The potential of tea to contribute

EXPORTS: A HIGHER LEVEL OF PERFORMANCE AN URGENT PRIORITY

There is an ongoing discussion on the need to improve our levels of achievement from exports. It was reported in the Daily FT last week that President Mahinda Rajapaksa himself had expressed concern when the declining share of exports as a percentage of the country’s total output over the last decade was pointed out at a consultative committee meeting on finance in Parliament last week.

Dr. W. A. Wijewardena, a Daily FT columnist on economic matters, gave us the benefit of his views earlier this week on this declining trend and identified the avenues which are still open to us to improve performance.

While leading policy makers in the country are no doubt also looking at possible solutions from a macro perspective, the EDB Chairman defended the current levels of performance and made reference to some recently published figures which by itself does not provide the case to uphold that rapid growth in exports will be sustained over a longer period.

The need for creative thinking

Despite the claim made that we are on track, it cannot be denied that even more positive measures need to be urgently taken and formulating strategies for each sector by all concerned is a critical requirement. Even more important is the need for creative thinking by the export community, conspicuous by its absence in most of the plans we have seen so far.

The Strategic Plan 2011-2015 document, recently released by the EDB, has determined targets to be reached by the individual sectors and identifies seven key product sectors amongst others, through which we are expected to tread the path to reach the declared goals. What is not clear however is the correlation between the annual increments in earnings factored in for each KPS to reach the targets set by 2015.

The strategy which has been listed and scheduled in very general terms as a means to get to our destination is not too well articulated and it is less than convincing that the plan will succeed. We need to take giant leaps at a time like this as opposed to small steps to move towards the targets we have set ourselves.

Accept the things we cannot change

The correction of the value of the rupee and the case therefore is a measure that the Governor of the Central Bank has insistently and repeatedly resisted, and these issues in my view are best left in the hands of those responsible for the overall management of the economy. Exporters’ dependence on depreciating currencies is a thing of the past.

We have been cautioned by Dr. Wijewardena that we may even be exposed to the malady of the Dutch Disease – “a common term to describe any displacement of the traditional export sector of a country due to a windfall inflow of foreign exchange...” So it is even more urgent for our exertions to be innovative and immediate.

Continuing the debate on foregone concessions afforded by GSP Plus is an exercise in futility at this stage as the country has firmly decided to close the book on a facility which in any case would have been short-lived. We have also missed to take the first and second buses which came to take us to CEPA and if we have the resolve and what it takes to re-examine the issues dispassionately and realistically once again, we may with luck still catch the last bus to realise what this partnership with our giant neighbour holds for us in the final analysis, despite some negative aspects.

We are in every sense of the word too close and at the same time too small to ignore overtures made for cooperation with Mother India on most matters and economic cooperation is no exception.

Our role as exporters

I am uncertain what exactly is meant when economists use the term ‘increasing productivity’ in the export sector. The common understanding is that it refers to the production end of the value chain and concerns outputs, yields, work rates, etc. I hope I am wrong and that the reference to productivity made by both Doctors Jayasundera and Wijewardena also includes the marketing and consumer end where the battle is ultimately won or lost.

Leaving the high level policy making and the overall development planning to those appointed and in place to get it right, we as the persons engaged in exports have a duty and a responsibility to suggest measures we would like to see in place to facilitate rapid incremental earnings in export earnings. We have no excuse as we are frequently requested to submit our suggestions and our ideas to the policy makers.

The question we as practitioners have to ask ourselves at this stage is have we used our imagination and ingenuity sufficiently to elevate ourselves to a different level of performance as time demands. We have, for too long, traversed the known road only, ever depending on policy makers to deliver and offer us handouts on the one hand and placing ourselves at the mercy of international buyers who dictate terms on the other. This complacency properly identified at the Consultative Committee Meeting in Parliament will take us down the slippery slope to nowhere.

Entry into the global tea business

In a recent piece I wrote earlier which you published as a Special Report on 14 March, I made a few key points which I will first recall for the benefit of readers as a backdrop to my thoughts on ways in which we can possibly earn much more than we presently do as tea exporters:

nEnsuring the viability of the industry in a rapidly developing economy, moving towards a $ 4,000 per capita income.

nCaring for the interests of all stakeholders including workers and leaf suppliers.

nFocusing on what is important for the consumer.

nQuestioning the wisdom of labelling all tea grown in Sri Lanka as ‘Ceylon Tea’.

nEntering the global business of marketing tea seriously as opposed to playing the role of a supplier.

nAccepting the realities and requirements of modern trading.

nRecognising the power of brand marketing and what it entails.

nThe case for having production facilities close to the marketplace.

nThe need to have a range of teas to offer (not single origin teas only). This is pre-requisite to position oneself as a ‘key player’ in modern trading.

nRecognising the need for massive levels of investment outside the country.

nIdentifying the role of entrepreneurs bold enough to enter the field with brands owned in Sri Lanka by Sri Lankans.

nPicking winners and backing them to the hilt.

Cup by cup

Stretching our imagination to its limits is what is called for. Let us as a hypothetical case ponder on the results if we were to sell all the exportable surplus of tea we produce, cup by cup instead of the way we presently do! That would be the ultimate in value addition.

