How Traceability is Restructuring Malawi's Tobacco Industry

How Traceability is Restructuring

Malawi’s Tobacco Industry



Jason Moyer-Lee (SOAS) and Martin Prowse (Lund University)

Development Policy Review, 2015, 33 (2): 159-174

• This paper applies a simple global value chain framework to the tobacco industry

in Malawi

• It describes how cigarette manufacturers (PMI, BAT, etc. ) govern the chain and

control first-tier suppliers, the leaf merchants (AOI, LL, JTI, etc.)

• The article describes how manufacturers have become obsessed with leaf

integrity due to litigation concerns

• Contract farming (CF) through leaf merchants allows smallholders to achieve

manufacturers’ compliance and traceability requirements

• CF leads to simultaneous process and product upgrading, but

threatens to exclude poorer growers

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1. Overview of the GVC framework with an emphasis on upgrading

2. On compliance and traceability

3. Process and product upgrading within the Malawian segment of the chain

4. Further research avenues






What is a value chain?

Typically, value chain analysis tracks a product from inputs, production, through

primary trading and processing, possible export, to manufacture, wholesale and

retail.

“the process by which technology is combined with material and labour inputs,

and then processed inputs are assembled, marketed and distributed. A single

firm may consist of one link in this process, or it may be extensively vertically

integrated” (Gereffi et al, 2005, p.79).





Input Suppliers

Producers

Global

Retailers

Wholesalers Exporters

National

Retailers

Processors/Traders

a) Short and simple chains e.g.

fresh fruits, vegetables

b) Intermediate complexity

chains e.g. nuts, seeds

c) Long and complex chains

e.g. coffee, cacao




Kaplinsky and Morris, 2000





In the value chain literature, governance refers to the mechanisms through which

chain participants are organised through power asymmetries

The group of companies which exert the greatest influence in a chain are ‘lead firms’

First-, second-, or third-tier suppliers tend to have less power

Lead firms often control the abilities of subordinate actors to upgrade their activities,

and co-ordinate and allocate roles to firms below them

The other key preoccupation of the GVC literature – upgrading – is the our main

focus

Typically, it is divided into……….






8

H i g

h e r O

r d e r

Process upgrading (increasing efficiency,

cost reductions)

Product upgrading (changes in product

characteristics)

Functional upgrading (moving to higher-value

activities with the chain)

Chain upgrading (moving to a chain with more

profitable end products)






Process upgrading is very straightforward – increasing yields through improved

(combination of) inputs

Product upgrading refers to more than a product with new physical characteristics

Reardon et al. (2001: 424) discuss how agricultural grades and standards

have led to the creation of the ‘credence good’:

‘a complex, new product with quality and/or safety aspects that cannot be known to

consumers through sensory inspection or observation-in-consumption’

• Fairtrade, organic, food safety certified are credence attributes






Five largest national markets for manufactured tobacco products are China, Russia, Japan,

Indonesia and the US, due to large populations and cultural attitudes to tobacco

Supplying these markets is extremely lucrative and lead firms in the GVC, the international

cigarette manufacturers, vigorously protect their positions

Top 5 firms: Chinese National Tobacco Corporation (41%), Philip Morris International (16%),

British American Tobacco (13%), Japan Tobacco International (11%), Imperial Tobacco (6%)

Entry barriers are substantial and have increased in recent years:

• Bans on advertising, on certain chemicals used in production and on various

additives and flavourings have increased the costs of entry

• Expenditures required for legal forms of marketing act as a barrier

• Having financial and technical resources to deal with litigation is vital





Phillip Morris International (PMI) is the largest customer and lead cigarette

manufacturer for Malawi

Japan Tobacco International (JTI) is the second biggest buyer

British American Tobacco (BAT) also has a large presence

Phillip Morris USA, Imperial and RJ Reynolds are also present

These blue-chip companies are the most desirable clients for leaf merchants

The Chinese National Tobacco Company (CNTC) does not have a major

presence as it mainly sources flue-cured Virginia for the domestic market

(which prefers Virginia Style cigarettes)






The blue chips require a reliable supply of quality leaf and concentrate supplies

with a small number of trusted leaf merchants especially AOI and LL

Market share of leaf merchants: Alliance One International 35%, Limbe Leaf 30-

35%, Premium-TAMA 15%, JTI 10-15% and Malawi Leaf around 8%.

The blue chips now wish to have intimate knowledge not just of the product but

of the production process

So leaf merchants are under increasing pressure to demonstrate that they can

comply with manufacturers’ requirements regarding:

• Chemical inputs (pesticides such as methyl bromide)

• NTRM

• Adherence to good agricultural practices (GAP)

• Reforestation

• Child labour practices






The compliance issues are partly due to the pariah status of tobacco:

• Manufacturers are under constant pressure to maintain decent public relations to

a much greater extent than other industries

• Regulators and the anti-smoking lobby use any means to demonise the industry

So the blue-chip manufacturers have invested very heavily in Corporate Social

Responsibility (CSR) strategies

Blue-chip manufacturers have also threatened to stop buying non-compliant

and non-traceable tobacco from Malawi






As contract farming allows leaf merchants to control compliance and traceability, they

are lobbying the government to increase the amount of tobacco produced this way

Privately, leaf merchants reveal that they wish to achieve complete contract farming

in Malawi because of their customers’ demands

Compliance and traceability requirements have led to significant investments by leaf

merchants in agronomy departments

The two leading leaf merchants hire Agronomy Technologies to provide data on crop

estimates, chemical use, the use of child labour and other compliance concerns

The firm also monitors the prevalence of malaria, green tobacco sickness

at a cost of US$6.30 per farmer per season






We now have different types of burley tobacco in Malawi:

• Standard tobacco (standard auction)

• Partial IPS tobacco (contract farming with silent auction)

• IPS tobacco (contract farming with silent auction)

3. Process and product upgrading within Malawi






Due to the integration of contract farming with compliance and traceability in Malawi,

partial or full IPS not only involves a process upgrade (through higher yields) but

simultaneously a product upgrade

Traceability ensures that IPS tobacco is a credence good (like fairtrade or organic

certification)





But upgrading in value chains typically occurs with exclusion of those who cannot

meet lead firm requirements

Wealthier smallholders are contracted by AOI and LL into IPS

Poorer smallholders are excluded from growing this new product

Two caveats:

• Spot auction system remains for marginal markets (although now covering only

20% of sales)

• Merchants still mop up the market (for burley, what about flue….?)






• To what extent are leaf merchants working through producer organisations? If

not, why not?

• To what extent are third parties involved in contract design and

implementation (above and beyond the role of TCC grading on the auction

floors)?

• To what extent has government offered a supportive legislative framework for

this institutional evolution?

• To what extent are leaf merchants actually investing long-term and not just for

short-term gain?

• To what extent are the leaf merchants diversifying into other commodities

and applying their expertise with traceability to other export crops?

4. Further research avenues



How Traceability is Restructuring Malawi's Tobacco Industry

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