The Indian Sugar Industry – Is it Sweet Enough?

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.

A. To determine industry attractiveness and long-run industry profitability of the Indian

Sugar Industry, we chose to apply Porter’s five forces.

1. Power of Buyers: Low

Sugar is an essential product for daily consumption and it has low sensitivity
towards the price. Product differentiation is also low as different manufacturers
follow a similarly fair process. Indian market is highly government-regulated
influencing the production, distribution, price of levy sugar and the free sale quota
releases for sugar. Hence, the power of buyers is highly restricted.

2. Power of Suppliers: Moderate

The number of sugarcane growers is large and the concentration is not high.
Product differentiation among suppliers is low to moderate as it depends upon
several climate conditions. The government regulates the area from where the
sugarcane can be procured, i.e., within a specific radius. The Sugar mills have no
choice but to purchase all the Cane sold to them from that radius, and even
farmers have to sell them to the mills which are nearby. Sugar producers are not
allowed to own cane fields in India. Changing suppliers is very difficult and
switching costs would be high as transportation costs will be coming into place. If
sugarcane purchase prices of the mills are not reasonable, stopping growing
sugarcane and switching to other crops can happen. Sugar mills are still under
pressure from the policy because the industry is closely related to social
objectives.

3. Threat from New Entrants: Moderate

Government regulations and increasing capital requirements in the industry
restrict new entrants. The Indian Sugar Industry is characterized by government
posing modest entry and exit barriers. The government has also put a restriction
on setting up of two sugar factories within the radius of 15 Kms. The new sugar
units are required to comply with the levy quota regulation from the first year of
operations. Growing of sugarcane will become less attractive as sugar prices
became volatile and keep falling. 90% of sugar produced via intermediaries
 reaches the market for consumption, making access to distribution channels to
high importance. The government earlier provided incentives to new plants that
had has affected small units, which was reverted later on. Considering the aspects
of government policy and access to sugarcane growing areas, barriers to entry are
high.

4. Threat from substitutes: Low

Costs for switching products is high. Being an essential commodity the demand
for sugar is not elastic. The trend to use substitute products of customers is not
high. The market for other sweeteners in India is very small compared to the
market for sugar. In terms of sheer volume, Cane sugar takes the lead and others
are not quite popular, mainly in India. Compared to the consumption of sugar, the
consumption of other sweeteners is controversial on health issues. So even
though they are cheaper, they are not popular. The low appeal of alternatives
allows the dominance of cane sugar in the Indian market, aided by traditional
households and customer behaviors. Hence, the threat of substitutes is low in
the industry. The ability to switch to alternative products is low due to consumer
habits, switching costs as well as the popularity of other sweeteners.

5. Rivalry: High
The ability that producers impose prices is low. Product differentiation is not high,
except for products with retail brand positioning on the market. Competitiveness
among the Indian sugar players is high. With around 640 factories engaged in the
production of sugar around the country, the industry is highly fragmented.
Cooperatives are relatively high as they account for about 40% of the industry’s
production. Barriers to exit the industry are high due to the unique characteristics
of the machinery and equipment. Sugarcane can also be used to produce other
products like ethanol, highly demanded in Liquor and chemical industry, which
can be used as another opportunity for players to generate revenue. The demand
for sugar in India, a developing country, is very high. However, domestic
production currently exceeds consumption, which results in competition within
the Indian sugar industry at a high level

Impact of the following factors on attractiveness of Indian Sugar Industry:

a) Relative bargaining power differences between farmers and sugar producers:
In India, various regulations dictate the bargaining power differences between
farmers and sugar producers. Mills can source cane from farms within a certain
radius of the mill. This has a positive and negative impact on both the farmers
and producers. Farmers get ensured buyers for their produce since the mills
have limited choices for souring the raw sugar cane but they are not able to
access the market to get a more favorable price.
 The government has also fixed minimum buying prices for sugar cane in various
States. Compared to the international market the prices set by the government
are quite high and thus negatively affect the producers. Hence the relative
bargaining power of the farmers is higher compared to the producers in light of
the regulatory and industrial trends. This makes the industry less attractive as
producers don’t have favorable bargaining power with the farmers which drive
up their input costs to a large extent.

b) Government regulations:
Government regulations act in both ways towards the attractiveness of the
sugar industry in India. Regulations like mandatory sourcing of sugarcane from
farmers within a certain radius around the mills are attractive for small
producers as they can ensure they have enough supply and larger mills can’t
hamper with their supply. For larger producers, this is not as attractive as they
are not able to access the market and let the market forces decide the prices.
Minimum prices by the State government also makes them less attractive as the
prices are generally high to protect the interests of the farmers. This drives up
the input costs for the producers.
The government is also trying to incentivize the products by giving a stimulus to
the by-products of the sugar products like ethanol and co-generative fuel
(bagasse) helping the producers increase revenue. The government also tends
to protect domestic producers in times of changing international prices by
removing and levying import duties as necessary.

c) Global sugar producers:

The global landscape is highly influenced by Brazil, given that it is the least cost
producer and the largest exporter of sugar. Ethanol has had a significant
influence on the global sugar market. Global sugar producers make the industry
less attractive. Sugar producers globally have a lower price compared the
domestic producers in India which makes Indian sugar low on export
competitiveness. To add to it, the industry is also susceptible to cheaper imports
and thus needs to be protected by the government.

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

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.

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.