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Friday, August 31, 2012

News Flash! Beyond Profits: China's Social Entrepreneurs

News Flash will be a new feature where current articles I believe are interesting are reprinted with links to the full article.  Here is the first one.

by Kay Park
mong the sand dunes of western Inner Mongolia, the futures of the encroaching desert, impoverished farmers and one enterprise are now intertwined with an unlikely product—fruit juice.

Sea buckthorn berries, a fluorescent orange fruit the size of a dime, grow on bushes about three to four feet high in the desert. Liu Zhifeng, founder and CEO of Spring Mountain, China’s leading producer of sea buckthorn berry juice, has known the fruit since his childhood in Ordos, Inner Mongolia.

“I drank [the juice] when I was younger,” says Liu. “But it wasn’t widely available.” In his early 30s, Liu has accomplished much, and he is eager to do more. The head of companies as varied as a weekly magazine and a hotel, Liu regularly takes the 7 a.m. flight from Beijing to Ordos and then the evening flight back. (One of Spring Mountain’s major sales distribution offices is in Beijing.)

His first company was a small, single store selling elevator components. After nearly having to shut down his company, Liu ventured into different sectors and markets until finally getting in on the ground floor on elevator and central heating installation in the early 2000s. Liu began looking for another business to get into. He went into hotels and media. Yet he still wanted something bigger, something that went beyond the traditional models, something that could help society. Eventually, he thought of the juice he drank in his childhood. No company had begun large-scale production of sea buckthorn berry juice. 

“I told my board that I wanted to start producing this juice and they were not excited about it,” says Liu. He got his hands on some research—the juice is full of Vitamin C and Omega-3. In other words, it’s an ideal drink for health food enthusiasts, who are growing in number in China. Global market research firm Euromonitor International estimated that in 2009, sales of wellness foods and beverages in China touched $1.5 billion, a 28% increase from five years earlier.

“Eventually I was able to convince them that this drink had huge market potential, and they decided to go along with me,” says Liu. He raised funds and invested his own money, totaling RMB 800 million, and was off to the races—sort of. “The plant takes three years to bear fruit, so we had a long time to wait before we would see any of that investment back.” Liu spent the three years acquiring the best juicing machinery, researching the health benefits of the juice, building sales channels and training farmers to ensue product quality. In 2011, the first year the bushes bore fruit, Liu’s company boasted a sales revenue of RMB 200 million.

Going the Extra Acre
If Spring Mountain were a normal beverage company, that would be the end of the story. But it’s not. It’s on the cutting edge of a business model that’s relatively new to China—the social enterprise. Although he doesn’t use the terminology, Liu thinks of himself as a social entrepreneur. “Through innovations in our product line, management and technology, we can promote societal progress and solve problems facing the country,” he says. Liu is quick to add that this is not a charity: “Implementing a profitable business model is still the most important thing.” 

Western China’s deserts are growing at alarming rates. Asia’s largest desert, the Gobi, devours nearly 1,400 square miles of grassland a year. For decades, the Chinese government has led massive efforts to battle desertification, going so far as building a “green wall” of millions of trees to halt the deserts’ advances. NGOs have attempted schemes of all kinds, sometimes even busing volunteers from Beijing to the desert regions to plant trees or cacti. These efforts have had a limited impact; but there are signs that the solution may come from people outside the government or NGOs. People like Liu.

Spring Mountain plants sea buckthorn bushes on 140,000 rented or purchased acres of desert in Inner Mongolia and Ningxia, two regions hit hard by desertification. The bushes require little water through the year and their roots burrow deep beneath the dunes—stopping erosion and slowing the march of the desert.

The land Spring Mountain uses was considered barren; the farmers and nomads who own it relied on their other tracts of arable land for growing crops and grazing. But when Liu showed up, the useless sand dunes suddenly had value. 

During the early phases of his company, Liu spent millions of RMB researching proper planting and maintenance methods for the sea buckthorn bushes. He hired agriculture experts and cooperated with multiple universities. When the time came to leave the greenhouse and head for the fields, this investment paid off in spades. The company sends its contracted farmers through a short training program, making them fully qualified to properly plant and grow the bushes. As more farming techniques are developed, the farmers are retrained to be kept up to speed with the latest methods. Spring Mountain buys the harvested berries, ships them to its factory in Ordos to be made into juice, and then distributes them through its widespread sales network that stretches across China.

This model turns the 70% of farmers that lease their property to Spring Mountain into micro-entrepreneurs, who have more technical know-how and are empowered to make full use of their land. (The other 30% of farmers work on land owned by Spring Mountain.) Farmers in this region are among the poorest in China, averaging a cash income of between RMB 2,000 and RMB 7,000 per year. Spring Mountain pays over 100,000 farmers between RMB 700 and RMB 7,000 per year, giving them revenue in addition to their other farmland.

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1 comment:

  1. FYI - RMB 800 million (Chinese currency) is roughly equal to $120 million US Dollars. Still a nice chunk of change to play with!