Tan Cuong Hoang Binh

Prepared by the Kenan Institute Asia November 2010

Case learning objectives The Tan Cuong Hoang Binh Group (TCHB) case study will explore the concept of using a company philosophy focused on farmer and environmental protection to differentiate a product in a crowded market. Tea is a staple crop of Vietnam, and Thái Nguyên province is known for its tea. However, tea is not all of the same quality, and the conditions by which companies employ or contract tea farmers varies widely. By producing high quality tea in a conscientious way, TCHB has had great success. The Tan Cuong Hoang Binh Group (TCHB) case study will explore how a company can promote healthy working conditions, environmental sustainability, and greater economic incentives for producers to give their product a competitive advantage. By reading the case and completing the exercise, students will have a better understanding of:  How to use CSR to differentiate a product  Benefits of focusing on high quality and high standards  Benefits of producing organic tea  The value of employing a respectful partnership and strategy with farmers  The value of a commitment to the local community

Lead author Christine Davis, Senior Associate, Kenan Institute Asia

Co-author Pham Lam Thuy Quynh, Training Coordinator, Vietnam Chamber of Commerce and Industry

Research, editing, production and translation team Richard Bernhard, David Lehr, Stephanie Soderborg and Kamonphorn Kanchana

This case study was developed under the Global Compact Network Vietnam (GCNV). The Vietnamese Chamber of Commerce and Industry (VCCI) is the national implementing partner of GCNV with financial support provided by the United Nations Development Programme (UNDP).

Kenan Institute Asia was selected as the project consultant for the Embedding Corporate Social Responsibility in the Vietnam through Research, Training and Curriculum Development Component. Tan Cuong Hoang Binh 1

Tan Cuong Hoang Binh

Tan Cuong Hoang Binh (TCHB) was founded in 2001, joining the Tan Cuong Hoang Binh group of companies. It does not have a long and storied history, but rather one that was born from an educational trip and a creative suggestion from a professor.

Hoang Binh Furniture Company was a small enterprise of 15 employees, producing wood furniture. In 2001, the company CEO, Mr. Vu Duong Binh, was pursuing his MBA and traveled to the U.S. on a field trip as part of his studies. He visited a California vineyard where the grapes were organically grown, but also delivered a good price margin to wine producers in the area. One of Mr. Binh’s professors there encouraged him to think beyond traditional business (and his current furniture company) and consider other options with potential. He suggested agriculture, particularly since there were still many agri-business opportunities in Vietnam. In addition to the vineyard, Mr. Binh visited a lot of farms and was impressed and influenced by what he saw – not just the agri-business benefits and the logic of organic, chemical-free farming, but also the benefits the farms were having on their neighbors who lived and worked nearby. He saw positive influences – jobs, community service, contributions to education, etc. — in their communities.

Upon returning to Vietnam, he began to take note of agriculture products: cashews of Binh Phuoc, coffee of Trung Nguyen, pomelos of Phuc Trach. He decided to focus on tea, as his home province of Thái Nguyên is well known for tea and there appeared to be a growing market for it. After researching suitable locations, Mr. Binh settled on the area of Tan Cuong Commune, which was known to have soil and climate that supported good tea production.

“The land of Tan Cuong can give birth to excellent tea; just as the land of France gives birth to excellent grapes…the tea is of this place only,” said Mr. Binh.

The Tan Cuong Hoang Binh Group case study will explore the concept of using a Corporate Social Responsibility (CSR) philosophy focused on farmer and environmental protection to differentiate a product in a crowded market. 2 Tan Cuong Hoang Binh

The important role of tea in culture and business alike

Tea has been planted for over 3,000 years, and Vietnam’s tropical climate is well suited to tea cultivation. Tea plantations are concentrated in the north and central regions of the country, and tea is a high value product for both domestic consumption and international export. The tea industry is important for Vietnam; it is the fifth largest exporter of tea worldwide. Tea cultivation has grown over recent years, from approximately 5,400 hectares in 1975 to more than 130,000 hectares in 20091. The tea industry exported more than 117,000 tonnes in 2009 and labor productivity in tea production has risen by 4% annually during the last ten years.2

Drinking tea is common everywhere in Vietnam; it acts as a bridge, a link between people in both family and business life. Drinking tea is a traditional daily pleasure and custom for most families. For business meetings, tea is often offered to guests. For such a modest product, tea plays a special and traditional cultural role in Vietnam.

Thái Nguyên City is the capital of Thái Nguyên Province, a mountainous region in northeastern Vietnam. Beginning as a small township, Thái Nguyên officially became a city in1962, and is currently one of the fastest growing cities in the north, with a population of 1,149,100 people. Thái Nguyên is best known around Vietnam for its vast tea plantations, and famous for its delicious bitter-sweet green tea.

