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Bulk importation of tea to be blended and re-exported Mahadenamutta’s solution for the tea industry:
November 22, 2016, 8:02 pm
For some time now, there has been a debate on the advisability of Sri Lanka importing cheap tea to mix with Ceylon tea to make its products less costly in the international market. Finance minister Ravi Karunanayake noted in his 2017 budget speech that the tea industry was ‘sharply divided’ on that matter and that the Prime Minister had appointed a committee to study the issue. He pledged that the government would not make any hasty decisions on the matter without consulting the stakeholders. In this interview, C. A. Chandraprema speaks to respected entrepreneur Merill J. Fernando about the wisdom of allowing the bulk importation of tea to be blended with Ceylon tea for export.
Q. For many months we have been discussing the advisability of allowing cheap tea to be imported to be blended with Ceylon tea and exported as tea packed in Sri Lanka. The moment you allow the importation of cheap tea, exporters will reduce purchases of locally produced tea and this will seriously affect the tea plantations and the small holders. There are nearly 200,000 registered workers on the tea plantations and over 400,000 registered tea smallholders. The number of those depending on the tea industry for survival could be over two million people. If any government allows the importation of tea, they will have to face the wrath of millions of people. Then why does this scheme which will destroy the tea growers and be suicidal in political terms for any government keep surfacing from time to time?
A. The origin of the concept of allowing the importation of tea goes back to 1979. The then minister of trade Lalith Athulathmudali visited the Rotterdam factory of Van Rees a tea trader who brought tea from all over the world to blend and market in the Netherlands and beyond, and he came back and said that he wanted to provide the same facility here. I objected saying the importation of tea from overseas would be a disaster for Ceylon tea. Lalith argued with me. Later President J. R. Jayewardene called for me and after listening to my explanation, he decided to shelve the plan. Thereafter, this scheme has been surfacing from time to time on the initiative of people who believe selling cheap tea is the way forward.
Q. But that’s selling somebody else’s tea, not ours ...
A. Yes. They were going to make tea cheaper by importing cheap tea and mixing it with Ceylon tea. When tea is imported for blending purposes, the Ceylon tea component in the blend is reduced. The people who agitate for the importation of tea do not care what happens to the industry or the workers or the smallholders because they believe that selling cheap is the answer to our problems. But, in actual fact we don’t have a problem. Our selling prices have been the highest in the world in the past half century but every kilo of tea produced in this country has always been sold.
Q. How is it that the politicians don’t seem to understand that by importing tea from overseas and driving the plantations and tea smallholders out of business, they will provoke a political backlash of unimaginable proportions?
A. Most politicians get carried away by new ideas and new thinking regardless of its impact on the existing structure. The tea industry has been taken for granted. Foreign tea traders have a brand name. What the product sold under that brand name contains is a different matter. The big brands of today were pure Ceylon tea up to about 30 to 35 years ago. Now they carry only a trace of Ceylon tea. But the consumer perception is that these brands are still Ceylon tea. They care cashing in on that. Inviting foreigners to come here to pack tea or allowing local firms to import tea to blend in Sri Lanka and ship as Ceylon tea would mean the end of our tea industry. The traders do not care where their profits come from. There are applications by two foreign companies including one from India, which wants to come here and import tea and pack on our soil for export as tea originating from Sri Lanka. The colonial structure of the trade was for us to grow the tea and for the colonial powers to market it and make the money. After we ceased to be a colony, big multinationals took over the trade. They are far worse than the colonial masters because they squeeze everything out of the producer. They compete on price. If we join that game and say that we should get into the bottom end of the mass market with Ceylon tea, within two years they will destroy the quality image of Ceylon tea.
Q. It’s a race to the bottom?
A. Exactly. One listed company which is at the forefront of the agitation for the importation of cheap tea sold their tea at 450 a kilo even after adding value with packaging etc., in a situation where the cost of production is around Rs. 500. My own company sells tea at over 1,500 a kilo. We market the best Ceylon tea, in the finest packaging and we are able to compete with all the big brands. For 30 years I have been dealing with retailers. On many occasions, certain brands have been sold at 50% less than our tea but after a few months they disappear having upset the market by making Ceylon tea available at a cheaper price.
Q. How is it that some exporters can export tea below the cost of production as you said?
A. The tea trade has a lot of regulations but they are not implemented properly. When the Tea Board wants to take action against a company that engages in irregular practices, politicians intervene and nothing happens. If the existing rules are applied, the only source of tea for export will become the auction in which case you will see an increase of about 500 million USD per year in export income. The Tea Board has the authority to check the f.o.b. prices of tea being exported. If I say my f.o.b. price is 500, they can ask for a breakdown of my costs and ask how much I have paid for the tea. If the cost of the tea is found to be below the net sales average relating to the respective grade at the auctions, then there is something fishy going on. In order to export at a price below the auction price you should have bought the tea at a much lower price which begs the question: Where did you get that tea from?
Q. From where do they get the tea to export below the cost of production?
A. There is what people call the ‘refuse tea’ industry. About 6% to7% of the tea produced is considered to be refuse tea. Previously this used to be put back into the tea bushes but now they are allowed to reprocess it. So, this waste tea is bought from factories at around Rs. 70 per kilo and processed and this finds itself into some exporter’s warehouses. So the average price of tea is brought down by using this tea. If the Tea Board examines the cost breakdown of our tea exports all that will stop. But the Tea Board is unable to do anything to stop this. If all the rules are implemented fully, the only source or tea becomes the auctions. Iraq used to be a buyer of good quality Ceylon tea. Some people started exporting BM Fannings (refuse tea) to Iraq and now that has become the standard. No tea must be sold outside the auction.
