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Plantation Industries Minister Mahinda Samarasinghe faced with major crisis in Tea Industry

by C.A. Chandraprema

Following fast upon the US resolution drama in Geneva, Minister Mahinda Samarasinghe is once again involved in a major controversy, this time involving his Ministry – Plantation Industries under which the Tea Board and the Tea Council functions.

scenic beauty:
The Colombo – Badulla train passing through the mountains of Pathana ~ pic courtesy of: UKIn Sri Lanka

It all began with a proposal submitted to the Chairman of the Tea Council, Merill J.Fernando by the Tea Exporters’ Association last August. Fernando who is fundamentally opposed to this proposal submitted a detailed rebuttal of the arguments put forward by the exporters.

With the controversy raging, the minister thought it fit to remove Fernando, Sri Lanka’s most successful exporter, from the Chairmanship of the Tea Council. It would appear that the minister himself is inclined to agree with the exporters. Anything to do with the future of the tea industry is too important to be left simply to the tea trade.

The Tea Council is the apex body of the tea industry in Sri Lanka. The gist of the argument put forward by the Tea Exporters Association (TEA) is that Sri Lanka has been losing market share in many destinations and that steps have to be taken to arrest this trend.

TEA points out that Ceylon tea lost its predominant position in the Pakistan and Egypt market due to the emergence of higher “cuppage” CTC tea from Kenya and tariff barriers in the destination countries.

Minister Mahinda Samarasinghe at UN-photo by UN

They say that though Sri Lanka now has a free trade agreement with Pakistan, and Egypt has a more equitable tariff regime, our tea exports to these traditional markets have not revived. Once we lose a market it is very difficult to get back the share we lost.

Touching govt’s G-spot

TEA also argues that this alarming trend is due primarily to the inability of SL exporters to offer ‘competitive multi origin blends’. When seeing the term ‘competitive multi-origin blends’ readers may be led to believe that what is being referred to is a matter of ‘taste’ and that it is due to our inability to cater to the taste of the importing countries that our market share is going down and that in order to be competitive, we have to provide tea with many different blends in order to be ‘competitive’ in the market.

However in this instance, what is being referred to in terms of ‘competitive multi origin blends’ is simply a case of providing cheap tea to the market. The term ‘competitive’ refers to competitiveness in terms of price and not taste, and ‘multi-origin blends’ refers to teas from other countries that are cheaper than Sri Lankan tea.

Basically the traders are arguing that Sri Lankan tea is being elbowed out by cheaper teas from other exporting countries and that in order to arrest this trend, they recommend the setting up of a ‘tea hub’ in this country so that cheap tea can be imported from other countries and blended with Sri Lankan tea and exported so that our tea will be more ‘competitive’.

Though nothing seems to have been put down in writing, the tea exporters are apparently holding out the tantalizing possibility that this ‘tea hub’ could be located near the Hambantota port. Any talk of locating a production facility near the Hambantota port is to touch the Rajapaksa government’s G-Spot and the tea exporters are apparently working on the government for all they are worth.

However, this is something that the government will do well to consider very carefully. They should not be blinded by the need to make the Hambantota port viable in a matter of months as the opposition seems to expect. If the government acts too hastily in this matter, whatever advantage that may be gained in terms of the Hambantota port becoming more viable will be vitiated by the collapse of the tea industry which provides a livelihood for millions of people.

The main consideration is, if cheap tea is imported into Sri Lanka, to be re-exported in packaged or bulk form, what will that do to the demand for local tea? This is one industry that has to be protected because it is politically important, providing a livelihood for well over two million people. Besides, this is an industry that the Western powers have little hold over in their quest to persecute the government of Sri Lanka. Up to now, only a miniscule amount of tea is allowed into the country for blending purposes – about 1.5% of the total exported. As of now, virtually all the tea blended in this country originates in Sri Lanka.

