Báo cáo khoa học nông nghiệp: SMALL-MEDIUM ENTERPRISES IN THE LIVESTOCK FEED SECTOR IN VIETNAM (VOLUME I)

INSTITUTE OF POLICY AND STRATEGY FOR AGRICULTURE AND RURAL DEVELOPMENT CENTER FOR AGRICULTURAL POLICY ---------------------------------------------- CARD Project 030/06 VIE: Developing a strategy for enhancing the competitiveness of rural small and medium enterprises in the agro-food chain: the case of animal feed SMALL-MEDIUM ENTERPRISES IN THE LIVESTOCK FEED SECTOR IN VIETNAM VOLUME I: Livestock feed production Pham Thi Lien Phuong1, Nguyen Thi Thinh1, Donna Brennan2, Sally Marsh2, Bui Hai Nguyen1 1 Center for Agricultural Policy, Institute of Policy and Strategy for Agriculture and Rural Development, Hanoi 2 School of Agricultural and Resource Economics, University of Western Australia Hanoi, April 2010 EXECUTIVE SUMMARY The origin of this study goes back to previous research on the livestock feed sector in Vietnam that has shown high costs and low productivity in the overall sector. However, no previous study has looked at the differences between mills of different production scale, mills by region and ownership types. Therefore, previous solutions to enhance the competitiveness of feed mills, especially small and medium enterprises, are usually generalised rather then specified for each type of mill. This study has focused on specific mill types in the Vietnamese livestock feed sector with a particular focus on small and medium enterprises (SMEs) in different regions. This report provides a current overview of the Vietnamese livestock feed production sector. Besides outlining the environment and infrastructure within which feed mills are working, an important part of the report was to provide information on how feed mills operate along their supply chain, describing relationships with their material suppliers and output customers. Data was collected during mid-2008 using a survey of 62 feed mills situated throughout the country. Information collected included that concerning the production and business activities of the different sized feed mills, their distribution channels, and their technology levels. The focus of this report is on comparing SMEs and large enterprises with regards to the production and business activities of enterprises such as material input use, storage, product types, quality control, and type of customer. These activities give indications of how SMEs compete with larger feed mill enterprises. The mills have been categorised in the following way in the analyses: small mills are those producing less than 10,000 tonnes per annum; medium mills are those producing from 10,000 to less than 60,000 tonnes per annum, and large mills are those producing 60,000 or more tonnes per annum. In this study we have explored aspects of competitiveness in the feed mill sector. Competitiveness in the sector is likely to involve more than cost efficiencies as a result of economies of scale. Competitiveness in the sector is also associated with quality aspects of feed (and perceptions of quality), services provided along with the sale of feed, and procurement and distribution channels used by the mills. We found statistical evidence in this study that cost of production was inversely related to scale, with small enterprises having significantly higher costs of production per kg of output than medium enterprises which had higher costs of production than large enterprises. This alone is not necessarily an indicator of greater inefficiency of SMEs. For example, we found that SMEs were more focused on production of concentrate than larger mills. Concentrate production has higher raw material input costs per kg of output, so cost of production per kg of total output would necessarily be higher for those producing more concentrate. We found no statistical evidence to indicate that small enterprises paid more for the key raw material inputs used in production of feed. Analyses of prices paid by location also indicated that there were no significant differences between the northern and the southern regions of Vietnam. Our findings indicated that raw material costs made up about 80% of the total cost of production in feedmills. An analysis of costs other than raw material costs showed that large mills had significantly lower unit costs than small mills. We also found other indicators, outlined in detail in the report, to suggest that the lower cost of production experienced by large feedmills may reflect greater efficiency. i Our data indicate that small mills (producing less than 10,000 tonnes per annum) are likely to struggle to remain competitive. The data indicate that they face significantly higher costs, and sell some feeds at significantly lower prices, resulting on average in a significantly lower profit. Anecdotally, this is supported by reports of small mills ceasing business, and our observations when conducting the survey of many previously listed small mills no longer in business. However, our results support the idea that medium-size mills (producing between 10,000 and 60,000 tonnes per annum) are remaining competitive, and have costs and product mix and prices similar to large mills. Our results show that the supply/distribution chains operating for SMEs and large firms in the livestock feed sector are quite different. SMEs source their raw materials and distribute their products differently to large feedmills. They deal more with small householders and traders both for the procurement of raw materials and in the distribution of their products. Large mills are more dependent on imports (e.g. maize) to meet their raw material requirements, whereas SMEs are more likely to be able to source sufficient domestic supplies. It is likely that small-medium feedmills do provide more direct support to other small-medium enterprises operating in the livestock sector. Quality control operates at a lower level in domestic mills compared to foreign-owned mills and mills operated by joint venture partners, although protein content (as nominated on the feed label) was not statistically lower in feeds produced by domestic mills compared to foreign mills. However, the fact that advanced international standards for quality control such as ISO and HACCP are only applied by foreign-owned and joint venture companies, indicates better quality control processes for both raw materials and output products from foreign/large companies. These mills are also more likely than domestic enterprises to have a quality control laboratory, to have separate production lines, to own automatic cleaning systems and to use least-cost feed ration software. Based on the findings of this study we make the following policy recommendations for policy makers: • Focus is needed on quality control. If long term food safety and export potential is to be reached, the Government of Vietnam needs to address quality control issues associated with the production of livestock feed products. • Restrictions on the movement of goods due to irregular police conduct need to be addressed. • Invest in domestic production of raw materials used in feed production. • Credit support for SMEs in the sector should be expanded. • Support and expand the role of the Vietnamese Animal Feed Association (VAFA). • Investigate the possible ways the government may provide price support for raw materials and livestock feed outputs. We suggest the following recommendations for SMEs operating in the sector: • Small mills need to increase their scale of