Tan Cuong is a region of Thái Nguyên, made up of three districts (communes): Tan Cuong, Phuc Xuan, and Phuc Triu. Tan Cuong produces a unique tea, aromatic and sweet, which lingers on the tongue after it is swallowed. Tan Cuong is protected from hot winds by the Tam Dao mountain range, and also benefits from fresh water sources flowing from the Cong and Nui Coc Rivers. The average daily temperature ranges about 8 degrees Celsius, a much higher fluctuation than other regions of the country. These Tea farmers in Tan Cuong factors contribute to the growing of exceptional black and green tea. About 80% of the population in Tan Cuong makes their livelihoods from growing tea, and approximately 10,000 tonnes of tea are produced per year.3

1 ThanhHienNews.com, August 20, 2010 2 Vietnam Export Portal - VNEX.com.vn 3 Bi Quyet de co mot thuong hieu manh, pg. 254 Tan Cuong Hoang Binh 3

Introducing Tan Cuong Hoang Binh

Tan Cuong is the home to Tan Cuong Hoang Binh, a Vietnamese tea company. Tan Cuong tea is a traditional agricultural product grown, produced and marketed in ways that differentiate the product and provide positive community impact. Its production demonstrates that success can be achieved when an enterprise shows respect to people and nature.

“Why not tea? Why not make this popular tea of Tan Cuong a well known, quality product, making Tan Cuong worthy of being called the ‘Land of Tea?’” company CEO Mr. Binh asked at a 2001 business forum about how to improve and promote local Vietnamese brands. To focus his core businesses more effectively, in 2007 he separated the businesses of his growing company into the Tan Cuong - Hoang Binh Group JSC, a group of more than 10 different units. Tan Cuong Hoang Binh (TCHB), one of the group companies, was created to focus on black and green tea. Tan Cuong has 95 employees in the tea processing factory, sourcing tea from over 1,000 farmers. With more than 1,000 hectares of tea plantations, Tan Cuong tea is now well known in the Vietnam market and packaged tea is exported to the U.S., Europe, Japan, Taiwan, Korea and Germany. In addition, tea is sold in bulk to China and Pakistan.

Mr. Binh’s strategy appeared to be sound. A Department of Agriculture and Rural Development assessment for the period 2006-2010 determined that Thái Nguyên province tea development was the most effective strategy for creating market stability and sustainable tea production.4 Overall, the province holds a 70% market share of products for domestic consumption and 30% for export. A significant factor for this is the high quality tea varieties and innovative propagation and stem cutting methodologies which TCHB has championed.

Key issues to overcome

Two key problems existed when the company began. While market research uncovered that tea from Tan Cuong was well known, 100% Tan Cuong tea was actually difficult to find in the market. Many teas are advertised as “Tan Cuong tea” but are not certified. Some are even cultivated in other regions but advertised under this name.5 TCHB needed to figure out how it would differentiate itself from the already flooded tea market.

The other major issue concerned farmers. Many come from generations of tea growing traditions, some which are not very efficient despite being established and accepted methods. Most growers are families, and many tea companies weakened their market power by grouping the families into small clusters with little communication, unsophisticated cultivation and processing techniques, limited price knowledge and no labor security. The growers were

4 http://www.tainguyenmoitruong.com.vn 5 This problem is not an isolated one. For example, coffee from the high altitude farms around Antigua is considered some of the best in the world, with more coffee labeled and sold as ‘Antiguan Highlands’ than is actually produced there. According to Fedecocagua, this excess is likely grown in Honduras and deliberately mislabeled. Co-author David Lehr’s interviews with Fedecocagua, 2006 4 Tan Cuong Hoang Binh

generally not aware that they were being taken advantage of or missing out on opportunities for growth and security, as they had been growing and selling their tea the “same old way” for generations. At the time, farmers’ income was low and standards of living poor.

Tan Cuong Hoang Binh’s CSR philosophy and business strategy

CEO Binh needed to adopt a business model that overcame these challenges while producing high quality organic tea and positively impacting the communities in the province.

When someone thought of “tea”, he wanted them to think of TCHB. Binh wanted his brand to be synonymous with producing quality tea, delivering value for staff, farmers and communities, and respecting the environment.

The company invested more than US $1million in technology, equipment, and training. They developed a contingent of highly skilled technical engineers and workers fully capable of producing safe, clean and high quality tea products.