The Tea Board strictly regulates the import of tea for blending purposes in this country. The only tea that is allowed to be imported for blending are high end teas that are more expensive than Ceylon tea. If cheap tea is allowed to be imported from overseas for blending in Sri Lanka, and exported masquerading as Ceylon tea, the main beneficiary will be the countries that produce cheap teas, not the Sri Lankan producer.

It should be remembered that the purpose of this whole exercise is to provide cheap tea to the world and since emphasis is on the cheapness, what will go more into the blend will be cheap imported tea and not the expensive Sri Lankan produced tea.

Naturally, the tea producers are up in arms against this scheme of importing cheap tea to export from Sri Lanka. The tea smallholders have registered their protest. Since cheap imported tea will become the base of the exported product the demand for Sri Lankan tea will decrease.

Value attrition, not addition

When one talks of a ‘tea hub’ the average layman may be led to believe that this would be a major processing centre which would add value to the tea being exported from it. Every kilo of tea exported from this hub will be cheaper than Sri Lankan tea. What this means is that this proposed ‘tea hub’ will not be for value addition but for value attrition -to decrease the value of tea not to increase it.

The exporters argue that when tea becomes cheaper, demand will increase and with the increase in the volume traded, the quantity of Ceylon tea being bought for blending will also increase. But there are too many ‘ifs’ here. The importation of cheap tea to Sri Lanka for re-export after blending will be a desperate gamble. Whether this gamble is worth the risk is something that has to be carefully considered.

As of now, producers confirm that every kilo of tea coming into the market is sold even though Sri Lankan tea is the most expensive tea in the world. This however does not mean that everything is hunky dory with the tea industry in Sri Lanka.

There is a genuine problem which does need fixing. The fact is that we are losing markets because our tea is expensive. To understand the problem and figure out a possible remedy, one has to understand what has been going on in this country in the name of exporting tea. Merill J. Fernando says that the lack of creativity among the exporter community has led to the present situation.

What has been happening over the past 30 years since the government started giving incentives for the export of value added tea is that local export companies became mere packers for large foreign brand owners. The local exporters were not pushing their own brands in the foreign markets.

The foreign brand owner buys the tea packed for his brand by local firms. Later, the foreign brand owner who has no loyalty towards Sri Lanka or Ceylon tea will slowly begin reducing the use of Ceylon tea in their blends and increasing the use of cheap tea from other origins so as to increase their profit margin.

Gradually the taste of the consumer in those markets is also weaned away from the more expensive Ceylon tea and they get used to cheap tea marketed under the same brand name. Since the blend would be changed in almost imperceptible quantities over a period of time, the consumer hardly notices the difference. The large brand owners think only about the profit margin and their market share and not quality, as they are in competition among themselves as well.

To highlight this lack of creativity among tea firms in Sri Lanka, Fernando has taken the example of Russia which started importing Ceylon tea in a big way after the fall of communism two decades ago. Before that they used to import all their tea from India. Hence twenty years ago, Russia was a virgin market where pure Ceylon tea could have been promoted by local brand owners, but they missed that opportunity and simply became packers for Russian importers who had just started business.

Such foreign tea importers will think only of their profit margin, and it is in their interest to reduce reliance on Ceylon tea which is more expensive. The strategy appears to have been to capture market share by having more of the better quality Ceylon tea and once the brand name is established in the market, to concentrate on the profit margin by reducing reliance on Ceylon tea.

The remedy suggested by the local tea exporters could turn out to be worse than the malady which is to allow the free importation of cheap tea from overseas to blend with Sri Lankan tea locally. Tea will then be a kind of nameless commodity like sugar with sugar produced in any country basically being the same.

Ceylon tea however has a distinctive taste and an image built up over a century which is what is selling the tea even at this moment. If it is simply cheap tea that is needed, nobody needs to buy from Sri Lanka because there is plenty of cheap tea available elsewhere. But the exporters do have a problem in that Ceylon tea is being priced out of the markets and there is a crisis. What then is the short term fix for this problem?

