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Innovative Development Model for
Rural Prosperity
Global Young Leaders Programme
Shanxi Project 2009
Table of Contents
I. Executive summary
II. Background
III. Business opportunity
IV. Value proposition
V. Marketing plan
VI. Management
VII. Financial analysis
VIII. Economic, social and environmental benefits
IX. Risk assessment and mitigation
X. Implementation plan
I. Executive Summary
• Shanxi province has high levels of rural poverty where agricultural growth is limited by small scale farming structures and rural-urban migration.
• However, farming associations in the province are keen to embrace new ideas especially for sustainable organic farming to uplift communities.
• The Pohan Farmers Association is the first registered farmers’ association in China comprising 3,800 farmer members and is a successful model of rural entrepreneurship and leadership.
• There is an opportunity for organic cotton due to growing global demand (US$3.2 billion market in 2008), growing green awareness and improvements to community livelihoods through sustainable farming.
Executive Summary (cont’d)
• The value proposition is to set up a JV company leveraging the association’s strategic advantages by moving up the supply chain to process seed cotton into lint cotton and commanding premium prices for branded cotton products. The association will have dedicated land resources certified to international organic standards to supply the JV.
Farming Ginning
Proposed JV
Buyers• Spinning factory
• Retailer
• Domestic/foreign buyers etc.
Trading
Seed Lint Yarn/Fabric
• The JV, which has strong support from the Provincial Government, will brand the cotton to make
it attractive to high end buyers, provide stable market access for the villagers and will transfer
management know-how to the local community.
• A strong branding and marketing strategy will be implemented by keeping the spending low in
early years to manage operating costs and ramping up marketing investments from year four
onwards.
• The recommended structure is a contractual joint venture with limited liability of each party to the
cooperative agreement between the farmers association and the investor. Under CJV
agreement terms, the profit is negotiable i.e. parties can receive different distribution ratios in
different years. The management structure can be self determined rather than by governing
PRC laws.
Executive Summary (cont’d)
• Financial summary:– Total investment cost of ¥2.32 million
– Short payback period of 5 years
– Project IRR (10 years) of 30%
– Strong and consistent cash flows of ¥3.4 million from year 5 onwards (after the organic conversion period)
– Excellent growth potential in the Extended Yellow River Region
• Benefits to community– By converting to organic cotton farming, the farmers will benefit from
organic price premium and increase their income level up to 40%.
– With organic cotton farming, use of harmful chemical fertilizers, pesticides and genetically modified cotton seeds will be eliminated.
– The JV will create more than 30 job opportunities within the JV and related business and retain young talents in the community.
– While the government provides subsidies, with increased funding to the Community Development Fund, there is scope to provide healthcare over and above primary healthcare services.
6
Executive Summary (cont’d)
Initiative Yr 0
Mth 1-3
Yr 0
Mth 4-6
Yr 0
Mth 7-9
Yr 0
Mth 10-12
Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6
onward
Marketing
channels
Set up online
presence (join
B2B portal, own
basic website)
Advertise on
China Textile
Accessories
Magazine
Start joining
trade fairs
Build
interactive
website
Certification Phase 1 land: apply for cert Phase 1 land: conversion period
Phase 1
land:
obtain cert
Phase 2
land: apply
for cert
SPOCTE
Operations
Set up T.E.
office, hire GM,
HR & Finance
heads
Hire other key positions
Ginning
FactoryDesign factory
Construct factory &
purchase machines
Start
ginning
Obtain
organic cert
TrainingDevelop training plan & road
map
1st round of team
training
Finance
Approach
potential
investors
Negotiate &
conclude JV
1st capital
injection:
RMB1.2m
2nd capital
injection:
RMB1.12m
Implementation Timeframe
II. Background
China
Shanxi Province
The Cotton Industry
Pohan Farmers Association
China – Land of Hope and Despair
Rural areas are not realising the
benefits of development
China is a rapidly
developing economy
9
BACKGROUND: CHINA
Rapid economic growth and huge capacity
• 9% annual growth rate in 2008
• 4.4 trillion USD in 2008, No.3 in the world
Low per capita GDP
• USD 3,381 per capita, No. 104 in the world
Huge GAP in per capita income between urban and rural area
• Urban area: RMB 15,481
• Rural area: RMB 4,761
Rural community NOT benefiting enough from China’s robust
and rapid economic growth
BACKGROUND: SHANXI PROVINCE
Demographics:
• Population: 34 million
• 34 minority groups; 0.32% of
population
Economics:• 2.12% of China’s annual GDP
• No.18 out of 34 provinces
• Per capita GDP
• RMB 20,398 (USD 2,985); RMB
2,242 lower than national average
• Annual household income
• Urban: RMB13,119
• Rural: RMB4,097; RMB664 lower
than national average
Challenges and Opportunities in Shanxi
Opportunities
• Converting to organic farming
can make a significant impact on
the environment.
