Distribution Channels for Agriculture Equipment Systems in India

Overview

The long run of substantial growth in the Indian economy since liberalization in 1991 spread opportunities for business expansion and entrepreneurial start-ups in all commercial sectors, including agriculture. During the past decade and a half, noticeable gains in the purchasing power occurred for some Indian farmers. Their economic circumstances improved through the expansion and strengthening of infrastructure, rapid farm consolidation to take advantage of economies of scale, adoption of genetically modified cropping, and utilization of more productive agriculture equipment systems. However, there are 700 million farmers in India – the second largest block in the world behind China – and clearly, not all enjoyed the same level of benefit from the blistering economy as evidenced by the article, “India on Fire” in the current issue of The Economist.

Regardless of economic strata and chosen agricultural practices, all farmers are dependent on some type of agriculture equipment system to conduct their farming operations. The range of different equipment systems is quite broad, extending from low-investment handheld tools moved by draft animals to extensive, high-investment “packages” of machinery, computer systems, integrated software, and global communication networks. As with any complex marketing landscape, matching solutions with opportunities to make a difference for the customer and the company is essential.

The following graphic illustrates the interrelationships of the number of farmers, farm size, and market potential for sales of agriculture equipment systems.

The distribution clearly shows that 695 million farmers hold 80% of the arable land in India on farm sizes that are less than 2 hectares, approximately 5 acres, each. In fact, estimates suggest that 600 million farmers work on lot sizes that are each less than 1.5 hectares, or slightly less than 4 acres. This distribution is significant for several reasons, but one that features prominently when considering a marketing distribution channel strategy in India is population, both in terms of density and migration. As evident by the sheer number of people involved, unchecked farm consolidation, such as what occurred in North America and Europe since WWII, is not a viable course.

The infrastructures of urban areas in India would be quickly overwhelmed if even 25-30 % of the 700 million farmers scattered across India abandoned their rural homes in hopes of brighter futures in the cities. The challenge facing India, then, is to improve agriculture practices, increase output, and raise the quality of life for 700 million farmers so they choose to stay put. Not an easy mandate to meet.

Such distribution coupled with a wide variance in farming conditions within India’s agricultural regions and a diversity of farming methods and crop portfolios in each creates a complex marketing space that is anything but homogeneous. Developing a distribution channel strategy under these circumstances is problematic unless due consideration is given to the segmentation scheme and the value propositions for those segments.

Channel Design and Infrastructure

Regardless of segment, the design of distribution channels is dictated by the reach, capability, and capacity of three fundamental systems of infrastructure: information / communication technologies, electrical power, and roadways / waterways.

1) Farmers, no matter how remote, have to communicate: among themselves, with suppliers, downstream processors and retailers, government agencies, and financiers. The more direct the connections without brokers and middlemen the better. ITC has carried this point further than many through the implementation of their trademarked e-Choupal system. Comprised of self-contained solar-powered kiosks, satellite downlink stations and cellular microwave towers, and computers, nearly 4 million farmers throughout India are able to communicate by phone, access the information from the Internet, conduct online transactions, and make daily decisions about their farming operations.

A successful channel strategy begins with the virtualization of the products, services, and solutions so they flow through the information and communication networks to current and prospective customers. This constitutes a clear value proposition through improved decision making. It also establishes the first level of trust that the relationship between provider and customer is not exploitative, but mutually beneficial.

2) It takes electrical power for a farming operation to function, despite where it is located or what is in its business portfolio. Currently, India imports 100 million tonnes of crude oil per annum and is projected to import 300 million tonnes per year by 2030. In addition, India possesses the fourth largest coal reserves in the world. However, consuming it to generate electrical power in an environmentally sound manner is problematic and costly to resolve. To continue aggressive economic growth while not compromising the environment or being held hostage, politically, by unfriendly, oil-rich nations, India must develop alternative energy sources. In a press release earlier this week, Indian president, Dr. A.P.J. Abdul Kalam, committed to put India on the path toward energy independence by 2030. Furthering the use of electrical power generated through renewable energy sources like wind, solar, geo-thermal, and biomass / methane is central to India meeting this long-term energy goal.

A successful channel strategy contributes to this in a two-fold manner. First, it discourages more dependence on oil by delivering agriculture equipment systems that do not require fossil fuels to operate. Second, it encourages the development, commercialization, and adoption of alternative energy sources to generate electrical power for agriculture. This enables farmers in rural areas where the electrical grid does not reach to have the technologies available to generate the electrical power they need. Also, as the grid becomes available they have the opportunity to draw from it as needed and transfer surplus power they generate onto it for revenue. This posits a value proposition that reduces the cost of farming operations and improves productivity and profitability. Furthermore, fostering an alignment of business interests with government intentions and policies establishes a second level of trust between the provider and customer.

