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COFCO XINJIANG TUNHE CO., Ltd.

CASE ANALYSIS

SUBMITTED BY
DEEPIKA (P35121)
DIVYA (P35126)
KANIKA (P35140)
SUMIT JHANWAR (P35193)
VIVEK PILLAI (P35210)

Q 1. Make five forces analysis of COFCO. How these forces impact the company.

Porters Five Forces represents theoretical framework that is used for industry analysis and
strategy development. Specifically, the five forces shaping competition within the industry
consist of the intensity of rivalry among the competitors, the risk of entry of new competitors,
the bargaining power of buyers, bargaining power of suppliers and the threat of substitute
products and services

Fig-1 Potters five forces for industry analysis

China is one of the largest tomato producers in the world, but there is a large gap between
China and foreign countries as for the tomato products aspect. The gap is mainly present in
the following aspects: less varieties, poor quality, backward planting technologies, low
machinery application level and single product variety. Chinas tomato products generally

belong to preliminary processing and become raw materials of overseas developed countries,
and the export price is on the low side.

COFCO Tunhe produced 50% of Chinas total processed tomato-product output and 15% of
the worlds output. Sales of tomato products accounted for 44% of the companys revenues
and 30% of its profits. Tunhe operated 22 tomato factories which produced 3 primary
products- tomato paste, tomato powder and lycopene. It exported 90% of its tomato paste to
80 different countries including U.S., Italy, Russia, Japan, North Korea and the Middle East.
Heinz Co., Nestle S.A., and Unilever N.V. were its top international customers. It also
provided tomato paste to fast-food restaurant chains like McDonalds and KFC. It also sold
its own branded products to consumers in China.

1) Threat of new entrants Entry into the industry is difficult given the high initial
cost of plant and machinery. Also with world leaders of tomato processing like
Tuhne and Chalkis already being present in the market, it will be very difficult for a
new entrant to carve a market share for himself, he will have to incur extra cost on
advertising and promoting his brand to attract international buyers.

But if someone can come up with a new technology or a new value chain which is
cost effective as well as improves efficiency, it will give him competitive advantage
helping him earn a better market share.

2) Rivalry among competitors- Xinjang Chalkis Tomato Products Company and


Xinjang Tienye Company are COFCOs main competitors which are owned by the
Xinjiang Production and Construction Group (XPCG) which was an outgrowth of
the Peoples Liberation Army (PLA) who had taken control of the Xinjiang region
in 1949. XPCG has been involved in infrastructure and industry development in the
region and has some 1500 companies under it. It also maintains relationship with
the local government.

Chalkis is the third largest tomato processing company in the world with a market
share of 7.43% and annual production of 2.5 million (MT). With the financial
backing from XPCG and established name in the tomato processing industry,

Chalkis possess a great threat to COFCO if it changes its working style by bringing
in more professionalism.

3) Bargaining power of suppliers- The only raw material required by Tuhne is


tomato so their biggest suppliers are 2,00,000 farmers from which it buys 2.2
million metric tons of fresh tomatoes in a year. In China Tomato growing was based
on Company + Farmer model. Farmers were organized under villages or farmer
cooperative associations of 10-20 families whose representatives signed contracts
with tomato processing companies.

Tomato was one of the least ruminative crop grown in the region, wheat and cotton
being more profitable in terms of yield as well as price. Thus the processing
company had to look at the prices of different crops in the previous year before
deciding on the price to be stipulated in the contract.

In China land is owned by the government and the local agriculture bureaus act as
intermediaries between the farmers and the business enterprise. The bureau strongly
encourages the farmers to grow crops that would provide them with the highest
profit.

Clearly the farmers have more bargaining power and thats why they receive higher
prices in the early and late stages of the processing season as well, even though the
quality of tomato is not as high as that of the peak season.

4) Bargaining power of buyers- Key international customers of Tuhne include H.J.


Heinz, Unilever N.V and Nestle S.A. etc. Apart from these it also sold in bulk to
paste re-packers like South Italys Antonio Petti Fu, Saudi Arabias National Food,
Tyseer and Russias Baltimore.

All the clients have annual revenues in billions of dollars and are involved in many
other businesses like Unilever has 400 brands in home and personal care, Nestle is
worlds largest food and beverage company and Heinz in involved in both backward
and forward integration in the tomato industry.

As can be seen, the companies Tuhne is serving have such a reputation that any
supplier will be willing to work according to their terms and conditions only to be
associated with such giants. These companies dictate their terms in the form of the
specific variety of tomato seed they want for their product, how it has to be
harvested, processed and packaged. Also the traceability of the tomatoes to its
farmer is a prerequisite with these company. On top of all this they buy the tomato
paste at a very low price as compared to world standards.

As the product is undifferentiated the buyers can easily switch between suppliers
according to price they offer suppliers. Clearly buyers have more bargaining power.

