VIETNAM TEA INDUSTRY: AN ANALYSIS FROM VALUE CHAIN APPROACH

International Journal of Managing Value and Supply Chains (IJMVSC) Vol. 6, No. 3, September 2015 DOI: 10.5121/ijmvsc.2015.6301 1 V IETNAM T EA I NDUSTRY : A N A NALYSIS F ROM V ALUE C HAIN A PPROACH Nguyen Viet Khoi 1 - Chu Huong Lan 2 - To Linh Huong 3 1 Dept. of Int’l Economics and Business, VNU University of Economics and Business 2 IAE NICE Graduate School of Management-Université Nice Sophia Antipolis 3 Dept. of Int’l Economics and Business, VNU University of Economics and Business ABSTRACT Over the past two decades, there has been an increasing trend in analyzing international trade from the perspective of “value chains”, particularly in agro industry. For many countries, particularly developing countries including Vietnam, agriculture is the backbone of economic development and the main source of income. Together with rice production, Vietnam is also known as one of the most ancient home of tea. Tea industry in Vietnam has a history of up to three thousand years and tea plays a vital role in income improvement and poverty alleviation in rural areas, especially in the Northern Uplands and North East South. In addition, tea is a high-value product that Viet Nam is already exporting to many other countries and territories worldwide. Having all these importance, there are still challenges facing the Vietnam tea industry including high fragmentation, small-scale operation and weak linkage among participants in the tea manufacturing process. This paper, hence, seeks to investigate the roles and benefits of participants in this single crop through value chain analysis to help them upgrade their position in the tea chain. KEYWORDS : Upgrading Value Chain, Tea Value Chain, Vietnam Tea Industry, Vietnam Value Chain. JEL: M10, M11 1. I NTRODUCTION The cultivation of tea in Vietnam has a long history up to three thousand years and teaplant has brought many economics benefits to the country, especiallyto farmers and locals in rural areas. Enjoying tea is considered a meaningful traditional custom of Vietnamese people since its appearance. Tea sector in Vietnam is export oriented with about 80 percent of its annual total output supplying foreign markets. Up to now, tea products have made their presence in more than 100 countries and territories worldwide with annual export value of 200 millionU.S. dollars. Despite such big achievements, Vietnamese tea sector are still confronting even bigger challenges. Among these issues, unequal distribution of power and allocation of costs and margins in tea value chain are big matters of concern. There is a need to foster the integration and participation of the poor in the tea chain in order to better distribute the gains from improvements. This report looks for investigating this issue through a detailed study of the tea value chain in Viet Nam, in the hope of obtaining a clear picture in the structure of the value chain, the positions of the different actors, the overheads and benefits shared to each with the focus on producers. The information collected will be used to identify and address some recommendations for improving the position of the most disadvantaged. International Journal of Managing Value and Supply Chains (IJMVSC) Vol. 6, No. 3, September 2015 2 2. M ETHODOLOGY A comprehensive survey was undertaken in Moc Chau, Son La with 65 selected samples. Questionnaires are designed to interview worker farmers here. The report applies both qualitative and quantitative approach to touch value chain analysis. The principal methodology is to develop a comprehensive map of value chain to understand the characteristics of the chain actors and the relationships among them, of the flow of tea through the chain. This information is obtained by conducting surveys and interviews as well as by collecting secondary data from various sources. After the value chain has been mapped, the next step is to identify the distribution of costs and margins of each. This step use quantitative tool to explore how overheads and margins are distributed over the chain actors. (Van den Berg, Michael, 2004) .In this study, multiple linear regressions are used to analyze factors affecting tea productivity of farmer. Data is collected from survey and analyzed by using SPSS 20. 3. L ITERATURE R EVIEW A number of studies about Vietnam tea industry have been carried out(Khải, N. H., 2005) in “Vietnam tea plants: Competitiveness in export and development”, introduced the origins and development process of tea industry in Vietnam; and gave an overview about the world tea market to draw lessons and experiences for Vietnam. The study also addressedrecommendations to enhance the competitiveness of tea products for export markets (Hao, 2011)explored factors affecting tea yield of farmers and mentioned the solutions to enhance economic efficiency of tea production in period of economic integration for the households (Nguyễn, 2010) focused on analyzing the status, achievements and challenges of tea industry in Thai Nguyen and ability to develop tea production for export in this province. The research also suggestedsolutions for socioeconomic development of tea yield.