Increasingly, multinational companies are establishing raw material production in developing countries to feed their supply chains. An April 12th article in The New York Times reported on Wal-Mart’s expansion in India and the establishment of its own local vegetable production to supply new retail stores.
Other companies have stepped out of their core businesses and invested in agricultural production to secure raw material supply chains. Michelin owns rubber plantations in Brazil, and Mercedes Benz and Leyte State University in the Philippines work together on a project that is intended to supply Mercedes with fibres from banana plants for car seats. Hoegh, a Norwegian logistics company, owns orange and apple plantations in southern Africa, using its logistical networks to produce and market locally produced orange and apple juice.
The question is, under what circumstances these investments happen and how they affect local markets? Wal-Mart has engaged in supporting Indian farmers with training and inputs, and farmers are reporting increased yields. Food prices are expected to drop when Wal-Mart expands this business model. On the downside, this model – with its tightly integrated supply chains – places more market power in fewer hands and, thus, might contribute to the consolidation of markets. The Times observes that:
Not everyone is happy about the company’s presence here. Many Indian activists and policy makers abhor big-box retailing, fearing that it will drive India’s millions of shopkeepers out of business.
In mature markets like Europe and the USA such effects are buffered by competition and regulation, but in less mature markets this might lead to farmer dependency on a single buyer.
But whatever the long-term outcomes of this trend, Wal-Mart (and others) have introduced innovative and sustainable techniques. The Times describes how:
… visitors can see some curious experiments: insect traps made with reusable plastic bags; bamboo poles helping bitter gourd grow bigger and straighter; and seedlings germinating from plastic trays under a fine net.
Post written by Sebastian Derwisch, consultant to CAS-IP