3) As farm productivity increases so do variety and volume of inputs and outputs. Moving, storing, applying, and disposing of more and more material within the same block of time drives the food system to hit the limits of capability and capacity preventing it from working efficiently and effectively. India has a number of critical initiatives underway that target an overburdened infrastructure for receipt of more resources and assistance as evidenced in “Priorities for The New Millennium” by the Asian Development Bank. This is complemented by a continuing effort to setup Special Economic Zones (SEZ) that, in part, facilitates the building of critical infrastructure. It also has a dampening effect on population migration due to farm consolidation by creating jobs that can be filled by those who are displaced from farming operations. A speculative argument by Indian development economist, Atanu Dey, and Vinod Khosla advances a concept called Rural Infrastructure Services Common (RISC), that addresses rural population, infrastructure, and economic improvement. While not necessarily the answer, it does offer insight into the degree with which people of influence and power in India are aware of the issues and are searching for answers.

A successful channel strategy distributes information, methodologies, and capabilities to people engaged in agriculture so that they can work through or around infrastructure deficiencies or build-up the infrastructure so that it is no longer an impediment to growth. Of particular importance is the delivery of product and service packages primarily intended for agricultural operations but can serve a dual purpose in building, upgrading, or maintaining physical infrastructure such as roads and waterways. This establishes a value proposition based on multi-use applications for basic equipment systems thereby leveraging the investments by farmers and contributing to additional growth opportunities. Because such an approach does not place the farmer in a bad situation where the benefits promised by increased productivity are cancelled through losses due to infrastructure weaknesses, a third level of trust that speaks to a long term commitment by the provider to the customer.

To design a distribution channel strategy for agriculture equipment systems in India, it is a critical to first understand information / communication technology, electrical power, and roadway / waterway infrastructures then, respond to the business context established by them. As the graphic below suggests, the rate of adoption for various agriculture equipment systems varies from one segment to another depending on the size of the farming operation, the ability of farmers to take advantage of available opportunities, and the potential for sustaining the business. Projecting across a ten-year period, greater adoption, market share, and revenue will go to the provider of systems that span across the full landscape of Indian farming operations.

To try to sustain a growth strategy by ignoring the bottom-of-the-pyramid (BOP) representing the vast majority of farmers and tapping the upper-end who lead the adoption curve and have the most resources to invest will yield short-lived and unsatisfactory results. Accusations of exploitation of the masses will take its toll on reputation, incite resistance, and drag down sales performance as reflected in numerous press articles (“Farm Widows in India Fear Crop of Creditors,” by Aparna Pallavi and “The Tale of Three Widows,” by Jaideep Hardikar in India Together online magazine) and research papers (“Biotechnology and Suicide in India,” by Glenn Davis Stone) about increases in farmer suicides.

Moving Forward with a Distribution Channel

Given these dynamics, there are three steps in initiating, expanding, and sustaining a distribution channel for agriculture equipment systems in India:

  1. Take advantage of existing or supplement information and communication networks to disseminate valued information about agriculture in an Indian context to prospective customers. This is a low-price, high-value service with low entry barriers and costs that quickly establishes a first level of trust upon which additional value can be delivered.
  2. Expand upon the initial business information to include knowledge about the larger Indian economic and political “system” in relationship to technological developments and the realities of community life to deliver product and service packages that make a difference for the agricultural businesses, environmental conditions, and community stability. This is a moderately priced, high-value package of services and products from different providers that collectively leverages the investment of the customer while providing an acceptable return for the providers.
  3. Engage major players from industry, government, academe, and the community to affect larger, more capital-intensive projects that serve broader objectives to build more capacity and further improve productivity. This is a higher priced, high-value package of services, products, and solution management from a wide range of providers.

Essentially, this is an “infrastructure first” approach that endears the company to the people by putting in their hands the information, knowledge, and resources they need to be successful. This is the key differentiator among equals. It builds a trusting relationship based on the clarity of motive, integrity in deed, and delivery of what works for the majority before moving into more extensive and riskier endeavors that may exceed the customer’s boundaries of healthy speculation. This means that the marketers, the dealers, and the sales force must know their customers so they can keep them positioned for sustained success without overrunning their headlights. And this brings us back to best approach for partnering with the Indian farmer: focus on improving the infrastructure – it is THE winning strategy!

Originally posted to New Media Explorer by Steve Bosserman on Saturday, February 3, 2007

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