Agriculture in Nepal

Nepal being an agricultural country employs more than ⅔  of the country’s population. But, contributing to 35% of the country’s GDP it is one of the highly unproductive sector. Commercialization of agriculture has been a highly publicized statement whereas nothing is actually done and issues remains the same.

The first issue I see is the financing challenge for small scale farmers. Although the policy requirement for the corporate banks to invest in the agriculture sector is minimum 10%, the banks are allocating their 2.7% of the capital in this sector. It is seen that the banks prefer to pay the fine to the investment. Also, here is a specialized Agricultural Development Bank  which provides loan to the dealers and traders but the SME farmers complain a lot on being deprived of the financing. There are commercial financial institutions which provide housing loan, auto loan at 9% but the same institution charges 14% for the agricultural loan. Government has recognized the three pillars economic model where cooperatives is recognized as one of the active contributor, but the lack of regulations and imprudence on the sector has neglected the development of grassroot agripreneurship. Simply, an interest rate of 18% and service charge of 2% encourage (total of 18% in average) wouldn't encourage  an aspiring entrepreneur who is facing the financial challenge.

Another challenge I see is on the part of insurance. I don’t know if there is any agricultural insurance policy in Nepal. I see the two major risks on the agricultural sector on two aspects: (1) Product risk: Risk involved during starting the sowing of the seeds to the shipment of the produced products. This can include risks from diseases, risks from the natural calamities, risks from theft, and etc. The risk is even more high in the production of organic products where no chemicals can be used. If a product catches the disease the whole farm is sickened. (2) Price risk. Risk involved in the uncertainty of getting the best value of the product produced. The price risk can be best clarified with the case of sugarcane pricing. The price of sugarcane is fixed after the negotiation between sugar mill owners and sugarcane producers association. Generally, the meeting is set after India fixes the price for Indian sugarcane. Their point on setting the meeting after India sets the price is to make the price of sugarcane in Nepal equal to the Indian market price so that no Nepalese farmers would sell their sugarcane to the Indian market for getting the better price and Nepal does not need to face the shortage of sugar canes. By that time, it will already be late for the sales and farmers are in rush to repay their loan taken during the chhath and dashain-depawali. Understanding this dependency, sugar mills always delay for the meeting so that it creates pressure on the sugarcane producers to lower down the price.

With all these hassles and price risk, a farmer won't get motivated for increasing the production and productivity.

The next issue I would like to highlight is the involvement of the agencies spending some much of resources in providing training to the farmers and providing them production knowledge while keeping the business development training to zero. The farmers learn, they implement and produce the products but when it comes to the sales they don’t have the direct access to the market. No one is going to purchase their product until it comes from the redundant channel. The farmers , with no options left, now have to rely on the middlemen traders for selling their products who ultimately are taking large share of profits giving the farmers petty amount of profit. The farmers now need to get empowered not only from the production methodology but also from the business perspective. They should be trained enough on aspects of quality preservation, supply chain, marketing, etc.

Another major constraint in the agricultural market is the dominance of the sector by few large markets where the price is controlled more by the things other than the fluctuation in demand and supply. Dependence of the whole capital city on one and only one large vegetable market clarifies the least bargaining power of the producers and the monopoly of few large scale of traders. Establishment of large scale alternative markets is necessary for enabling the farmers to get the best value.

Despite the constraints, there are so many opportunities in this sector which have been still untouched. With the growing middle-class population, the demand for organic and semi-organic food has been increasing. Although the business scope has been identified, the demand has not been yet catered. It is positive that like minded entrepreneurs have been discussing at this idea of serving organic/semi organic agricultural products. Green-Mart Chain project is one potential project that we (at Biruwa Ventures) have been discussing upon. Next, the financing from the seed fund capitalists like Uddhyami Impact Fund, Gazaab Ventures  fund etc. , who provide equity financing and even loan financing without any collateral raises a hope for the budding entrepreneurs who were not able to start their business because of lagging the start-up capital. Info Dev : a world bank group project is opening the first agricultural business incubation center in Nepal which will help the farmers to look at their problems, analyze them, and solve them individually. These all initiatives raises a hope for better agricultural  future, at least I see the hope.

Good quality-Low price makes the sale; this is a fable now!

On one Sunday, during a brainstorm session, I asked a participant, “How do you assure me that you will sell your product? Why would I change my brand and move towards your product?”

He replied, “It’s simple, If I supply a quality product at a low price, everyone will buy.”

I asked him again, “Low price? How are you going to compete with the mass production of India and China to offer a low price? and ‘Quality’ how would you assure me your product is quality? If you say you have a good quality product because it is more performing, reliable and durable, I would ask how would an American customer looking for your coffee at the shelf of Walmart buy it for the performance, what about the durability?”

