Case Presentation – EMS Group | Emerging Markets Strategy| Section B

Kaushik Thacker, Nirav Devpura, Chirag Sukhija,

Dr. Rajesh Pillania Dr. Swayamsiddha, Abhiroop Gupta, Sarvagya
1 Kala
Grain Policy in China
Early Reforms
• 1949-1978: fixed pay to
farmers -> limiting their
incentives to increase
grain output
• 1978-1984:
Decollectivized and
allowed farmers to keep
excess grains
• By 1990, National
Wholesale Grain markets
arose and began to
diversify BDH’s clientele to
private purchasers
• Inflation in 1990 and quick
increase in grain prices in
1997 led massive
investment from Chinese
government into the
infrastructure for storage
unit-> Groundwork for
increase in production
Post 1990
• 1998: China separated SOE’s
Administrative functions from the
commercial ones -> removal of large
beureaucracy
• Managerial attention of entities such as
BDH shifted to market share, revenue
growth and profitability
• 1999: Chinese govt barred private
organizations to buy directly from the
farmers ensuring trading roles for
entities such as BDH
• No income/value added tax for Chinese
farmers
• Subsidies in infrastructure to farmers
upto 50-60% and in machinery 10-30%;
equal to that of US and EU
• Lifted millions out of poverty by 2000
• Demand for Soybeans increased –Exhibit
2
• By 2013, China produced half of the pork
in the world
Recent
Reforms
• As the scale of Chinese demand
became unclear, the govt took
various initiatives
• NDRC, Ministry of Agriculture->
“Going Out” Policy -> which enabled
and encouraged domestic firms to
look for elsewhere for foodgrains
• Financial assistance, tax breaks,
assistance and insurance coverage
for the firms going out
• However BDH saw them as vague in
practice
• They felt national level bilateral
partnership offer a more reliable wu
for BDH to build relationships
abroad with local food producers
Slide 2
Beidahuang