• Growing global demand for
organic products
• Farming associations are already
established in the region and are
keen to embrace new ideas for
sustainable organic farming.
Challenges• High levels of rural poverty
• Small scale farming structures limit agricultural growth
• Rural-urban migration
• Environmental deterioration.
Shanxi Province can benefit widely from
improvements in farming techniques.
Cotton Industry
Worldwide:
• 31 million ha (465 million mu) or 2.4 % of global arable land used for cotton production.
• 50 million farmers employed in over 100 countries
• Production of cotton in 2008 = 23.3 million metric tons.
World Lint Cotton Production Distribution in 2008
U.S.A ; 3.2
China; 7.8
India; 5.1
Pakistan; 2
Brazil; 1.4
Uzbekistan;
1.1
Others; 5.1
30%
20%
12%
20%
8%
5%
4%
Million Tons
1mu = 0.06 ha
China:• The biggest cotton producer and consumer
• Producing 7.8 million metric tons and consuming 9.9 million metric tons in 2008.
• About 14 million Chinese farmers directly involved in cotton production in regions as above.
Organic cotton is the way forward
Cotton Industry
Organic Cotton Farming
• Land Management
• No Pesticides
• No Herbicides
• No Genetically
Modified Seeds
Organic cotton farming uses the earth’s
natural resources for sustainability
• Natural Fertilisers
• Fair Treatment of
workers
• Water
management
Organic agriculture combines tradition, innovation and
science to benefit the shared environment and promote fair
relationships and a good quality of life for all involved.—International Federation of Organic Agriculture Movements[4]
Organic Cotton Benefits
• Elimination of toxic
chemicals
• Water savings
• Elimination of genetically
modified seeds
• Long term soil fertility
• Organic certification
requires fair working
conditions for all worker
along
Pohan Farmers’ Association (PFA)
• 1st registered farmers’ association in China in 2004
• Membership: approx. 3,800 farmers
(Average income: 2,400RMB/mu/yr)
• Established in 1998 by Ms. Zheng Bin(Nominated for the 1000
Global Women Nobel Peace Prize 2005,
Top 10 rural entrepreneurs in China in 2008)
• Current Status
- Well organized farmers’ association with a mission to uplift rural
livelihoods today and providing 28 full-time jobs
Ms. Zheng: Visionary Leader
Organic Farming &
Trading Association
Women’s Handicraft
cooperative
Rural retail chains
Green Family GroupFarmers’ school
Youth Organic
Farming Group
Application of
Farming technique,
Hands-on
experiences
Fertilizers
based on
Chinese
tradition
medicine
Growing
& Selling
of Cotton
Fertilizers
based on
Chinese
traditional
medicine
PFA Key Projects
Transfer of
Experience &
Track Record
Basic
education,
vocational
skills,
transfer of
farming
know-how
Vision and Inspiration: Harmonious Society
PFA’s Vision
Strategic Goals:
• Promote entrepreneurship
and organic farming
• Strengthen bargaining power
• Improve quality of life
• Enhance community welfare
• Promote sustainable
• development
Promoting Sustainable Development and better MARKET ACCESS
Implementation:
• Selling products
• Provide information
• Adult education
• Engaging youth
Business Opportunity
Organic Cotton Opportunity
International Certification
Organic Cotton Opportunity
Demand55%
Supply45%
Source: Organic Exchange
Global Organic Cotton Supply/Demand Mismatch
Strong & Increasing Global Demand
IRR of 30% within 10 years
30% Price Premium over conventional cotton
Growing Awareness of Green Movement
Great Social Impact & Improve Community Livelihoods
Global Organic Cotton
Production
26% 18%
14%42%
Global Production 2007
India Turkey China Others
Source: Organic Exchange, ‘Textile Information Weekly’
China ranked 3rd producer globally amongst 24 countries in 2008
with Xinjiang dominating China’s production market
Xinjiang95%
Others5%
Domestic Production2007
Organic Cotton in the World Growing Demand & Internationally-Driven
Growing demand from retail drives the global production
A 25 – 55% annual growth rate of organic cotton products in next 5 years
forecasted by Organic Trade Association.
Source : Organic Exchange & International Federation of Organic
Agriculture Movements
0
0.5
1
1.5
2
2.5
3
3.5
2005 2006 2007 2008
Global Retail Sales of
Organic Cotton Products
Sales Value
($billion)
23
Organic Cotton in the World Growing Demand & Internationally-Driven
Major Consumer Countries (2006) Metric Tons
1) United States 9,500
2) Switzerland 2,500
3) Germany 1,500
4) United Kingdom 750
5) France 650
6) Sweden 350
7) Japan 350
8) Italy 250
9) Netherlands 100
Organic Cotton in the World Growing Demand & Internationally-Driven
Brand Demand for Organic Cotton is on
the rise
2007 2008 2009
74,839MT
92,998MT
173,272MT
33% 25%
Source: Organic Exchange, Nike & Wal-Mart Company
Website
2008 Green Initiatives of two of
the global largest users:
Purchased more than
12.7 thousand tons of
organic cotton and an
additional 5.5 tons of
transitional cotton from
1000 farmers at certified
organic prices.