Good quality-Low price makes the sale; this is a fable now!

With the market liberalization, foreign companies entering into the field, there is an intense worldwide competition. Competition here not only arises from the domestic firms but also from the regional and global leaders . And, it is funny, all of them claim themselves as a good quality - low price products. Thus, the focus of the business should be on Branding. And when the branding comes in, there are a couple of things that the market leaders adopt in order to stay ahead from the creepers.

Packaging: In addition to support in stacking and storage, packaging plays an important role in promoting the purchase. It is often called last second advertising. It gives an impression on what the product inside would look likely be. Smart companies spend much resources in the packaging. According to Datamonitor, a leader in qualitative and quantitative research for the consumer packaged-goods industry, over 50 percent of shoppers' purchase decisions are made at the shelf. Since packaging of a product is the first thing that a consumer sees, it plays a vital role in differentiating a brand from the competition.

E.g. of an investment in packaging: Nepali tea traders, an america based Nepali tea company, spends 60% of the total cost in packaging. This is why it is being able to brand the product in the American Market.

   

Both the tea are made in Illam-Nepal, which one do you prefer to buy?

Storytelling: Storytelling approach of marketing has been successful to change the buying behavior of the today's customer. Those buyers who are indifferent on choosing a brand  for price and quality, look for the impact they are creating on the purchase. This is why smart companies share their struggling story, condition of its workers, impact on the community and etc.

E.g. of a storytelling: HBTL’s story; “Himalayan Bio Trade Private Limited (HBTL), founded in 2000, is a natural products processing and marketing company, owned by a consortium of community enterprises whose shareholders are the community members who sustainably manage the forests. HBTL products can be traced back to the forests that produced them and the communities who responsibly harvested and processed the natural products. HBTL and its community enterprises have received FSC, Organic and Wildlife Friendly certifications..”

Aveda, the company which accounts for more than 85% of annual paper sales of HBTL, makes its commitment to buy from HBTL because the communities of high-mountains gain employment and generate income through locally owned enterprises. Aveda express their buying reason as : “Our mission at Aveda is to care for the world we live in, from the products we make to the ways in which we give back to society.”

Cause marketing: Cause marketing involves the tie-up between a for profit company and a non-profit company to create synergies in mutual benefit. Cause marketing basically helps to associate a favorable image of the customer towards the brand. This approach can attract those bunch of customers who are conscious in the way the company is operating; it’s responsibility towards the society.

E.g. of a cause marketing:  Laxmi Bank Green Saving Account;  “They say the best time to plant a tree was 20 years ago. The next best time is now. As a token of our appreciation to your contribution to a greener planet, Laxmi Bank pledges to plant a tree for every Green Savings account opened with us. Plant a tree. Plant a hope.”

Quality, price are important aspects of the business. But the vital thing is the sales. You are not going to make any money until you sell the product. Focus on the sales, focus on the relationship, focus on the bonding, focus on the consumer problems. Serve accordingly.

Advantages of Mergers and Acquisition

Ø Synergy

            The basic concept of synergy is that the unified whole is greater than the sum of its individual parts. It can be expressed as 2+2 is greater than 4, in case of synergy. Say, there is ABC Bank Ltd with an annual operating profit of Nrs. 10 Million and MNO Bank Ltd. with an annual operating profit of Nrs. 8 Million. Then if the two banks work together, according to the concept of synergy, their annual operating profit will exceed Rs. 18 Million. This is a result of synergetic effect by the cooperation between the companies.

Ø Staff Reductions

            As every employee knows, mergers tend to mean job losses. Consider all the money saved from reducing the number of staff members from accounting, marketing and other departments. Job cuts will also include the former CEO, who typically leaves with a compensation package.

Ø Economies of Scale

            This refers to the fact that the combined company can often reduce its fixed costs by removing duplicate departments or operations, lowering the costs of the company relative to the same revenue stream, thus increasing profit margins. A bigger company placing the orders can save more on costs. Mergers also translate into improved purchasing power to buy equipment or office supplies - when placing larger orders, companies have a greater ability to negotiate prices with their suppliers.

Ø Acquiring New Technology

            To stay competitive, companies need to stay on top of technological developments and their business applications. By buying a company with unique technologies, acquiring company can maintain or develop a competitive edge.

Ø Improved market reach

            This states that the buyer will be absorbing a major competitor and thus increase its market reach and enhance market power. Companies buy companies to reach new markets and grow revenues and earnings. A merger may expand two companies' marketing and distribution, giving them new sales opportunities.

