages are long lasting and keeping scores of old advantages is not the same as building new advantages (Hamel and Prahalad 1989). Success lies in creating tomorrow's competitive advantage faster than the

128 competitors' abilityto mimicwhat one has today. For Sri Lankan tea producersand exporters,the effort should be to build a wide portfolioof advantagesby stackinglayers of advantageon top of one another.For example,one layer of advantagecould be through diversificationinto high-valueforms of tea. Then a secondlayer of qualityand reliabilitycould be addedby buildingplants large enoughto serveworld markets.The third layer could be built with efficientmarketing channels and brand namesto gain recognition.Yet another layer could be addedby buildinga global brand franchise- or a global customerbase. This process of building layersdemonstrates how the organization could move along the value chain to keep strengtheningits competitiveadvantage.

129 The Final Analysis

As part of their evolutionary process, industries pass from periods of rapid growth to more modest growth upon reaching a period commonly called industry maturity. The global tea industry reached this maturity over a decade ago. It is now in a critical period during which fundamental changes are taking place in the competitive environrnent requiring difficult strategic response. The slowing of growth is creating more competition for market share. When this share is not realized through expansion of the market itself, companies turn to attack the shares of others. Outbreak of price wars, discounted service, and promotional warfare may develop in the industry to shake out weak players. The transition to maturity also provokes firms to concentrate on their core markets and defend their position vigorously. This does not seem to have happened with the Sri Lankan tea producers who have conceded important markets like Pakistan and Egypt to relative newcomers like Kenya. Another characteristic of a mature industry is the shift of the more competitive firms towards greater cost economy and service commitment. This may require higher investment in the most modern facilities and equipment. However, in the case of Sri Lanka, one finds the contrary to have happened, mainly because the industry was far too long under public control. There is a slow down of capacity creation in mature industries as the market evens out, otherwise overcapacity would develop. This has not happened in the tea industry, as more and more producers are relentlessly adding more and more production capacity. Fortunately, Sri Lanka does not belong to this category. But, it should monitor the competitors' capacity addition closely and take corrective actions where necessary. One important thing that Sri Lanka's tea producers need to do, however, is to change its marketing and distribution methods to capture the essence of the market. Mass marketing through auctions definitely is not the best method of meeting consumers' needs nor is it good for all the strategies involving differentiation and focus that we have discussed earlier. It is time for the industry to make a realistic assessment about the future and decide what strategies and methods they want to pursue to take them out of the rat race for survival. Winning the game would require new thinking, new orientation, and intelligent moves because the competitors are equally powerful. Sustaining competitive advantage does not only depend upon exploiting the national environment. Individual firms in the industry must work actively to improve their home base by upgrading the national "diamond" (Figure 3-4). First, they must draw on their own home-based resources to extend and upgrade their own competitive advantage (e.g., factor pools, local demand, etc.). Achieving this requires that the company understand how each part of the "diamond" best contributes to competitive advantage. It also requires a long-term investment perspective. Some of the firms in the industry already have taken this outlook and are channeling investment in the plantations for productivity increase. In many studies of successful firms and industries it has been seen that to do so the leading firms took explicit steps to create factors and to ensure that institutions were established, because factors are created and not inherited (Porter 1980, op.cit.).

While the government has an important and constructive role in creating factors, this responsibility can not be the government's alone. The firms in the tea industry have to

130 influencegovernment in shapingpolicy and must put their support behind constructive governmentprograms. They should stay clear of quick fixesthat in the long run undermine their competitiveability (for example,asking for subsidies).They may also look for alliancesfor exploitingthe benefitsof national advantagein other nations. Again, some Sri Lankan companieshave alreadytaken this step by forgingalliances with experienced companiesoutside Sri Lanka to provide managementand technicalknow how. The governmentshould encourageand not obstruct this.

The government's role is also quite important in internationalcompetition. The centralrole of the governmentis to develop criticalresources (like manpower and capital) for high levelsof productivity.It shouldassist innovationand improvementwithin the industryand create an environmentin which firmscan upgrade their competitive advantage.A few of the essentialsteps that governmentmust take are deregulationof the labor market,removal of unnecessarycontrols of the industry(such as control over marketingof tea), and developmentof the financialmarket without which companies cannot find investmentcapital. The govemmentof Sri Lanka has alreadytaken many steps to improvecompetitiveness of its tea industry,such as devaluationof the currency,partial deregulation,and privatizationof the estates. Other things that are also necessaryare overseaspromotion of the industry,collection of marketingintelligence, tax reforms, infrastructuredevelopment (particularly the power infrastructure),expansion of investmentin tea research, and the improvementof education for plantationworkers. There are a few importantpremises that hopefullycould guide future governmentpolicy towards the sector (Porter 1980, op.cit..):

• Firmscompete in industries,not nations. * A nation's competitiveadvantage in an industryis only relative. * Dynamismleads to competitiveadvantage, not short-term cost advantage. * Pursuit of competitiveadvantage demands that industriesupgrade. * Competitiveadvantage takes decades to develop, not a few years of a business cycle. * Nations gain competitiveadvantage because of differences,not similarities.