From a kilo of tea, at two gms per cup, we can have 500 cups of tea. Depending on the situation and the place, we can sell a cup at prices ranging from US cts 50 to $ 5 per cup. For the sake of this exercise let’s assume that the cost of tea in a cup of tea is taken at US cts 25; accepting the fact that there are obviously a number of other costs incurred in delivering a cup of tea to the ultimate consumer. From 300m kilos of tea, we can produce/serve 150 b cups of tea which will generate revenue of $ 37.5 b at US cts 25 per cup. That would be over 28 times more than what we presently earn as a country annually from tea. Even if we reduce the tea cost, in this “cup by cup” scenario to US cts 5 per cup, still the earnings of US$ 7.5 b looks most favourable.

Selling the entire exportable surplus in this way may be unrealistic, I agree. Let us therefore assume we only sell the specialty teas that our country is endowed with using this special route. We may then proudly and authentically project those teas as ‘Pure Ceylon Teas’ and undoubtedly the premium due on these seasonal and flavourful geographically identified teas will accrue to us as a country. Safeguarding the reputation of Ceylon Tea is of great concern and is strenuously voiced by those who argue against the transformation of Sri Lanka’s tea business to one of global status.

Assuming that the quantity available under this category is 10% of the exportable surplus, then 30m kilos, at say US cts 10 per cup, will earn $ 1.5 b, which is still more than our present earnings from all the tea we export. In this last scenario, we are still left with 270m kilos to sell in any other manner we think fit and consider profitable.

You may at first consider these ideas more than optimistic and ‘pie in the sky,’ perhaps. But the point I am trying to make here is that we need to think very big, differently and out of the box if we are to break out from the mould we have been cast into by time and circumstances. No doubt, it is a monumental task with a huge level of investment needed to set up Ceylon Tea boutiques in the major street corners of the world, but the possibility has already been proven as in the case of coffee that there is a return for those who are adventurous enough and possess the courage and will to dare.

This is just one idea that has been running through my mind for some time, but I feel sure that there are many in this country who have the capacity to believe in a dream. Our winning cricket team immediately comes to mind. I witnessed the manner in which we beat the side of the country that originally taught us the game and that was most inspiring, even spurring me in writing this piece for our tea. It is a glaring example of what can be accomplished by a winning spirit.

Brand marketing

Even if you find the ‘cup by cup’ idea as outlined above idealistic, you will accept that we already have a few bold entrepreneurs who have entered the global brand marketing field and succeeded. I believe the time has come for us to take them to a higher level and to seriously look at what they would require to scale up and secure greater market shares.

The market has now become fiercely competitive so that it is imperative that costs are minimised and access to low cost funding is becoming a crucial factor. Most of our competitors have access to cheaper money. International brands such as Unilever, you would know, have access to immeasurable resources while players like Ahmad have grown international in stature with the tremendous backing and support they enjoy from the original countries their owners hail from. The Indian billionaires listed by Forbes as amongst the world’s foremost, I suspect, attained those heights not without the assistance of the Indian Government.

All serious brand players find it in their best interests to have their own production facilities and distribution networks in the markets in which they operate. This applies as a general rule, wherever the number of consumers in a market exceeds 40 m persons. It is not practical, viable or profitable to operate differently in this category of market with the level of competition that exists.

Therefore, what is required urgently is a clear Government policy in regard to Sri Lankan-owned brand operations outside the country. The last Budget gave some indication of impending relaxation of Exchange Control Regulations to facilitate investments outside Sri Lanka, but it is still unclear as to the extent to which the relaxation applies.

For example, would the current regulations permit a Sri Lankan public rupee company to invest in production facilities and distribution channels in other countries? A positive approach to these challenge faced by brand owners will generate greater value and benefits to Sri Lanka. It is through the creation of winning brands, building up and boosting the spirit of those directly engaged in brand marketing that the answer lies.

The growth of brand equity flows back to the country where the brand is owned. The salesman from Thailand who created Red Bull in the beverage sector and now ranked as the second wealthiest person in the country is a classic case study which is worth studying. Revenue streams from brands such as Red Bull help to bridge deficits in the Thai economy. The opening of new markets on this scale has a host of positive benefits in terms employment, exposure to newer technology, taking our skills to a higher level, and adoption of best practices amongst other benefits.

I refer not only to tea, which we are better positioned to exploit since we have a huge exportable surplus, but our attention should also be focused on other branded products as well such as biscuits, Ayurveda and herbal products, rubber-based products, leather, ceramics, jewellery, etc. Unfortunately, just as much as we pick the best 11 to play cricket for the country at international level, brand marketing globally is not for the fainthearted and requires us to make a call as to who will go for us. Not everyone who runs can win.

Admittedly, as a country we may not have all the resources just now to open the doors for exchange to be released for the levels of investment overseas required to position our A team of brand marketers in the global market place, so we have to pick likely winners and back the right ones to the hilt.

(The writer is a past chairman of the Exporters Association of Sri Lanka and can be contacted on [email protected].)