The answer seems to be that there is no quick fix solution and any solution will have to be in the medium to long term. The good news is that at the present moment every kilo of tea that comes into the market is sold. Even at higher prices and there is demand for more. This situation will last for some years more despite the slide in Sri Lanka’s market share in many destinations and this intervening period should perhaps be made use of to get the industry back on its feet.

High cost of production

One reason why Sri Lankan tea is so expensive is because the cost of production is so high in this country. The fact is that the large tea plantations in this country are the most inefficient in the world with the lowest yields. The tea smallholdings in this country are however more productive than the corporate sector – an incongruous situation.

Merill J.Fernando has argued in a rebuttal of the Tea Exporters Association position that if cheaper teas have to be exported from Sri Lanka, the answer would be to increase the productivity of the large estates so that the unit price of a kilo of a tea goes down. To increase yields, what the large estates have to do is what the Gunapalas and the Siriyawathies in the tea smallholding sector have been doing all along, planting high yielding VP tea, applying fertilizer and looking out for the acidity levels in the soil.

That corporate sector yields are less than half of the smallholder sector is a ridiculous state of affairs and Fernando’s argument that cheaper tea should be sought locally by improving the yields of the large estates certainly rings true. He has in fact suggested that the contracts of the estate management companies be extended to 60 or 90 year leases so that replanting and care for the soil will become a worthwhile exercise for the estate companies.

Other than increasing the productivity of the large estates, perhaps the other thing to do would be to encourage a marketing attitude in the tea industry like in the apparel sector and marketing Ceylon tea as a premium product which is more expensive but unique in taste.

It need not be said that a matter as important as allowing the importation of cheap tea into Sri Lanka is a decision far too important to be simply left to the line minister. This is a matter for a cabinet sub-committee to go into with all stake holders including the producers being allowed to state their case.

A decision that would place the tea industry at a crossroads has to be debated widely. The media has to get involved as do the political parties. The overall interest of the tea industry is more important than increasing the profit margins of a few. In fact, the last thing that this country should do is to get into the zero sum game of competing on the international market on the basis of price because once you do that, it will be a never ending cycle of lowering quality to provide a cheaper product.

Sri Lanka will in fact never win a price contest because our cost of production is high and is increasing – a point that will not be lost on the government. Even in the apparel industry, we have stopped competing on price and now concentrate on quality and ethical production practices etcetera.

An important point that Fernando raises is if everything is to be reduced to competing on price, what is the unique characteristic that we will be able to promote? There will be nothing to distinguish tea originating from Sri Lanka as against other teas from other origins. And given the fact that other countries will always be able to produce tea cheaper than Sri Lanka, this will be a zero sum game which this country will never survive.

Perhaps it would do everyone good to take a long hard look at what we are. This is no longer a poverty stricken country with dirt cheap wages. In fact wages and the cost of other inputs like fuel and fertilizer are very high in this country and this country will never be a low cost producer of anything.

Perhaps even in the tea industry, the only way to go would be to sell tea on quality and taste at a premium price. But we must also at the same time do the needful to improve the productivity of the large estates so that more tea will be available for the cost conscious market as well.

If certain importing countries like Russia want the value addition done at that end and are encouraging the importation of bulk tea from Sri Lanka to be packed at the destination, Merill Fernando sees nothing wrong with Sri Lanka complying and Sri Lankan firms setting up production facilities in the importing countries to pack tea.

However he stresses that what should be promoted is pure Ceylon tea which is not blended with any foreign tea. In the event where Ceylon tea is blended with foreign tea, then the label should clearly indicate that. One problem in the Russian market is that it allows tea to be described as Ceylon tea even if the proportion of Ceylon tea in the blend is just 51%.

Whether Sri Lanka will be able to claw back market share can be illustrated perhaps by the example of Turkey. The average Turk probably drinks more tea in a day than a Sri Lankan would in a week and drinking multiple glasses of tea is the habit there. However the tea consumed is grown in Turkey does not have the same taste as Ceylon tea.