(Nguyễn Thị, 2007) systematized development trends of world tea market and marketing strategies for tea export from some tea exporting countries and lessons for Vietnam. Nguyen Trung Dong (2011)mentioned the risk of losing markets of Vietnam tea products and suggested long-term and feasible strategies to set foot in world market of Vietnam tea products. Tran Cong Thang (2004), with the project: The Value Chain for Tea in Viet Nam: Prospects for Participation of the Poor, deeply investigated the tea value chain in Vietnam and potential opportunities for participation of the poor in such value chain. The report, however, carried out in 2004 and based on the traditional value chain structure. Up to now, there has been a change in the structure of tea value chain and the integration among actors in the tea chain. This implies a need for further research on updated tea value chains. In the light of these facts, we can say that there is a school of studies on tea industry in Vietnam. Nevertheless value chain approach remains limited. This study uses value chain approach aiming at examining thedistribution of roles and benefits of participants in the chain. 4. O VERVIEW OF THE T EA S ECTOR IN V IETNAM Vietnam is known as one of the most ancient cradle of tea with tea plant dates back 3,000 years. The first tea plantation in Vietnam was established in 1890 in Phu Tho by The French (Zeiss, M., & den Braber, K., 2001). Since the inception of Renovation (Doi Moi) and the government’s focus on tea as a strategic commodity for economic development, tea production has grown significantly. International Journal of Managing Value and Supply Chains (IJMVSC) Vol. 6, No. 3, September 2015 4.1 Production Vietnam is given a favor to grow tea spreading in the whole country. cities nationwide spend 125,000 ha of their cultivation area for growing tea, an increase of 63.8 percent with that in 1999. Figure 1: Production and Tea Area in Tea production in Viet Nam grew s tea production increased an average of 8.5 percent yearly, while area and yield grew 2.5 and 3.1 percent respectively. The year 2012, meanwhile, saw an exponential growth in planted tea area.Tea yield, nevertheless, is still at low le question. In particular, yields are typically above th more conducive to tea production. capacity of 4 tons p er ha while the figure reaches 11 to 12 tons in Northern provinces. Figure 2: Tea Yield in 4.2 Export Situation Export Volumes Viet Nam tea products have made their presence in more than 100 countries and territories worldwide; wit h average annual export value export oriented with nearly 80 percent of production destined for foreign markets. The country’s main export is lowquality black tea processed using orthodox technology. Most wholesale, without labels, branding or packaging. 0 50 100 150 200 250 0 5 10 15 20 International Journal of Managing Value and Supply Chains (IJMVSC) Vol. 6, No. 3, September 2015 Vietnam is given a favor to grow tea spreading in the whole country. At present, 34 provinces and 125,000 ha of their cultivation area for growing tea, an increase of 63.8 Figure 1: Production and Tea Area in Vietnam (2005-2012) Tea production in Viet Nam grew s trikingly over the past decades. During the period tea production increased an average of 8.5 percent yearly, while area and yield grew 2.5 and 3.1 percent respectively. The year 2012, meanwhile, saw an exponential growth in planted tea is still at low le vel, only reaches 3.1% in average during question. In particular, yields are typically above th e average level in the Northern more conducive to tea production. Normally , traditional tea varieties in the midland only have er ha while the figure reaches 11 to 12 tons in Northern provinces. Figure 2: Tea Yield in Vietnam (2005-2012) tea products have made their presence in more than 100 countries and territories h average annual export value up to USD 200mil . The tea sector in Viet Nam is export oriented with nearly 80 percent of production destined for foreign markets. The country’s quality black tea processed using orthodox technology. Most of this tea is sold wholesale, without labels, branding or packaging. 0 20 40 60 80 100 120 140 160 180 Planted Area of Tea( 1000 ha) Average tea yield (100kg/ha) International Journal of Managing Value and Supply Chains (IJMVSC) Vol. 6, No. 3, September 2015 3 At present, 34 provinces and 125,000 ha of their cultivation area for growing tea, an increase of 63.8 the period 2005-2011, tea production increased an average of 8.5 percent yearly, while area and yield grew 2.5 and 3.1 percent respectively. The year 2012, meanwhile, saw an exponential growth in planted tea during the time in e average level in the Northern , which are , traditional tea varieties in the midland only have er ha while the figure reaches 11 to 12 tons in Northern provinces. tea products have made their presence in more than 100 countries and territories . The tea sector in Viet Nam is export oriented with nearly 80 percent of production destined for foreign markets. The country’s of this tea is sold Planted Area of Tea( 1000 Average tea yield (100kg/ha) International Journal of Managing Value and Supply Chains (IJMVSC) Vol. 6, No. 3, September 2015 Figure 3: Tea Export versus Tea Production, selected years Tea export volume of Vietnam in 1996 14.1 percent per year. 2010’s figure increased more than 6 times compared to that of 1996, from 20.8 thousand tons in 1996 to 138 thousand tons in 2010. Export price The export price of Vietnam is dependent on fluctuations of price in 20012005 period is 1, 061 2000 which was 1,351 U.S. dollars clime in the figure, reaching 1,288 years, exports v alue remains comparatively lower than other nations, at 1,200 U.S. dollars per ton in comparison with 3,700 U.S. dollars for Kenya and over 4,000 U.S. dollars for Sri Lanka and only accounts for 60 percent of the global average Figure 4: Vietnam Tea Export Price and World Price, selected years It should be noted that meanwhile all in meet target expectations or are on the right track to decreased over time. Tea export price in was at 1,48 U.S. dollars per kg. So far, from 1998 onward, while world average price increased by 18%, Vietnam‘s price o f tea exports has been on a declining trend by 20% and the gap between Vietnam‘s export price and world pri 0 50 100 150 200 250 0.0 0.5 1.0 1.5 2.0 2.5 3.0 USD/kg International Journal of Managing Value and Supply Chains (IJMVSC) Vol. 6, No. 3, September 2015 Figure 3: Tea Export versus Tea Production, selected years Tea export volume of Vietnam in 1996 - 2010 period reached high level of growth rate, about figure increased more than 6 times compared to that of 1996, from 20.8 thousand tons in 1996 to 138 thousand tons in 2010. is dependent on fluctuations of world prices. The average export 061 U.S. dollars per ton, lower than the average price in 1996 U.S. dollars per ton. The next five years , nevertheless, brought a sustained 1,288 U.S. dollars per ton. Although tea export increa sed o alue remains comparatively lower than other nations, at 1,200 U.S. dollars per ton in comparison with 3,700 U.S. dollars for Kenya and over 4,000 U.S. dollars for Sri Lanka and only accounts for 60 percent of the global average price (about $2,400 per ton) Figure 4: Vietnam Tea Export Price and World Price, selected years It should be noted that meanwhile all in dicators such as export volume and planted area of tea expectations or are on the right track to exceed target , export value continuously decreased over time. Tea export price in 2011 was 1,26 U.S. dollars per k g while 2006’s figure per kg. So far, from 1998 onward, while world average price increased f tea exports has been on a declining trend by 20% and the gap and world pri ce is on the increasing trend. Tea Export ( thousand tonnes) Total Output( Thousand tonnes) World Price Vienam Export Price International Journal of Managing Value and Supply Chains (IJMVSC) Vol. 6, No. 3, September 2015 4 2010 period reached high level of growth rate, about figure increased more than 6 times compared to that of 1996, from The average export per ton, lower than the average price in 1996 - , nevertheless, brought a sustained sed o ver the alue remains comparatively lower than other nations, at 1,200 U.S. dollars per ton in comparison with 3,700 U.S. dollars for Kenya and over 4,000 U.S. dollars for Sri Lanka and planted area of tea , export value continuously g while 2006’s figure per kg. So far, from 1998 onward, while world average price increased f tea exports has been on a declining trend by 20% and the gap Tea Export ( thousand Total Output( Thousand Vienam Export Price International Journal of Managing Value and Supply Chains (IJMVSC) Vol. 6, No. 3, September 2015 5. T EA V ALUE CHAIN IN V IETNAM Simply, value chain of the tea products stakeholders, including tea leaf producers wholesaler, retailers, and exporters. Figure 5: Simple Tea value chain in Vietnam However, the value chain for tea, in fact, is a complex one. While it involves just three main activities – the production of tea leaves, a large number of actors are involved in each process. While components discussed in greater detail throughout this section, the figures below provides an overview of the types of interactions and linkages present in the value Viet Nam. It maps the entire value subcategories of actors and their interactions. International Journal of Managing Value and Supply Chains (IJMVSC) Vol. 6, No. 3, September 2015 IETNAM of the tea products involves the participation and interaction of different stakeholders, including tea leaf producers (farmers), dry tea processors, dry wholesaler, retailers, and exporters. Figure 5: Simple Tea value chain in Vietnam However, the value chain for tea, in fact, is a complex one. While it involves just three the production of tea leaves, dry tea processing, and the sale of a large number of actors are involved in each process. While components of each will be discussed in greater detail throughout this section, the figures below provides an overview of the types of interactions and linkages present in the value - chain for tea in Viet Nam. It maps the entire value -chain for tea and highlights the role of the subcategories of actors and their interactions. Figure 6: Tea value chain in Vietnam International Journal of Managing Value and Supply Chains (IJMVSC) Vol. 