China's New Agribusiness Strategies

On January 26-28, the Ministry of Agriculture called in representatives of its elite "dragon head" enterprises (also known as "leading" or "flagship" enterprises) to instruct them on the communist party's new direction for businesses. The vice-minister of agriculture, Chen Xiaohua, outlined China's new strategy for agricultural companies at a "training class" for representatives of national-level agricultural "dragon head" enterprises. At the training, the company representatives were devoted to "serious study" of the central communist party's work meetings on the economy, rural affairs, and agriculture. The meeting is an example of how the party/government instructs large businesses who get certain benefits from the government on how to carry out the party/government's strategy. If you're watching what's happening or doing business in China, you should be aware of the behind-the-scenes string-pulling that is orchestrating the dramatic changes you are seeing.

The guidelines presented by Chen are described by Farmers Daily as a transformation of the mode of development. The strategy is wide-ranging, including an emphasis on science and technology, vertical and horizontal integration to form bigger companies with a wider geographic scope of operations, product safety and quality, and environmentally-friendly production. The broad goal is to "pull along" farmers--integrate small farmers with the modern marketplace and raise their incomes.

The first point emphasizes science and technology. Companies are encouraged to spend more on technology. They are also urged to "absorb" foreign technology and equipment (joint ventures beware!) They should cultivate proficient technicians, and form cooperative relationships with research institutes, universities, and extension stations to do research and disseminate technology. This is analogous to the alliance between agribusiness and the Land Grant system in the U.S.

Companies are encouraged to pursue marketing. Do research on consumer trends. Develop branding strategies and integrate the strategy between raw material production, processing and marketing stages. Companies should form marketing links with agricultural producers. They should explore new domestic and foreign markets, and increase agricultural exports.

Chen urges companies to exert greater control over the farm source of raw materials. They should participate in programs to increase production of horticultural, livestock, and aquaculture products, and implement controls on pesticides, fertilizer, veterinary drugs, and feeds in production bases to clean up production. They should set up field-to-table traceability systems that package products shortly after production using a label that displays logos (for the brand and certification) and a product code. Companies should implement certifications.

Companies are instructed to form cooperative alliances. This includes mergers and acquisitions to form conglomerates as well as separate companies cooperating to form "industry clusters." The goal is to form companies that operate in multiple regions and to form a completely integrated production-processing-marketing industry chain.

The instructions then shift to environmentally-friendly production and "carbon economy" to conserve resources, reduce pollution, and reduce CO2 emissions. Companies should pursue technologies and strategies that conserve resources, water, land, energy, pesticide, and seed. They should pursue "recycling agriculture." Companies should find ways to utilize by-products and waste from processing.

Finally, companies are reminded that the overarching goal is to benefit farmers and the rural economy. They should purchase raw materials under contract from farmers, and ally with farmer cooperatives. Finally, there is a call for the all-important "market order." Companies are reminded to abstain from a laundry list of company sins: don't suppress prices paid to farmers or arbitrarily reject their products, don't engage in cut-throat competition or price wars, don't produce or sell fake or shoddy products.

If these strategies sound like they came from a management consultant with an MBA, they probably did--the Communist Party schools for training party officials are now quasi-MBA programs. The strategies are well thought-out and make a lot of sense. In the background is a shift toward larger elite companies with better connections to banks and technology (which means better connections with the government) and a freeze-out of small entrepreneurs who bring "disorder" to the market. The attendees of this training are members of these elite companies designed by the government as "dragon heads." Efforts to build a more integrated industry with safer, environmentally-friendly production implicitly entails strengthening the position of big, well-capitalized government-connected companies. And time and time again, the small entrepreneurs undermine these well-intentioned strategies by selling cheaper and offering greater convenience and flexibility. It is the small entrepreneurs who give China's economy its dynamism and competitiveness (see Yasheng Huang, Capitalism with Chinese Characteristics: Entrepreneurship and the State). Thus, to make these strategies work, a brutal crack-down on small companies is required to maintain "market order." It's not clear whether these strategies can successfully be carried out or whether the government-industry partnership it entails is a healthy path for China.