Agro Industria (AI) Exportadora S.A.
AI was founded in 1973. Its original owners were from Zamora and Michoacan in Mexico and they planned to buy agricultural produce and process it into sales using labour intensive processes. AI’s operations, employing as many as 450 people, lasted until 1982. During this early period, the founding partners invited Mr Gonzales, from Guadalajara, to join the company as manager. Over time he received ownership interest, and in 1978 he decided to buy out the original owners, a process that was completed in 1982. At this point, however, the Mexican economy was in a perilous state, with the peso being heavily devalued after a long period of being- tied to the dollar at a fixed parity of 12.5 per dollar. The difficult economic situation led M Gonzales to cease operations.
However given Mexico’s potential in agriculture and agribusiness, the International Finance Corp (IFC), which is a division of the World Bank, decided to make agribusiness investments in Mexico. IFC invited a Mexican national, Mr. Ojeda who was also a director of Banamex, to become involved in such a venture He in turn contacted Mr Gonzalez to restart operations, with a greater focus on exporting.
The reborn company slowly found its feet and, in 1986, Mr. Ojeda quit Banamex to become a partner in the company, with additional capital investment from the venture capital arm of Banamex. The company decided to focus on exporting frozen vegetables and sought another partner, Mr Polari, a big grower of vegetables. Mr Polari’s association with the company lasted
three years, until 1989, when he sold his share in the company. By then AI had it’s ownership
divided as fol lows: Mr. Gonzalez held 25 percent, Mr Ojeda had 35 percent. with the balance held by an investor from Mexico City. IFC, which had held an ownership stake in the company during its difficult years, sold out, as is its custom once the company seemed to be on an even keel and did not require continued IFC capital or support.
Initially, the company had canned Anaheim chillies for export to the United States. Once the United States opened its market to the import of fresh Mexican chillies, however, prices shot up and selling canned chillies was no longer viable. Hence, Al had to find another product line for its canning plant, which had started initial operations in 1987.
Mr. Gonzalez had been invited to Japan and in scouting business opportunities there noticed that the Japanese were heavy users of grapefruit segments, in jellies, cakes, pies and so on He returned to Mexico thinking this represented a potential opportunity for AI. However, some practical problems immediately arose. Whereas chillies are high in acidity, fruit is generally low in acid and high in sugar content. As a result cans were liable to explode easily. Hence AI had to experiment with new canning methods and processes. However, Japanese canning technology as applied to grapefruit was not useful to AI. Because of differences in weather, altitude (Guadalajara is about 3,000 feet above sea level) and humidity. Further, fresh fruit is soft and has a different texture from frozen produce. Therefore, AI had to adapt its production processes. It’s
initial exports to Japan were of poor quality, and shipments suffered from spoilage. Consequently, AI had to request time from it’s Japanese clients to solve its production problems.
In 1990, Al decided to change over to using imported U.S. cans. The cans needed a special
enamel coating to accommodate citrus products. Further, the Mexican cans oxidised easily even before use, and were not of uniform quality, as different kinds of Steel imported from Spain, Venezuela, and so on were used in production Consequently Al decided to import cans from Florida even though this meant paying for transporting empty cans that were being shipped to the Al plants. But the U.S. cans were of superior quality, and soon Al stopped experiencing problems with exploding cans and other problems of uneven quality. Al had learned that the Japanese were continually seeking quality improvements, and at continually lower prices. At first, AI exported on an exclusive basis to Marubeni Corp. However, when Marubeni began lowering the quantities purchased Al began to seek additional Japanese distributors, including additional Japanese trading companies Mitsui and Toshoku Because Al had established a good name in Japan, it had actually been approached by Marubeni about becoming a distributor. Al’s
competition came from Mexico, Israel, and South Africa. AI had the best quality (or so it claimed), though its prices were slightly higher. Al felt that it was too difficult to sell directly to the final Japanese consumer firms, who numbered about 50 in all, major grocer chains, food processors, and others.
