Journal of Economics, Management & Agricultural Development Vol. 5, No. 2 35

Improving the Vietnamese Tea Value Chain in the International Market: The Case of Thai Nguyen Province

Le Van Hung1, Vu Ngoc Quyen2, and Nguyen Dinh Hoa3

Abstract

Tea production is considered the key sector in Thai Nguyen Province for its provision of livelihood to 40% of rural households. The province is also best known for its traditional green teas with a century history. Based on the primary data collected through field surveys and key informant interviews in Thai Nguyen city and Dai Tu district, the analysis of Thai Nguyen’s tea value chain was done by segments and key players. Thai Nguyen ’s tea is mainly consumed domestically while tea in Vietnam in general is intended more for export.

Results of the analysis showed significant differences in gaining profits among key players. In particular, tea growers with certified production earned more than those with non -certified farming practices. Better profits were also concentrated in the group of Kinh farmers and tea growers in Thai Nguyen City or in tea growing households with higher education levels and with production and/or market linkages. Lower profits from exports of tea materials and the decrease in export volumes in recent years would imply weak competitiveness of Thai Nguyen’s tea exports, which was mainly attributed to non- standardized farming practices, small-scale production and non-rigorous control of food hygiene and safety. In order to improve the tea value chain in the international market, it is necessary to develop a quality-focused strategy for tea products in Thai-Nguyen province, improve the social recognition of GAP-certified households producing tea and provide incentives for GAP-adoption and renewal of certification, increase investment in irrigation infrastructure, provide adequate R&D funding for the diversification of tea products and development of environment-friendly packaging materials, plan and establish a processing cluster for tea products, and coordinate and support enterprises to provide updated market information and trade promotion for tea products. Keywords: green tea, production and market linkages, certified production

Introduction

Tea is considered one of the Vietnam’s key agricultural products. It is grown in 34 out of 64 provinces spreading from the north to the south. With an annual production of 185,000 mt, tea production in the country has created employment for 500 farmers and workers. Vietnam stands seventh among the largest tea producers in the world, exporting 80% of its production in the international market. The sector’s export value in 2017 was estimated to reach at USD 251 million (IDH 2018).

1Senior Researcher, Vietnam Institute of Economics, Vietnam Academy of Social Sciences, Vietnam, [email protected] (corresponding author) 2Researcher, Vietnam Institute of Economics, Vietnam Academy of Social Sciences, Vietnam, [email protected] 3Senior Researcher, Vietnam Institute of Economics, Vietnam Academy of Social Sciences, Vietnam,, [email protected]

36 Le, Vu, and Nguyen

Located in the Northeast region, Thai Nguyen province is the second-largest tea producer in Vietnam. Green tea has been grown in Thai Nguyen province since early 1920s and now has become the province’s strategic agricultural product. The tea production has been continuously expanded over the years to reach 22,027 ha in 2018, covering about 14.3% of the total cultivated area and 57.9% of the total area of perennial crops in the province. Thai Nguyen’s tea industry also provides livelihoods to 95,000 farming households, accounting for 40% of the total rural households in the province (Thai Nguyen’s DOIT 2017). The tea industry in Thai Nguyen, however, is facing major challenges that hinder its sustainable development. Tea farmers practice a more experience-based cultivation rather than following a standardized production process. According to MCG Management Consulting (2014), fertilizers and pesticides are applied in different ways that vary by tea production households and are less compliant with international safety standards. Food safety is not rigorously ensured in many tea production and processing establishments. The contaminated tea production also raises concerns over the health of consumers and safety to environment, which indeed has affected the marketing of Thai Nguyen’s tea products both in domestic and international markets. The province’s tea exports, thus, confront difficulties in entering high-end markets due to failure to meet their food hygiene and safety requirements. Owing to lower safety standards, domestic markets remain the major destinations for Thai Nguyen’s tea products. Only less than 10% of tea produced in the province is traded internationally (Thai Nguyen’s Provincial People’s Committee 2017). This paper aims to (1) analyze Thai Nguyen’s tea value chain to identify the key factors that limit the participation of Thai Nguyen’s tea products in the global tea value chain; and (2) determine the policy implications and suggest upgrading strategies to increase value-added and access of Thai Nguyen’s tea products to the international market.

Review of Literature Vietnam’s tea production and tea value chain have drawn a great interest to the research and development community. Although many studies regarding the topics had been conducted, few focused on the constraints of Vietnamese tea in general and Thai Nguyen’s tea in particular in meeting the needs in international markets. A study by Huong (2017) affirmed the possibility for Vietnam’s tea products to be more marketable globally. Nevertheless, Vietnam so far has only joined in the global tea supply chain as a supplier of raw materials to other international tea producers. The limitations of production scale and processing technology are the main reasons for the quality of Vietnam’s tea products. IPSARD (2015) revealed that small and medium-sized enterprises (SMEs) for black tea have applied outdated technology and their major markets are in the lower end, like China and Middle East countries. Green tea SMEs, on the contrary, are active mostly in the domestic market due to limited charter capital and number of employees. For green tea, retailers are the price setter while the role of green tea processors is less significant (Dang and Lantican 2011). To enhance the integration of Vietnam’s tea in the international market, it is recommended to improve the market power of tea growers and processors.