operation. • Quality control standards need to be raised. • Continue to explore and exploit niche market opportunities. • Consider advantages from diversification and/or a cooperative structure. • Support a strong role for the VAFA. ii ACKNOWLEDGEMENTS The authors gratefully acknowledge funding for this research work from AusAID’s CARD Program for Project 030/06 VIE: Developing a strategy for enhancing the competitiveness of rural small and medium enterprises in the agro-food chain: the case of animal feed. The authors acknowledge contributions made to the research work from CAP staff other than the listed authors, including: Pham Tuyet Mai, Tran Cong Thang, Nguyen Ngoc Que, Nguyen Do Anh Tuan, Nguyen Anh Phong and Nguyen Le Hoa. The authors also acknowledge helpful discussions with Mr Le Van Lich (VAFA), Mr Tran Cong Xuan (VPA), Ms Bui Thi Oanh (MARD) and Mr La Van Kinh (South VAAS) as well as participants in the two stakeholder workshops held in December 2009 in Hanoi and January 2010 in HCMC. Advice on technical issues was received from the Vietnamese experts mentioned above, and also from Dr. Johanna Pluske (livestock economics consultant) and Professor John Pluske (animal nutritionist from Murdoch University in Western Australia.) Feedback on draft versions of this report was provided by Dr Johanna Pluske and we highly appreciate her useful and critical comments. Finally, we acknowledge and thank feed mill survey participants for their willingness to support the survey work and give details associated with their businesses. LIST OF ABBREVIATIONS ANOVA Analysis of Variance ASEAN Association of South East Asian Nations CAP Center for Agricultural Policy CARD Collaboration for Agriculture and Rural Development CP Charoen Pokphand DLP Department of Livestock Production FAO Food and Agriculture Organization GDP Gross Domestic Product GMP Good Management Practice HACCP Hazard Analysis Critical Control Points ISO International Organization for Standardization MARD Ministry of Agriculture and Rural Development MCP Mono Calcium Phosphate NSD No Significant Difference SD Standard Deviation SME Small Medium Enterprise SOE State Owned Enterprise VAFA Vietnamese Animal Feed Association VAT Value Added Tax VBARD Vietnamese Bank for Agriculture and Rural Development VND Vietnamese Dong iii TABLE OF CONTENTS EXECUTIVE SUMMARY ..................................................................................................i LIST OF FIGURES......................................................................................................................vi LIST OF TABLES......................................................................................................................vii 1 INTRODUCTION.......................................................................................................9 1.1 Background........................................................................................................9 1.1.1 The livestock sector in Vietnam ..................................................................9 1.1.2 Small medium enterprises (SMEs) in Vietnam ..........................................9 1.1.3 SMEs in the livestock feed sector in Vietnam...........................................10 1.2 Objectives.........................................................................................................10 1.3 Research questions........................................................................................11 1.4 Methodology.....................................................................................................11 1.4.1 Background research.................................................................................11 1.4.2 Survey design and sites..............................................................................12 1.4.3 Sampling design.........................................................................................12 1.4.4 Data collection and processing ..................................................................13 1.5 Limitations and structure of the report.........................................................15 1.5.1 Limitations.................................................................................................15 1.5.2 Structure.....................................................................................................15 2 RECENT CHANGES IN THE VIETNAMESE FEED INDUSTRY .......................16 3 BACKGROUND INFORMATION ON FEED ENTERPRISES IN VIETNAM.....21 3.1 General characteristics...................................................................................21 3.2 Labor use and wages.....................................................................................22 3.3 Infrastructure....................................................................................................25 4 COST STRUCTURE AND RAW MATERIAL USE...............................................28 4.1 Cost structure of feed enterprises................................................................28 4.2 Procurement of raw materials.......................................................................29 4.2.1 Prices paid for raw materials and percentage of raw material from different sources ....................................................................................................................29 4.2.2 Providers of raw materials.........................................................................33 4.2.3 Payment method for input purchase ..........................................................34 5 FACTORY OUTPUT................................................................................................36 5.1 Output types.....................................................................................................36 5.2 Profit..................................................................................................................39 5.3 Market share and competition.......................................................................40 5.4 Nutrient content and additives use...............................................................40 6 SUPPLY CHAIN.......................................................................................................42 6.1 Distribution channels – transportation distances .......................................42 6.2 Distribution channels - type of customer.....................................................42 6.3 Overview of input supply and output distribution channels for different scale enterprises.........................................................................................................45 6.3.1 Supply sources and distribution channels for large feed mills ..................45 6.3.2 Supply sources and distribution channels for medium feed mills .............46 6.3.3 Supply sources and distribution channels for small feed mills..................47 6.3.4 Summary of input supply and distribution channels..................................47 6.4 Payment methods...........................................................................................48 6.4.1 Payment methods for complete feed..........................................................48 6.4.2 Payment methods for concentrate feed......................................................49 6.5 Services............................................................................................................50 iv ... - 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