Biting The Bullet
With 30 years of experience in tea industry Jagjeet Singh Kandal is a Tea Expert with extensive and well rounded experience in all operations of the Tea business. Anwesh Kumar Chakraborty, is a professional holding over 13 years of experience across multiple industries(F&B Cement) and multiple functional domains (Corporate Strategy, Strategic Business Unit and Maintenance, Engineering & Projects).
An interesting era is upon us an era when asset light businesses are ruling the roost and asset heavy businesses are faltering one after the other or saving grace by the skin of their teeth. It is intriguing that both the Consumer & Capital Market share betting heavily on the asset light companies. Asset light Flipkart is valued at Rs.1.8 lakh crore while asset heavy BSNL is valued only at Rs.71000 crore. Similarly OYO Rooms, without owning a single hotel room till recently, has a valuation of Rs.72000 crore vis-a-vis the combined valuation of Rs.40000 crore of the top five hotel groups in India with multiple properties in prime locations around the globe. The writing on the wall is clear dual track economy is here to stay.
In the context of Tea Industry in India, the trend of off loading hard assets and deleveraging them has been visible, since the early 2000s when two top players viz. Tata Tea Limited and Hindustan Unilever Limited divested their plantation operations and chose to focus on and expand their soft assets. This strategic switch was aided by the emergence of a completely new species of tea growers Small Tea Growers (STGs) and manufacturers Bought Leaf Factories (BLFs)since the latter half of 1990s.
Conventionally integrated/regulated tea producing companies(RTG)operating multiple tea estates with factories or even proprietary single estate tea companies are encumbered with huge overhead costs on account of their heavy asset base of labour & land. They are regulated by an act known as Plantation Labour Act (PLA), 1951. It mandates that all the social welfare benefits to the workers like housing, medical, primary education, drinking water, sanitation (toilets), recreational facilities, and others need to be paid 'in kind' over & above the cash payment of basic wage and other statutory payments like Provident Fund, Gratuity, Bonus and many more. Additionally, there are mandates on distribution of fringe benefits like subsidized ration and firewood to the workers. One industry agreement even mandates no reduction in deployment of permanent labour below the number as on 1st Jan, 1969.RTGs have been operating since pre independence and their lands and bushes are aged and have become low yielding and need large scale rejuvenation (uprooting and replanting). This age old asset heavy structure of the tea industry has been created by the regulations of state.
In comparison the STGs are not regulated by PLA or the above mentioned industry mandates. They don’t need to employ an army of permanent workers & bear the related mandatory social costs, and in some cases even statutory costs as they operate through deployment of daily paid/casual labour. Same is the case with BLFs who operate through contracted labour or daily paid/casual labour. STGs are comparatively newer in the business and so their lands and tea bushes are newer and comparatively higher yielding with higher vitalities than the RTGs. All these factors help the STGs grow tea at almost one third the cost of the RTGs. BLFs who buy green tea leaves from STGs to manufacture tea, therefore, are also able keep their cost of production (CoP)very low. In effect, the entire value chain of STGs and BLFs works on a costplus model and derives positive margin on every kilogram of tea it cultivates or produces. This is the new age asset light tea industry created small scale entrepreneurs.
The current decade has been particularly challenging for the RTGs on account of the‘dual cost structure’ that has severely affected their market competitiveness. Their entire business ecosystem has drastically transformed and in conjunction with equally extreme changes in the external environment has put a question on the sustainability of the entire tea industry itself. Climate change has posed a serious impediment to tea cultivation rainfall quantum has gone down its distribution pattern has changed, average temperatures have been increasing YoY, natural water resources have emaciated flash flooding has increased manifold. To add woe to the worry, pests have become more resistant to the traditionally approved chemicals and their onslaughts have increased. The soils have become impoverished and their mineral input requirements have shot up. All of the above, have led to progressive lowering of yields and deterioration in the quality of produce, and in combination with a steady inflationary rise in cost of inputs, have exponentially increased the cost of production of tea.
To make matters worse, the prices in the commodity tea market have not increased commensurately due to a continuously growing supply of low cost tea from the STGs & BLFs. It is sobering to know that this scenario of flat prices and inflated costs has forcibly brought the shutters down on many RTGs, if they have not willingly cut the ties to their fixed assets to remain solvent.
The conventional way to revive tea industry would be to cutoff the main overhead costs for RTGs and create a level playing field for all the tea producers. This would require transfer of all social benefits for workers mandated under PLA to state & central rural welfare schemes, and thereafter universalizing the wage structure across all producer groups(RTGs & STGs). A thorough review of existing legislation and active participation from all key stakeholders are the major pre requisites. The dual cost structure would be eliminated and would ensure that product quality and process efficiency are the only metrics for competitiveness.
A more unconventional solution is DE-ESTATING. This would entail deconstruction of the existing business structure of the RTGs where in ownership of existing plantation land bank would be transferred from the plantation managing company to the currently employed workers aggregated together either in the form of Farmer Producer Organizations(FPOs) or Cooperatives. These FPOs/Cooperatives can then operate as STGs and the RTGs can operate as BLFs. In addition to the elimination of dual cost structure, this would help create a rich micro entrepreneurship ecosystem and subsequently improve the standard of living of the workers. This would also mark the end of the ‘Colonial Plantation Regime’ in its truest sense. Various models of de-estating are successfully working in countries like SriLanka, Rwanda and Viet Nam.
It won’t be long before nature takes its own path and pulls the curtains down for the Indian Tea Industry, as we know it today considering the fact that RTG big wigs have become unsustainable commercially and many players are in the queue. The powers that be need to BITE THE BULLET and either review PLA and universalize wages or implement de-estating with all due haste to lessen the number of casualties of circumstance, and to create a roadmap for resurgence of the tea industry, and secure the future of 10 million people working directly or indirectly for the industry.