TCHB believes they have a sound strategy for continued business success: 1) Recognize and understand the potential of local raw materials 2) Promote and leverage the region of Tan Cuong, already associated with fine tea, and brand with a strong and traditional Vietnamese identity 3) Use advanced processing technology and expertise; be open to new and innovative technology and provide training which keeps the workforce up to date 4) Take care of people, including those within the company and those who live in the communities in which they grow and manufacture tea

To address these issues, TCHB decided to produce 100% natural tea based on the following three principles:

Tan Cuong Hoang Binh: Quality Model

Excellent 100% natural tea

Respect for & investment Environmental in employees, farmers and stewardship communities Tan Cuong Hoang Binh 5

By following these principles, TCHB built a high-quality brand with teas produced in a conscientious manner, which differentiates itself from its competitors. The company focuses on producing not only the finest quality tea, but doing so in an ecologically sound way in partnership with tea farmers. It aims to simultaneously develop the business and the farmers’ capacities, while protecting the environment.

Beginning in 2001, TCHB developed a management model that incorporated social responsibility into their management philosophy. See the model below for an illustration of TCHB’s management strategy.

Tan Cuong Hoang Binh Management Strategy

Use only the best Take care of our Healthier community raw materials people, employ fair and above & beyond Reduced illegal and labor practices aberrant activity Employ correct & careful processing (all natural) Higher standard of living

Invest & Loyal employees and reinvest in farmers technology and Meet and exceed training production and High quality tea, quality standards sustainable tea plantations Support the Create thoughtful communities in which Environmental branding and we operate through stewardship marketing strategic investment, approaches philanthropy and Profits engagements

Organic tea differentiation

TCHB believes organic farming is a logical, common-sense approach. While it is more expensive, it pays for itself through:  Tastier, better quality tea  Lovely fragrance (important to tea drinkers and connoisseurs)  No chemical pesticides or fertilizers that damage the environment  Better for the community – people are healthier in a physical environment free of chemicals  Commands a premium price 6 Tan Cuong Hoang Binh

TCHB farmers have substituted non-agricultural chemicals such as fertilizers, pesticides, and chemical herbicides with organic alternatives such as compost and green manure, extracts from herbs, and pruning (cutting the branches deep to eliminate weeds and pests).

TCHB has skillful technical engineers and well-trained workers with years of experience in tea processing that advise farmers on how to produce safe, A view of Tan Cuong Hoang Binh tea farming clean and high quality tea products. Products are processed from high grade raw materials and modern machinery imported from China, Taiwan, and Germany. No chemicals are used in the growing of the tea and all fertilizer is natural. The tea is also “handmade”; processed by hand to ensure care and accuracy in separating out the different parts of the tea stalk and leaves to ensure quality of the different grades of tea.

This high quality, organic tea plays a critical role in product differentiation. The corporate strategy for this included:  Use only the best raw materials  Produce 100% organic tea  Create unique branding and packaging targeted at different market sectors: gift boxes that include a special cultural aspect (e.g. the distinctive Sapa thocam cloth bag to hold the tea, and Bat Trang ceramic tea cups/pot), tea used for religious ceremonies, extra high grade tea for gifts and special ceremonies, and daily consumption tea which is high grade but affordable  Use no artificial fragrance  Produce a “hand crafted” product; indeed, Mr. Binh says, “Even the way the tea leaves and tips are cut from the stalk is important to the taste of the product.”  Hire experts: directors from other tea companies served as advisors when developing the business strategy to provide expertise and new ideas

Local authorities and community members are supporting the shift to organic farming. Ms. Nguyen Thi Hoc, the Central Military Commission Chairman, said that tea growers that use pesticides and chemical fertilizers reduce the quality of tea.6

6 http://www.thiennhien.net/news/152/ARTICLE/10211/2009-12-22.html Tan Cuong Hoang Binh 7

TCHB’s farmer strategy

TCHB management knew they would have to have a solid and patient strategy to win over Tan Cuong farmers; they see the investment in their employees and farmers as an investment in the company and its long term sustainability. Securing a reliable supply of quality raw materials is a must for TCHB. A plan to engage farmers was created, and focused on a number of elements:

 Build long lasting relationships with the farmers, sharing the strategic plan for the future including how the company sees development and production of the tea to be sustainable and successful in the long term  Teach farmers organic farming techniques  Share new farming techniques, such as how to grow and cut the tea in a way that produces the finest products  Introduce new technology options to farmers, and provide loans to enable them to upgrade their tea processing facilities  Provide above average pay and above average prices for premium crops  Require exclusivity to supply TCHB; they become shareholders of the company  Provide farmers with benefits as if they were direct employees, including retreats, field trips, rewards and recognition, etc.  TCHB CEO and management visit farmers often and ensure there is regular interaction  Contribute to the communities in which the tea growers live – e.g. education scholarships and other school support  Through word and action, consistently communicate a message that the company cares not only about profits but about having a positive impact on the farmers themselves and their communities  Employ fair labor practices, and employ no children under 15 years old

The company then approached the farmers of Tan Cuong to convince them that they should supply exclusively to TCHB. It was not an easy task. Regardless of the difficulty of their lives, they were reluctant to take a risk and try something “unproven” and new. It took a long time for CEO Binh to convince the farmers that an all-natural process and more care in harvesting the tea itself would reap a finer organic product with more profitable results. However, building trust and relationships with these farmers was essential to convince them to: 1) change and improve their ways of growing tea, 2) process tea with new technology, and 3) commit to exclusively work with Tan Cuong.

