Collaboration for Agriculture and Rural Development (CARD) Program 262 ENHANCING THE COMPETITIVENESS OF RURAL SMALL AND MEDIUM ENTERPRISES IN THE AGRO - FOOD CHAIN: THE CASE OF VIETNAM’S ANIMAL FEED INDUSTRY Project title: Developing a strategy for enhancing the competitiveness of rural small and medium enterprises in the agro - food ch ain: the case of animal feed Project code : CARD 030/06 VIE Authors: Dr Nguyen Do Anh Tuan 1 , Pham Thi Lien Phuong 1 , Nguyen Thi Thinh 1 , Sally Marsh 2 , Dr Donna Brennan, Prof John Pluske 2 Project Implementing organisations: 1 Center for Agricultural Policy ( CAP) - IPSARD 2 University of Western Australia SUMMARY The study provides a comprehensive picture of the animal feed sector in Vietnam (both supply and demand side) upon data collected from 2 main surveys: feed mill survey investigating the supply side and producer survey investigating the demand side. The results show that, on the supply side, SMEs appear to have less competitiveness than large ones. That is reflected in some aspects such as higher production costs per kg output, using more labor, limi ted quality control, limited access to capital and land, and many small enterprises have losses. However, small and medium enterprises also have strategies to maintain their share in the market. Several strategies are used including: focusing on production of concentrate feed rather than complete feed as the large enterprises do; selecting plant locations in rural areas to use domestic supplies of raw material inputs; supplying products mainly for small producers; provision of credit, delivery services. On the demand side, larger pig and chicken producers are more likely to use a higher percentage of industrial feed in their livestock diets. In term of production cost, industrial feed is shown to be a more cost - effective diet for chicken producers. However, there is some evidence supporting the cost effective use of mixed feed – particularly for pig production. Another noticeable result is that few surveyed producers were found to be using domestic brands of industrial feeds. Foreign brands were clearly prefe rred by both pig and chicken producers. The main reason given for this choice by producers was that foreign brands were considered to be of higher quality and give better productivity. This once again mentions about issues related to quality control of SME s. Based on the main findings of the study, some policy recommendations focusing on investment, scale increase, quality control are given to policy makers and SMEs as well. 1. Introduction In Vietnam’s agriculture sector, livestock plays a very important role with its share ranging from 22.6 to 25.5% annually and is considered as one of the important pillars of a sustainable development strategy. Over the last years, due to the effects of the urbanization process and CARD 030/06 – Enhancing rural SME competitiveness in animal feed sector 263 income growth, the demand for meat has increased substantially. This leads to a shift in the production structure of agriculture from cultivation to livestock and services. However, in livestock production, high cost and poor quality of animal feed are big problems. One of the best solutions i s to improve quality and reduce cost production of animal feed as well as increase income for the rural areas through enhancing competitiveness of SMEs. Up to now, few studies have analyzed the economic effectiveness of SMEs, and especially no study has be en done on assessing the competitiveness of SMEs in comparison with large, foreign - owned or joint venture enterprises in Vietnam and other enterprises in the world. Because there has not been much investigation of agro - industrial SMEs, there are many unans wered questions about the level of competitiveness, whether constraints to competitiveness can be overcome, and whether policy changes can encourage the development of SMEs in this sector. The study of competitiveness will answer more general questions abo ut the nature of economies of scale in the industry, factors affecting the costs of production and marketing of animal feed, and will lead to policies that enhance the competitiveness of the sector. 2. Objectives and M ethod ologies 2.1. Objectives  Unders tanding the role and performance of SMEs in the animal feed sector in other countries, draw lessons from their experiences and apply for conditions of Vietnam;  Providing a quantitative assessment of the factors affecting the competitiveness of the animal f eed industry in Vietnam; and  Providing policy recommendations to the government with regard to the efficiency of firms operating in the livestock feed sector, and provide advice to SMEs competing in the livestock feed sector . 2.2. Research Methodologies There are two main surveys conducted under the study 2. 