Tea industry should re-evaluate value chain, embrace technology: MAS CGO

MAS Holdings Chief Growth Officer and Director Nathan Sivagananathan

Following is the keynote speech delivered by MAS Holdings Chief Growth Officer and Director Nathan Sivagananathan at the 19th annual general meeting of the Tea Exporters’ Association, held on August 31, 2018.

Prime Minister Ranil Wickremesinghe, Plantation Industries Minister Navin Dissanayake, committee and members of the Tea Exporters’ Association and all other esteemed guests; I thank Tea Exporters’ Association Chairman Jayantha Karunaratne for inviting me to deliver this keynote speech today. It is a privilege to address all of you, who are stakeholders in an industry that is of utmost importance to Sri Lanka. 

It is a matter of national pride that the Ceylon Tea brand is globally recognised for premium quality tea. Unfortunately, when I introduce myself as Sri Lankan to people abroad, they are still much more likely to bring up Ceylon tea than Ceylon underwear! 

As we know, the Sri Lankan tea industry was born out of the demise of the previously thriving coffee industry in the 1860s, after coffee plantations were devastated by a disease that affected Sri Lanka and the rest of Asia. Sri Lanka’s tea planting was initiated by a young man who set up the first tea plantation in Kandy at the age of 17. The birth of Ceylon tea was thus initiated from one man’s entrepreneurship and experiment in diversification in the face of devastation.   

Sri Lanka celebrated its 150th anniversary in the tea industry last year. We now face the question - will the industry survive for another 150 years? If we are to survive, we must use the sense of entrepreneurship exerted at the time tea was first brought to Sri Lanka.   

Putting things into context, we face challenges in maintaining our reputation as one of the world’s premier tea producers. World tea consumption has grown at an average of 4.5 percent every year in the last decade, driven by rapidly increasing demand from China, India and other emerging economies. However, tea production in Sri Lanka is stagnant. Production in 2017 was at the same level it was 15 years ago (around 310 million kg).  

Competitors have therefore gone ahead: China grew its tea supply at an average rate of 6.5 percent annually since the 1960s, compared to Sri Lanka’s miniscule annual average growth rate of 0.8 percent. Over the last 50 years, Sri Lanka’s share in the global supply of tea dropped from 20 percent to 6 percent. We are not capitalising on the rising global demand for tea, a US $ 70 billion industry being driven by growth in the value-added segment.   

I am here today to talk about my industry – apparel – and other industries that have gone through similar problems:  
 
Major issues for both apparel and tea are low labour productivity and labour shortages, as workers move from agriculture and manufacture to service sectors. This has been one of our biggest challenges over the last 10 years. 

A second challenge is undiversified export markets. Sri Lankan tea exports are dependent on a few markets including Russia (15 percent) and the Middle East (50 percent), which are both facing crises. Likewise, Sri Lanka’s apparel sector is traditionally dependent on the US and UK.  

We also face the obstacle of cheaper competitors. Sri Lanka has lost significant market share over the years due to the high price of our tea. If you look at tea imports to Britain in 2016, Sri Lanka only supplied 3 percent, while Kenya supplied 47 percent - a drastic change from a few decades ago. The apparel sector is, of course, no stranger to cheap competition from Asia and now Africa. This is a key part of why we need to have more value-added services in our industry.  

Finally, Sri Lanka has an unconducive policy environment: It is vital that all major export industries are governed through clear, consistent policies.  

Despite these challenges, the apparel industry has been able to consistently add value and maintain growth globally by providing specialised products to the global market. The key fundamentals that have helped us are looking at the global changes that are taking place, understanding, and reacting to them.

   
Today I will speak to you about three of them: your consumer, your business and your supply chain.     
(1) Understand and cater to your consumer   
In the apparel industry we have come to learn the importance of understanding the final consumer. Over the years we have realised that our focus should not be solely on the brands for whom we manufacture but the final consumers. We have teams dedicated to consumer insights and consumer-centric design and innovation. We even hired a professional consultancy firm to help us put in place our strategy and oversee its implementation. The tea industry similarly needs to hire dedicated individuals to carry out research on consumers in their main markets, tracking their likes and dislikes, income levels and lifestyle changes, to adapt tea to suit customer needs.   

