Chaoda Modern Agriculture (Holdings) Ltd.

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Chaoda Modern Agriculture (Holdings) Ltd.

LAUNCHING CHINA’S GREEN REVOLUTION IN 1994

PUBLIC OFFERING IN 2000

LAUNCHING CHINA’S GREEN REVOLUTION IN 1994

The agricultural community was one of the earliest targeted for reform during the change in Chinese economic policies under Deng Xiaoping in the late 1970s. Under the new reform policies, the government fazed out the previous communal farming model and its notoriously low production yields. Instead, the new reforms put into place a new farming model based on individual responsibility. Farming families were then given their own plots of land, assigned to them by local village authorities. These plots were generally quite small, often no more than 1.5 hectares. Farmers were given the right to grow cash crop vegetables and fruit, which they could sell at market or to wholesalers at a profit. At the same time, however, farmers were also required to respect certain quota requirements, notably for the production of cereals, rices, and other grains vital to the government’s self-sufficiency goals.

The new model did indeed result in often significant production gains. However, farmers remained hampered by government-imposed pricing controls, and especially by the small sizes of their farms. Nonetheless, China’s agricultural activity took off through the 1980s and into the early 1990s, transforming the country into the world’s single largest agricultural region, responsible for some 40 percent of total world crop production.

In the meantime, China’s race to industrialize its economy and near total disregard for environmental concerns resulted in the massive contamination of much of the country’s most populated regions. The pollution of the country’s rivers, groundwater, air, and soil inevitably led to a series of disasters and food-related health scandals in the early 1990s. In response, the Chinese government began developing a new series of more environmentally favorable farming and food standards, ranging from the less restrictive “green” label to the organic food standards in line with those found in the West.

The potential of this new market attracted a number of China’s growing ranks of would-be entrepreneurs. Among them was Kwok Ho, son of a high-level People’s Liberation Army (PLA) officer. Ho’s father had been among those who successfully routed the Nationalist Party from the southern province of Fujian, and Ho himself was originally destined to join the country’s military elite. Ho left school after completing only the elementary level, and at the age of 14 went to work in a factory owned by the PLA. Ho later experienced the farming life first hand when he, like many of his contemporaries, was forced into the fields during the Cultural Revolution. Ho’s connections within the PLA, which, in addition to its military and defense role, grew into one of China’s largest industrial conglomerates, enabled him to launch a business of his own, that of importing and distributing integrated circuits. The reform and liberalization of the Chinese economy during the 1980s gave a boost to Ho’s business, and by the beginning of the 1990s, Ho ranked among the country’s wealthiest.

The government’s decision to devalue the yuan in the early 1990s, however, cut sharply into the country’s import trade. Ho’s business too suffered from the downturn, and forced him to look elsewhere for his investment interests. The growing concern over the country’s food supply attracted Ho’s attention, as well as the highly fragmented, inefficient farming system in place throughout the country. The promise of further reforms, which enabled the company to negotiate with villages, rather than directly with farmers, were to make it easier for the company to negotiate land acquisitions. Ho recognized that by acquiring leases on farms (in China, all land remained the property of the state), he could institute a new type of farming model, largely inspired by the mass farming techniques deployed in the United States over the previous fifty years. Yet, given the increasing health concerns over pollution in China, Ho’s vision held a major difference. Rather than rely on the massive use of pesticides, chemical fertilizers, weed killers, and the like that had largely “poisoned” the U.S. food supply, Ho set out to comply with the government’s “green” standards.

Ho established the Chaoda Modern Agriculture Company in 1994 and began buying up plots of land, targeting the country’s most rural areas still relatively spared from the pollution of China’s industrialized regions. Under Chaoda’s model, farmers were allowed to work their own land or otherwise find jobs within the company; they could also choose to lease their land to Chaoda, in exchange for an annual rent. Ho also recognized the need to invest in the development of new seeds and organic fertilizers in order to produce higher yields using organic farming techniques, setting up an initial investment of $120,000.

COMPANY PERSPECTIVES

In these few years, we have established a comprehensive quality control system for agricultural produce, realizing unpolluted control of agricultural produce along the entire process from cultivation to consumption and creating a “Green and Organic Ecological Industrial Chain.”

By the end of the decade, Chaoda had established itself as the leading producer of organic and green fruits and vegetables in China. The company’s steady land acquisitions had enabled the company to boost its total acreage to 224 hectares in 1999, and again to more than 1,300 hectares in 2000. This expansion was aided by the runup to China’s entry into the World Trade Organization, slated for the early years of the 2000s, when the country’s agricultural sector would be opened to foreign competition for the first time. This prospect in turn stimulated a widespread consolidation among the country’s farms.

PUBLIC OFFERING IN 2000

Chaoda was not alone in vying for the country’s organic foods market. By the beginning of the 2000s, the country counted nearly 750 companies working within the organic and/or green market, including an increasing number of food processing groups. Chaoda nonetheless remained the segment’s leader, and also became the first of the country’s agricultural groups to go public. In 2000, the company, registered in the Cayman Islands, listed its stock on the Hong Kong Stock Exchange. The success of the listing was underscored by the presence of Hong Kong tycoon Li Ka-shing among the initial investors, with a holding of more than 6 percent of Chaoda’s stock. Kwok Ho retained majority control of the company, with more than 50 percent of shares (reduced to just over 35 percent by the midpoint of the first decade of the 2000s).

