Takeover Threats from Foreign Feed Companies

Market fluctuations, credit sources and especially stiff competition with foreign producers sent about 30 percent of domestic feed producers to bankruptcy in 2011.

 

In contrast to the performance of domestic producers, foreigners have been growing rapidly in this field. Recently, Cargill Vietnam Co., Ltd - a member of the US-based Cargill Corporation, inaugurated its 9th feed mill in Vietnam with an annual capacity of 240,000 tonnes, bringing its total production capacity in the country to 1 million tonnes. It plans to increase its total production capacity to 1.5 million tonnes in 2015.

 

Hence, I fear that a current 30 percent market share of domestic companies is facing the threat of shrinking when foreigners continue to cross over.

 

We all know that feeds determine the quantity, productivity and quality of livestock. Meanwhile, domestic feed production can meet only about 40 percent to the demand. Every year, Vietnam has to import a large growing volume of feed materials for domestic production.

 

In 2009, to produce 11.3 million tonnes of feed, Vietnam had to import 53.6 percent of raw materials. The material import rose to 59.8 percent in 2010 and 60.5 percent in 2011. In particular, the import of protein-rich and energy-rich materials, supplement foods and additives accounts for 80 - 90 percent.

 

Meanwhile, according to forecasts of the Vietnamese livestock development strategy, this sector will need 18 - 20 million tonnes of industrial feeds in 2015, and 25 - 26 million tonnes in 2020. As such, it can be seen as a fertile ground for feed companies.

 

However, the competition between domestic and foreign enterprises is unequal. While Vietnamese companies have to borrow money at an annual interest rates of up to 18-24 percent and lack supports, foreigners enjoy the government’s investment incentives and can access much softer loans with annual interest rates of 1- 4 percent.

 

On the other hand, Vietnam’s investment policies are inadvertently in supportive of foreign investors as they do not have to pay value added tax and land rents if they signed contracts with livestock farms.

 

That’s right. It is undeniable that foreign enterprises make huge contributions to the animal feed industry. The participation of foreign enterprises has accelerated the growth of livestock industry in Vietnam. From a small-scaled traditional feed production model in the company of small, backward livestock industry, with the presence of world-leading feed corporations like Cargill, CP and Proconco, Vietnam has developed the livestock industry.

 

In fact, domestic feed manufacturers also have the opportunity to thrive. However, many of them have become bankrupt in this super-profit industry. According to the Vietnam Feed Association, in the last five years, the number of feed producers fell by a half. In the first quarter of 2011 alone, nearly 30 percent of shrimp and fish feed companies had to close. Some came to bankruptcy while others were acquired by foreign enterprises.

For example, after Hong Kong-based Pokphand Joint Stock Company (CPP) bought into CP Vietnam Livestock Joint Stock Company, two Japanese companies, namely Sojitz Corp and Kyodo Shiryo Co., Ltd (leading Japanese makers of animal feed), announced to invest 2 billion yen (US$24.5 million) to build animal feed mills in Vietnam, aiming to take up 10 percent of Vietnamese feed market share in 2020.

 

What exerts a pull on foreign investors is above all the market potential. Vietnam needs 25 - 30 million tonnes of animal feed a year but domestic producers can meet 11 - 12 million tonnes. Secondly, foreign companies have advantage in credit access as they can borrow low-rate loans in foreign currencies without security assets and receive supports in low-price, payment-deferred purchase of materials from their parent companies in foreign nations. In the meantime, domestic producers have to borrow at exorbitant rates.

 

Third, according to industry experts, many foreign companies are legally evading taxes by signing outsourcing contracts with livestock farms. Therefore, they do not have to pay value added tax and land rents. This fact sends advantages to the hands of foreign companies.

 

With advantages in capital, technology and management, many foreign companies are actively creating breeding animals to form a closed circle in animal husbandry.

 

According to the Vietnam Feed Association, Vietnam now has 230 feed mills, of which 58 mills are run by foreign-led joint venture producers which turn out nearly 7 million tonnes of compound feeds a year, supplying 60 percent of the market. The remaining 172 feed mills are operated by Vietnamese producers with a yearly output of 4.5 million tonnes. Or, a mill produces 2,184 tonnes a month and 26,209 tonnes a year.

In the short term, farmers seem to benefit because they can rest assured on breeding livestock, feeds, and even output market. But in the long term, with this method, companies will gradually control the market and manipulate prices. Animal feed prices have kept rising for years. In 2011, prices increased from 30 - 40 percent over 2010. The rise in feeds and stocks are gradually denting into profits of farmers, making them from owners to dependent employees and forcing them to accept the fashion of low-paid employment for those enterprises.

 

It is abnormal to see overwhelming dominance of foreign companies in an agriculture-based economy. Paradoxically, our company lacks feed ingredients and up to 70 percent is imported from foreign countries. Maize is easily grown but Vietnam has to import up to 50 percent. Up to 90 - 95 percent of soybean oil, soybean meal and wheat are imported. And, all minerals, vitamins and flavouring substances are imported.

 

In my opinion, the responsibility of restoring the balance of husbandry industry belongs to domestic companies and apparently policymakers. Without prompt actions, remaining 30 percent of the market share currently kept by local feed producers will be hard to be retained.