6, No. 3, September 2015 5 involves the participation and interaction of different tea traders, However, the value chain for tea, in fact, is a complex one. While it involves just three tea processing, and the sale of dry tea – of each will be discussed in greater detail throughout this section, the figures below provides an chain for tea in role of the International Journal of Managing Value and Supply Chains (IJMVSC) Vol. 6, No. 3, September 2015 6 Each stakeholder can be categorized into different groups. Producers, for example, four types are identified: unlinked farmers, contract farmers, worker farmers, and cooperative farmers. Similarly, processors can be differentiated as household processors, private processors, jointventure companies, and State-owned companies. 5.1 Producers (Farmers) According the most recent Agricultural Census (GSO 2003) report, Viet Nam has nearly 400,000 tea growing households that are mainly concentrated in large tea producing regions such as the Northeast (65 percent of producers), Northwest (8percent), North Central (9 percent) and the Central Highlands (8 percent). There are four types:  Worker farmers are mainly workers of plantations or companies. They are now allocated land for up to 50 years on the condition that they produce tealeaf based on company dictates.  Contract farmers are tea farmers who have their own land but sign contracts with companies to sell a portion or all output.  Cooperative farmers are member of cooperatives organized to produce tea.  Unlinked farmers are those who produce and sell tea on the open market, either to traders or processors. Of all these channels, worker farmers and contract farmers typically enjoy better living standards than unlinked farmers. These farmers receive benefits such as stable output; access to good quality land; technical training; credit access; retirement pension and insurance against sickness. 5.2 Processors The development of private sector along with advent of technology and transport infrastructure and reductions in the cost of processing equipment has enlarged the size of tea processors. Viet Nam now has over 600 processors with capacities of 3 to 7 tons of fresh tea per day and over 10,000 traditional processing households. Five different types of processors are identified: (a) non-registered households, (b) registered households, (c) private companies, (d) State-owned enterprises, and (e) Joint-venture and foreign companies. Non -registered households and registered household processors Non-registered household processors use their own tea-leaf production and that of other producers to produce dry tea. Typically, the capacity of these processors is only 70-100 kg of fresh tea per day. All of these households manufacture dry tea by using hand or motor driers. Registered household processors operate on a larger scale than non-registered households, and have their own bank account. However there has been a sharp decrease in the number of these two types over the last decades. Private processing companies Private companies are much bigger than household processors in terms of scale, capacity, equipment and labour use. They process both green and orthodox black tea, using raw material purchased from leaf traders and household producers. On average, these processors manufacture about 400 tons of dry tea per year (in Moc Chau, Son La). Some companies only process dry tea to sell to others for export, others, meanwhile are directly linked to export companies to reduce intermediate cost. In general, small enterprises prefer to register as companies rather than International Journal of Managing Value and Supply Chains (IJMVSC) Vol. 6, No. 3, September 2015 7 households due to many privileges. First, such enterprises are typically involved in other activities besides tea and as such, formal registration as a company makes it easier to do business. Second, it enabled them to avoid local government intervention. 5.3 Traders There are two types of tea traders: tealeaf assemblers and dry tea traders. Tealeaf assembler Local tealeaf assemblers collect fresh tea from individual households using bicycles and motorbikes. Tealeaf assemblers buy tealeaf from household growers in the region, then sell to processors in the commune or to tealeaf traders. The fact that tealeaf begins to deteriorate after 46 hours means it must be mobilized immediately for processing. Dry tea traders Dry tea traders are those purchasing dry tea from processors and then packaging and labelling the products before sale to wholesalers or retailers. Typically they use cars or trucks to transport products and possess more marketing experience. In addition, large scale of operations made trading network of traders wide. They largely sell dry tea to other districts and deliver to other provinces for both wholesalers and retailers or companies for export. Nonetheless, today tea leaf assemblers almost disappear. Tea processors often directly contact with farmers (tea producers) in the regions and purchase tealeaf to reduce intermediate cost. 5.4 Domestic wholesale and retailers As part of the value chain, the wholesales purchasedry tea, which are packaged and labelled