For every cotton-
containing apparel
product to contain
at least 5 percent
organic cotton by
2011.
• Growing global demand for organic
cotton (2008: US$3.2 billion vs. 2007:
US$1.9 billion)
• Increasing demand for organic cotton
from brand-name buyers
• Growing awareness of the green
movement
• Environmentally friendly: eliminating the
misuse of pesticide and fertilizer
• Improve community livelihoods with
sustainable farming system
• Sales may be susceptible to economic
cycle
• Currently in the start-up phase and
testing land-conversion
• High certification-associated fees and
lengthy implementation process
• Less credibility in the domestic
certification process -> gives rise to many
potential entrants in the organic market
25
Organic Cotton:
Opportunities & Challenges
Opportunities Challenges
Why International Organic Certification is
Required
26
1) Certified products command organic cotton premium
2) Most end-buyers require international certification
3) Certification from China is typically not recognized in the international market
4) Largest organic cotton end-consumers are US, EU & Japan
Main Market Standards: 1) US NOP, 2) EU 2091/2, 3) Japan JAS
• Certain brand-name retailers may have other sets of requirements
International Certification
• Standards need to be applied across the value-chain down to the farm & ginning factory
• Need to engage a accredited certification company for the application process
• Certifies both the land & specified product
• Annual inspection & renewal
Organic Certification Process
Timeframe: 6 months
Validity Period: 1
year
Inspection required
every year
85,000RMB /year
Engage
Certification company
Engage certification
company which are
accredited by the
standards bodies
Pre-Conversion
Certification company
execute first inspection:
1.Farming standard
2.Requirement
1.Application form
2.Documentation etc.
Certification company
inspect conversion
process
Required Conversion
Period
US: 3 years
EU: 2 years
JPN: 2 years
2 months to complete
certification process
Cost: 25,000 RMB /year 85,000RMB /year
2.5-3.5 years
Conversion
PeriodYearly
Renewal
Certification Process Requires
4 Years
Value Proposition
Value Proposition
JV Vision
Business Model
Rationale
Competitive Advantage
Value Proposition
• The value proposition is to set up a JV company leveraging OFTA’s strategic advantages and moving up the supply chain to process seed cotton into lint cotton.
• The JV company will focus on organic cotton with a dedicated ginning factory for organic lint cotton production.
• Through its trading arm, the JV will command premium prices for its branded organic lint cotton.
• The OFTA will have dedicated land resources certified to international organic standards to supply organic seed cotton to the JV
By trading directly with the JV, farmers will avoid being exploited by the middlemen and obtain fair prices for their products.
Farming Ginning
Proposed JV
Buyers• Spinning factory
• Retailer
• Domestic/foreign buyers etc.
Trading
Seed Lint Yarn/Fabric
JV Vision
1. China’s Leading Organic Lint Cotton Producer– Provide branded organic lint cotton, which will be certified to
international standards and sold at a competitive price to high end buyers
2. Future Growth – To achieve annual compounded sales growth of 30% over 10 years
3. Opportunities for the Community– To provide economic opportunities for the community through
employment of young farmers as well as nurturing local talent, management capabilities and leadership skills
4. Sustainable development– To promote sustainable development in Shanxi Province and the rest of
China through the elimination of chemical fertilizers, pesticides, herbicides and genetically modified cotton seeds as well as reduced water usage.
The Business Model
JV
Consists of
• Ginning Factory
• Sales and Marketing
OFTA Investors
Purchases
seed cotton
Sales of
Excess
Seed
Cotton
Jointly Owned
Other Ginning
Factories
• Spinning Factories
• Domestic Buyers for
international Market
Sales of Organic
Lint Cotton
Other Organic
Cotton Growers
Buyers
Sales of Cotton
Seed
Relationship Between OFTA and the JV
OFTA
• Facilitates organic conversion of land
• Provides technical support to farmers on organic farming
• Part ownership of JV
JV
• Ownership of ginning factory
• Buys organic seed cotton from
farmers through OFTA
• Converts seed cotton into lint
cotton
• Branding of organic lint cotton
(西 厢 棉)
• Markets and sells lint cotton to
high-end buyers
• Sells by-product cotton seeds
• Profits distributed to OFTA
Rationale
• The JV will brand the organic lint cotton to make it attractive to high end buyers such as buyers for brand retailers (e.g. Muji, Walmart, C&A, Nike, Hugo Boss etc.) and as such obtain a 30% higher premium
• The JV will also provide stable market access for the villagers, which will encourage them to make long term planning and be more responsive to market changes.
• The JV has strong support from the Commerce Administration Department of the Provincial Government who wish to stimulate development of rural enterprises.