Despite Chaoda’s strong growth, its overall market share in China remained tiny, just 0.02 percent in 2001, attesting to the enormity of the domestic market. Yet the quality of Chaoda’s produce, as well as its commitment to the country’s green and organic standards, had earned it a growing international clientele. Hong Kong became an early and prominent market for the company, where it could sell its crops at significantly higher prices than on the mainland. As a result, much of the company’s best produce became destined for the foreign market. By the beginning of the 2000s, Chaoda fruits and vegetables were supplied directly to Hong Kong’s ParknShop Supermarket (owned by Li Ka-shing) and Wellcome chains, as well as to a growing number of the island’s wholesalers. Japan also became a major export market for the company. By mid-2006, more than 30 percent of the group’s production was destined for overseas markets.

In the mainland, the company sought continued expansion as well. In 2001, for example, the company finally broke into the important Beijing market, where an estimated 60 percent of all fruits and vegetables were contaminated, through a partnership with a local green distributor. By the end of that year, the company’s revenues had grown to $72 million, and its payroll had swollen to 4,000. The company itself was described by Businessweek as “emblematic of where the government wants agriculture to go.” Where much of the rest of the country’s agriculture remained mired in the inefficient methods of the past, Chaoda had become highly profitable, and extremely competitive; indeed, in the mainland, the company boasted that it was able to maintain pricing of its organic produce at levels of the nonorganic market.

DIVERSIFICATION IN THE NEW CENTURY

In 2003, the Chinese completed a new round of reforms that provided for the further liberalization of the agricultural market. Major features of the new reforms included the dropping of requirements that all farms produce wheat, corn, and rice. The government also liberalized pricing, opened up new domestic markets, as well as stimulating the growth of the country’s export market. Chaoda also took advantage of the government’s backing of research and development efforts, and the company’s own R&D budget grew to represent 5 percent of its total revenues.

Into the new century, Chaoda had increasingly sought to diversify its operations. The company launched its own chain of fruit and vegetable stores in 2000. By the end of 2001, the company owned 130 retail stores and ten wholesale markets, covering most of the country’s major cities in the south and east. Chaoda also entered the production of organic fertilizers, and by the early 2000s operated 20 factories; the company also began working with the Fujian Academy of Agricultural Sciences to develop organic pesticides. Chaoda also began trading livestock, and entered dairy production at the beginning of the decade.

KEY DATES

1994:: Kwok Ho founds Chaoda Modern Agriculture Company in order to produce fruits and vegetables for China’s “green” and organic sectors.
2000:: Chaoda goes public with listing on Hong Kong Stock Exchange; total acreage tops 1,300 hectares.
2006:: Chaoda’s total acreage tops 18,500, as company announces plans to double its acreage in near future.

Chaoda hit a temporary snag in 2002, when its auditor, PricewaterhouseCoopers, refused to endorse its annual report. The company was also accused by some of misleading investors by claiming its production as organic. According to one source, however, some 90 percent of the company’s production was more accurately described as conforming to the Chinese government’s “green” standard, less stringent than the organic norms established in the West. Chaoda’s troubles were compounded by its difficulties achieving promised growth rates of 30 to 60 percent. As a result, the investment community soured on the company and its share price plunged.

Into the middle of the first decade of the 2000s, Chaoda largely overcame investor hesitation, in part through its continued strong growth. By the end of 2003, the company had increased its total acreage to more than 11,000 hectares, and boosted its number of production facilities to 36 factories in 11 provinces. The company had successfully entered the market for high-end teas, while at the same further expanding its export market, including its first sales in the European market, of tangerines to the Netherlands, in 2004. In that year, the company moved to transform the Chinese dairy industry, importing more than 600 dairy cows from Australia as part of an effort to breed new high-yield cattle for the domestic market. In 2005, the company launched plans to develop a new cattle facility in Upper Mongolia with a planned capacity of up to 30,000 dairy cows.

In the meantime, the rapid consolidation of the Chinese agricultural market was further reflected in Chaoda’s own growth. By the end of 2006, the company’s total land area had soared past 18,500 hectares. In that year, the company announced plans to double that total before the end of the decade. By then, too, the company, considered one of the top brand names in its category in China, had raised its market share. Yet, with just 2 percent of the world’s single largest agricultural market, Chaoda appeared ripe for continued growth into the future.

M. L. Cohen

PRINCIPAL SUBSIDIARIES

Chaoda Vegetable & Fruits Limited (Hong Kong); Desire Star (Fujian) Development Company Limited; Fujian Chaoda Green Agriculture Development Company Limited; Fujian Chaoda Liancheng Foodstuffs Company Limited; Fujian Chaoda Livestock Company Limited; Fuzhou Chaoda Modern Agriculture Development Company Limited; Huge Market Investments (British Virgin Islands); Inner Mongolia Chaoda Stock-breeding Co., Ltd; Insight Decision Limited (British Virgin Islands); Jiangxi Nanfeng Chaoda Fruits Company Limited; Timor Enterprise Limited (British Virgin Islands); Worthy Year Investments (British Virgin Islands).