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Linkages affect directly the value chain since it helps create competitive advantages for the product through better optimization and coordination. The production efficiency of tea growing households, therefore, depends on linkages along the chain (Nam and Thien 2017). Nevertheless, the linkages in Thai Nguyen’s tea value chain remain restricted while there is poor coordination between actors of the chain (Anh et al. 2017). Among five key factors influencing the linkages, which include profits, information, access to resources, risks, and policies; the operation policy plays the dominant role. Support policies should accordingly focus on strengthening the value chain linkages through mechanisms for harmonious benefit- cost sharing between actors. Improper agricultural practices that are adopted by tea growers are another concern raised in many studies of tea production in Vietnam and in Thai Nguyen province. Application of improper production techniques is attributed to rising production costs, lower productivity and higher risks, and product quality issues (Hong and Yabe 2015; Khoi et al. 2015). Training programs to enhance farmers’ knowledge on agricultural practices, particularly in tea irrigation and pest and disease prevention, would help reduce the risks and improve production efficiency (Bac, Nanseki and Chomei 2018, Hong and Yabe 2015).

Methodology Study Areas Thai Nguyen province is the second largest tea production area in Vietnam, both in terms of production volume and cultivation area. Tea in Thai Nguyen is considered a strategic agricultural crop that employs 40% of farming rural households living in the province. Given that tea production has a long history of development, Thai Nguyen’s green tea products are best known and favored a lot in the domestic market. Tea exports in Thai Nguyen, however, remain limited. Thus, the study focused on the green tea value chain of the province and provided an analysis that involved both domestic and export markets. Among nine districts of tea cultivation, Thai Nguyen city and Dai Tu district were selected based on their differences in socio-economic situation. Thai Nguyen city is the capital of the province with more developed and urbanized conditions and dominated by the Kinh (Viet) people. The mountainous district of Dai Tu is 25 km distant from Thai Nguyen city to the northwest of the province and home to different ethnic communities. This selection of study areas is expected to illustrate better contrast of the cost and profit analysis of the province’s tea value chain. Methods of Data Collection and Analysis Both primary and secondary data were used in the study. Primary data regarding Thai Nguyen’s tea sector were collected through the field surveys of 168 tea growers with the aid of questionnaires in Thai Nguyen city and Dai Tu district. Key informant interviews with five tea enterprises and business establishments and two cooperatives, and focus group discussions with four government agencies, including the Department of Agriculture and Rural Development (DARD), Department of Industry and Trade (DOIT), two commune authorities of Tan Cuong (Thai Nguyen city) and La Bang (Dai Tu district), and the Vietnam Tea Association (VITAS) were also conducted to generate relevant information. Secondary data and information were gathered from different sources such as FAOSTAT, General Statistical Office of Vietnam (GSO), Thai Nguyen’s Statistical Office, and other documents provided by Thai Nguyen’s DARD and DOIT and other agencies. 38 Le, Vu, and Nguyen

The Thai Nguyen’s tea value chain was examined following a value chain approach. The paper first adopted the functional analysis of Thai Nguyen’s tea value chain to determine the chain segments and the general roles of key players. Based on the primary data collected through field surveys, the cost and profit analysis then was carried out to better understand the economic importance of key players along the chain. Major constraints and challenges that limit the access of tea products to the international market were also identified to determine policy implications and suggest upgrading strategies for the improvement of the tea value chain in the global market.

Results and Discussion Overview of the Tea Production Vietnamese specialty teas are concentrated in three major regions: traditional green teas in the Northeast, wild teas in the Northwest, and oolong teas in the Central Highlands (mostly in Lam Dong province). Located in the Northeast region, Thai Nguyen province is best known for its traditional green tea, particularly for its Tan Cuong brand - one of the country’s two tea brands that have been awarded Protected Geographical Indication (PGI). The province is ranked as second nationwide both in terms of tea cultivation area and tea production. In 2018, the total area of tea production in Thai Nguyen was 22,027 ha. Of this total, 19,683 ha were the harvested area (Table 1). The growth rate of tea production area in 2011-2018 reached an average of 2.3% per annum. Tea is grown in Thai Nguyen city and all eight districts in Thai Nguyen province, among those the largest tea production areas include Dai Tu district (accounting for 29.2%), Phu Luong district (20.7%), and Dong Hy district (16.5%). For other districts and Thai Nguyen city, each only makes up less than 10% of the total tea cultivation area (Thai Nguyen’s Statistical Yearbook 2018). Table 1. Tea Production Area and Volume, Thai Nguyen Province, Vietnam, 2011-2018