• Working with an investor partner, OFTA will benefit from financial support and management know-how (which will be eventually transferred to the local community).
Model is consistent with worldwide organic fair trade best practice
Competitive Advantage of JV
• International Certification in Organic Cotton Production
– aimed to achieve in 4 years time to command a higher price
• Geographical advantages
– Suitable weather in growing organic cotton
– Possesses land reserve which can expand to larger scale production to meet
demand from larger buyers
– Possesses transportation, utilities and production infrastructures (one of the 5
conventional cotton production bases in China.)
• Integrated process controlled by PFA
– includes a ginning factory to provide more value-added products and eliminate
middlemen
• Early Mover
– strategically positioned for early market entry with strong presence and brand
recognition among handful of established producers
34
Local but Global
Organic Cotton – Goods of the Future
35
Marketing Plan
Objectives/Strategies
Branding
Logo
Product Channels
Pricing Strategy
Marketing Objective
37
Become the Most
Respected, Ethically
& Socially
Responsible Organic
Cotton Producer in
China
Branding Objectives
• Delivers a clear message
• Confirms credibility
• Connects with target customers
• Motivates the buyer
• Concretes User Loyalty
Objectives of branding the
trading the entity
•Name of the JV Company Shanxi Pohan Organic Cotton
Trading Enterprise (SPOCTE) signifying the province, name
of the farmers association, product and business.
Branding Signifies
A Social Enterprise for the Pohan Farmers Association
39
Branding Strategy and Positioning
Economy Penetration
Skimming Premium
• Creating a distinctive Brand Image
• Differentiate product
• Top Organic cotton product in China
• Green and environment friendly Product (Organic cotton)
• Top Organic cotton product in China
Brand Positioning
• Key Themes – going green, Organic and local significanceLogo
• XiXiang Mian(西厢棉)Brand name
• Xixiang Ji (西厢记)is one of the most well known classic love stories in China, which
happened in Yongji City (Location of SPOCTE)
• The brand identity indicates green farming, healthy and environmental friendly product and
local significance
Brand identity
Brand Positioning:
- Premium Organic Cotton
Branding Strategy
西 厢 棉
Chinese No.1 organic cotton
西厢棉
Chinese No.1 organic cotton
西 厢 棉Chinese No.1 organic cotton
西 厢 棉
Chinese No.1 organic cotton
Recommended Brand logos for SPOCTE
Marketing Campaign Plan will align with
Production Ramp-Up
Year 1
Year 2
Year 3
Year 4
Year 5 Onwards
• Creating a static content website for SPOCTE
• Advertising in the textile magazine with two insertions per year.
• Listing SPOCTE on B2B website’s (e.g. Alibaba)
• Register SPOCTE with the nearest cotton exchange
• Advertising in the textile magazine with two insertions per year.
• Advertising in the textile magazine with two insertions per year.
• Advertising in the textile magazine with two insertions per year.
• Upgrade website to an interactive with e-marketing website
• Participate in trade fairs
• Advertising in the textile magazine with four insertions per year
• Advertising in Textile Newspaper
• Participate in trade fairs
Scenario 1: Utilizing the 80,000 mu available in Pohan
Scenario 2: Utilizing 300,000 mu available in Yellow River Region
Available Land for Cotton Production
-
5,000
10,000
15,000
20,000
25,000
30,000
Year
0
Year
1
Year
2
Year
3
Year
4
Year
5
Year
6
Year
7
Year
8
Year
9
Year
10
mu
Scenario 1
Scenario 2
TOTAL mu
Marketing Campaign Plan will align with
Production Ramp-Up
1mu = 0.06 ha
Breakup of Marketing Spends
Assumption: inflation rate is 7% YOY
Marketing spends and intensity ramps up with increase in production.
Marketing Strategy
Advertising in textile magazine: Niche targeted magazine to ensure higher
reach in the most cost effective way.
Advertising in Textile Newspaper: Niche and cost effective.
•Creating the static content website in year 1; Upgrade to an interactive e-
marketing website in year four
•List SPOCTE on B2B website's (e.g. Alibaba) to get access to the online
fraternity
•Register SPOCTE with the nearest cotton exchange.
•SPOCTE takes part in trade fair’s since that will provide direct access to
interested buyers.
Media Plan
Online
plan
On ground
plan
Strategy: keep the spends low in early years to manage operating costs and
ramp up marketing investments from year four onwards.