2.1 Feed mills survey This survey aims at providing a general picture of the Vietnamese feed sector with a focus on comparing SMEs and large enterprises with regards to the production and business acti vities of enterprises such as material input use, storage, product types, quality control, and type of customer. These activities give indications of how SMEs compete with larger feed mill enterprises. Sixty two mills were surveyed in seven provinces in three regions: Ha Noi, Ha Tay and Hung Yen provinces located in the Red River Delta; Binh Duong and Dong Nai in the South East; and Tien Giang and Long An in the Mekong River Delta. The mills have been categorized in the following way in the analyses by p roduction scale: small mills are those producing less than 10,000 tons per annum; medium mills are those producing from 10,000 to less than 60,000 tons per annum, and large mills are those producing 60,000 or more tons per annum. Only data from 44 mills we re able to be used in analyses by production scale because of data unreliability. 2.2. Producer survey A survey in six provinces of 300 pig and chicken livestock producers of mixed production scale was conducted aiming at investigating feed use by producer s. Producers were classified as small, medium or large based on their per head production in 2008. For pig producers, small producers were classified as those raising less than 50 heads per year, medium producers are those producing from 50 to 120 heads p er year, and large more than 120 heads per year. The classification of chicken producers was different for layer and broiler production. For layer production, small producers were classified as those producing less than 1000 heads per year, medium produce rs are those producing from 1000 to 4000 heads per year and large as those producing more than 4000 heads per year. For broiler production, small producers were classified as those producing less than 500 heads per year, medium are those producing from 50 0 to 3000 heads per year Nguyen Do Anh Tuan, Pham Thi Lien Phuong , Nguyen Thi Thinh , Sally Marsh , Donna Brennan & John Pluske 264 and large as those producing more than 3000 heads per year. 3. Research results and discussions 3. 1 Livestock feed production 3.1.1 Production characteristics and costs of production In this study, statistical evidence was found t o show that cost of production was inversely related to scale of production, with small enterprises having significantly higher costs of production per kg of output than medium enterprises, which had higher costs of production than large enterprises. Durin g 2007, the mean costs of production per kg of output were 8420 VND, 6340 VND and 5380 VND for small, medium and large firms respectively. This alone is not necessarily an indicator of greater efficiency of larger enterprises. For example, small - medium ent erprises were found to produce a higher share of concentrate as percentage of total production than large enterprises. On average, small mills made 37% of their revenue from concentrate production, compared to 18% for medium mills and only 11% for large mi lls. Over 80% of revenue for medium and large mills was made from sale of complete feed. Concentrate production has higher raw material input costs per kg of output, so cost of production per kg of total output would necessarily be higher for those firms p roducing more concentrate. Raw material costs made up about 80% of the total cost of production in feed mills. Small firms used 19 labor units for one unit of output, compared to around 11 labor units used by both medium and large firms, and this differen ce was significant. This may indicate under - utilization of labor by small firms, or capital substitution by larger firms. It does indicate that small firms play a role in providing employment. 3.1.2 Profitability of small - medium enterprises For overall pro duction, we found that small firms made a loss of 70 VND per kg of output while the medium and large ones made a profit of 120 VND and 100 VND per kg output respectively. These results indicate that small mills are likely to be struggling to remain competi tive. The data indicate that they face significantly higher costs, and sell pig complete feed at significantly lower prices, resulting on average in a significantly lower profit. 3.1.3 Quality control The fact that advanced international standards for qua lity control such as ISO and HACCP are only applied by foreign - owned and joint venture companies, indicates better quality control processes for both input materials and output products from foreign/large companies. These mills are more likely than domesti c enterprises to have a quality control laboratory doing various tests of raw materials and feed products, to have separate production lines, to own automatic cleaning systems and to use least - cost feed ration software. Clearly, there are quality control i ssues for domestic mills. 