5) Threat of substitutes- The existence of close substitute products increases the


propensity of customers to switch to alternatives in response to price increases (high
elasticity of demand). As it is a raw material dominated industry, potential threat of
substitute is quite less. Nonetheless it can be in the form of better variety of seed
which has better features. Another source can be artificially produced sauce which is
of lower cost. It can also be in the form of better and low cost packaging that adds
substantially to the margin of the processor.

2. Why did Heinz outsource tomato paste procurement?

Heinz is a global food company based in USA with revenues of $9 billion in 2007. Heinz is
known worldwide for its signature product line which includes Heinz ketchup, Classico
tomato sauces, Ore-Ida frozen potatoes, Weight Watchers Smart Choice prepared foods and

AB brand soy sauces. Ketchup and sauces sold directly to customers and commercial
enterprises like fast food joints, accounted for over 40% of the companys revenues.

In the late 1990s, Heinz began to shift its supply strategy for its branded tomato products like
Heinz Ketchup as Heinz considered the reputation of its brand as its core asset. That is it had
faith that customers will buy its products on the basis of the brand image it has created over
the years. People will purchase ketchup on the basis of Heinz being written on its bottle.
The source of the contents inside this bottle was of secondary concern for the customer as
long as Heinz was claiming it belonged to the Heinz group. Thus it decided to outsource more
of the production of tomato paste rather than produce it in-house.

Its business with China particularly began in 1998 when a tomato supply shortfall occurred in
California. As China was the third largest producer of tomatoes in the world having a share of
12% in processed tomato product output, Heinz thought it to be a good option as it also gave
benefit of low cost. But it had concerned regarding efficiency of China farmers and therefore
it started procuring from Chalkis the third largest tomato processing company in the world.
But when it started doing business with COFCO Tunhe from 2005 onwards, it was really
impressed as COFCO responded accurately to their specific requirements of seed, method,
pesticide residue etc. In 2007 Heinz purchased 5% of its global paste requirement from
Tunhe.

Q 3. What are the major risks for Heinz in procuring it from COFCO? How is it being
addressed? Can Global GAP certification would be of use to COFCO and how?
Ans. Heinz was outsourcing more of the tomato paste rather than producing it. The company
thought that outsourcing does not matter unless the quality is ensured. So, for the tomato
perspective Heinz decided to outsource it to China when a shortfall occurred in California. It
formed a relationship with Tunhe, under COFCO management.
Major risks undertaken were:
1. Mould and pesticide residue: Heinz revealed that Chinese were not that efficient in
producing tomatoes as they were able to find out some mould and pesticide residues
on some of the tomatoes.
2. Production capacity(1st year): the production capacity of the factories in Tunhe was
not up to the mark. They were not equipped to manufacture high viscosity pastes,
which resulted in production back-ups and hence, problem for Heinz.

3. Processing Delays (2nd year): In the second year of operations, Tunhe employed
unused mechanical harvesters which resulted in in excess dirt entering the factory
premises and created further processing delays. The processes undertaken were not
automated which might result in faults and delays, which was a major concern for the
Heinz.
4. Promotion of modern techniques had to be done which eventually increased their
costs.
The problem basically faced was because of the inexperience of Tunhe in complying with the
international standards.
Heinz adopted following methods in order to mitigate the risks:
1. Trainings were also imparted on improved, international standard processes.
2. Heinz pushed the government to change the current land system for producing more
tomatoes.
3. The company encouraged Tunhe to procure lands and firm it according to Heinzs
international standards. Deep-till soil preparation, drip irrigation, IPM and mechanical
sprayers were employed for consistency of process.
4. A lot of investment of time, energy and dollars had to be done by Heinz in order to
help Tunhe to improve their production.
GLOBAL G.A.P (Good Agricultural Practice) Fruits and Vegetables Standard:

It covers all stages of production, from pre-harvest activities such as soil


management and plant protection product application to post-harvest produce
handling, packing and storing.
This certification would help COFCO in covering all the flaws, present in the
production process.
Global Gap Certification is a strict procedure and it would help COFCO in
maintaining international standardization & supply quality products to Heinz.
It would also help to improve seed management, control of GMO products, site
selection, field management, harvest management, personnel safety, environmental
protection and other issues.

4. Why did COFCO integrate backward into seed production? What are the advantages
of such a move?

Ans: To survive and stay relevant and competitive after opening up of the import export of
food sector COFCO had to integrate backward- upstream in the supply chain as its customers
began to establish direct relationships with their suppliers in China.

Of all the raw materials seeds were the most essential and important element in agriculture
production. Tunhe had the aim of becoming most favourable supplier to its customers.
The advantages of the backward integration for seeds are as follows:
1.

