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Case Study: Deqingyuan - IFC

Case Study: Deqingyuan - IFC

3Market

3Market MoversConclusion“Head and shoulders abovethe rest”Setting up an operation likeDeqingyuan’s is expensive. Thebirds’ cages have come from Italy,the fertiliser-making equipmentfrom Germany, and the biogas plantfrom America’s General Electric. Notsurprisingly, for some time moneywas Chairman Zhong’s main challenge.He says he devoted up to 80% of histime to fund-raising.IFC was impressed by the company’s vision of transforming China’segg production at the same time as it pioneered new standards ofsustainability.But he managed to attract someheavyweight foreign investors –including the IFC (which took astake in the company in 2006) andthe Washington-based Global EnvironmentFund. Mr. Zhong believesthat Deqingyuan’s high standardof animal welfare was partly responsiblefor IFC’s interest. Theproject is smaller than wouldusually draw IFC’s attention, butthe institution was impressed bythe company’s vision of transformingChina’s egg production at the sametime as it pioneered new standardsof sustainability. Receiving IFC supportwas crucial for Deqingyuan,bringing not only money but alsoexpertise – in, for example, thebiogas project.The company is now thinking ofa stock-market listing in 2008 or2009 to give it access to the furthercapital it will need if it is to scaleup its operation to a national level.Its good governance and environmentalperformance will stand itin good stead as it approaches themarket. Mr. Zhong says the thingthat keeps him awake at night nowis the challenge of finding enoughsuitably qualified people to managethe company’s rapid expansion. Theindustry has traditionally been runby small family firms; trained poultrymanagers in China are even rarerthan good eggs.The high price of entry may deter competitorsfrom capturing Deqingyuan’smarket share for the foreseeablefuture. Those who do enter will inany case be hard pushed to findthe management skills required tomaintain such high environmentalstandards. The few rivals that existin the branded egg market currentlyoutsource at least some of theirproduction to others, handing overbirds to their suppliers and collectingtheir eggs thereafter. Deqingyuandoes everything itself and is incontrol of its birds all the time. It is,says Joan Larrea, “head and shouldersabove the rest.”Box 5: LeadershipDeqingyuan’s profitability dependson the company’s abilityto charge a price premium tocover the higher costs of producinghigh-quality eggs. Thisis no mean feat in a countrywhere food quality standardsare inconsistent and many eggproducers have been bankrupteddue to the price competition.However, Mr. Zhong’s visionand leadership allowed him totake the risk. He bet (correctly)that his high-quality eggs wouldmesh with the growing healthconsciousnessof Chinese consumersif he could build a brandthat became associated withquality. He achieved this in severalways, including organisingmarketing activities in residentialcommunities, giving awaymore than 500,000 eggs for freefor people to taste, and developinga unique brand and packaging,with production datesclearly printed. Mr. Zhong’sleadership in pioneering higherquality and ethical standards inthe Chinese market also helpedsecure IFC investment – anothercritical factor that contributedto success.Courtesy of Deqingyuan

Market Movers 4Courtesy of Deqingyuan

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