FBA Issue 22: September / October 2008
Asian feed industry investment flows: The direction of power
This is a most interesting time in the development of Asia's feed industry. What was mostly a humble, farm-based cottage sector a century ago is now a vertically integrated enterprise dominated by large - and increasingly Asian multinationals.
The rise of Asian feed giants has both a political and economic component to it. Economically, we describe how Thailand's domestic feed millers used textbook liberal economics to piggy-back their ascendancy on the country's export-driven poultry and aquaculture sectors. In the same vein, we see how the Philippines unconsolidated, protectionist feed sector squandered the head start that early multinational investment gave it.
Politics is outside the scope of our articles, which cover feed markets, yet plays a role in them. China, sensing that western feed giants were starting to dominate its feed sector in a manner reminiscent of the Philippines, recently banned new foreign investment in its feed industry. Yet, despite the weakness of China's domestic feed companies, they can leverage their home market's economies of scale to open new mills in southeast Asia.
This coincidentally, is the opposite of Thailand, where, having outgrown their limited domestic market, giants such as Charoen Pokphand are creating economies of scale by establishing vertical feed-to-frozen meal supply chains in neighbouring countries. Moreover, Thailand's vertical and cross-border value chains represent an interesting form of import substitution and feed sourcing.
By investing in overseas vertical feed-to-meat value chains, they pre-empt local governments from setting up tariffs against Thai feed or meat exports by substituting their locally sourced feed and meat. Second, by investing in contract farming of grains such as corn within ASEAN, they ensure that their domestic Thai mills have adequate, low-cost feed raw materials.
Finally, in addition to the economic and political facets that govern feed sector investment, technology is taking on an ever-more critical role in the milling process. By raising productivity, it enables feed mills to stay one step ahead of rising grain prices and supply shortages. Names as diverse as Oracle or national telecom operators are now playing a multitude of roles in raising feed manufacturing efficiency.
These include real-time updates on payments, logistics monitoring, inventory tracking, and detailed, quantitative control of every step of the actual milling process. In addition through innovations such as an enterprise dashboard monitor, a decision maker can monitor all cost, revenue, supply and demand situations throughout the feed supply chain - instantaneously and in real time.
Such innovations allow executives to see and monitor emerging situations as they happen - not after they occur through a delayed communication from middle management. This type of online, real-time awareness and proactive control was first incorporated into manufacturing industries almost a decade ago but we now see it making its way into advanced feed industry players throughout Asia.
However, not all national feed industries move at the same speed. Some, like Thailand's advance far more quickly than others, such as those of Vietnam or Laos. And the resulting large disparities in feed sector performance do not only exist between countries but in some cases, internally too. For example, the Philippine feed industry, which is in many respects promising, is held back by large internal disparities. A handful of advanced companies provide over half of that country's livestock feed. The dozens of unconsolidated players at bottom of the market hold back the entire feed sector.
Ultimately, it is these disparities in technological level, scale or capital which drives today's cross border investment in Asia's feed sector. Some, like Thailand, are fundamentally strong enough to ward off the encroachment of multinational giants and expand abroad. Others, such as China, are geopolitically strong enough to protect it from outside control, while leveraging scale economies to enter weaker Asian states.
And the fact that China found it necessary to protect its immature feed sector from international feed industry investment has the following profound implication: Driven by disparities of technology or capital, cross-border feed industry investment is ultimately a metaphor for the flow of political and economic power. There is nothing more fundamental than feed, as who controls it controls what we eat. Hence, we examine the feed industry investment of two countries, who is investing in them, and which nations they are investing into. And in doing so, we learn who in Asia is gaining sovereignty over the food supplies of other nations - and who is losing it.
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