As noted above, Binh also focused on treating his employees and his new farmers with respect and fair pay. In addition, he guarantees purchase of their full crop if quality standards are met. According to Binh, practices have improved at every step of the tea cultivation process: seeding, planting, tending and harvesting, processing, storage, and transport to market. 8 Tan Cuong Hoang Binh

Benefits

The company began to reap benefits quite quickly. After just two years, TCHB became well recognized for quality tea and emerged as one of the top Vietnamese tea producers, accounting for approximately 30% of the local market share and approximately 35% of Vietnamese exports. TCHB exports tea to the US, Europe, Japan, Korea, Pakistan and China.

Benefits extended beyond profits as TCHB cited a variety of gains to its farmers and their communities. These include:  The total income of the average farmer has increased over ten times since Tan Cuong Hoang Binh began to purchase their tea; from VND10,000 (before year 2000) to VND100,000/day in 2010.  The farmers’ standard of living has improved significantly. A farmer now has the potential to own their own house and car, and support university level education for their children. Some are able to send their children abroad for university.  While no hard data is available, community members believe petty crime and other social disturbances have decreased. Mr. Tai, one of TCHB’s tea farmers, said he had seen a notable reduction in neighborhood troubles since TCHB began its partnership with the community.7  Raw tea prices have risen from VND50,000/kg to upwards of VND500,000/kg, thanks to superior quality resulting in part from improved technology and processes provided by TCHB.  TCHB has received awards for fine tea. At the 2006 Tea Culture Festival in Da Lat, Lam Dong Province, five TCHB tea brands were awarded places in the top ten teas, as well as awarded one of 16 gold medals for quality, and one of their brands tied for the very highest score of 95 points. In 2007, Tan Cuong was awarded the Vietnam Gold Star Award for the fourth time.

In addition, TCHB was one of three privately held companies that received the prestigious Third- class Labor Medal by the President of Vietnam in 2009. Party Committee Secretary of Thái Nguyên Province Nguyen Van Vuong said, "I greatly appreciate the spirit of Tan Cuong Hoang Binh daring to invest in the challenging industry of agricultural products. The efforts of Tan Cuong Hoang Binh and the way they operate are highly valued and respected as their business has not only brought recognition of regional tea excellence to Tan Cuong, but they’ve also contributed significantly to improving the quality of life of people in this tea region."

In spite of the progress, company management uncovered weaknesses that need to be addressed to ensure company sustainability. Most of these are related to the absence of management tea-making expertise, general business experience, and a strategic vision for the business. These are all areas the company continues to focus on as it moves forward.

7 Face to face interview, Tan Cuong Commune, September 27, 2010 Tan Cuong Hoang Binh 9

Discussion Questions

1. The standard of living has improved in Thái Nguyên over the past eight years, with farmers today earning approximately ten times as much as they did in 2001. In addition, Mr. Tai, a TCHB manager and tea farmer, said that he has seen a decrease in illegal activity in Tan Cuong Commune since Tan Cuong Hoang Binh came to the area. Moving forward, what kind of role should TCHB continue to play in effecting positive change? Specifically, what actions would you recommend TCHB take now? 2. CEO Binh’s goal is to raise the quality standard of tea across the entire Thái Nguyên province (right now Tan Cuong is just 1,000 ha out of 20,000 ha). How can he leverage TCHB’s differentiated and organic product to influence quality of the industry across the province? How would increasing the quality of all tea in Tan Cuong, including that of TCHB’s competitors, hurt or improve TCHB’s business prospects? 3. How can TCHB continue to build on its 100% natural product commitment – what other benefits can this “organic philosophy” bring to the company, the communities, and the environment? What additional costs, if any, would this impose on TCHB? 4. Do you think TCHB’s combination of community and environmental protection practices are the most effective way to grow the business? If not, what would you do differently? 5. Was TCHB able to overcome the two main barriers that existed for them in 2001? What alternative approaches could they have considered? 6. What are the prospects for TCHB growth? What are the impediments to expansion? Is their strategic vision sufficient for sustainable growth? 7. Who are TCHB’s main stakeholders? How does TCHB engage its stakeholders?