China's new development and investment frontier

As they continue to move up the economic ladder Chinese people today consume much more protein than

they used to. It is estimated that in the next five to seven years China’s meat and dairy consumption will

increase by more than 35%. This increase in consumption is driving a growth in demand for high-quality

forage such as alfalfa to be used as feed for livestock. China’s current annual demand for alfalfa far

outstrips domestic supply, with the shortfall made up by imports from the Americas. Demand for alfalfa

continues to rise as producers struggle to keep up with consumers appetites for high-quality meat and

dairy products.

Global Leaders Programme Round-upHong Kong & Gansu 7-18 July 2014

For almost two decades the Chinese government has been promoting alfalfa cultivation in dry

mountainous areas where the soil is not fertile enough for other crops to grow. Until recently cultivation of

alfalfa has primarily been for self-use and there was no formalised domestic alfalfa market. To meet the

agricultural needs of a large population and to prevent soil erosion and further desertification huge

swathes of mountainous land around china and particularly in the northwest have been “landscaped” to

allow for cultivation of crops. Rapid urbanisation in recent years has left a lot of arable and previously

landscaped land unattended. Although this land is suitable for alfalfa cultivation much of it is going to waste

and over time returns to its natural arid and barren state. The lack of rural labour is compounded by a lack

of mechnisation for harvesting, mainly due to the inaccessible mountainous terrain. Not only is harvesting

alfalfa by hand labor intensive and time consuming, it also impacts the crop quality as the plants protein

levels peak for only a short period of time and it is prone to spoiling if not pressed dry and processed

quickly.

Alfalfa: Perennial flowering legume cultivated globally as a forage crop, alfalfa is known as the “queenof forages” for its high protein, vitamin and mineral content as well as its highly digestible fiber. It isprimarily used as forage for high producing dairy cows and is also used in feed for cattle, sheep, rabbit,poultry and fish farming. Alfalfa has been scientifically proven to positively impact milk productionyields, protein content and overall cattle health.

Lanzhou, the provincial capital of Gansu, is built on the banks of the Yellow River. Over 60% of the population of Gansu lives in the countryside and the government has undertaken large-scale landscaping projects to increase the availability of arable land.

During the experiential component of the 36th

Global Leaders Programme (GLP) participants

worked closely with Gansu Modern Forage

(GMF), a leading Chinese producer, processor

and merchant of alfalfa products for the domestic

Chinese animal feed and animal husbandry

markets.

GMF was established in 2009 by one of the

founding shareholders of China’s top dairy

company Mengniu and last year achieved sales of

over RMB100 million. Over the course of the

GLP the participant group developed

recommendations for the company to strengthen

its supply chain and scale up its production to

achieve sales of RMB1.3 billion in the coming five

years.

Participants came from a variety of national and professional backgrounds including companies and

organisations such as HSBC, ORIX Corporation, Indonesian conglomerate Astra International, German

think tank the Heinrich Boell Foundation and Harvard University. They would have to learn to form a

high performance team, communicate across cultural boundaries and work together to produce a high-

quality output with real world implications.

Participants were given the opportunity to listen to GMF Founder and Chairman Zhang Yuping talk about his reasons for entering the alfalfa business and his long-term vision for the company. They were also treated to a guided tour of GMF’s pellet factory.

Gansu Modern Forage operates an alfalfa pellet production plant and storage facility in Dingxi Prefecture, 100 km from Lanzhou.

Capturing the alfalfa opportunity in Gansu

Before traveling to Gansu province, participants spent a rigorous week in Hong Kong questioning

assumptions about the roles of business and government in society, the impacts of globalisation and the

various adaptations of capitalism around the Asia region. They engaged in dynamic discussions on some

of the most pressing business issues of our time including the under pricing of natural resources,

externalities and the shifting social contract between the public, private and civil sectors.

Prominent speakers also offered their diverse perspectives on a variety of topics. Mr. Graham Barkus,

Head of Organisation Development & Change at Cathay Pacific Airways and Swire Properties, shared

insights and tools that leaders in large organisations can use to make the case for change when outdated

success models need to be replaced with a new approach. Ms. Ada Wong, JP, a staunch advocate of

creative education and cultural development and founder the non-profit Hong Kong Institute of

Contemporary Culture led a discussion on the rise of civil society and its impact in Hong Kong and

Mainland China. Professor Thomas Abraham, Director of the Master of Journalism Programme at the

University of Hong Kong and a former Editor of the South China Morning Post spoke about the critical

role of media in society and how new media is impacting the lives of everyone today.

