UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT

UNCTAD Expert Meeting

"Enabling small commodity producers in developing countries to reach global markets"

Organized by UNCTAD Commodities Branch

Email: leonela.santana-boado@unctad.org, Web: http://r0.unctad.org/commodities/

11 - 13 December 2006

ITC eChoupal

by

Mr. Rohit Bhatla

Branch Manager - Rajasthan, e-Choupal

International Business Division, ITC Limited

The views expressed are those of the author and do not necessarily reflect the views of the UNCTAD Secretariat, nor do they imply the expression of any opinion whatsoever on the part of the secretariat of UNCTAD concerning the legal status of any country, territory, city or area, or of this authorities or concerning the definition of its frontiers or boundaries.

ITC eChoupal UNCTAD Conference,

Geneva, 12 Dec 2006

Ramdeo speaks for 57% of India’s workforce –The Farmer!

He underscores the imperative of Inclusive Growth in an otherwise Shining India !!!

Why are farmers like Ramdeo resigned to fate ?

Because most of them are small (1.5 ha average holding)…

. …they do not have bargaining powerBecause all of them live in hinterlands (600,000 villages)…

. …they do not have access to real time information (prices, weather)Because the circumstance of each one is very different (agro-ecological conditions, resources)…

. …they cannot get customized knowledge advise (on farm practices, risk management)

Every Area of Strength of Indian Agricultureis Neutralised by a Constraint

Large Arable Land X Fragmented farm sizes

Rich & Diverse Agro- X Heavy Dependence on Monsoon Climatic zones

Strong institutional base X Poor Extension work at the farm level in R&D

Large domestic X Numerous Intermediaries consumption base

Attractive export X Weak infrastructure &inconsistentMarkets Quality

Demands of the globalising trade

1. Transition from Supply driven to Demand driven value chains• Quality as per customer needs (& changing diets)• Traceability to farms & farm practices

2. Competitiveness in Price /Value equation• Increased farm yields• Lower transaction costs along the chain

Further accentuating the need for…• Customised knowledge• Real-time & relevant information• Access to quality inputs at competitive prices• Effective vertical coordination of the value chain• Efficient Price discovery & risk management

The Insight - 1

Actually, these numerous intermediaries makeup for weak infrastructure, and deliver critical value in each leg at very low cost

But their aggregate cost makes the chain uncompetitive

And many times, by blocking flow of information & market signals, they are able to extract more profits for themselves than the value they are delivering

A more effective business model must be able to leverage the physical transmission capabilities of these intermediaries, yet disintermediate them from the flow of information and market signals

Answer : Leverage the power of Information Technology

The Insight - 2

Low Risk Taking Ability

Low Investment

Low ProductivityLow Value Addition

Low Margin

Weak market Orientation

Answer : Leverage the power of collaborative business models

The Insight - 3Information Technology and Collaborative Business Models gave us the power to design a new model

But physically reaching the nook & corner of India, and facilitating Net access to the largely illiterate farmers at lowcost, and delivering effective service is still a challenge…

The only historical success stories we could rely on were cross-industry !

Wide & Deep penetration of the FMCG retail channelRapid scale-up of Public Telephone BoothsLow cost reach & effective customer servicing by Cable TV Operators

Answer: Unleash the power of small scale entrepreneur

Our Alternative Solution Theme

Provide an end-to-end solution……with farmer having the freedom of choice, .. who should be able to take an informed decision…which delivers an effective servicenotwithstanding the fragmentation, dispersion, heterogeneity and weak infrastructure ! at low cost !!!This will create substantial incremental value through a virtuous cycle

ITC eChoupal

The eChoupal Delivery System

ICT Kiosk with Internet AccessIn the house of one trained farmer, SanchalakWithin walking distance of target farmers

Warehousing Hub / Store Managed by the erstwhile middleman, SanyojakWithin tractorable distance of target farmers

Collaborative Network of CompaniesOrchestrated by ITC With a Pan-Indian presence

The eChoupal Services

Relevant & Real-time Information• Commodity prices, Local Weather, NewsCustomised Knowledge• Farm Management, Risk ManagementSupply Chain for Farm Inputs• Screened for Quality, Demand Aggregation for Competitive Prices & Efficient LogisticsDirect Marketing Channel for Farm Produce• Lower Transaction Costs, Better Value through Traceability

The Imperative

Freedom of choice to the farmer, by design, means that we cannot expect a preferential treatment from him just because we are providing information to him !

We need to compete for business on merits !!Requiring new value capture mechanisms !!!

Another Insight : Unevolved markets in emerging economies provide interesting opportunities

Elimination of non-value adding activitiesCreation of new value through identity preservationScope for two-way flow of goods & services

Bottomline for the Farmer

Higher Incomes through• Increased Yields• Improved Quality• Reduced Transaction Costs

. Power of Scale to the Small Farmer

. Customised Knowledge despite Heterogeneity

. Real-time Information despite Distances

The Other Innovation: Who Pays?