Total 2011 2012 2013 2014 2015 2016 2017 2018

Production area 19,068 19,484 20,020 20,787 21,127 21,361 21,649 22,027 (ha) Harvested area 17,583 17,847 18,170 17,618 18,233 18,750 19,170 19,683 (ha) Production volume (fresh 190,690 194,126 193,438 192,951 202,325 211,244 224,711 230,903 tea bud) (mt) Source: Thai Nguyen’s DOIT (2017) and Thai Nguyen’s Statistical Yearbook 2018

Trung Du is the local tea cultivar and used to be the most widely grown in Thai Nguyen province together with the other popular tea cultivars such as LDP1, Kim Tuyen, Phuc Van Tien, and TRI 777/PH1. These are the high yield and quality green tea cultivars that have been long-time cultivated in the province. LDP1 is a newly developed cultivar characterized with improved tea yield and production. Thai Nguyen province has been promoting the switch from Trung Du to LDP1 among tea growers since early 2010. As a result, in 2016, the LDP1 tea cultivated area doubled to 9,932 ha while the Trung Du tea area reduced half to 6,952 ha (Thai Nguyen’s DOIT 2017). Thai Nguyen’s fresh tea production also increased accordingly by nearly 20%, from 192,951 mt in 2014 to 230,903 mt in 2018, which was equivalent to about 46,180 mt of processed tea (Thai Nguyen’s Statistical Yearbook 2018).

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Although tea production has been developed in Thai Nguyen province for nearly a century up to now, the cultivation and processing techniques of tea growers still rely mostly on their experiences and traditional practices. The standardized and certified tea production area has remained limited. As of 2016, the total VietGAP certified area of tea cultivation was 735.6 ha, accounting for 3.44% of the province’s total tea growing area. Whereas, tea areas that meet higher standards (such as UTZ or organic tea) only made up insignificant shares. These certified tea areas are mainly raw material areas of enterprises with exports to Pakistan, Taiwan, China and so forth. Value Chain Segments and Key Players The value chain map of Thai Nguyen’s tea products shows the involvement of various players and enablers in different segments or functions of the chain (Figure 1).

Figure 1. Value Chain Map of Thai Nguyen’s Tea Products

Input Provision Input services are relatively accessible in Thai Nguyen province, even in the mountainous Dai Tu district. Tea cultivars, fertilizers, pesticides, or simple production tools and processing equipment are easy to buy at local stores. These businesses are mostly provided by the private sector and within the oversight of the provincial Thai Nguyen’s DARD and DOIT. Tea growers can pay for their input materials at once or at a time later (pay on credit) as agreed between them and the store owners. Good tea cultivars are essential for improving tea yields and production of better quality tea. The taste characteristics of tea depend on the variety grown and climatic conditions. However, tea growers and processors have some control over the quality of taste during the cultivation and processing stages. Since Thai Nguyen’s policy promotes the LDP1 tea, growers enjoy receiving free cultivars provided through local Farmers Union. Alternatively, they could buy cultivars from different sources such as certified and non-certified nurseries and other tea growers who sell their self- produced seedlings.

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Farming and Collecting Tea growers in Thai Nguyen are mostly farming households. Survey results showed that tea-production household in Thai Nguyen has an average size of four people with three of the household members are at working age. More often, two workers in the family participate in tea production, including the head of the household. The average age of the household heads is 53 years, a relatively old age compared to the currently social security eligible retirement age of 60 for men and 55 for women in Vietnam. Many household heads obtained the lower secondary education with 7.6 years of schooling on the average (Table 2). Table 2. Employment in Thai Nguyen’s Tea-Production Households, Vietnam, 2018 Indicator Value Average tea-production household size (people) 4.0 Average number of people at working age 3.0 Average number of people involved in tea production 2.0 Average age of head of household (years) 53.0 Average schooling of head of household (years) 7.6

Tea in Thai Nguyen is harvested manually and could be collected three times per year. However, tea growers apply succession planting to increase the number of harvests up to 6-10 times annually. Women are the main labor in tea farming and collecting. They are responsible for 65.8% of the workload during the production stage. In particular, the collecting activity is done entirely by women since tea has to be hand-picked. Men only dominate the work in spraying since about 69% of the surveyed households reported that the work is taken care of by the male members of the family. Extension services, including technical training, are provided through Farmers’ Unions. Representatives from Farmers’ Union at the commune level are invited to attend the training and later play the role of trainers to their peers. There is a common practice, however, that tea growers still prefer their traditional cultivation techniques since many of them have 30 to 40 years of experiences. The application of different agronomic practices among farmers often results in non-uniformity of product quality. Processing and Packaging Thai Nguyen’s tea is processed right away after being collected from the field. This segment is mostly done by households with traditional methods. In 2018, the total production volume of processed tea in Thai Nguyen province was more than 46,000 mt, of which over 80% of the tea was produced at the household level by 45 cooperatives, 95 farmer groups and 216 tea villages. Tea processed by firms only made up 8,400 mt, which is less than 20% (Thai Nguyen’s DARD 2018). In order to maintain and preserve the product quality, processed tea is packed with aluminum foil and plastic vacuum bags. Tea products by households are often packed in large and clear plastic bags without labeling while registered processing establishments and cooperatives usually have their own labels that are popular to local consumers. However, their capacity is not too large and they mainly buy raw