3.1.4 Constraints on production Small mills tend to have some disadvantages in terms of accessing loans from different sources. They are less able to access enough funds through loans compared to medium and large mills. Access to credit was the most common issues nominated by mills as needing support from the government: by over 50% of medium and large mills, and over 30% of small mills. Access to land was also the second most common issue (after access to credit) nominated by mil ls as needing support by government: by over 20% of all mill size classes. Forty two percent of firms overall reported restrictions with the movement of goods, and more large firms (61%) reported restrictions than SMEs. Tolls, inter - district and inter - pr ovincial roadblocks and “police conduct” were reasons given for restrictions on the movement of goods. Of these, “police conduct” was nominated as the most important restriction on movement of goods by 67% of small firms, 33% of medium firms and 75% of lar ge firms. 3.1.5 Strategies used by SMEs to compete for market share against larger firms CARD 030/06 – Enhancing rural SME competitiveness in animal feed sector 265 a. Location SMEs are more likely to be located in rural rather than urban areas, and medium - size mills in particular tend to supply customers further from their produc tion site, and this customer is more likely to be a smallholder. This indicates that some SMEs are focused on supplying smallholders in areas further from major cities. SMEs also used a higher percentage of domestically sourced raw materials for productio n. Location in rural areas may assist SMEs to source these domestic supplies of raw material inputs, including raw materials used less often, such as broken rice, groundnut, and cottonseed meal. b. Supply chain differences The research showed that the supp ly/distribution chains operating for SMEs and large firms in the livestock feed sector are quite different, indicating that they are sourcing materials from and targeting distribution to different market segments. Unlike large mills, SMEs source some input s and distribute products directly from/to small households. Large mills are more dependent on imports (e.g. maize) to meet their raw material requirements, whereas SMEs are more likely to be able to source sufficient raw materials in the domestic market. SMEs are more likely to diversify their business into trading activities, and in addition they sell to a wider range of customer types including other companies, agents and households. Small mills in particular will sell direct to farm households, and med ium mills target mainly retail agents for their products. By contrast, large mills distribute their products almost exclusively for on - selling by wholesale agents and traders, and source raw materials from private processing businesses and state - owned ent erprises. c. Services to agents and farm households SMEs provide different services associated with the sale of feed products to agents and farm households. Small mills are more likely to provide delivery services to agents (compared to both medium and lar ge mills). SMEs are also more likely than large mills to offer credit/delayed payment option to agents. 3. 2 Livestock feed use 3.2.1 Industrial feed is more often used by large producers, and more commonly in early production stages In general, it was fou nd that industrial feed was used more by larger producer groups, and in the early production stage rather than later stages. These differences by scale were also true for the amount of industrial feed used: that is, larger producers used more industrial fe ed ( i.e. quantity fed per head). Industrial feed produced by foreign companies was generally more favored than that produced by domestic companies, with more than 90% of the surveyed households choosing both complete and concentrate feed with a foreign com pany brand. The main reason given by producers for this choice was that foreign brand feeds were of better quality and gave greater productivity. 3.2.2 Use of mixed raw feed only diets is no longer prevalent; instead more complete only and diets using mixe d industrial and raw feeds are used Except for a few households that fed only mixed feed to their chickens (9% for broiler and 18% for layer), a large percentage of both pig and chicken producers used complete feed only: 53% for broiler and 64% for layer; and 43% for sow, 77% for piglet and 45% for porker production. The remainder used both complete and mixed feed in the daily diet for livestock. The ratio of concentrate feed in the total mixed feed was found to be about 27% overall for chicken producers, and 17% for porker production. Mixed feed was used much more than complete feed by pig households for all production stages. 