First 60 Years BDH Trading Group The Five Year Plan in 2011-2015

• Largest subsidiary; Revenues in 2012 • Focus on globalization of Chinese

• Named after Beidahuang –The
$5.3b enterprises
Great Northern Wasteland
• Company was on bankruptcy before six • Qian took the opportunity to
• Formation in 1970 by MOA
years and Qian was hired; At that time restructure, modernize and
• 1984: $70m world bank loan ->
there was no strategy implementation of internationalize the BTG->by 2020,
MOA launched the program to
BTG BTG would rank in either top 500
expand Beidahuang to three
• Qian sought to clear the responsibilities firms or top 20 trading firms
million acres -> 4 years completion
of BTG; everything was done in • “168” Strategy:
• 1998: To remove large bureaucracy
unsystematic and chaotic way 1. “1”: China’s leading third
chain, ownership transferred t o
• Qian decided to develop BTG as a party logistics company
Heilongjiang Province
logistics company 2. “6”: BTG will strengthen
• Various subsidies of BDH were
• Vision other six business lines
formed and organized by various
• Deepen BTG’s implementation of 3. “8”: BTG would develop
product type such as grain, oil,
commercial reforms group of platforms to
malt and dairy
• Stabilize and expand gasoline and support all these initiatives
• In 2013, Nine subsidiaries
fertilizer business such as ecommerce
• Slaughter capacity of 100000
• Develop Tourism in the region to • Unlike the rest of China’s SOE, BTG
heads per year, raised cattles and
increase brand recognition allowed operating autonomy to its
pigs (11m)
• Acquiring Human Capital and subsidiary
• Strategic location Heilongjiand ->
excess capacity because of small redeploying
population Slide 3
The Strategy of BTG – Operational Excellence
Going Global
BDH Grain Logistics Mission It was clear for BDH that it was operating at full capacity within its
arable land in Northeastern China -> Sought opportunities in Africa,
• Generating Revenues Argentina, Australia, Brazil, Russia, and Southeast Asia
• Transportation of BDH • Serving the Farmers • Rice Cultivation In Mozambique which relied for imports for its
was fragmented ->2008 half of the rice consumption
BTG created BDG Grain • Australia -> jointly develop agricultural production, port facilities
Financing
Logistics and bilateral agreement of leasing arable lands
• Grain Bank – 3m tons • BDH Grain Logistics • Russia -> farmers affiliated with BDH farms in china had been
Storage facility working in Russian lands
financed its imports • Brazil -> Pre crop financing, equipment ad technical expertise to
• Provided three months with lines of credit from local farmers
of free grain storage to commercial banks – BDH had superior seed technology, production management skills as
22,400 rural farmers RMB 1B well as workers managers and equipment's -> Create a “Shadow
• 2009: First electronic • BDH maintained RMB 20 Arable Zone” -> land not owned, but leased by BDH.
trading platform -> B with industrial and
decreasing transaction commercial bank of BDH also provided distribution to unaffiliated farmers
cost, logistics cost and chine and 10 B with
purchasing cost BDH actively sought the partners who could train them about the
Bank of China global trading practices, local cultures, local practices to sensitize
• Partnership with banks • The Export-Import Bank about the issues e.g. Argentine Pollution issue -> A Separate Office
allowed farmers to seek offered rates below the
loans for their stored china’s market rates – They felt that they did not pose a political threat to anyone as they
grains -> improved They borrowed from simply created an ecosystem in which everyone benefited
efficiency for farmers MOF at 2% and added a
margin Slide 4
Brazil and China
Soybeans in Brazil
• Before mid 80s, The soybeans production was concentrated
only around southern ports
• Potential in the Cerrado Region – 200 m hectres of tropical
forest land
• It was aided by good sun exposure, good water supply, mild
temperature and optimal growing conditions
• The output rose four times from 15 m tons in 1990 to 60 m
tons in 2010 -> 1/3 of soybeans export worldwide
However, this large scale production mounted new challenges of transportation,
infrastructure inadequacies, lack of skilled labor, Complex Tax Regime, etc.
• Brazil invested less than 0.5%of its GDP in transportation
• Lackluster Road, Rail (Different Gauge sizes), and Port networks
• Still However, 45% of the production in 2006 was done by the BIG ABCD firms
• The Brazilian transportation network lacks a greater variety of options to the
companies. The country counts with 214.000 km of roads (1.600 km of them,
unpaved) and only 30.000 km of railways and 14.000 km of waterways.
• Considering these numbers, it’s understandable that around 60% of the cargo in
Brazil relies on roads, revealing one of the greatest weaknesses of the system.
Loads here are transported by roads even along extreme distances involving
thousands of kilometers. The cost of road transport is very high in Brazil,
especially over long distances, for which we should use other means of
transportation. – Source: thebrazilbusiness.com
Brazil and China
• Brazil and China Traded $75.5 b in goods in 2012,
surplus of $7b to Brazil
• Soybeans exports to china were to overpass that of
iron ore in 2013, as the demand increased for
Brazilian Soybeans
• CGG, a large SOE based out of Sichuan Province,
announced plan to build a $500 m industrial base in
brazil to process and export the soybeans products
• Most firms purchase through ABCD -> which levy 18
– 24% of the margins -> which can be eliminated if
you directly collaborate with the producers
• Backlash from Legislature -> AG used a 40 year old
law to make it harder for foreigners to buy the land
in 2011
• By 2013, Argentina and Brazil both barred foreign
control of all land ownership, although they can
purchase a minority stake in the local land owning
firms
Slide 5
Partnering with Zebra Investments

As Qian decided to internationalise, in 2012, BTG partnered with Zebra Investments, a commodity trade and boutique
merchant bank to operate its business in Americas. Zebra owned and developed land in Argentina and was well familiar
with supply chain of Brazil and U.S. – a Three Phase Plan in Brazil

Brazil The Future

• Phase One: Develop relationship with resellers and
exporters.
• Phase Two: Provide capital and inputs to the trusted
farmers in exchange of sufficient collateral, forward
supply contracts and interest on the capital. They
Created a separate entity for the same.
• Phase Three: BTG and Zebra will develop an integrated
investment and operations entity to originate, finance,
transport and export grain.
US
• In US, however, most logistics assets were held by global players over
which BTG had little control
• Found a logistics opportunity by which U.S. farmers can deliver their
grains to specific rail side facilities for transport in unit cars to the US
west coast for onward ocean shipment
• Qian knew that farmers’ access to lands and input would be
the important element of any future integration of the
global grain value chain
• China’s problem of land scarcity
• Qian was uniquely positioned to capitalize on farmers’ needs
internationally through a source of demand, or by technical
superiority, or by operational efficiency
• Partnerships with even cooperatives such as CHS and
Viterra!
• Alliance with key players, and even competitors, in a difficult
environment in emerging markets such as Brazil has a great
potential
• Qian should leverage its roots in Chinese agriculture and
expertise of BTG to aid Brazilian farmers
Slide 6
Thank You