Q. Is this refuse tea fit for human consumption?
A. If any tea can meet ISO 3702 standards, that is black tea and is acceptable. There is a school of thought that reprocessed refuse tea or BM Fannings, can be sold at a separate auction. The bigger exporters are opposing this because if that tea is also sold at an auction, reprocessed refuse tea also goes up in price. The manufacturing facilities processing refuse tea should be declared and these can be monitored and standards enforced so that they all put out a product conforming to ISO 3702. Up to now, the tea industry has had little or no regulation. One of the reasons why the Ceylon tea sells for the highest price is because we have the lowest occurrence of pesticide residue. In the low country there is no pesticide at all.
Q. Isn’t the application of weedicide a problem?
A. Even that is being minimised. In China, 13 different insecticide and pesticide residues have been discovered in tea. In India also a similar discovery has been made. All the developed countries have very stringent tests. If a pack containing cheap imported tea that goes as Ceylon tea is found with pesticide residue who is going to take the blame for that?
Q. In the old days, it was fashionable to talk of importing and re-exporting and trading hubs and all that. But today all countries are becoming more and more protectionist because opening up causes job losses in the developed, high cost countries.
A. The World Bank says that Sri Lanka must start adding value to all its exports, not reducing the value of exports. The importation of tea will reduce the value of our tea exports, not add to it.
Q. One of the arguments put forward by the exporters who want to import cheap tea is that because our tea prices are so high, foreign brand owners keep reducing the percentage of Ceylon tea in their blends year by year which results in the demand for Ceylon tea going down.
A. Not a single kilo of Ceylon tea over the years has remained unsold. But there is some truth in what those exporters say. The Twinning brand used to be about 70% Ceylon tea. Five years ago they were down to 15%. Two years ago they were down to 5%. Now I don’t think they have any Ceylon tea at all in their blend. They have reduced their prices and become a mass market brand. Yet our tea is sold at the highest prices in the world. The reason for that is that no tea in the world is complete without a larger or a smaller component of Ceylon tea. There was a brand which was using a lot of Ceylon tea and it is now being packed in the Middle East with a lot of Indonesian and Vietnamese teas. Now that brand has lost market share after cutting down on Ceylon tea.
Q. Is this a cycle where a tea brand starts off with a large component of Ceylon tea and after capturing the market they start using less and less Ceylon tea in order to increase profits and substitutes cheap tea from Indonesia and Vietnam until there is no Ceylon tea in their blend. Then a new brand enters that market with a large component of Ceylon tea, and that brand catches on because of superior quality while the older brand which stopped using Ceylon tea loses market share?
A. Liptons yellow label was originally pure Ceylon tea. As the volumes increased they started using Indonesian tea and called their product Ceylon tea without the word ‘pure’. Then they started calling it ‘Ceylon blend’. After another year or two they called it ‘Ceylon type tea’ with no Ceylon tea at all. Now it’s plain Lipton yellow label tea. That is what everybody does but the Ceylon name is so strong that our tea has a demand. There are a lot of smaller brands marketing good Ceylon teas. Starbucks uses a brand with about 70% Ceylon tea but after a while there will be no Ceylon tea in it.
Q. So how does one get around that problem?
A. When I went to Australia I did a survey asking them about the tea they drank and whether they would buy pure Ceylon tea. I found that most of the respondents were under the impression that the tea brands they were buying contained pure Ceylon tea. It was very difficult to convince them that what they were drinking was not Ceylon tea. What we learnt from that is that the consumer perception of good tea was Ceylon tea. When I said I wanted to sell pure Ceylon tea in Australia, I was told that I didn’t have a hope in hell competing with the big brands and that the big brands knew what the consumer wants. In any event, I was given a chance to sell at Coles. When my pure Ceylon tea appeared on the shelves, Liptons brought down their prices by about 25%. But they were not able to price my brand out of the market. I never had to reduce my prices because the Australian consumer had started buying pure Ceylon tea and could tell the difference!
Q. The solution then is to sell pure Ceylon tea packed in Sri Lanka to the overseas consumers direct under Sri Lankan owned brand names?
A. The Russians came here and got our companies to pack tea for their brands. Now they are packing tea elsewhere using tea blended with cheap tea from Vietnam and Indonesia and they call it Ceylon tea. The Russian government allows them to do that. The Sri Lankan government has not taken up this matter with the Russian government. Vietnam tea and our tea look alike in terms of appearance but when you liquor it, the Vietnam tea is just water. Tea drinking is not so popular among the younger generation in the developed world and one of the reasons for this is that what is given to them in the name of tea is an indifferent drink. But if we provide a good tea, and cater to new market trends such as green tea and flavoured tea, tea will gain ground as I know through experience. We can’t make any headway as a supplier of bulk tea for others to blend and market. Our biggest strength is our quality and reputation. We are getting this high price for tea despite the fact that many countries that buy tea from us are embroiled in wars and civil unrest such as Iraq, Egypt and Syria. The way forward is to market to the world pure Ceylon tea, packed in Sri Lanka under our own brand names. That is what value addition is about. The tea industry has immense untapped potential in this regard. But as with any good thing, some money and effort will have to be invested to achieve the result we want. We must understand that it is the consumer who calls the shots, not the multinational brand owner. When you market things you are talking directly to the consumer. When the consumer asks for the product, the supermarkets and the retailers have to supply it to the consumer.