Any Turk who drinks Ceylon tea would prefer it to the local variety. For this reason, in order to protect the Turkish producers, the Turkish government has a tariff in excess of 140% on imported tea.

One of the points that the tea exporters have raised is that companies in many markets have been gradually reducing the quantity of pure Ceylon tea in order to reduce the costs and thus over a period of time, the market gets used to the different taste and they are thus weaned away from the expensive Ceylon tea in favour of inferior teas from other origins. But any country that consumes inferior tea will immediately recognize the unique flavour of Ceylon tea and therein perhaps lies the long term salvation of the Sri Lankan tea industry.

The Turkish assignment

Sri Lanka will be opening up an embassy in Turkey soon and the fist Ambassador to Turkey will be Bharati Wijeratne, the daughter of a key tea industry figure of the past, Lofty Wijeratne. Lofty was described by Herman Gunaratne as having been totally committed to the promotion and export of pure Ceylon tea and not a mongrelized blended version of it.

Bharathi herself is Sri Lanka’s first woman tea taster. Lofty was the Consul general for Turkey in Sri lanka for 23 years and Bharathi inherited the Consul Generalship from him and held it for a further twelve years which means that the Turkish Consul Generalship has been with the Wijeratne family for 35 years.

In an usual turn now Bharathi who represented Turkey in Sri Lanka is now going to represent Sri Lanka in Turkey. Whether she will be able to persuade the Turkish government to reduce the tea tariff is doubtful because the self interest of the Turkish tea growers is bound up with the whole question.

Lofty was recommended for the Turkish Consul Generalship when he was a director of the tea exporting company Carson Cumberbatch & Co. by the SLFP government of Sirima Bandaranaike. Even at that time, perhaps the Turkish tea market was making people here salivate. The way the Turkish people drink tea has to be seen to be believed.

Bharathi is undoubtedly the best choice available for the position of the new Ambassador to Turkey. She already has extensive contacts with Turkey forged over a period of 35 years and she was the handpicked choice of the Turkish government to succeed Lofty when he retired from the Consul Generalship due to ill-health.

When she was recommended for the Consul Generalship, she was already married to Mano Wijeratne who was an opposition parliamentarian. Yet in a rare exhibition of broadmindedness the then government of President Chandrika Kumaratunga approved the appointment. The Turkish government helped in a big way after the tsunami of December 2004, by constructing 500 houses in Weligama along with shops, playgrounds and shopping centres, medical centres and community halls for tsunami victims. It was opened by the Turkish Prime Minister himself. This provided a foretaste of what Turkish-Sri Lanka relations can be if handled properly.

As such, Bharathi is certainly a better choice than a career diplomat who would have to grope his way around in Ankara. This hopefully is a fact that the career service too should recognize.

However, one thing that the Turkish example shows is that even if a certain market is consuming a particular kind of black tea, and Ceylon tea is alien to that market still, if someone in that market tastes Sri Lankan tea, he will immediately notice the difference. The moral of the story is that good tea is recognized even by those who may not have ever tasted Ceylon tea before.

Therein perhaps lies the salvation of the Sri Lankan tea industry. The owners of foreign brands may over a period of time reduce the proportion of Ceylon tea in their blends and increase profits by substituting cheaper tea from other locations; and the consumer may over a period of time get used to drinking the inferior brew; but once that consumer is exposed to genuine Ceylon tea again, he notices the difference.

If the consumer did not notice the difference, Turkey would not need to have punitive tariffs on imported tea. The pre-eminent place that Ceylon tea has, as the benchmark against which all teas are measured, is probably the biggest asset we have and it would be foolish to fritter this away for the short term profit of a few.

The reduction in world poverty, the expansion of the middle class especially in Asia, and the rise of ethically conscious markets in the west all provide a market for higher quality tea. For a country like Sri Lanka where a strike on the estates could result in a higher cost of production overnight, to try and compete on price and price alone on the international market would be suicidal. courtesy: Sunday Island

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