Downstream in Overseas Supply Chain
For the past three decades, Chinese agchem manufacturers have been exporting generic technical-grade and formulated products as well as key intermediates worldwide. In recent years, there have been attempts by some plants to go more directly into the overseas markets by having their own product registrations and branded products, as some of their Indian counterparts have done. This development was a result of intense competition amongst the 2,000 or so manufacturers as well as competition posed by several hundred Indian companies.
Margins have been squeezed. For a given manufacturer, overseas orders received fluctuate according to whether it is offering the lowest price or whether it has the product available at the right time. As a result, business transactions tend to be opportunistic rather than long-term and sustainable in nature.
Typically, there are no definitive, continuous,sustainable marketing efforts and plans for their products and manufacturing capability, even at the immediate next layer of the supply chain which is their overseas buyers – the registration holders. They have been merely discovered by their overseas customers due to their occasional participation at industry trade shows, effective but limited advertising in agchem magazines and journals, their websites and introductions made by agchem traders.
Besides their overseas customers in the supply chain, no one recognizes any of them, as all product registrations and branding are the intellectual properties of their customers. All goodwill in the marketplace is accrued exclusively for the benefit and ownership of their customers only.
The Chinese government has recognized the importance of this growing industry. It is not only a key component in its national plan for agriculture production but an important pillar in their quest for food security. In light of that, the government has been nudging manufacturers to venture overseas to capture more market share and to continue to grow and make the industry more sustainable.
The Chinese government even encouraged major producers of various active ingredients to form product-specific consortia with a view of ensuring “more orderly marketing” and avoiding cutthroat selling against each other, rendering losses that could make their businesses unsustainable. While the intentions are clear and reasonable from that point of view, such actions are certainly against anti-competition laws overseas. Having said that, it simply illustrates the Chinese government doing what it can to help the industry.
With limited government support and its own recognition of the untenable and unsustainable situations described above, some agchem manufacturers have indeed made efforts to go down the overseas supply chain to capture more value. However, to date, results are mixed at best. Some who went down that path have in fact pulled back to concentrate on being active ingredient producers and exporting these together with some formulated products. A limited number of manufacturers have had better results and these are the ones which managed to find national distributors with good track records in major overseas markets such as USA and Brazil.
The Major Impediments
Why are there so few success stories of Chinese manufacturers going downstream in the overseas supply chain thus far? There are only a handful that have found joint-venture partners or acquired equity in distribution companies that have a good track record of market access.
■ Language and cultural barriers
Almost all decision makers, the owners of the manufacturing plants, do not have a working knowledge of the English language. They are dependent on usually young and domestic graduates in foreign trade to manage their exports and communications with foreign buyers. These export department staff members have a good working knowledge of English to conduct day-to-day business transactions.
However, their command of English is inadequate to engage in deeper understanding of the agchem markets in terms of basic agronomy, market dynamics, more complex product registration and regulatory regimes and differences in national cultures of the various countries they deal with. All westerners are lumped as “lao wais” (old foreigner). Those foreign customers and associates who speak with local and peculiar accents make it more difficult for them.
Typically, in a business discussion with foreign buyers and business associates, there is no problem translating straightforward issues and points. But when it comes to complex analysis and deeper discussions of greater intensity, these are normally only partially understood, or worse, misunderstood, and hence only partially translated or translated erroneously.
Without a full understanding of the markets and their dynamics as well as the various foreign business cultures and laws, either wrong or no decisions are made on non-export related opportunities.
■ Intoxicated by sporadic successes in exports and short-term profits
Many owners of manufacturing plants say they are keen to invest and get a position downstream in the overseas supply chain. However, when investment opportunities are presented to them, especially in more intangible investments in areas like co-investing in product registrations costing hundreds of thousands of dollars or more, registration data package generation, market development, marketing and branding, they tend to shy away. They are more enthused when it is a formulation plant that is for sale as they are more familiar with this aspect of the business. To the Chinese, looks and visibility, read: size, are of paramount importance. For instance, a big company vehicle, office building and manufacturing plant all have size, and size matters.
More often than not, manufacturers are looking for more immediate profits. So, investment projects with a few years’ gestation period before revenue rolls in are not favored by them. In their minds, why should they invest in such overseas projects or ventures when they are already making products and exporting them, though not always done profitably.