Shanxi Pohan Organic Cotton Trading Enterprise
Products and channelsProduct Range: - Cotton Seed, Raw cotton and Lint cotton
Farming
(raw cotton)
Ginning
(Lint cotton)
Local farmers/factories
(ginning / spinning etc )
Direct Sales to
Domestic buyers
Advertising on Online
BtoB market place
(e.g. alibaba)
Web-site
(links to sales team from
Trading company)
Raw
Cotton
Cotton
Seeds
Lint
Cotton
Sales channels
provide“Cotton seeds" and
“Lint cotton”
provide “Raw cotton”
Sales process
Trading
Section
(marketing
/sales)
provide “Raw cotton”
Pricing Strategy
Economy Penetration
Skimming Premium
Quality Low High
L
o
w
h
i
g
h
P
r
i
c
e
Rationale
- Demand exceeds Supply
- Xinjiang is the only dominant producer in domestic market
- Pro-organic cotton and domestic sourcing policy of Chinese government
Objective
Short to medium term
(3 – 5 years)
- To launch the product successfully
- To gain and expand market shares in
target markets
Long term (5+ years)
- Premium product image
- Top Organic cotton producer in China
Notes: 1- Year 1&2
2- Year 3&4
3- Year 5 & onward
4- Prevailing Organic Cotton Market Price
Price = avg. market price4 X 80% (20%
discount)
Price = avg. market price4 X 90% (10%
discount)
Price = Xinjiang product price X 95%
• Conversion Stage I1
Market Entry Pricing
• Conversion Stage II2
Marketing Penetration
Pricing
• Certified Organic3
Steady Stage Pricing
Pricing Strategy (cont’d)
Management &
GovernanceObjective
Structure
Governance
Training and Development
OBJECTIVE
– Structure – clear
organizational chain of command
– Leadership – commitment
towards accountability, efficient
operations & profitability
– Transparency – open and
regular communication with
various stakeholders on key
compliance and financial
indicators
•Assist SPOCTE’s sustainable organic cotton production through:
http://www.wilsenachvanwyk.co.za/images/Management%20Team.jpg
Corporate Structure of SPOCTE
• Creating most favourable partnership between PFA and Investor to ensure SPOCTE as most reliable ethically & socially responsible organic cotton producer in China while sustaining profitable growth.
Recommended structure
– Limits liability of each party to the cooperative agreement
– Established through cooperative agreement between PFA and Investor
– Governed under CJV Agreement terms as negotiated between PFA & Investor rather than governing PRC laws.
– * Profit negotiable; parties can receive different distribution ratios in different years as agreed by PFA and Investor under CJV Agreement
– Investor may receive profit prior to CJV corporate income tax & prior to CJV distribution of profits
– Management Organization Structure can be self determined under CJV Agreement terms rather than governing PRC laws.
N.B. See appendix for Cost & Procedure diagram of incorporating CJV
* Investor receives higher % profit for stated period of time for purposes such as recovering invested capital.
Contractual Joint Venture (CJV) as Limited Liability Company
Organization Structure of SPOCTE
Board of Directors
General Manager
(1)
Company Audit
(1)
Sales & Marketing
(2)
HR, PR & Community
(2)
Financial
Controller and
Deputy Controller
(2)
Production &
Supply Chain
(2)
Factory Workers
(Part-time)
(15)
Technician
(1)
Quality Assurance
(1)
( ) denotes headcount
Leadership Roles & Responsibilities
General
Manager
Sales &
Marketing
Production
& Supply
Chain
Financial
HR, PR &
Community
Company
Audit
Oversees all of the company's sales & marketing as well as the daily operation
of the company, and reports to the Board of Director.
Promoting the product to the market to develop business opportunities for the
company and ensure the implementation of the annual sales target.
To source the raw material for the factory and be responsible for all the
production processes in the factory.
Responsible for the accounting issues, prepare monthly financial report and
prepare budgeting proposal to the General Manager as well as the Board.
Responsible for the management, training and development of the organization,
and liaising with relevant parties, such as government & certification companies.
Responsible for management, training & development of CJV, liaise with relevant
parties such as governmental department, certified agents.
Ensure governance of CJV in meeting Financial, CSR and Organic
Production commitments, reporting directly to Board of Directors.
Members in Board of Directors
• It is advised that the Board of Directors contain executive & non-
executive members as follows:
Independent
Director
(Accounting
background)
Independent
Director
(Agricultural
background)
Related NGO
Representative
(e.g. FuPing)
Local
Government
Representative
NON-EXECUTIVEEXECUTIVE
PFA
Representative
Investor
Representative
General
Manager
Governance Challenge
Several predictable challenges:
• To recruit competent audit talent, who possess the knowledge and skills for
finance, CSR and Organic cotton farming and ginning in local;
• Governance should be strengthened because some the farmers with small
plots can potentially damage the credibility of the organic cotton due to
some of their practices;
• To raise the awareness on health, safety, and labor issues in the Ginning
factory and seek compliance with the overall mission to be ethically and
socially responsible;
• Meet the international and domestic standard on Health, Safety &
Environment
• Meet the international and domestic standard on labor
54
Governance - CSR check list
Labor
• What is the local minimum hiring age?
• What system is in the factory to prevent child labor hiring?
• What is the local minimum wage?
• What is the lowest basic salary in the factory?
• How does the factory pay Saturday and Sunday work?
Environmental, Health & Safety
• Is the noise level monitored in the workshop?