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materials from tea growers who are family relatives, close acquaintances, or cooperative members. This trading relationship allows better quality control over the input materials for processing. Similarly, processed teas by enterprises also account for a modest quantity. Very few tea firms are involved in tea processing for exports due to limitations in production and business conditions. Trading and Consumption Both fresh tea buds or leaves and dried teas are traded in the markets. Since most tea growers also process their tea buds, the major collection is for dried tea. Traders can collect tea at the fields, at their collecting points, or at tea growers’ home. More often, dried tea is traded at local wholesale markets (e.g. weekly tea markets in Dai Tu district). Traders then resell dried tea to processing establishments, enterprises, or retailers within and outside Thai Nguyen province. Nevertheless, processing firms in Thai Nguyen province mainly purchase tea (fresh and processed) directly from tea growers. Distributors of Thai Nguyen’s tea include also wholesalers and retailers in the domestic market and exporting firms, who act as an intermediary with cooperatives, enterprises and importers. Green tea products designated for domestic and export markets are different. While Thai Nguyen’s traditional green teas target domestic consumers, tea exports are often raw materials for the production of ordinary tea bags and novelty teas. Of the total tea production in Thai Nguyen province in 2018 (Table 1), about 74% has been traded after drying by tea growers to domestic processors, collectors or traders, and firms and 26% as fresh tea buds to domestic processors who are tea processing households, cooperatives, and business firms. Since fresh tea buds need to be processed immediately after being collected from the fields, the purchases as such often happen among tea growers who have contracts, either in oral or written forms, with processors. With the high demand of Thai Nguyen’s traditional green teas in the country, more than 90% of the processed tea is consumed in the domestic market and only 4.2% is sold to the export market. The international markets for Thai Nguyen tea are played exclusively by firms and cooperatives, who are also tea processors. Few tea cooperatives and processing establishments sell their products internationally and often trade in small quantities to overseas Vietnamese people. The strict requirements of food hygiene and safety set by tea importers while these standard bars are much lower in the domestic market discourage tea producers and processors to export. Market Analysis Tea production in the world over the last decade had grown continuously by 4.4% per annum to reach 6.101 million mt in 2017 (FAO 2018, FAOSTAT 2018). The world tea export, however, saw a slight decrease in the same period, down from 1.787 million mt in 2007 to 1.701 million mt in 2017 (FAOSTAT 2018). The largest tea producer was China, who accounted for 40.3% of the world tea production. Vietnam ranked at seventh among the top ten tea producing countries with a production volume of 260,000 mt in 2017, but the country’s tea export volume had been half from 147,000 mt in 2012 to only 74,000 mt in 2017 (FAOSTAT 2018). Despite this sharp decrease in tea exports, Vietnam remained one among the world’s top ten tea exporters. Its largest tea trading partners included China with the total tea export value of approximately USD 10.35 million in 2017, followed by Afghanistan and Pakistan with the respective values of USD 2.34 million and USD 2.29 million in the same year (GSO 2018).

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The current situation of Thai Nguyen’s tea exports reflects the downward trend of the world’s and Vietnam’s tea exports. The province’s total volume of tea exports in 2010-2018 dropped drastically by 69.9%, from 6,380 mt in 2010 to only 1,918 mt in 2018, resulting in a decline in the tea export value from USD 10.5 million to just more than USD 3 million year on year (Table 3). The shrinkage of tea exports, both in terms of volume and value, despite a continuous increase in the province’s tea production indicates a growing demand for Thai Nguyen’s tea in the domestic market. More importantly, it has implied also the failure of tea exports from Thai Nguyen province in the global market integration. This is further proven by the decreasing revealed comparative advantage (RCA) index for Vietnamese teas, which fell from 6.0 in 2008 to 3.9 in 2012 and then to 2.5 in 2016, a much lower score compared to the country’s competitors like China, India and Sri Lanka. Table 3. Tea Export Volume and Value, Thai Nguyen Province, Vietnam, 2018 Total 2010 2015 2016 2017 2018(*)

Volume (dried tea, mt) 6,380 4,952 3,282 2,217 1,918

Value (USD million) 10.50 9.89 6.44 4.90 3.04 Note: (*) Preliminary statistics Source: Thai Nguyen’s Statistical Yearbook 2018