from tea traders and then distribute to retailers. With regard to retailers, currently in the city, there are four main paths for tea retail: small tea houses, tea bars, traditional tea retailers and supermarkets. In large city, the increase in the number of tea bars has resulted in a fall in the number of traditional tea retailers and small tea houses. Inrecent years, supermarkets or large agents have become destinations for large number of consumers due to its safeness and diversity in products. This kind of consumption is gradually replacing purchases of green tea from traditional retailers because supermarket price is transparent, products are safe, and it is convenient for consumers. The company rather than the supermarket sets the price of tea in supermarkets. And supermarkets pay tea companies after making sales. 5.5 Exporters At present, about 80 percent of Viet Nam’s tea output is destined for export. In 2006, according to VITAS,approximately 180 companies in Vietnam exported tea. In comparison withthe number of rice exporters or coffee exporters, the school of tea exporters is much higher. Tea can be exported through three channels:  State-owned enterprises (mostly through VINATEA)  Joint-venture and foreign companies  Private companies (including limited and joint stock companies). International Journal of Managing Value and Supply Chains (IJMVSC) Vol. 6, No. 3, September 2015 8 The role of the state has dropped markedly in recent year. The private sector in export is becoming increasingly important. In 2007, private companies accounted for 12 of the 19 largest exporters. 6. P ROFITS AND MARGINS This part examines the production costs, profits, and margins accruing to key participants in value chains with an emphasis on returns to producers. 6.1 Cost and Profit of actors in tea value chain It is due to limited time and expense, the study is supposed to provide thorough description about production cost of specific tea varieties: LDP1 Cost and Profit of tealeaf producer A research survey carried out in Moc Chau, Son La examines the production cost of producers in Moc Chau tea farm as followed. Table 1: Tea production cost of worker farmers in Moc Chau, Son La in 2014 (10.000m2) Items Unit Total Cost (VND) A Cost Labor cost ------ 0 Materials Cost Kg 26,025,000 Other Cost 1,000,000 B Total Cost VND/ha 27,025,000 C Total Unit Cost VND/kg 2,460 D Sale Price VND/kg 6,000 E Revenue VND/ha 66,000,000 F Profit VND/ha 39,075,000 G Unit Profit VND/kg 3,540 Tealeaf farmers normally do not take into account the labour cost because they use the family labour. The typical sale price of tealeaf is 6,000 VND per kg .In such a way, total cost per unit is at 2,460 VND per kg and the farmers gain a net profit of 3,540 VND per kg. Accordingly, they may think they are doing well while in fact, the total production cost of their tealeaf exceeds its value. Costs and Profit of Private processing companies With a large scale of production, private companies typically produce about 11,000 kg of dry tea per month on the planted area of 10ha (100.000 m2). Normally, private processing companies put on production in 10 months per year, meaning that annual dry tea output will be 110,000 tons. The table below will display production cost to produce 22,000 tons dry tea from 110,000 tons fresh tealeaf. International Journal of Managing Value and Supply Chains (IJMVSC) Vol. 6, No. 3, September 2015 9 Table 2: Dry tea production cost of private processing company (100,000 m2) Items Unit Quantity Price Costs (VND) Share (%) Cost Fresh Tea Kg 110,000 6,000 660,000,000 44.6 Labor People 10 2,000,000/month 200,000,000 13.5 Fixed asset Depreciation 9,000,000 0.61 Management Cost Month 12 30,000,000 360,000,000 24.34 Other Cost 250,000,000 16.92 Coal Electricity Tax Total Cost VND 1,479,000,000 100 Total Unit Cost VND/kg 67,228 Sale price VND/kg 80,000 Revenue VND 1,760,000,000 Profit VND 281,000,000 Unit Profit VND/kg 12,772 As shown, among cost items, expense for fresh tea accounts for 44,6 percent of the total cost. Due to large production scale, private processing companies incur larger production cost, including capital to invest in machinery and technical equipment, factories building, high-qualified engineers, skilful workers with experience in manufacturing. Their total unit cost is VND 67,228 per kg and the sale price reaches 80,000 per kg. Cost and profits of dry tea traders Dry tea traders can play the role of distributors to wholesalers or direct sale to customers but the majority is wholesalers. Tea trader can buy dry tea from private firms or produce themselves, then packaging and labelling the products for distribution, storage and sale. This part examines the costs and profit of dry tea trades. Table 3: Cost and profits of dry tea traders Items Unit Quantity Price Costs (VND) Share Dry Tea Kg 4400 80,000 352,000,000 82.68 Labor Cost People 10 2,000,000 20,000,000 4.7 Fixed asset Depreciation 3,750,000 0.88 Rotating Machine 5,000,000 Vacuum Packaging Machines 400,000,000 Management Cost 30,000,000 7.04 Other costs VND 20,000,000 4.7 Total Cost VND 425,750,000 100 Total Unit Cost VND/kg 96,761 Sale price 125,789 Unit Profit VND/kg 29,028