• Is the management aware of noise hazard?
• Is the management aware of hazards of dust?
• Are the workers provided with necessary personal protective
equipments(个人保护用品)n the factory
• Are there regular safety and health trainings for the factory workers
Training & Development
Aim• To refresh and upgrade employees’ and farmers’ knowledge and skills, so as to
achieve SPOCTE’s production and sales goals
Focus Areas• Organic agricultural standards and methods
• Health and safety standards and methods
• Business-related concepts and skills e.g. marketing, law
• Leadership and team building
• IT and technical skills
Modes• Classroom workshops (leveraging on farmer school)
• On-site field training
Resources• SPOCTE HR staff
• Farmer school teachers
• OFTA leaders & experts e.g. technical support team, YOTG members
• External experts e.g. agriculture university academics, certification company experts
Training & Development
– Improve farming techniquesInvite external agriculture experts to
improve current farming school’s quality of
training.
– Expand knowledge
Invest resources into current farming
school and educate teachers to expand
and modernize training
Training & Development
Company vision
• Company culture
• Safety awareness
• Employee attitude and behavior
• Company policy
• Organic agriculture and environment
Technical
• Organic cotton planting
• Organic cotton quality control
• Environment (soil, water) for organic
Cotton
• Ginning techniques
• Quality control on ginning
Skill
• How to learn by computer
• How to do business-sell products
• Basic international trading knowledge
• Negotiation skill
Knowledge
• Reading
• Basic English for young leaders
• Communication
• Team building
• Time management
• Effective Supply Chain management
• To be a modern farmer
Financial Analysis
Investment Requirements
Key Assumptions
Financial Projections
Summary
Investment Requirements
• Benefits of SPOCTE funding:
– Higher price premium with more value-added products
– Increased income by dealing directly with buyers
– Both OFTA and SPOCTE will benefit by fair returns
• An upfront ¥2.32 million capital injection to cover the investment
costs, which will be incurred in first 12 months comprising:
– ¥ 2.2 million initial investment for the ginning factory, including:
machinery and installation, land, workshop, office, and initial working
capital
– ¥0.12 million investment for the sales and marketing department to set
up the company’s website
60
Key Financial Assumptions
• The financial model is based on equity
funding for ginning factory with
capacity of 6 tons/day of lint cotton for
10 years.
• The conversion ratio of raw cotton (raw
material) to lint cotton is 3:1.
• 2 sources of revenues are available:
lint cotton and cotton seeds.
• Straight line method is applied for
depreciation.
• 4-year conversion period for organic
certification will be observed.
• The organic cotton enjoys a premium
of 30% after conversion period.
• Relevant expenses contain
certification, maintenance, marketing,
salaries, operation and set up cost.
61
Ginning Factory Assumption
Yield –steady 200kg/mu
Planted area-steady 15867mu
Raw cotton ¥5/kg
Variable operating cost ¥0.3/kg
lint cotton
Fixed operating cost ¥100,000/year
Maintenance cost ¥30,000/year
Pre-operating cost ¥200,000
Training cost ¥30,000/year
Cotton seed ¥2/kg
Organic lint cotton ¥19.5/kg
Certification fee ¥85,000/year
Key Financial Assumptions
62
• The organic conversion process will be carried out in 2 phases:
Phase 1 – Utilizing the 80,000Mu available in the Pohan area
Phase 2 – Utilizing the 300,000Mu available in the Extended Yellow River Region
Land converted to Organic Cotton Production (Mu)
-
5,000
10,000
15,000
20,000
25,000
30,000
Year
0
Year
1
Year
2
Year
3
Year
4
Year
5
Year
6
Year
7
Year
8
Year
9
Year
10
mu Phase 1
Phase 2
TOTAL mu
1mu = 0.06 ha
63
Financial Projections (Net Income)
Steady net income of ¥3.2 million from year 5 onwards (after the
organic conversion period)
1 2 3 4 5 6 7 8 9 10
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
¥ million
1 2 3 4 5 6 7 8 9 10
Year
Net Income Projections
- Phase 1: Current Pohan area
64
Financial Projections (Net Income)
Strong growth potential from the Extended Yellow River Region
1 2 3 4 5 6 7 8 9 10
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
¥ million
1 2 3 4 5 6 7 8 9 10
Year
Net Income Projections- Phase 1 + Phase 2 (Extended Yellow River Region)
Phase 1
Phase 1 + Phase 2
65
Financial Projections (Cash Flows)
Strong positive cash flow of ¥3.4 million from year 5 onwards
Short payback period of 5 years
0 1 2 3 4 5 6 7 8 9 10
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
¥ million
0 1 2 3 4 5 6 7 8 9 10
Year
Free Cash Flow Projections
- Phase 1: Current Pohan area
66
Financial Projections (Cash Flows)
Excellent growth potential from the Extended Yellow River Region
0 1 2 3 4 5 6 7 8 9 10
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
¥ million
0 1 2 3 4 5 6 7 8 9 10
Year
Free Cash Flow Projections
- Phase 1 + Phase 2 (Extended Yellow River Region)
Phase 1
Phase 1 + Phase 2
Summary of Key Financials
• Total investment cost of ¥2.32 million
• Short payback period of 5 years
• Project IRR (10 years) of 30%
• Strong and consistent cash flows of ¥3.4 million from
year 5 onwards (after the organic conversion period)
• Excellent growth potential in the Extended Yellow River
Region
67
Economic, Social and Environmental
Benefits
Impacts
Benefits
Empowerment
Sustainability of Community Benefits
Economic
Social
Environment
Increased Income
leads to better
livelihood through
social
development
Knowledge leads to
higher awareness of
action impacting the
environment
Sustainable environment is
fundamental for future economic
growth
Provide continuous
education through Farmers’
School
Invest in Organic FarmingEstablish JV
Economic benefits to community
• Setting up JV
– Create jobs within the community
– Provide a platform for farmers to increase their bargaining power
for organic cotton trading
– Buffer income shocks from crop variability and volatile
commodity prices
– Provide opportunity to take ownership in the company
– Encourage agricultural entrepreneurship
By converting to organic cotton farming, the farmers will benefit from
organic price premium and increase their income level up to 40%.