To gain more access to the international market, it is necessary to improve its quality standards as well as meet the food hygiene and safety requirements of Vietnamese tea products. Tea producers, processors, and exporters need to follow certified programs of internationally recognized organizations like Rainforest Alliance (RA), Universal Trade Zone (UTZ), International Federation of Organic Agriculture Movements (IFOAM), and so forth. In the high-end markets, particularly developed countries in Europe, North America or East Asia, there are strict requirements for tea products to meet concerning pesticide residues, impurities, heavy metals, and color additives (like anthraquinone). Some markets such as European Union (EU) also have regulations over the smell of smoke coming from tea drying. Noticeably, more rigorous regulations on tea imports have been introduced in recent years to better protect consumers and the environment. The number of requirements for EU product safety standards also increased from 63 in 1999 to 227 in 2017 (FAO 2016). Since 2016, the EU has set the MRLs for 454 types of pesticides that import teas have to satisfy for clearance. In the domestic market, Vietnam also has different instruments to regulate the tea industry from production stage to processing, packaging ,and labeling to ensure the tea product quality, food safety, and hygiene issues (Table 4). The critical problem, however, is the weak enforcement of these regulations. Besides, the consumers do not have adequate information regarding the product quality and the differentiation between clean and safe teas. A wide range of tea products are now available in the domestic market without clear indication of their origin, manufacturing and expiration dates, and main ingredients of the products. The ineffectual management of government agencies has not only limited accessibility of consumers to product information but dampened the incentives of righteous tea producers also.

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Cost and Profit Analysis The cost and profit analysis on production and processing stages and by type of processors was conducted to determine who among the key players in Thai Nguyen’s tea value chain generated higher profit. Production stage Production cost, revenue, and profit greatly varied among certified and non-certified tea growing households (Table 5). Table 4. Vietnam’s Standard Codes for Tea Production and Processing Agency in Charge Standard Document Issuing Date (under MARD) Department of Processing and Circular No. Food hygiene and safety at tea December 2, Trade for Agro-Forestry- 75/2009/TT- processing establishments 2009 Fisheries Products and Salt BNNPTNT Production Sampling process for analysis Circular No. June 25, Department of Agro-Forestry- of tea quality, food hygiene 37/2010/TT- 2010 Fisheries Quality Assurance and safety BNNPTNT

Circular No. Methods for the detection of December 63/2012/TT- Department of Plant Protection harmful organisms to tea trees 14, 2012 BNNPTNT

Requirements of food hygiene Circular No. and safety in the production January 22, 07/2013/TT- Department of Crop Production and processing of fresh 2013 BNNPTNT vegetables, fruits and tea buds

Assaying the distinctness, Circular No. June 21, uniformity and stability of tea 33/2013/TT- Department of Crop Production 2013 cultivars BNNPTNT

Source: Authors’ synthesis

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Table 5. Production Cost, Revenue, and Profit per Northern Acre of Tea by Types of Certified Households (in VND 1,000), Thai Nguyen Province, Vietnam, 2018 Non- VietGAP- UTZ- Category All Households Certified Certified Certified Households Households Households Cost breakdown Organic fertilizer 423.50 414.80 432.20 563.30 Synthetic fertilizer 884.70 1,006.90 606.40 727.00 Nitrogen fertilizer 678.10 852.10 285.10 235.00 Kali 122.40 134.10 102.30 27.30 Pesticides 720.60 833.40 473.50 356.70 Labor 5,670.40 5,927.90 5,195.10 4,791.70 Depreciation 136.10 140.30 131.50 56.70 Power and water 122.60 114.30 142.70 157.30 Others 96.40 104.10 76.70 0.00 Total cost 8,854.80 9,5278.90 7,445.50 6,915.00 Total revenue 19,153.50 18,191.90 21,360.50 26,360.00 Total profit 10,298.70 8,663.00 13,915.00 19,445.00 Note: A Northern acre in Vietnam is 360 square meters

Tea production is very labor-intensive. Labor costs accounted for the largest share of input costs. Farmers also spent large amounts of money on fertilizers and pesticides, which could be the reason why tea trees were prone to diseases and insects. In comparison, the costs of fertilizers and pesticides of the non-certified households were much higher than those of the certified ones. Certified production also helps tea growers sell fresh tea at higher prices. Specifically, if the average farm-gate price of non-certified tea was only VND 35,200/ kg, the average farm-gate prices of VietGAP- and UTZ-certified tea were VND 40,400/kg and VND 57,300/kg, respectively. Certified tea growers therefore, earned greater profits than non-certified growers. Analysis also noted a wide gap in the farm-gate price between the two survey locations. A kilogram of fresh tea could be sold at VND 42,500 in Thai Nguyen city, approximately 1.5 times higher than the average price in Dai Tu district at VND 29,000. Thai Nguyen city has a strong competitive advantage due to the specialty green tea of Tan Cuong commune, one of the two PGI-certified tea brands in Vietnam. Tan Cuong tea was sold well and at better prices in the domestic market. Besides, the production costs of tea growers in Thai Nguyen city were also lower so they enjoyed a profit of more than three times higher than their peers in Dai Tu district (Table 6).