Chandran Nair, Founder and CEO of GIFT, facilitates a discussion around some of the key challenges leaders of large organisations are facing in the 21st century

In the classroom – challenging conventional wisdom

Speakers including Mr. Graham Barkus and Ms. Ada Wong, JP led interactive sessions and encouraged participants to think differently about their own roles as leaders and the world around them.

Gansu Province is situated on the upper and middle reaches of the Yellow River in northwest China.

Similar in size to California and larger than Japan, Gansu once played a significant role as a trading center

and hub for cultural exchange along the Silk Road. It still has a rich cultural landscape shaped by Han

Chinese, Islamic, Taoist and Tibetan Buddhist influences. Like much of Western China Gansu’s economic

development has lagged behind the eastern coastal provinces and today its GDP per capita ranks 30th

out of 31 provinces. Over 60 per cent of Gansu’s 26 million residents live in rural areas and rely on

agriculture for their livelihoods.

Participants met with farming communities,

cooperatives and other key GMF stakeholders

including government officials, agricultural

machinery providers and financial institutions to

get a better understanding of the challenges and

opportunities in the alfalfa value chain.

The key issues they identified were a lack of

access to capital and appropriate mechanised

harvesting solutions among farmers and

collectors. They also saw a need for GMF to

formalize and strengthen existing relationships

with its key suppliers and create a new supply

chain model to access increasingly higher

amounts of alfalfa every year if scale was to be

achieved.

GMF’s operational hub and alfalfa pellet plant is in

Dingxi prefecture, one of the nations least

developed areas situated 100km from the

provincial capital Lanzhou. A 25 year veteran of

the dairy industry, GMF founder and chairman

Zhang Yuping has, since the company’s inception,

worked closely with alfalfa farmers, collectors and

agricultural co-ops as well as leading national

research bodies to improve the quality and

quantity of alfalfa produced locally.

Aligning interests along the alfalfa supply chain

Participants meet with an alfalfa farmer in Dingxi

Local government officials introduce their village in Hancha, Huining County to the group

The team meets with management at the Agricultural Bank of China in Dingxi city

After sites visits, focus groups and information gathering, participants worked intensively to produce

their strategic recommendations for GMF. The report describes an opportunity for GMF to grow 50%

p.a through 2019, see a tenfold increase in sales volume and achieve sales and net profit of RMB1.3

billion and RMB144 million respectively.

The group’s key recommendations to GMF include:

– Focus on the production of alfalfa pellets to take advantage of rising demand from the animal

husbandry sector, using as raw material medium quality alfalfa which can be cultivated on large

tracts of rain fed mountainous land in Gansu

– Differentiate through an inclusive business model by establishing cooperatives of alfalfa collectors

and farmers and offering these key suppliers shareholding in the parent company to strengthen the

value chain and secure consistent supply of alfalfa

– Enter into a strategic partnership with an agricultural machinery provider to develop and distribute

appropriate technology such as alfalfa harvesters customised for use on mountainous terrain and

pulley systems for more efficient transport of alfalfa

– Acquire and retain a strong management team and consider offering shareholding to instil a sense of

ownership and shared success

– Work alongside the government and farming communities to promote the utilisation of unused

mountainous land for alfalfa cultivation by demonstrating through its business model the potential

benefits of alfalfa cultivation for rural development

– Approach financial institutions for access to working capital in the value chain and socially oriented

investors with an interest in rural development to provide for rapid expansion of operations.

An inclusive business model for shared success

Participants endured long days and short nights and put their leadership skills to the test as they came to a consensus on the key elements of their recommendations for GMF

At the end of the two-week programme,

participants presented their findings at a forum

co-hosted by GMF and GIFT.

Amongst the 120 attendees were senior

provincial officials in charge of agriculture,

private sector leaders and media, all of whom

showed great interest in the topic given its

potential to support rural development in Gansu.

Some local farmers and representatives of Co-

ops who met with participants traveled hundreds

of kilometers to attend the forum. Guest

speakers included Mr. Wu Wenbin, Director of

the Gansu People’s Congress Agriculture

Committee (above right) and Mr. Li Hui, Vice

President of Gansu Investment Group.

The ideas outlined in the final report are being considered by Chairman Zhang and his team and it is

hoped they can help GMF to achieve its long term vision of becoming China’s top forage producer and

improving the livelihoods of farmers and supporting rural development in the process.

Sharing the opportunity with a wider audience

For more information on this project or the Global Leaders Programme in general please contact GIFT’s

Head of Programmes Karim Rushdy at krushdy@global-inst.com or +852 3571 8134