It is being able to provide high quality and customised variety of seeds to farmers
such that they produce tomatoes with specific characteristics that Tunhes customers
required for their particular products. For example , the companys Japanese
customers needed products with high lucopene content. Tunhe now produced 80% of
the seeds its farmer used.
2. The ability to develop new seed varieties was also helped Tunhe to gain new
customers.
3. By establishing seed research institute and partnering with well known tomato
genetics suppliers they have ensured supply of high quality seeds for procurement
desired quality of produce and thus reducing dependency on other seed producing
organisation.
Thus, it was wise to integrate backwards into seed production.
5. How would you describe the relationship between Heinz and COFCO? What are the
expectations for each of them in the relationship? Are they hostage to each other?

Ans: The relationship between Heinz and COFCO is that of trust. Heinz has invested a lot of
time, energy, and dollars in helping Tunhe improve. Their relationship has not yet been
formalised though. COFCO TUNHE and Heinz reached the agreement on tomato
demonstration project. 5.4 hectares of planting base was established in Hutubi County. Seeds
from Heinz were introduced to local farmers. Heinz experts strictly guided them with
planting techniques. Through the project, a total of 5,750 MT raw material was produced in
2006 on an average of 87 MT per hectare, 27 MT higher than the other planting regions. And
the raw material met the Heinzs requirement on producing HB products with high bostwick.
Productive efficiency improved and local tomato industry in China upgraded after
cooperation from Heinz.

Both Heinz and COFCO are dependent on each other. Heinz wants tomato paste for making
Heinz tomato sauce and Heinz ketchup. Even though Heinz business is diversified to a
certain extent, but its 40% revenues are generated from sauce and ketchup products only. So,
ensuring regular supply of tomato sauce was the most essential aspect to keep its bottom line
healthy.

Also, after facing crisis once in 1998, they needed a big supplier of tomato which can provide
high volumes of tomato paste while ensuring higher quality standards. Taking all these
considerations, they decided to partner with COFCO Xinxiang Tunhe Co. Ltd. as it was
ranked second among tomato processing companies with 7.43% of worlds market share
(2006). Also, being alow cost producer in a country with adequate climate for tomato
cultivation supported by huge man power availability, Heinz could rely on COFCO.

Another fact in support of Heinzs strategy to partner with COFCO Tunhe Co. Ltd. is that
Chinas per capita consumption of tomato processed product was very low.

All Heinz wanted was international standard tomato paste in huge volumes and COFCO was
capable of doing so.

COFCO Tunhe Co. Ltd. lacked brand name credibility and Heinz core asset is its brand
reputation. The brand building exercise could take years thus it is better for COFCO to
partner with Heinz and create a win-win situation. Also, COFCO Tunhe Co. Ltd. got access
to Heinzs resources in terms of Heinzs hybrid seeds, drip irrigation, deep till soil preparation
method, integrated pest management and mechanical sprayers. This helped COFCO in
increasing their agricultural productivity from 24 Metric tons to 48 Metric tonnes. Increase in
cost was also there but in lower ratio which assured profitability. Thus apart from market
access, COFCO had new technology in tomato production. Deal would also help in creating
domestic market reputation.

6. How did COFCO turn around Xinjiang Tunhe after taking over the controlling
interest? Is it really a strategic fit as claimed by the company? Explain.
COFCO introduced a new work culture in Tunhe and brought in a culture of professionalism
to all their businesses. Their aim was to achieve a decent life not only for the investors and
shareholders, but also for those working in Tunhe. Communication with the customers in
order to understand their specific requirements was not considered critical till then. They
made sure that much effort was put in place to know the actual requirement of the customer
rather than being concerned only about what price they could get from the paste. This
required top managers who dealt with international customers to learn English as it was
essential for proper communication.
These two objectives were achieved by bringing in new personnel from other COFCO
businesses into the senior management team, at the same time retaining high performers.

They were chosen with the prime focus on good enterprise management, especially in the
processing industry, good administration, personnel management and good language skills.
COFCO and Tunhe needed each other strategically. Being a trading company primarily,
COFCO realized that they were losing their importance in the industry with the growing
relationship between their export customers and suppliers. In order to remain relevant, they
adopted a strategy of backward integration, moving COFCO upstream in the supply chain
which was when they came across Tunhe. When we look into the history, China DLong
International Strategic Investment Co. had acquired a controlling interest in Tunhe in 1997.
However their rapid expansion policies left the company in precarious financial shape which
was when COFCO came along and acquired 37.2% stake in Xinjiang Tunhe, taking
controlling interest in June 2004. While COFCO gave them the much needed vision on the
way forward with better management and export management expertise, Tunhe was a high
volume supplier which helped COFCO integrate and expand.
This decision was strategically beneficial and essential for both the parties. While COFCOs
relevance was under question due to the introduction of new governmental policies which
increased competition, in order to adapt to the changing external environment acquiring
Tunhe or a good supplier was a matter of survival in the long run. They had the resources
needed to support their decision as well as bridge the financial mismanagement in Tunhe
caused by the wrong expansion decisions taken by DLong. Thus in the overall picture, it can
be viewed as a good strategic fit.