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Table 6. Comparison of Production Cost, Revenue, and Profit per Kilogram of Fresh Tea by Location and Other Categories (in VND), Thai Nguyen Province, Vietnam, 2018

Category Cost Revenue Profit

All households 18,556 37,190 18,634 By location Thai Nguyen city 15,863 42,454 26,591 Dai Tu district 22,515 29,455 6,940 By ethnicity4

Kinh 17,707 37,610 19,903 Others 25 ,851 33,588 7,737 By education level

Lower secondary school or below 18,804 36,409 17,605 (Grade 6-9 or under)

Higher secondary school or above 17,249 41,308 24,059 (Grade 10-12 or above) By production and/or market linkages

With linkages 16,083 41,816 25,733 Without linkages 19,308 35,784 16,476

The Kinh growers received an average profit of VND 19,903/kg, which is 2.6 times higher than tea growers of other ethnic groups. Even when analyzing the two groups in the same location, the Kinh growers still earned better. This was mostly attributed to different farming practices applied by the Kinh and other ethnic-minority growers. Besides, living distant away from major tea markets also limited the market accessibility of the non-Kinh growers. They needed to rely on collectors/traders who often try to lower the prices. With higher intermediary costs and lower prices, the non-Kinh groups made less profits accordingly. Survey results revealed that the group with household heads obtaining higher secondary education received much better profit than the group of lower secondary education, with VND 24,059/kg against VND 17,605/kg. Besides, contracting with enterprises allowed tea growers to receive technical support and obtain higher profit for a more secured and sustainable markets for tea products. Processing stage Tea processing in Thai Nguyen province is implemented by various processors, including tea growing households (self-processing), processing establishments, and enterprises. Due to lower level of processing technology and limited capacity for branding and marketing, earnings of the households were often lower than those of processing establishments and enterprises.

4 In Vietnam, Kinh (or Viet) people are the dominant ethnic group, accounting for about 87% of the country’s population. There are also 53 other ethnic communities, among those the vast majority live in remote or hilly/ mountainous areas of more underdeveloped conditions. Due to the small number of the ethnic-minority households involved in tea production in Thai Nguyen province, they were gathered into one group for the comparison against the Kinh group. 46 Le, Vu, and Nguyen

Processing households Private collectors/traders are the main market outlets of 67.2% of the processing households interviewed, with a traded volume up to 46% of the processed tea. About 26.3% of the households sold 27.6% of the dried tea directly to final consumers. Although enterprises bought tea from a small proportion of the households (6.5%), their purchase accounted for more than a quarter of the dried tea production (26.3%). Their purchase price was also the highest, 25.8% and 30.6% greater than the prices to final consumers and collectors/traders, respectively. Households processing VietGAP- and UTZ-certified tea could sell their products at very high prices and earned a lot better despite higher costs for tea materials and packaging. Specifically, the processed UTZ-certified tea gained an average profit of VND 111,000/kg while processing households earned half less for VietGAP-certified tea (VND 55,007/kg) and one-third of that for non-certified tea (VND 34,504/kg) as shown in Table 7. Table 7. Comparison of Profits per Kilogram by Types of Processed Teas (in VND), Thai Nguyen Province, Vietnam, 2018 VietGAP- Non- UTZ- Category All Types Certified Certified Tea Certified Tea Tea Cost breakdown Tea materials 177,773 161,092 196,317 286,667 Labor 13,904 13,962 14,225 9,667 Energy (burning 7,938 8,123 7,680 8,333 wood/power) Packaging 4,471 3,846 5,190 9,000 Depreciation 4,668 4,043 5,875 2,000 Loan interest 394 537 200 0 Others 1,111 313 250 0 Total cost 210,259 191,916 229,737 315,667 Selling price 254,077 226,420 284,744 426,667 Profit 43,818 34,504 55,007 111,000

Certified-tea products are packed by enterprises before selling to supermarkets and well-known retailers or exported in small quantities to developed countries. Whereas, non-certified tea is only traded domestically through traders, retailers, or by the households at traditional markets and directly to final consumers. Processing establishments Unlike processing households, processing establishments (including cooperatives) are registered businesses with larger processing capacity and locally- known brands. Typically, they develop their own material areas in cooperation with tea growing households who are family relatives or cooperative members. The popularity of their brands is often attributable to their own processing secrets in order to create the distinctive green tea aroma and tastes.

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There are many tea products of conventional to special grades and their prices also vary widely. It is the quality of input materials (fresh tea buds) and the complexity of processing techniques that contribute to the price differences. Dried tea by processing establishments could be graded into three main categories: Grade I (special tea), Grade II (fine tea), and Grade III (conventional tea). Special tea products are the best quality tea that could be sold at an average price/kg of VND 3 million in the domestic market, while the average prices of fine teas and conventional teas at VND 600,000/kg and VND 350,000/kg, respectively (Figure 2). Tea products of Grade I therefore are exceptionally profitable. Nevertheless, their production accounts for a very small proportion, around 3%-5% of the total volume of dried tea only. Due to the scarcity and high prices, special tea products are often sold to customers who make reservation in advance. Processing enterprises Processing enterprises focus on two major groups of products, including final green tea products (made from green tea buds) for direct consumption and tea materials (made from green tea leaves or by-products) as inputs for other international tea producers (in Pakistan, Sri Lanka, etc.). Among the three groups of processors in Thai Nguyen province, only enterprises are involved in tea exports of large quantities. Nevertheless, tea exports in the province so far have been limited. It is mostly due to high requirements set by tea importers on food safety, chemical contents, and pesticide residues while the profits from exports of tea materials are not conducive enough. Thai Nguyen’s tea enterprises are weak in deep-processing for highly-demanded novelty teas, like matcha green tea or flavored tea bags. Some tea products of such types could not even compete in the domestic market with the international tea brands (like Lipton, Dilmah, or Japanese matcha tea). Furthermore, small-scale tea cultivation also restricts the development of internationally- standardized material areas to serve the production for exports. Tea firms, therefore, predominantly target the domestic market for lower investment risks and less rigorous safety requirements.