Not the farmer !

Information & Knowledge are free of cost

Transactions only if the farmer chooses at free will

Not subsidised !

ITC shareholder looks for a competitive return, like all shareholders do

No Government money involved

Instead, latent value in the typically unevolved markets of an emerging economy is captured

Transaction Costs in APMC ChainSoybeans Example

Farmer Incurs

Trolley Freight to Mandi = 120Labour = 50Kacchha Adat = 150Handling Loss = 50

Rs per MT

370

ProcessorIncurs

Commission to Agent = 100Cost of Gunny Bags (net) = 75Freight to Factory = 120Handling at Mandi = 40

335

Total Chain 705

Soybeans Example

Farmer Incurs

Trolley Freight to ITC Hub = 120Labour = 50Kacchha Adat = 150Handling Loss = 50

Rs per MT

370

ProcessorIncurs

Commission to Sanchalak = 100Cost of Gunny Bags (net) = 75Freight to Factory = 120Storage & Handling at Hub = 40

335

Total Chain 705

120

50

Cash Disbursement Costs = 50

215

335

Transaction Costs in Choupal Chain

Bottomline for ITC

Better supply chain for ITC’s Food & Agri Businesses• Costs, Quality, TraceabilityAccess to the Underserved Rural Markets• Through a Virtuous Cycle created by “Larger Incomes”, and founded on “Trust” that is builtNew ITES Business Opportunities• Health, Education, Entertainment, eGovernanceShareholder Value through Serving Society• Also, the infrastructure serves as a reliable delivery mechanism for resource development initiatives (e.g. water management)

The Roadblocks in Execution

• Convincing farmers (Weighment, Mandi Prices)

• Aligning Middlemen (Cost, Effort, Risk Vs Margin Equation)

• Sanchalak Capability Building (IT, Communication, Entrepreneurial)

• Changing Government Regulations (APMC)

• Dealing with Poor Infrastructure (Power, Connectivity)

• Empowering the Frontline (Loner on the field, Subjective Decisions)

• Dealing with Competition (Computers Vs Motorcycles)

The “New” Commodities Business

From ‘trading commodities’ to ‘sourcing raw material’ for select customers

Customer-specific structured offers based on arbitrage opportunities in any or all of

aggregated or disaggregated lot size

delivery point

storage time

pricing mechanism

quality segregation

credit etc.

Soybeans, Wheat, Coffee

From ‘selling what is produced’to ‘help producing what is wanted’

through demand driven value chains traceable to farms and farm practices in the high value segment in the agri produce portfolio

Aquaculture

Horticulture

Organic products

Dairy

with appropriate intermediate processing activity at the hub

Leveraging Capacity

of existing eChoupal areas to expand presence in additional commodities produced in those agro-climatic zones, e.g.

Maize

Millets

Sorghum

Pulses

Mustard etc.

No additional infrastructure is required for these,

and our interface with the farmers will also be year round

Beyond Commodities …

… the journey takes another turn …

From Trading Commodities to Laying Highways

Our ringside view of rural India, while we were trading commodities, gave us some key insights

The resultant business model, ITC eChoupal, is transforming our traditional commodity trading business into a commodity services business…

…delivering more stable profits through higher margin & lower risk business portfolio on an increasing volume base

The Story in Short – Part 1

The “3 layers x 3 elements” eChoupal infrastructure, managed through “3” business principles”, has built a “Universal Business Platform”

that can efficiently carry any product / service into & out of rural India…

…that offers an “increasing returns” network orchestration opportunity to ITC

From Trading Commodities to Laying Highways

The Story in Short – Part 2

The 3 Business Principles

Information & Knowledge Free of Cost

Freedom of Choice in Transactions

Only source of income for the Sanchalak is a fee on transactions

The Size

Launched in June 2000, 'e-Choupal', has already

become the largest initiative among all Internet-based

interventions in rural India. 'e-Choupal' services today

reach out to more than 3.5 million farmers growing a

range of crops - soyabean, coffee, wheat, rice, pulses,

shrimp - in over 36,000 villages through nearly 6400

kiosks(e-Choupals) across nine states

The Resultant Network Organisation

1. Empowerment of the Community through realtimeinformation & customised knowledge

2. Community responsive grassroots organization through freedom of choice and local management with self interest

3. Efficiency through competition

4. Power of Scale through Virtual Aggregation

5. Benefits of Specialisation through Collaboration

6. Increasing Returns Ecosystem because of anchor business support by ITC, the Network Orchestrator

Vision 2010

100,000 Villages

eChoupalShareholder Value through Serving Society

Thank You