Ø Reducing Competition

          M&A between the companies, except the conglomerates, reduces the competition among the business companies. This can be used to eliminate the waste, for e.g. marketing expenses; commissions etc., and increase the economies of scale of the company.

Ø Taxation

              A profitable company can buy a loss maker to use the target's loss as their advantage by reducing their tax liability. Tax minimization strategies include purchasing assets of a non-performing company and reducing current tax liability under the Tanner-White PLLC Troubled Asset Recovery Plan. Simlarly, the profit of one company can be cary forwarded to meet the loss of another company in order to escape the tax- liability. In this age of globlisation, many companies across the world go with M&A with the companies in tax haven countries in order to reduce tax liability.

to be ctd.......

Net Blog: Types of Mergers and Acquisitions

Mergers and Acquisitions

(In Nepalese Perspective)

Merger:

A merger is a combination of two companies to form a new company. In a merger, the two companies are brought together to create an existence of a new company while abandoning the legal existence of the old two companies. It means the two companies are mixed up as a single unit to create a new business company. In the pure sense of the term, a merger happens when two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a "merger of equals." Both companies' stocks are surrendered and new company stock is issued in its place.

For eg. :      Himchuli Bikash Bank and Birgunj Finance

Acquisition:

          An acquisition is the purchase of one business or company by another company or other business entity. When one company takes over another and clearly established itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be traded. Acquisitions are divided into "private" and "public" acquisitions, depending on whether the acquiree or merging company (also termed a target) is or is not listed on public stock markets.

For eg. :      Standard Chartered Bank and Grindlays Bank

NOTE: ‘Consolidation’ actually occurs when two companies combine together to form a new enterprise altogether, and neither of the previous companies survives independently..

Whatever may be there in the defination, in practice, however, actual mergers of equals don’t happen very often. Usually, one company will buy another and, as being bought out often carries negative connotations, the term is named merger even if it is the acquisition. So, in order to overcome this shortcoming the terms Merger and Acquisiton (M&A) is taken together.

to be continued.......

 Next Blog: Advantages of Mergers and acquisitions

Economy of Nepal

Present economic situation of the country and things to do better it: (In a nutshell)

40 Billion GDP  and a growth of 4 % is the present condition of our economy. Decades of armed conflict and unstable government has jeopardized the economy of Nepal. Economy of Nepal is highly dependent on foreign donation, remittance from the abroad working Nepalese.

Import is much higher than the export and the trade deficit is more than $750 million. More than 80% of the people are engaged in non-commercial agriculture and animal husbandry. The unemployment rate is 45%. Annually, more than 700,000 youths go abroad seeking the jobs. The greatest export of Nepal has been human resources in the middle-east. Load-shedding touches up to 16 hrs. per day. (It is predicted that the loadshedding goes up to 20 hrs. a day this year)

Nepal has a great tourism potential. It has a wide range of Himalayas, beautiful sceneries, good culture, historical monuments, flora and faunas, religious places, adventure spots and many more. Amongst these, mountaineering and adventure tourism has the highest potential in Nepal. Lonely planet has classified Nepal as world's 6^th most cheapest  destination.

Another possibility of Nepal is on Hydro-power. Hydropower has a low per unit cost as compared to other alternatives. Study says Nepal has the attainable capacity of 42,000 MW while the economy requires 2,000 MW for internal consumption. Nepal can generate huge revenue by selling the electricity production to neighbor nations.

Despite these key potentials, transitional politics is deteriorating the economy day by day. Nepal is not being able to formulate proper policies and plans. The five year plan is not being able to incorporate all the requirements.

The economy is in a worse condition. So, the following things are suggested to make it better:

ñ  Government should create an investment climate to attract big MNC's to operate in Nepal. For this, investment protection agreement can be done.

ñ  The political parties, trade unions should start protesting in a creative way. The old shut-the-office, block-the-roads should be changed.

ñ  Venture Capital laws should be brought by the gvt. And it should encourage youths not to go abroad.

ñ  Entrepreneurship should be promoted at the national level. Without local job creation 46% of unemployment can not be solved easily.

ñ  BFI's should invest as a micro finance in order to make the services reach to the poor farmers changing their way to commercial farming.

ñ  Business houses should start providing unique products and services. They should not invest in the competitive line with Chinese and Indian products.

ñ  Governments key focus should be on developing roadways/railways, investment in quality education should be increased.

  

ñ  The key area of investment should be on tourism and hydro-power. Promotion of tourism should be done internationally. Strategies should be made in order to attract mass of the tourist visiting China and India to  come Nepal.