■ Unable or unwilling to self-finance
Going downstream into the overseas supply chain is a major departure from exports in terms of financing. Often, we are told that manufacturers have good bank financing and support even to the tune of tens of millions of dollars. Dig deeper, and you will understand that these are cut out for export financing where there is a definitive payment term imposed on their overseas customers. In other words, come payment due date, their banks expect the transaction or specific invoice financing to close out.
Such back-to-back bank export financing does not allow manufacturers to have their own branded, solely or jointly owned products to be shipped overseas to subsidiaries or joint ventures on consignment basis. Overseas partners or joint-venture partners hoping that the Chinese manufacturers will come and play ball this way, sending them unlimited consignment stocks, will be sorely disappointed. Obviously, at this stage of the game, the question from the overseas potential partner is that if the Chinese can’t meet this part of the equation, then what values are they bringing to the table?
Therefore, unless the manufacturers are cashed up, they are going to find it difficult to finance overseas ventures with their own branded generic agchem products.
■ Lack of tolerance to financial exposure
The new business model, from being a traditional exporter to owning brands and national distribution in overseas markets, presents a much higher number of customers to manage. Instead of the usual tens of customers worldwide, they now need to manage hundreds, or more, at the local dealer or reseller level. Inventory management and debt collection in an unfamiliar environment is thus a major challenge. Millions of dollars of products could end up in carry-over stocks in an overseas market with no appetite for them.
■ Inability to manage an overseas outpost
A strong, trusted local management team needs to be in place. Though the need for this is well-recognized, finding and managing such a team from China presents yet another formidable challenge. Cultural differences and differences in business practices are their own are hurdles that need to be crossed. It is hard enough for a western company acquiring another western company overseas to manage integration.
For a Chinese company with little international exposure other than at the export-level, to do the same is even more difficult.
■ Lack of government incentives
Other than providing encouragement, there are not a lot of government incentives for Chinese agchem manufacturers to venture overseas. Quite the contrary, any manufacturer wanting to invest overseas is subject to bureaucracy and checks at different levels of government.
Often, it takes months before a manufacturer can make its initial disbursement of invested funds to an overseas venture, even though all the overseas paperwork has been completed and the new business has been registered. Prevention of foreign exchange leakage by fraudulent and dubious overseas ventures is always on their mind.
All said and done, agchem manufacturing plant owners are risk-averse when it comes to any overseas investments. This is understandable as it is essentially an uncharted territory for them.
Being unfamiliar with the language, culture and business practices make venturing overseas down the supply chain a formidable task.
Given that banks do not generally finance consignment stocks to be shipped overseas, relying on their own ability to finance overseas ventures means they have to ask themselves whether they want to risk their hard-earned money.
The Way Forward
If Chinese agchem manufacturers are serious about going downstream in the overseas supply chain to capture more value with their own branded products hence, making their business more sustainable in the longer term, they need to wean off their manufacturing for export and immediate profits mentality. A longer-term vision needs to be in place.
They also need to invest more time and effort to properly understand the dynamics of overseas markets. This will entail engaging overseas consultants or managers who are bilingual in Chinese and English, and experienced in the international agchem industry. The ability to understand, appreciate and most of all, pay for the value of such consultancy, is paramount.
A fundamental change of mindset from size-oriented thinking (“How big is your company? What is your sales turnover?” or “Your company is so small…so, how can you help us?) to a value-oriented one (“What value and expertise do you bring to the table to complement what we have”?) is a must. In addition, companies must be less over-confident based on past successes in exporting products, as these are not a prelude to success in going downstream in the overseas supply chain. Neither should they be so inward-looking, on the other hand, as to say that they have no expertise in going down this path and write this off from the outset, which I know some have done.
With greater understanding of the risks and the rewards in venturing overseas, and minimizing the effects of business, linguistic and cultural barriers with higher quality manpower resources, hopefully, a less risk-averse and longer- term vision will prevail.
Concrete government incentives to mitigate some of the risks, instead of dishing out bureaucratic impediments, would surely help push them along down the right path. Hopefully, springing from the announcement in May 2013 by the new Chinese premier that the private sector and market forces play a larger role in its economy will result in some significant incentives, and less bureaucracy, for manufacturers venturing overseas.
Unless these fundamental pre-requisites are met and detailed preparations are made well in advance, a la Admiral Zhenghe’s 15th-century overseas expeditions, gaining sustained success in an overseas business operation will be elusive.