An interesting era is upon us an era when asset light businesses are ruling the roost and asset heavy businesses are faltering one after the other or saving grace by the skin of their teeth. It is intriguing that both the Consumer & Capital Market share betting heavily on the asset light companies. Asset light Flipkart is valued at Rs.1.8 lakh crore while asset heavy BSNL is valued only at Rs.71000 crore. Similarly OYO Rooms, without owning a single hotel room till recently, has a valuation of Rs.72000 crore vis-a-vis the combined valuation of Rs.40000 crore of the top five hotel groups in India with multiple properties in prime locations around the globe. The writing on the wall is clear dual track economy is here to stay.
In the context of Tea Industry in India, the trend of off loading hard assets and deleveraging them has been visible, since the early 2000s when two top players viz. Tata Tea Limited and Hindustan Unilever Limited divested their plantation operations and chose to focus on and expand their soft assets. This strategic switch was aided by the emergence of a completely new species of tea growers Small Tea Growers (STGs) and manufacturers Bought Leaf Factories (BLFs)since the latter half of 1990s.
The conventional way to revive tea industry would be to cutoff the main overhead costs for RTGs and create a level playing field for all the tea producers
Conventionally integrated/regulated tea producing companies(RTG)operating multiple tea estates with factories or even proprietary single estate tea companies are encumbered with huge overhead costs on account of their heavy asset base of labour & land. They are regulated by an act known as Plantation Labour Act (PLA), 1951. It mandates that all the social welfare benefits to the workers like housing, medical, primary education, drinking water, sanitation (toilets), recreational facilities, and others need to be paid 'in kind' over & above the cash payment of basic wage and other statutory payments like Provident Fund, Gratuity, Bonus and many more. Additionally, there are mandates on distribution of fringe benefits like subsidized ration and firewood to the workers. One industry agreement even mandates no reduction in deployment of permanent labour below the number as on 1st Jan, 1969.RTGs have been operating since pre independence and their lands and bushes are aged and have become low yielding and need large scale rejuvenation (uprooting and replanting). This age old asset heavy structure of the tea industry has been created by the regulations of state.
In comparison the STGs are not regulated by PLA or the above mentioned industry mandates. They don’t need to employ an army of permanent workers & bear the related mandatory social costs, and in some cases even statutory costs as they operate through deployment of daily paid/casual labour. Same is the case with BLFs who operate through contracted labour or daily paid/casual labour. STGs are comparatively newer in the business and so their lands and tea bushes are newer and comparatively higher yielding with higher vitalities than the RTGs. All these factors help the STGs grow tea at almost one third the cost of the RTGs. BLFs who buy green tea leaves from STGs to manufacture tea, therefore, are also able keep their cost of production (CoP)very low. In effect, the entire value chain of STGs and BLFs works on a costplus model and derives positive margin on every kilogram of tea it cultivates or produces. This is the new age asset light tea industry created small scale entrepreneurs.
The current decade has been particularly challenging for the RTGs on account of the‘dual cost structure’ that has severely affected their market competitiveness. Their entire business ecosystem has drastically transformed and in conjunction with equally extreme changes in the external environment has put a question on the sustainability of the entire tea industry itself. Climate change has posed a serious impediment to tea cultivation rainfall quantum has gone down its distribution pattern has changed, average temperatures have been increasing YoY, natural water resources have emaciated flash flooding has increased manifold. To add woe to the worry, pests have become more resistant to the traditionally approved chemicals and their onslaughts have increased. The soils have become impoverished and their mineral input requirements have shot up. All of the above, have led to progressive lowering of yields and deterioration in the quality of produce, and in combination with a steady inflationary rise in cost of inputs, have exponentially increased the cost of production of tea.
To make matters worse, the prices in the commodity tea market have not increased commensurately due to a continuously growing supply of low cost tea from the STGs & BLFs. It is sobering to know that this scenario of flat prices and inflated costs has forcibly brought the shutters down on many RTGs, if they have not willingly cut the ties to their fixed assets to remain solvent.
The conventional way to revive tea industry would be to cutoff the main overhead costs for RTGs and create a level playing field for all the tea producers. This would require transfer of all social benefits for workers mandated under PLA to state & central rural welfare schemes, and thereafter universalizing the wage structure across all producer groups(RTGs & STGs). A thorough review of existing legislation and active participation from all key stakeholders are the major pre requisites. The dual cost structure would be eliminated and would ensure that product quality and process efficiency are the only metrics for competitiveness.
A more unconventional solution is DE-ESTATING. This would entail deconstruction of the existing business structure of the RTGs where in ownership of existing plantation land bank would be transferred from the plantation managing company to the currently employed workers aggregated together either in the form of Farmer Producer Organizations(FPOs) or Cooperatives. These FPOs/Cooperatives can then operate as STGs and the RTGs can operate as BLFs. In addition to the elimination of dual cost structure, this would help create a rich micro entrepreneurship ecosystem and subsequently improve the standard of living of the workers. This would also mark the end of the ‘Colonial Plantation Regime’ in its truest sense. Various models of de-estating are successfully working in countries like SriLanka, Rwanda and Viet Nam.
It won’t be long before nature takes its own path and pulls the curtains down for the Indian Tea Industry, as we know it today considering the fact that RTG big wigs have become unsustainable commercially and many players are in the queue. The powers that be need to BITE THE BULLET and either review PLA and universalize wages or implement de-estating with all due haste to lessen the number of casualties of circumstance, and to create a roadmap for resurgence of the tea industry, and secure the future of 10 million people working directly or indirectly for the industry.
