Group 9 – Strategic Management Case Solutions – Indian Sugar Industry and Cash Out

Aman Amit Jain

Pranav Sekhar
Ifrah Ishrat
Vikas Kumar
Pratik Dhar

1. Assess the attractiveness of the Indian sugar industry using Porter’s five forces
model. Discuss the impact of the following factors on its attractiveness:
a) Relative bargaining power differences between farmers and sugar
producers;
b) Government regulations; and
c) Global sugar producers.

Porter’s Analysis of Indian Sugar Industry:

Competitive Rivalry: Stringent government regulations along the entire supply chain of sugar
production – from cane cultivation, procurement, refining and sale has resulted in a highly
fragmented industry. The largest player accounts for less than 4% of the overall output.
However, some companies dominate the export and ethanol production segment. The primary
competitors are SRSL, Bajaj Hindusthan, EID Parry, Balrampur Chini, Triveni Engineering
and Bannari Amman
Threat of New Entrants: Ease of cultivation and strong prices has resulted in many players
entering the field, both large and small.
Threat of Substitutes: Several substitutes are available in the market including sugar alcohols,
natural calorific sweeteners, modified sugars and artificial sweeteners. Threat of substitutes
appears to be high, but these substitutes contribute less than 1% of the overall market. However,
their market is growing with a CAGR of 4.5%
Supplier Power: The regulation that stipulated a minimum radial distance of 15 km between
two sugar mills distorted the market and gave mills a virtual monopoly over a large area where
landholdings are small. This reduced the bargaining power of supplier who in many ways is
forced to sell to mill even if there are payment arrears from the mill. Transporting produce over
long distances is prohibitively expensive and infeasible. Thus, supplier power is low.
Buyer Power: Processed sugar is a commodity product used across all households, the
number of customers is large, order sizes are low, and consumers can easily substitute the
product. The power of an individual buyer is quite low. However, institutional buyers such as
soft drink manufacturers, Biscuit manufactures etc. buy up 52% of the overall output and can
exercise significant buyer power. Thus for individual retail consumers, buyer power is low;
but for institutional consumers, buying power is high.
The following points are also to be discussed:
a) Relative bargaining power differences between farmers and sugar producers:
Farmers have little bargaining power. The regulation that stipulated a minimum radial
distance of 15 km between two sugar mills distorts the market and gave mills a virtual
 monopoly over a large area where landholdings are small. This reduced the bargaining
power of supplier who in many ways is forced to sell to mill even if there are payment
arrears from the mill. Transporting produce over long distances is prohibitively
expensive and infeasible. On the other hand, mills have a virtual monopoly over
farmers, however they have to adhere to a FRP while buying produce. Thus, their
bargaining power is reduced slightly via regulation, however, farmers are still reliant
on the mills for selling their produce (only the mills located nearby, due to
transportation constraints) and thus have little bargaining power compared to the
producers.
b) Government Regulation: Sugar levy, the mandate which forces a mill to procure cane
from farmers within a specified area, FRP reduces efficiency of the industry. In addition
to stifling competition, it also restricted entry and additional investment by
entrepreneurs. Sugar mills were also not allowed to own captive farms for cane
production. These regulations make sugar industry unattractive for market entry.
c) Global Sugar Producers: Indian sugar produces spend 80-85% on cane as a
percentage of total price compared to the global average of 62%. Moreover, compared
to Brazil, where producers can own sugar producing lands, ethanol as percentage of
petrol is allowed up to 25%, presence of export incentives, favourable weather
conditions make the industry very unattractive compared to the same industry in Brazil.

2. What are the critical success factors of Indian sugar industry?

The following measures would improve the performance of the Indian industry:
 Abolition of sugar levy
 Producers to sell entire production in open market, rather than at government
controlled prices
 Abolition of guidelines requiring maintenance of 15 km distance between 2 mills
 Scientific cultivation practices to reduce cane costs
 No approval required for exports

3. Discuss whether the following possibilities could improve the attractiveness of

Indian sugar industry:
a) Changes in the industry forces within a foreseeable period of time;
b) Deregulation; and
c) Focus on by-products such as ethanol.

Changes in the industry forces within a foreseeable period of time:

 Higher supplier power would encourage greater spending on equipment, fertilizers,
seeds etc. to produce higher quality product

Deregulation
 Sugar mill’s rights to own large tracts of land would reduce costs of production
  Abolition of FRP would enable mills to purchase cane at market price, rather than
paying FRP. They’d be able to enter into forwards and futures contracts to manage
market dynamics, reducing costs

Focus on By-products:
 Permitting ethanol up to 26% (similar to Brazil) would enable better utilization of by-
products, providing an additional source of revenue
 Bagasse: Bagasse, a by-product of sugar manufacturing process can be used for
manufacture of paper and biofuel. It has the potential to meet up to 6% of the energy
requirements. This would provide an additional revenue stream to the sugar mills and
enhance attractiveness

4. Compare the characteristics of Brazilian and Indian sugar industries and discuss
whether there is a possibility of convergence of these two industries in terms of
their structural characteristics.

Indian Industry Brazilian Industry

1 CAGR 2.5% CAGR 10%
2 Heavily Regulated Relatively Unregulated
Sugar Levy and FRP are used by the government as No Sugar Levy or FRP
tools to protect farmers and consumers. Also, the 15km
3 regulation reduces supplier power
4 Mills not allowed to own large tracts of land for sugarcane Mills allowed to own large tracts of
agriculture land
No export incentives Orientation towards exports and
5 presence of export incentives
6 Permits ethanol content up to 3% Permits ethanol content up to 26%

Due to the presence of rigid regulation, the structure of the industries in India and Brazil has
evolved differently. In India’s case, regulations led to lower capital investments in the industry
leading to a fragmented market. Regulation affects all parts of the supply chain – from cane
cultivation, procurement, refining and sale has resulted in a highly fragmented industry. The
nature of this industry is quite difficult to change. However, deregulation of the norms
mentioned in the table, export incentives, by-product regulation may lead to a convergence in
industry structure between India and Brazil over time.