August 2005
Corporate Focus

Ganpati Vanaspati

What’s Cooking in the Medium?

The Nepal-India treaty, which provides a quota facility for vegetable ghee export from Nepal to India, will come to an end after the next two years. What are the vegetable ghee companies looking in the future? This company presents a microscopic example.

Ganpati Vanaspati (P) Ltd., which is licensed to produce 20,000 tons of vegetable ghee , has been utilising almost 60 to 65 percent of its capacity and exporting about half the production to India.

With around 125 employees, this unit is an average sized one among the 18 vegetable ghee units of the country, but it is prominent among those exporting to Tibet, an alternate market for this industry other than India. However, 10 percent export duty on vegetable ghee imposed by the Nepali government makes it difficult for the ghee units to export to Tibet too says Satish Kumar More, Chairman of the company. Though the export duty is now reduced to 8 percent from mid-July 2005, its impact on the vegetable ghee export will be seen only after some time, but More describes it as a positive step though not sufficient.

Now China too has started charging an import duty on vegetable ghee from Nepal as they have set up their own ghee factories.

“However, if the export duty is removed, Nepal can sell at least 25,000 tonnes per annum in Tibet,” he claims. Though the government has agreed in principle to remove this export duty, it is still delaying its full implementation as it cannot resist the temptation of about Rs. 400 million it collects from vegetable ghee export as revenue.

One attractive feature of the Tibet market is that brand awareness is growing there, making it a good market for branded products. But brand infringement is also going on in Tibet and Ganpati too faced that problem recently. Now Ganpati has registered its brand in China also and More thanks the Royal Nepali Consul General at Lhasa, Lilamani Paudel, for reminding the company to do so in time. Ganpati is now among the four biggest sellers of Nepali vanaspati ghee in Tibet.

Faculty Perceptions

This industry seems to be a victim of wrong perceptions. One major weakness perceived about the vanaspati ghee industry by general observers, the government authorities and India—the major export market of this product—is that this industry has low value addition. But More does not agree to it and points out that this industry is gradually going in for vertical integration to increase value addition in the economy. He gives two examples to prove his point.

First, these industries, including Ganpati, are mixing sesame oil in the imported palm oil to prepare the final product and the sesame used is grown in Nepal. Second, most of the companies, including Ganpati, manufacture the tin containers and plastic jars used to pack the finished goods on their own. Plastic pouches, which are used to pack the finished goods for retail sales, are procured from the local plastic industries.

In fact, the complaint about low value addition in the Nepali vegetable ghee industry seems only a propaganda which the Indian vegetable ghee manufacturers have been making in their attempt to push Nepali companies out of the Indian market.

It is generally perceived that Nepali vegetable ghee industry has a 60 percent duty advantage in India. But More says that it is again a wrong perception. “What we export to India is vegetable ghee, not crude oil. The import duty on vegetable ghee in India is 30 percent and a lot of this product is coming into India from Malaysia and Indonesia on payment of 30 percent duty. Moreover, Sri Lanka has a zero duty facility and no quota restriction to export vegetable ghee to India and there is no state-wise restriction for the Sri Lankan ghee. Equally importantly, there is no canalising agent in case of importing Sri Lankan ghee in India while in case of Nepali ghee there is one canalising agent who charges up to Indian Rupees 1,600 per metric tonne. On top of this, the Nepali government was imposing a 10 percent export duty (now reduced to 8 percent) on vegetable ghee while Sri Lanka has no such duty. When all these facts are taken into consideration, the so-called duty advantage perceived as being enjoyed by the Nepali ghee is eliminated,” says More.

What about the possibility of a further vertical integration in this industry so as to satisfy the critics of the industry? “There is not much scope for this, at least for the time being,” is the reply from More. There were a number of attempts made by some companies for that purpose but they were not successful, he recalls, though the exact reason for the failure of those attempts is still not clear.

One scope for the expansion of the vegetable ghee industry is to explore new markets. But again the prospects have not been found so promising, according to More. His company, together with the others, had tried to explore such markets in Bangladesh and Bhutan. The Bhutan market is, however, ruled out as the ghee it imports from India does not attract any duty while a duty is levied on Nepali ghee. When a FNCCI delegation visited Bhutan recently, it was learnt that Bhutan had already sent a draft for a free trade agreement to the Nepal government and a response was still awaited. “Until this political decision is taken by our government, Bhutan market is ruled out,” says More. Recently Bhutan too has established one ghee factory and started exporting to India, enjoying all the facilities which Sri Lanka enjoys.

According to him, the Bangladesh market, if available, will be helpful for the vegetable ghee units located in the eastern parts of Nepal, such as Biratnagar but not for those located in the central or other parts, such as Birgunj, because of the transport costs.

Marketing

Among the brands produced and sold by Ganpati are Safari, Mamta and Society. More says that his company chose these names to ensure that they do not match with any Indian brands as it make it difficult for them to sell in India. Safari has got the NS mark and is sold in Kathmandu too while the others are sold mostly in the Terai.

In the domestic sales, Ganpati Vanaspati uses dealers while some other units have their own depots at various places from where the product is distributed to dealers. Explaining the reason, he says that his company is more focused on selling than on marketing as the local market is very small to deserve full-fledged marketing activities from all the vegetable ghee units. The largest single market area is Kathmandu and the main product that sells in Kathmandu is soybean oil. Therefore, companies that are strong in soybean oil can carry out more extensive marketing activities and they are doing it. “We are not that strong in soybean oil, so we are concentrating more on ghee,” says More.

In this industry, the firm profitability is very difficult to predict because of the highly volatile nature of the raw material prices. The prices change almost every hour. “If you are lucky the prices will be low when you placed the order and you make a good profit, otherwise it is not possible.” Internationally, the buyers of the raw material of this industry can buy a cargo that is already approaching the port. Nepali firms are, however, not allowed this privilege due to the Nepali rule that requires the date of the Bill of Lading of the cargo to be later than that of the date of opening L/C. “If this restriction is eased, Nepali vegetable ghee units will have a greater flexibility in negotiating with the raw material suppliers, and thereby enhancing the competitiveness,” he says.

There is still another factor that is causing the cost of Nepali vegetable ghee to be higher. While these units get a duty drawback facility on the crude oil used in the manufacture of the finished goods, this facility is not available for the duty paid on the import of the raw material used to manufacture the tin containers and plastic jars (packing material). “Since part of the total invoice price is accounted for the packing material, it is logical that we get duty drawback also on this count. But the existing rules do not allow the pass book system for this,” he points out and demands for suitable amendment in the rule to allow this facility.

Future

“I neither see the future of this industry dark nor bright,” says More. “While the existing treaty with India granting Nepal a quota facility is still there, we must start preparing for the future right now as the treaty will only remain valid till March 2007. We have already started urging the government to think about it now so that the vegetable ghee industry would not have to face a similar fate as the garment industry. Meanwhile, we are also looking forward to the final outcome from SAFTA and BIMSTEC.”

However, as the plants and equipment of this industry cannot be used for any other industry, the companies that are already involved are stuck. They have nothing else to do except cross their fingers and see how the Nepal-India relations evolve in the future and what the regional free trade arrangements will finally be.

Meanwhile, they are trying to convince the government to remove the export duty so that the competitiveness of this industry lost over the period due to newer developments in the export business would be restored. “Though the Finance Minister seems to have clearly understood the point, in the Finance Ordinance issued for fiscal year 2005-06, he reduced the export duty on ghee only marginally—from 10 percent to 8 percent. It shows that the government has accepted the ghee industry’s situation. So we are hopeful that in the days to come it will be reduced to zero.”