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137

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Recent World Bank Discussion Papers (continued)

No. 334 ManagingPrice Risk in the PakistanWheat Market. Rashid Faruqee and Jonathan R. Coleman No. 335 PolicyOptions for Reformof ChineseState-Owned Enterprises. Edited by Harry G. Broadman No. 336 TargetedCredit Programs and Rural Povertyin Bangladesh.Shahidur Khandker and Osman H. Chowdhury No. 337 The Roleof FamilyPlanning and TargetedCredit Programs in DemographicChange in Bangladesh.Shahidur R. Khandker and M. Abdul Latif No. 338 Cost Sharingin the SocialSectors of Sub-SaharanAfrica: Impact on thePoor. Arvil Van Adams and Teresa Hartnett No. 339 Publicand PrivateRoles in Health:Theory and FinancingPatterns. Philip Musgrove No. 340 Developingthe NonfarmSector in Bangladesh:Lessonsfrom Other Asian Countries.Shahid Yusuf and Praveen Kumar No. 341 BeyondPrivatization: The SecondWave of TelecommunicationsReforms in Mexico. Bjom Wellenius and Gregory Staple No. 342 EconomicIntegration and TradeLiberalization in SouthernAfrica: Is Therea Rolefor South Africa? Merle Holden No. 343 FinancingPrivate Infrastructure in DevelopingCountries. David Ferreira and Karman Khatami No. 344 Transportand the Village:Findingsfrom African Village-LevelTravel and TransportSurveys and RelatedStudies. Ian Barwell No. 345 On the Roadto EU Accession:Financial Sector Development in CentralEurope. Michael S. Borish, Wei Ding, and Michel Noel No. 346 Strtctural Aspectsof Manufacturingin Sub-SaharanAfrica: Findingsfrom a Seven CouintryEnterprise Survey. Tyler Biggs and Pradeep Srivastava No. 347 HealthReform in Africa:Lessonsfrom Sierra Leone. Bruce Siegel, David Peters, and Sheku Kamara No. 348 Did ExternalBarriers Cause the Marginalizationof Suib-SaharanAfrica in World Trade?Azita Amjadi Ulrich Reincke, and Alexander J. Yeats No. 349 Surveillanceof AgriculturalPrice and TradePolicy in Latin Americaduring Major PolicyReforms. Alberto Valdes No. 350 Who BenefitsfromPublic Education Spending in Malawi:Resultsfrom the RecentEducation Reform. Florencia Castro-Leal No. 351 From UniversalFood Subsidies to a Self-TargetedProgram: A CaseStudy in TunisianReform. Laura Tuck and Kathy Lindert No. 352 China'sUrban Transport Development Strategy: Proceedings of a Symposiumin Beijing,November 8-10, 1995. Edited by Stephen Stares and Liu Zhi No. 353 TelecommtnicationsPoliciesfor Sub-Saharan Africa. Mohammad A. Mustafa, Bruce Laidlaw, and Mark Brand No. 354 Savingacross the World:Puzzles and Policies.Klaus Schmidt-Hebbel and Luis Serv6n No. 355 Agricultureand GermanReunification. Ulrich E. Koester and Karen M. Brooks No. 356 EvaluatingHealth Projects: Lessonsfrom the Literature. Susan Stout, Alison Evans, Janet Nassim, and Laura Raney, with substantial contributions from Rudolpho Bulatao, Varun Gauri, and Timothy Johnston No. 357 Innovationsand Risk Taking:The Engineof Reformin LocalGovernment in Latin Americaand the Caribbean. Tim Campbell No. 358 China'sNon-Bank Financial Institutions:Trust and InvestmentCompanies. Anjali Kumar, Nicholas Lardy, William Albrecht, Terry Chuppe, Susan Selwyn, Paula Perttunen, and Tao Zhang No. 359 The Demandfor Oil Productsin DevelopingCotntries. Dermot Gately and Shane S. Streifel No. 360 PreventingBanking Sector Distress and Crisesin Latin America:Proceedings of a Conferenceheld in Washington,D.C., April 15-16,1996.Edited by Suman K. Bery and Valeriano F. Garcia No. 361 China:Power Sector Regulation in a SocialistMarket Economy. Edited by Shao Shiwei, Lu Zhengyong, Norreddine Berrah, Bemard Tenenbaum, and Zhao Jianping No. 362 The Regulationof Non-BankFinancial Institutions: The UnitedStates, the EuropeanUnion, and Other Countries. Edited by Anjali Kumar with contributions by Terry Chuppe and Paula Perttunen No. 363 FosteringSustainable Development: The SectorInvestment Program. Nwanze Okidegbe No. 364 IntensifiedSystems of Farmingin the Tropicsand Subtropics.J.A. Nicholas Wallis No. 365 Innovationsin HealthCare Financing: Proceedings of a World Bank Conference,March 10-11, 1997.Edited by George J. Schieber No. 366 PovertyReduction and HumnanDevelopment in the Caribbean:A Cross-CountryStudy. Judy L. Baker No. 367 Easing Barriersto Movement of Plant Varietiesfor AgriculturalDevelopment. Edited by David Gisselquist and Jitendra Srivastava THE WORLD BANK

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