A key trend worth noting is the rise of millennials and Gen Z. Globally, tea is appealing to younger, wealthier, trendier consumers. The Tea Association of the USA estimated that as of 2018, 87 percent of millennials in the USA drink tea – far higher than other age group. We can see this in the success of DAVIDsTEA, a high-end tea retailer that has expanded dramatically since 2008 by tapping into a growing tea boutique industry.  

Starbucks prompted the same revolution in coffee 20 years ago, when it turned coffee from something people drank with breakfast at home, to a premium product with instant brand recognition. This has even been effective in traditional tea drinking countries like India, where domestic consumption of coffee has grown at almost double the rate of tea since Starbucks’ entry into the market. 

Winemakers have remained relevant in today’s beverage market by getting rid of the stereotype that wine is a fancy drink for refined palates only. By making branding trendier, they target millennials with modern label designs and differentiated packaging such as boxes and cans.   

Health and wellness is another major trend. People are looking at ways of being healthier through eating, drinking and their lifestyle. Tea and specifically herbal tea has an opportunity to benefit from this trend from increased awareness about its anti-inflammatory, anti-oxidant and weight loss effects. Sri Lanka is lucky enough to already grow many of the spices and herbs that the West now recognises for their medicinal qualities and there is a big opportunity to play in the wellness tea which has risen by more than 5.8 percent in the US market in 2018-2018 alone.  

Other key drivers are transparency and sustainability. Modern consumers want to feel that they are minimising the ecological and social impact of their consumption. In 2005, the expiry of the quota era exposed our apparel industry to Chinese competition. We were faced with two extreme options: compete with global giants in mass garment manufacturing in other Asian countries or the less competitive yet highly risky option of rebranding. We focused on rebranding the industry as an eco- and labour-friendly manufacturing location through our “garments without guilt” movement, making Sri Lankans the first in the world to champion the cause of ethical garment manufacture. 
  
The coffee industry was an early adopter of sustainability certification standards such as Fair Trade. The Brazilian coffee industry led its remarkable recovery from imminent decline through self-regulation and setting up certifications for purity and sustainability.

The tea industry is moving in this direction: Between 2009 and 2012, certified tea sales grew by 49 percent annually. Major players like Finlays, Unilevers and Tata have all launched major sustainability initiatives, including Tata pledging 100 percent sustainable sourcing by 2020. An emerging model in Taiwan improves transparency in processing by using RFID tagging of batches of tea leaves.   
In summary, Sri Lanka has been traditionally been slow to capitalise on trends in the market. We still export 80 percent of our tea in bulk format, with almost 40 percent facing value-added at import destinations and tea hubs in the Middle East. There is a massive opportunity to fast-track grow by keeping track of emerging consumer trends.   

(2) Invest in your business  
In 2005, along with the end of the quota era, we were also completely disrupted by a competitor and lost a large amount of business almost overnight. We responded by investing in innovation as a crucial part of our growth strategy, particularly by creating a Research and Innovation team. As part of this, we visited several companies like 3M, Google and Facebook to draw learnings from them. You might wonder why an apparel manufacturer would visit these technology companies, but that’s one of the most important things I can share with you – there are a myriad of learnings in other industries that you could apply to the tea industry. A couple of major takeaways are to embrace technology and professionalise.  

Embrace technological development. Automation is needed to improve productivity across the value chain and this can be done through robotics and data analysis. We also focus on digitisation to drive digital technologies to the core, to be able to play in the global digital economy and strengthen data analytics.   

Other industries have been able to revolutionise their businesses with technology: - Coffee producers have used infrared technology to reduce coffee pulp drying time from several days to hours, thereby minimising post-harvest loss. - The 8000-year-old wine industry modernised through biodynamic processes that improve the quality of the soil and the farm’s microclimate, thereby improving the taste of grapes.   

