Underlying business model
Huong Hoa’s main business is the production of industrial starch for export. Sales are high given strong current demand from China. However, the company recognises that future profits depend more than anything on securing a reliable cassava supply from farmers. All farmers in Vietnam are smallholders, with average plots of one hectare. There is little diversification in farm size, due to the history of the country which meant that all land was government property. Thereafter, families were allocated small private plots of land during the land allocation programmes in the early 2000’s. The farmers in North-Central Vietnam however are poorer, ethnic minority people who have benefited less from recent development trends in the country due to social and cultural differences.
Huong Hoa’s business model focuses on ensuring adequate and timely supplies of cassava from its suppliers over the long term. This involves not just offering a fair price to farmers for their crop. Instead, their processing business is made sustainable by aiding farmers in achieving the necessary quality and quantity standards, and through a more sustainable supply of cassava throughout the year. In addition, and perhaps most importantly, the company is actively trying to build trust and loyalty among farmers by delivering what it promises. Building trust has been an important factor, especially since the processing company is working with ethnic minorities. In order to build trust between farmers and the company, Huong Hoa found bilingual staff in the communes who acted as trusted intermediaries.
Because of this, Huong Hoa provides services to farmers to build their confidence in the factory and develop long term relationships. It is promoting sustainable agricultural practices to make sure that it has ample supplies of cassava in the long term. Farmers now receive a complete agricultural extension service from the company.
When the plant opened in 2004, Huong Hoa found it difficult to ensure adequate supplies of cassava for processing. Farmers were not organised and individually lacked the capacity to harvest large quantities of cassava for collection at an agreed time. In addition, growing practices were inefficient. Soil fertility fell with repeated planting of cassava, which caused farmers to shift between several plots, thus leading to an inefficient use of farmland. Factory Director Ho Xuan Hieu was concerned that it would be difficult for farmers to maintain yields, as soil fertility fell along with repeated planting. Lastly, farmers all planted their cassava at the same time during the season, which resulted in one large harvest peak during the season. This was unfavourable for all parties: the processor had to handle all the cassava at once (since cassava needs to be processed fresh in order to maintain its quality), while the processing facilities remained idle for the rest of the year; a peak in harvesting resulted in large price fluctuations which were unfavourable for farmers as well as the processor.
As governmental extension services for cassava farmers barely exist (most extension programmes of the government focus on rice and fruits), the company addressed the production problems by re-training a team of field staff. This team were already employed, but they focused on sourcing and buying of cassava and they were now trained to organise cassava farmers into informal knowledge groups. They then provided the groups with training in leadership, group cohesion, and the cultivation and harvesting of cassava. The company introduced improved varieties of cassava and farmers were taught how to plant using a dressing of fertilizer to maximise yields. Ho Hoat, a farmer group leader from the Paco ethnic group, explained that his groups are learning how to cultivate an improved variety of cassava with organic fertiliser which has proved capable of raising productivity by 25% or more. The introduction of several new varieties enabled the company to promote the sequencing of planting to spread the harvest throughout the year and avoid overstocking at any one time. Cassava is harvested after 8-9 months with farmers now sharing labour on each other’s farms to dig the cassava out of the ground in time for collection by the company.
Huong Hoa buys directly from farmers at buying points in the communities as the co- operatives that are found all over lowland Vietnam does not exist in the higher altitude parts of the country. Farmers are paid directly in cash. Farmers are paid US$100 per metric tonne. With the use of organic fertiliser the aim is to keep yields above 10 mt per hectare. This would give farmers a gross income of at least US$1,000 per hectare of cassava grown. No formal deductions are made from the price paid for cassava to cover extension costs, although it must be assumed that extension costs are built into the price paid. Farmers are expected to finance the cost of fertiliser themselves.
The factory currently obtains its supplies of cassava from 5,000 (note 1) smallholder farmers, mainly of the Paco and Van Kieu ethnic groups. These groups are among the poorest in the country. It has plans to increase these numbers by another 2,000 in order to bring production up to the factory’s capacity. One thousands of these will be from Laos along the newly-established East-West Economic Corridor that links Vietnam to Laos and Thailand.
(Note 1) The other enterprise mentioned in the introduction is working with similar numbers of farmers, which brings the total number of farmers affected to around 10,000.