Figure 2. Domestic Selling Price, Total Cost and Profit per Kilogram of Dried Tea by Processing Establishments (in VND thousands) Source: Thai Nguyen’s Provincial People’s Committee (2017)

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The export of final green tea products indeed generates very good profits for both tea processing enterprises and their contracted tea growers. Of the same grade, a kilogram of green tea for export could be sold at VND 6.6 million, about 1.5-2 times higher than being sold domestically. In 2018, tea firms paid extra costs/kg of VND 4.853 million besides VND 426,700 for tea materials from growers in order to reach the final consumers abroad (Figure 3). They earned VND 1.320 million profit per kilogram of tea compared to the grower’s VND 111,000. Although growers and firms made most profits from export teas, firms still earned nearly 12 times better than growers. The export of tea materials, however, produces less profits. Tea materials are made from less quality teas, by-products such as tea dust or tea fanning, and wastes from the tea plant. The prices of tea materials therefore are much lower than those of final tea products. Major Constraints and Challenges Constraints With a large number of households involved in tea production in Thai Nguyen province, the average area per household is only 0.36 ha and fragmented into two or three small plots of land. Because of the fragmentation and small farming areas, households face many difficulties in cultivation process as well as in applying production technology, leading to higher production costs and lower efficiency.

Figure 3. Selling Price, Total Cost and Profit per Kilogram of Export Tea (in VND thousands) Source: Derived from survey results (2018)

Whereas, the linkages between tea growing households and between households and enterprises remain restricted. As evidenced by the survey results, only 1.8% of the households was contracting with enterprises, 12.7% participating in cooperatives and 8.9% being the member of farmer groups. Up to 76.6% of the surveyed households did not have any linkages nor joining any production models. Certified and non-certified tea production areas are intertwined, obstructing the concentration of standardized production areas.

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Despite the province’s efforts in promoting certified tea production, the areas adopting VietGAP and other recognized good agricultural practices accounted for only 4% of the total production areas. However, the certification for nearly half of these areas was already expired (Thai Nguyen’s DOIT 2017). The tea growers are hesitant to renew the certification because of the strict technical procedures they need to follow and maintain. On the other hand, tea growers believe that obtaining such certificates does not help guarantee their sales of tea products in the domestic market. While the UTZ or higher certificates indeed help improve the profits of export-oriented tea growers, it is still limited in both number and export capacity. There must be strong linkages between them and tea export companies who are in Thai Nguyen province. Other major problems that tea growers encounter include irrigation water and labor. In the regions with poor irrigation systems or lower rainfall, tea growers use water wells instead. More than 77% of surveyed tea growers reported the difficulty during the dry season from November to April. Likewise, nearly 71% of households found it extremely difficult to hire labor. Since Thai Nguyen province in the last decade has become an industrial hub of electronics and manufacturing sectors, workers flock to industrial zones where both labor demand and wages are on the rise. Laborers in the tea industry become scarce and are mostly older people. Challenges Due largely to the uncertified production, the overuse of chemical fertilizers and pesticides still occurs in Thai Nguyen province. A tea growing household on average sprayed 19.2 times for seven tea harvests per year compared to the recommended frequency of 14 times in Vietnam. The pre-harvest interval (PHI) was also shorter, only 12.3 days against the recommended 15 days. Thai Nguyen’s tea products might be sold well still in the domestic market on the account of lower requirements on food safety and hygiene. However, the scheme is not sustainable causing damage to the health of tea producers and consumers and the environment in the long-term. About 94% of processing households used simple equipment like rotary corrugated irons and burning wood for drying tea. Hence, the tea quality depends on the experiences and techniques of individual processor. Such practice does not ensure the uniformity of tea quality. After being processed, the tea is vacuum-packed with plastic bags for sale and preservation. The annual production of more than 46,000 mt of processed tea needs a huge volume of plastic bags for packaging. The use of plastic bags raises a great concern to environmental issues. Thai Nguyen’s teas are mainly marketed domestically through retailers. There are three dealers, 17 companies, 17 cooperatives and rural-based groups, and 738 households who have been entitled to use the Thai Nguyen Tea brand. Quality assurance of the brand remains to be the biggest challenge to Thai Nguyen’s concerned authorities. Currently in the domestic market, customers are unaware of the different products which makes it difficult for them to distinguish between certified and non-certified tea products. In addition, there is unavailable rigorous policies for food hygiene, safety standards and organic certification for tea products. The ambiguity of a product origin makes consumers more reluctant to purchase domestic teas and would prefer import teas of the same types instead. As a result, it dampens the motivation of the producers to attain safe and high-quality teas.