Economic benefits to community
40% of PFA’s share of overall JV’s profits will be
directly distributed to farmers in form of bonuses.
Environmental impacts
• High usage of chemical fertilizers and pesticides leaking into surrounding ecosystems
• Accounts for 22.5 - 25% of insecticide and 8-10% of pesticide usage worldwide
Every year 20,000 deaths result from pesticide usage worldwide, many of which are due to cotton farming.
Source: World Health Organization (WHO)
Conventional cotton farming has
following impacts:
Environmental impacts
Conventional cotton farming has following impacts:
• Every year 2.6 % of the world’s water is used in cotton production
(20,000 liters of water is used for the production of a T- shirt and a
pair of jeans)
• 73% of global cotton harvest comes from irrigated land
• As cotton farming requires abundant water reserves, low humidity
and long daylight, the existing farm sites often face constraints in
expansion due to lack of water reserves.
Water management is key component of
successful organic cotton farming
Environmental benefits
Two key benefits of converting to organic cotton are:
1. Soil Fertility– With organic cotton farming, use of chemical fertilizers,
pesticides and genetically modified cotton seeds will be eliminated.
– Traditional methods will be used as a substitute (Chinese medicine and use of manure).
2. Water conservation– In the long term, we will introduce Drip Irrigation Systems which
will save about 50% of the water currently being used.
Social impact and benefits
Currently there are limited opportunities in rural China
572,000 people left Shanxi province between 2000- 2005 in search of a better life and higher income
In Out Net
Shanxi 255,000 827,000 -572,000 -1.5%
Rural Urban Migration for Shanxi Province between 2000 - 2005
Source: White Paper: Internal Labor Migration in China (University of Washington, Seattle)
Our plan will create more than 30 job opportunities within the JV and
related business and retain young talents in the community.
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Education
Social impact and benefits
Healthcare Social Wellbeing
Harmonious Society
30% of the Profits of the JV will be allocated for Community Development
Empowerment through education
• Additional Funding will directly benefit the expansion of the Farmers School
and the Community:
�
i) Farmers
• Empower farmers through continuous technical education (organic farming methods including
soil fertility management, technical training on ginning practices)
ii) Women
• Empower women through continuous adult education and increase of self-esteem
• Additional income for women through more job opportunities
iii) Youth
• Empower rural youth with no tertiary education through education especially in IT and
management skills.
• In the long term the School could be expanded to provide specialized
education in organic farming beyond the Shanxi Province .
Education is key to sustainable development
78
– By lessening the exposure to chemical fertilizer and pesticides, we
can improve the health conditions of farmers.
– While the government and PFA provide subsidies, with increased
funding to the Community Development Fund, there is scope to
provide healthcare over and above primary healthcare.
Healthcare benefits
Risk Assessment
Risk Priority Mapping
Mitigation Measures
Risk Priority Mapping
80
Likelihood
Impact
High
Low
HighLow
• Not enough fertile land
• Not enough labor
• Setting up of heavy industry nearby
• Speculative dive in organic cotton prices
• Lower government support
• Currency risks
• Dissatisfaction from farmers due to
unrealized benefits
• Not enough organic-related skills
• Pollution of water, air, soil
• Increased foreign competition (including
lower tariffs)
• Drop in available financing
• Not enough raw materials e.g. non-GM
seeds, organic fertilizers
• Bad weather e.g. floods
• Export restrictions
• Customers unconvinced of organic benefits
• Counter-party risks e.g. buyer non-payment
• Increased local competition
81
Risk dimension Mitigation Measures
• Regular training, monitoring and inspection• Not enough organic-related skills
• Frequent analysis of water, air, soil
• Secure strong investor with long-term, social view
• Increased foreign competition
(including lower tariffs)
• Build local industry network, ensure consistent
high quality and even production, lock-in buyers
• Pollution of water, air, soil
Mitigation Measures
High Impact, High Likelihood
• Drop in available financing
82
Risk dimension Mitigation Measures
• SPOCTE to source for alternative suppliers,
conduct careful testing before usage
• Seek government support (materials sourced
locally will be assured full supply by provincial
government & incorporated into province plans)
(Provisions for the Encouragement of Foreign Investment in Shanxi)
• Not enough suitable raw materials e.g.