3.2.3 Efficiency of industrial versus mixed feeds We found that feed conversion ratios – the kg of feed fed per kg of live - weight produced - decrease as production scale increases. The FCR is much lower in households using complete only rather than mixed feed, possibly due to better nutrition from complete feed in the former case, compared to the mixture of Nguyen Do Anh Tuan, Pham Thi Lien Phuong , Nguyen Thi Thinh , Sally Marsh , Donna Brennan & John Pluske 266 raw feed types included i n the latter. The FCR is also significantly lower in households using foreign complete feed than those using domestic brands in the case of chicken (2.94 versus 4.18). FCRs for pig production using complete feed were significantly lower for small scale pr oducers (2.08) compared to large scale producers (2.92). The FCR was also significantly lower for complete feed diets (2.65) compared to mixed feed (4.06). The FCRs may be used as a standard measure of productivity. However if a more productive feed costs more per kg, it may be worthwhile for farmers to use the cheaper feed with the higher FCR if the net cost per kg of gain is lower. In the case of chicken, we found that overall feed cost per kg of live - weight gain is statistically different between househ olds using complete only and mixed feed (22,690 VND versus 27,890 VND - which may be evidence to support the use industrial feed. On the contrary, in the case of pig production, the feed cost per kg of live - weight gain was significantly higher for househo lds using complete feed only compared to those using mixed feed overall (23,580 VND versus 20,150 VND only). This case of pig production seems to support mixed feed use (often using local residual feeds) as households can reduce their feed cost by about 3, 400 VND per kg live - weight gain overall. 4. Conclusions and recommendation s 4.1 Conclusions The results support the idea that medium - size mills (i.e. those producing between 10,000 and 60,000 tons per annum) are remaining competitive; with costs, product mix and prices similar to large mills. They have a sales strategy that targets a different customer base to large mills (i.e. retail agents rather than wholesale agents). Small - sized mills (producing less than 10,000 tons per annum) appear to be under pre ssure to survive, and many will need to increase their scale of operation and improve quality control to remain in business. Besides, SMEs are more likely to be located in rural areas and to use domestic supplies of raw material inputs. Hence, opportunitie s may also exist for the production of niche feed products for smaller livestock industries in rural areas (such as duck, local chicken and pig, and beef cattle) rather than competing against foreign companies to supply feed for pig and chicken production. 4.2 Recommendations Based on the findings of this project we make the following policy recommendations for policy makers:  Focus is needed on quality control. If long term food safety and export potential is to be reached, the Government of Vietnam needs to address quality control issues associated with the production of livestock feed products.  Restrictions on the movement of goods due to irregular police conduct need to be addressed.  Invest in domestic production of raw materials used in feed productio n.  Credit support for SMEs in the sector should be expanded.  Support and expand the role of the Vietnamese Animal Feed Association (VAFA).  Investigate the possible ways the government may provide price support for raw materials and livestock feed outputs. We suggest the following recommendations for SMEs operating in the sector:  Small mills need to increase their scale of operation.  Quality control standards need to be raised.  Continue to explore and exploit niche market opportunities.  Consider advantages f rom diversification and/or a cooperative structure.  Support a strong role for the VAFA. CARD 030/06 – Enhancing rural SME competitiveness in animal feed sector 267 Reference 1. Center for Agricultural Policy, 2010. Small - Medium Enterprises in the Livestock Feed Sector in Vietnam: Vol 1. Livestock feed production. Report for CARD Proj ect 030/06 VIE 2. Center for Agricultural Policy, 2010. Small - Medium Enterprises in the Livestock Feed Sector in Vietnam: Vol II. Feed use by pig and chicken livestock producers. Report for CARD Project 030/06 VIE 3. Policy Brief 1: Competitiveness of Small - Medi um Enterprises in the Livestock Feed Production Sector in Vietnam 4. Policy Brief 2: Quality Control in the Livestock Feed Sector in Vietnam 5. Policy Brief 3: Constraints Facing Small - Medium Enterprises in the Livestock Feed Production Sector in Vietnam 6. Polic y Brief 4: Use of Industrial and Mixed Feed by Livestock Producers in Vietnam . Collaboration for Agriculture and Rural Development (CARD) Program 262 ENHANCING THE COMPETITIVENESS OF RURAL SMALL AND MEDIUM ENTERPRISES IN THE AGRO - FOOD CHAIN: THE CASE OF VIETNAM’S ANIMAL FEED. FEED INDUSTRY Project title: Developing a strategy for enhancing the competitiveness of rural small and medium enterprises in the agro - food ch ain: the case of animal feed Project code : CARD 030/06. cost and poor quality of animal feed are big problems. One of the best solutions i s to improve quality and reduce cost production of animal feed as well as increase income for the rural areas