Gaining Access to Global Crop Protection Markets via Joint Ventures: An Alternative to M&A

BY CS LIEW, Pacific Agriscience Pte Ltd., Singapore

Food security has gained much more attention in light of COVID-19 disruptions in the supply chain. During the onset of the pandemic in 2020, many supermarkets around the world had empty or near-empty shelves periodically, exacerbated by consumer panic buying. Governments of countries that are net importers of food started to panic.

Compounding the food security issue is the ongoing war in Ukraine, leading to another major disruption in food and chemical fertilizer supplies and consequently causing another spike in food prices.

Climate change resulting in erratic weather conditions, drought followed by floods for example, in many agricultural regions around the world, is another factor having an impact on food production and supplies.

The supplies of generic pesticides, which account for about 70% of the total volume of pesticides consumed around the world, have also been disrupted due to environmental pressures followed by prolonged lockdowns and strict COVID-19 containment measures in China, the main producer of generic pesticides.

These four major factors have impacted the supply and demand, and hence pricing and profitability, for both pesticides and chemical fertilizers, leading to most players in these two market segments of the $220-billion agricultural chemical industry doing quite well over the past three years.

The recent years’ emphasis on sustainable food production techniques and regenerative agricultural practices, especially in more developed countries, has led to double-digit compounded annual growth rate (CAGR) for biopesticides and biostimulants. This phenomenal growth in demand has spurred agricultural inputs players, big and small, to step up research and development of these products to meet the growing demand.

The current landscape of higher demand and more players at the manufacturing level entering the global markets, spurs mergers and acquisitions globally. At the distribution level though, the number of players has not increased in tandem. Established distributors are not short of products and solutions, even in the rapidly growing biosolutions sector as they are bombarded with offers by many new players.

Crop protection manufacturers are therefore facing a double whammy in terms of gaining market access. As mentioned above, distributors are not short of products and offers. Attempts in gaining market access through acquisitions at the distribution level is becoming more and more difficult as not many are for sale and if they are, enterprise value has gone up significantly over the past three years.

Pressure to gain sales and market share intensifies once crop protection manufacturing plants are set up and running. Knocking on the doors of distributors offering undifferentiated products at lower prices is not sustainable or viable.

More and more players at manufacturers’ level are entering the crop protection market, which adds to the pressure to gain sales and market shares quickly. In India for example, many more technical grade pesticide manufacturers are expected to come into the market. As of 2020, 2,403 companies have been issued pesticides manufacturing licenses and this number continues to grow.

Therefore, partial or total acquisition of targets at the distributor level is a much quicker way to gain market access compared to setting up a local distribution team, which is risky. Having said that, established and larger crop protection manufacturers, such as multi-national corporations (MNC), may have to deal with conflicts of interest, and anti-trust issues, when going down the acquisition route. Newer and smaller manufacturers of course do not have such constraints.

In the biosolutions sector, many players at the R&D and manufacturing levels, both in India and China, as well as in the western world, are entering the global markets. Because barriers to entry are relatively low compared to the chemical pesticide sector, many new players from MNCs to the very small, mainly started by scientists, are entering the market. In fact, even ones who have had no prior business and experience in the development and sales of agricultural inputs are also getting into the market.

Distribution and marketing of products in the biosolutions sector is still evolving, unlike the case of traditional chemical crop protection products. So, manufacturers in this sector must contend with even fewer choices in terms of finding experienced and suitable distributors.

In light of the challenges discussed above in terms of gaining international market access through acquisitions at the distributor level, what else can a manufacturer do to succeed in this changing agricultural inputs market?

For a manufacturer with a good range of differentiated products, for example generics with novel formulations and novel biosolutions and crop nutrition products, a joint venture (JV) model is possible and viable. If there is an attractive value proposition, a local experienced distributor with good market traction should be keen, so long as there is no major overlap with their current product portfolio. For the local party, this JV, a new entity, will be independent of their current distributorship and business.

The foreign party, a manufacturer, brings a range of novel formulations and products while the local distributor brings local market knowledge, expertise and dealership network, and perhaps formulation and repacking facilities as well.

A possible share structure of a JV that works for both parties is one that the local company starts off with a majority shareholding of say, 70% of the new entity. Essentially, the JV entity will become a clone of the local distribution company in terms of expertise and local market knowledge but with its own staff and organization. The local partner winds down their shareholding over a period of say, three to five years with higher valuation at each stage to get their return for their efforts and sharing of their local expertise, market knowledge, and dealership network.

• There should be no major conflicts of interest at the outset for both parties.

Both parties should not only plan for success but for failure as well in case the product range does not gain enough market penetration in spite of best efforts and collaboration from both sides.

Conclusion

The need to gain market access globally for players at the manufacturing and innovation levels is getting more urgent and intense. Market access via acquisitions on the other hand is becoming more difficult and costly, especially for medium to smaller players, which are not cash rich. The JV model as outlined above could be a win-win model for both JV partners.  •

Photo of CS Liew courtesy of Pacific Agriscience Pte Ltd