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Tea exports from Thai Nguyen province, on the other hand, are mainly raw materials and half of the export volume is now absorbed by Pakistan. High dependence on a single lower-end market is not a sustainable strategy for the development of Thai Nguyen’s tea industry. Although export companies perceive high demand for specialty and novelty teas in developed countries, they could not find quality materials for their export products. If Thai Nguyen’s tea production standards could be improved to satisfy strict requirements set by developed countries, there would be great opportunities for tea producers to earn better and diversify their markets.

Conclusion, Policy Implications and Upgrading Strategies Tea production in Thai Nguyen province plays a critical role in providing livelihood for nearly half of the rural households. While teas in Vietnam in general are intended for exports, more than 90% of Thai Nguyen’s teas reach consumers in the domestic market. Tea growers and processors could also play as wholesalers and retailers. Results of the cost and profit analysis showed significant differences in profits between the households with and without production certifications. The VietGAP and UTZ groups received higher profits than the group applying traditional farming practices, while the Kinh growers earned more than non-Kinh group. Comparing the two survey locations, tea growers in Thai Nguyen city made more profit than those in Dai Tu district. Higher profits were observed as well in tea growing households with higher education levels and production and market linkages. Production linkages are important for the improvement of production efficiency and enhancement of farming household capacity through sharing of experiences and technical support from enterprises. Establishing strong market linkages between tea growers and processing establishments or enterprises also require strong support from the local government units and concerned government agencies and institutions to ensure better prices and market outlets for the former and supply of quality and safe tea for the latter. Tea processing also involves various types of processors which could be divided into three major groups, including processing households, processing establishments or cooperatives, and processing enterprises. Among those types of processors, processing households earned less than processing establishments and enterprises due to its manual processing technology and limited capacity. For final tea products of the same grade, export-oriented processors made the most profits. On the contrary, the export of tea materials to other international tea producers generated smaller profits for tea processors. Tea production in Thai Nguyen province remains fragmented and in small-scale while there is a modest proportion of tea areas following VietGAP and higher production practices. The application of manual techniques also makes the industry very labor intensive. Besides major difficulties of water irrigation and hiring of labor, Thai Nguyen’s teas face significant challenges on technical barriers in export mar- kets, brand management and product quality control, diversification of products and consumer markets, and health issues that affect tea producers, consumers, and the environment.

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Investment in irrigation infrastructure in tea growing areas (e.g. construction of water reservoirs and water catchments for surface run-off) is needed to increase tea production. To address the problems caused by unstandardized production practices, it is necessary to provide tea growers, including women, with a training program focusing on health, environmental, and economic benefits of adopting certified farming practices and producing safe green tea, which is in fact suggested by 56% of the surveyed households. The price subsidies for bio-pesticides and organic fertilizers could be another solution to encourage tea growers to apply less toxic input materials. In addition, local and central authorities should improve the social recognition of GAP-certified households producing tea, provide incentives for GAP-adoption and renewal of certification, and establish an intensive information dissemination scheme to increase awareness on the benefits of consuming certified tea products. It must be accompanied with close quality control and stricter regulations on brand management. These actions would help create both push and pull factors (from the demand and supply sides) for the growers to adopt good agricultural practices while concurrently increase the market accessibility of certified teas. Clustering approach, which is successfully applied in the cocoa value chain in the Philippines, could be an alternative model. It would increase production scale, develop the standardized products, plan and organize processing clusters for tea products, and establish linkages between farmers and between farmers and firms. This relationship may better employ investment resources for infrastructure and postharvest and processing facilities and equipment. The consumption of Thai Nguyen’s teas currently depends heavily on the domestic and Pakistan markets. Thai Nguyen province should take the initiatives to gradually raise the bar of standards for its tea products, even for domestically- consumed teas. This is a strategic step to position Thai Nguyen as the leading producer in the country especially on food hygiene and safety. Organic teas also have great market potentials, both domestically and internationally. In order to improve the tea value chain in the international market, it is necessary to develop an appropriate quality-focused strategy for tea products in Thai Nguyen province, provide adequate R&D funding for the diversification of tea products and development of environment- friendly packaging materials, and support and coordinate with enterprises to provide reliable and updated market information and trade promotion for tea products.

Acknowledgements We would like to acknowledge the financial support of the Vietnam Academy of Social Sciences (VASS) and the Asian Development Bank (ADB) for the research project entitled “Improving Vietnam’s Agricultural Value Chain in the Regional Market: The Case of Tea and Lychee Products”. In particular, we wish to express our special thanks to Dr. Flordeliza A. Lantican, the academic advisor of the team, and other ADB experts for their technical support and inputs during the implementation of this research. Also, we would like to extend our appreciation to the tea households, firms, Thai Nguyen’s DOIT DARD, and other government agencies for generously providing the research team their time, insights, and valuable data and information.

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