non-GM seeds, organic fertilizers
• Monitor climate and geographical developments
• Use trading facilities e.g. Letter of Credit
• Customers unconvinced of
organic benefits• Build brand in China, build local industry network
and support industry promotion efforts
• Build local industry network, join lobby group if
necessary
• Bad weather e.g. floods
Mitigation Measures
High Impact, Medium Likelihood
• Counter-party risks e.g. buyer
non-payment
• Export restrictions
Implementation
Timeframe
84
Implementation Timeframe
Initiative Yr 0
Mth 1-3
Yr 0
Mth 4-6
Yr 0
Mth 7-9
Yr 0
Mth 10-12
Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6
onward
Marketing
channels
Set up online
presence (join
B2B portal, own
basic website)
Advertise on
China Textile
Accessories
Magazine
Start joining
trade fairs
Build
interactive
website
Certification Phase 1 land: apply for cert Phase 1 land: conversion period
Phase 1
land:
obtain cert
Phase 2
land: apply
for cert
SPOCTE
Operations
Set up T.E.
office, hire GM,
HR & Finance
heads
Hire other key positions
Ginning
FactoryDesign factory
Construct factory &
purchase machines
Start
ginning
Obtain
organic cert
TrainingDevelop training plan & road
map
1st round of team
training
Finance
Approach
potential
investors
Negotiate &
conclude JV
1st capital
injection:
RMB1.2m
2nd capital
injection:
RMB1.12m
APPENDICES
85
Appendix A. List of Organic Cotton
Suppliers
87
88
89
90
91
Appendix B. Preliminary Costs for
incorporating JV
Set Up of Cooperative Joint Venture
Joint Venture Cooperation (JV) in China
PFA / Domestic-investor Foreign-investor (FI)
Obtain Letter of Opinions
Apply Project Application Confirmation Report
Perform JV Name Check
Obtain the Contracts & Articles of Association
1. Acquire Permission reports from county
level or industry authorized dept.
2. Apply foreign-funded enterprise license
3. Obtain feasibility research report
4. Establish foreign enterprise constitution
5. Report the legal person or director candidates
6. Obtain FI legal dox and QC dox
7. Get approvals from local gov’t and related depts.
Handle registration procedures and receive business license
Open Bank AccountApply Customs
RegistrationApply Taxation
RegistrationApply Foreign
Exchange Registration
Preliminary Costs for incorporating JV
Procedures Fee(RMB)
Company name approval 80
Company approval 20
Trademark Registration 1000
*Company registration fee (base on USD$200,000 capital) 1333
Business IC card 280
Company Seal 500
Organization Code license 228
RMB currency a/c IC card 250
Foreign currency a/c IC card 250
Tax registration 100
Custom registration 175
Check capital (base on USD$200,000 capital) 3000
Statistical license 20
Finance license 20
Total: Approx. RMB 6,600
* < RMB 10 million, 1‰ of registered capital
> RMB 10 million, portion over 10mil charged at 0.5‰. Portion > RMB 100 million not charged.
N.B. Figures may fluctuate slightly in accordance with local & central government laws
Appendix C. List of Participants
List of Participants
• Mr. Robert Zhou (Nike Inc.)
• Mr. Hideki Oka (Infotree)
• Ms. Melinda Mears (Meinhardt)
• Mr. Liu Chi On (Meinhardt)
• Mr. Phillip Xiao (Lever Style)
• Ms. Feng Li (Lever Style)
• Ms. Sherin Goh (IMC)
• Mr. Sin-Hong Leong (IMC)
• Mr. Takashi Kumon (JETRO)
• Mr. Rohit Suri (Turner)
• Mr. Zero Sham (Awake Limited)
• Ms. Reimi Imaizumi (CLSA)
• Ms. Marike Jensen (HKUST)
• Ms. Sandy Hsu (HKUST)
• Ms. Janelle Zai (Chinese University of Hong Kong)
• Ms. Jie Zheng (Tsinghua University)
• Ms. Sherry Ma (Tsinghua University)
• Mr. Jeffrey Song (Tsinghua University)
• Ms. Hui -Yi Lin (Tsinghua
University)
Thank you
If you are interested in this investment opportunity, please contact Chandran Nair at GIFT at (852) 3571 8103 or [email protected].