The tea industry needs to invest in digitising payment and collection methods, soil testing, geo mapping and automating book keeping. Even a drastic agricultural revolution like aquaponics could be considered an opportunity, not something to fear – have we thought about whether tea could be grown in a different way?  It is essential to develop unique systems of tea planting and not rely on tea planting systems set in place during British rule.   

Prioritise professionals. The tea industry is not attractive to graduate and professionals, who are drawn to industries like, banking, IT, hospitality. It is vital to change this through higher incentives and exciting opportunities for growth. Apparel was also an old-fashioned industry with a bureaucratic nature and formal attire but we have changed that culture completely though entrepreneurship. Our employee backgrounds are not limited to those with manufacturing and textile expertise but engineers in robotics, aerospace, mechatronics, marketing entrepreneurs, financial analysts, those who have studied in the likes of Harvard, Yale, Oxford and Cambridge. This variety brings in a global view and challenges existing legacy perspectives.   

The tea industry also needs to bring in younger entrepreneurial employees to create a culture of entrepreneurship so employees feel they have ownership of some of the wealth created through tea. These younger mindsets will drive the industry forward towards the 21st century.   

 
(3) Your supply chain   
Look upstream and downstream. As part of our retaliation to the end of the quota system, we looked at what we could do for our brand partners. We invested in the downstream value chain by moving into fabrics and other parts of our supply chain. We also built our own design and development services, pitching products to consumers instead of playing the role of a traditional contract manufacturer. Our transition out of being a contract manufacturer is also taking place via launching our own brands, to use our expertise to earn the higher margins associated with the retail space. We have launched several online brands, which has required a significant amount of knowledge in digital marketing and consumer insights.    

Trade zones outside Sri Lanka are helping the apparel industry be more global. The Sri Lankan tea industry can benefit from having a Tea Trade Zone or a bonded hub based within a Free Trade Zone in the Middle East or Africa, where global tea can be mixed and exported to compete with global pricing. Eighty percent of our tea is exported in bulk and probably blended elsewhere, so why not start doing this ourselves? Although based offshore, this still brings in revenue to Sri Lanka though a different supply chain. We need to move on from the belief that all investment should be within Sri Lanka to bring in revenue. We must shift to a mindset that we can invest in other countries if this will have a more favourable impact on the industry as a whole.   

Automate the tea auction system. This was proposed over 10 years ago and tasked to the Colombo Tea Traders’ Association but has not been established yet, even though it would be a key step towards revamping Sri Lanka’s tea export industry. India has already automated its tea auction and Sri Lanka too needs to move on to this system to access a wider selection of buyers around the world, as well as facilitate faster purchases and transparency, as well as better documentation. This also needs to link to the EDI (electronic data interchange) system, which connects exporters to Sri Lanka Customs and Sri Lanka Tea Board. The apparel industry has already established 
this link.     

Finally, the government plays a key role is ensuring the playing field is conducive. It is essential that the policies governing the tea industry are based on scientific, rational decisions and that they are kept consistent.   

We need to invest more in research and development: tea should be a popular topic of research for Sri Lankan scientists but sadly it is not. The Tea Research Institute (TRI) can be used more effectively to incentivise more efficient, viable, commercialised research. SLINTEC is a great example of a public-private institution doing excellent research and churning out patents. It is also important to support producers through replanting support or fertiliser subsidies, as this ensures the quality of the tea produced. The government can also do more to promote Sri Lankan tea on an international scale. The Sri Lanka Tea Board must utilise the vast fund collected through the tea promotional levy since 2010. We must support outbound exports the same way we support the inbound tourism industry. Finally, the state should improve the economic and social infrastructure in tea producing areas to improve the environment for those working in the tea industry.   

In conclusion, despite these internal and external challenges, we must be positive about our capacity to create positive change. Tea is Sri Lanka’s largest producer-led export, which is vital to the strength of our economy. Not only have we dedicated 4 percent of this country’s land to tea cultivation, this is also a livelihood crop, on which over one million Sri Lankans are directly or indirectly dependent for their livelihood. We can – and must – use this as a stepping stone to drive higher growth, increase FDI and support national development.