Al typically processed the fruit in Mexico packed it in cans without labels, and used a Mexican shipping line for transportation to Japan. It shipped about one container every 10 days to Japan, with the final customer price about double the FOB Manzanillo price.
A critical point in export success is the quality of the raw material, that is, the produce. Al took care in its purchasing. Japanese customers wanted the grapefruit segments to be all of the same size. Hence, AI had two people permanently stationed at the growers’ sites, where they made
commitment to purchase the fruit at the bloom stage, picking producers bases on taste, freshness and fruit size. Once fruits were ready to pick, picking was done every day with AI’s two
people on flat out supervision. Once the fruit was received, it was graded by size, with the smaller units sold off to juice firms. Only fruit of the requisite size was sold to Japan. On average, for fruit with a value of 100 pesos, transportation costs added a further 120 pesos. Imported cans were stored in bond. To avoid duties, since the cans were destined for re-export. Most of the fruit exported to Japan were in #10 cans, containing 2 kilograms of produce and 1 kilogram of syrup. As it was to be expected, AI faced seasonal cycles and had to develop multiple fruit lines to keep them busy all year round. Foe example, in 1992 fiscal year, Ai exported:
Grapefruit August to December 1.575 million pounds
Valencia oranges January to March 1.470 million pound
Lemon May to August .4 million cell sacks
(That is, lemon juice in lemon-like containers)
AI felt that it had to pick produce lines for its plant that were not chosen by its competitors. Its most recent produce addition is strawberries a target of 7 million pounds annually to enter this line. Al made an agreement with ‘Congeladora de Samora, whereby it took over operations of
their factory in return for a 50-50 split of the profits Strawberries are generally sold In 30 pound plastic pails, in Pure-Pak car tons, or in 425-pound drums for use by jam manufacturers.
Al has a U S food broker, World Food Sales, which it owns. World Food’s Sales director was a
former partner of AI in its earlier incarnation, and has over 30 years of experience in frozen produce. Al pays a 6 percent sales commission to World Food. World Food also represents other Mexican food produce companies, such as growers of broccoli and cauliflower. Sometimes the U S broker served as an alternative export conduit to Japan enabling AI to export incremental quantities if demand from its (then) exclusive arrangement in Japan was low. As part of operating procedures, all sales are made on letters of credit, and quotes to all international customers are priced in US. dollars.
In addition to Japan and the United States Al also sells to Europe, principally to Germany. Like Japan, Germany requires quality and is willing to pay a higher price if necessary. Mr Gonzales wife is German and was instrumental in helping to break into the German market, achieved gradually by repeated visits to the world trade fair, held every third year in Cologne, Germany. German exports are ti IC Frozen Foods, the German distributor, who also exports to Sweden and Denmark, where it has representatives.
The United Kingdom is a more difficult market, as lower quality, highly discounted products compete with AI’s produce AI also considered Korea as a market though a 1991 visit indicated that while AI quality was considered superior its prices were held to be high
Al’s goal is to diversify it’s export markets. In 1990 its export sales were 70 percent to the United States and Canada, 25 percent to Japan, and 5 percent to Europe. In 1992, the respective percentages were 60, 30, and 10. For 1993, targeted percentages were 5O, 40, and 10. AI notes that each market has peculiarities and presents a different set of challenges For the U S. market AI is experimenting with new lines such as broccoli, cauliflower, romanesco (a hybrid of cauliflower - and broccoli), Brussels sprouts and cucumbers, both pickled and fresh. Cucumbers represent its latest success which it buys from 92 growers who devote 205 hectares to the crop with total exports being 4.4 million pounds. AI is renting a plant to process cucumber. It houses three grading machines, where the cucumbers are first sorted by size. They are then hydro cooled, loaded onto 40-ton trailers in green plastic bags, along with 2 tons of ice, and then exported at a temperature of 38 degrees to the United States, with more ice added after crossing the border. The cucumbers continue on to Colorado, where they are washed, packed, and sold as flesh produce. The entire cycle averages 17 hours from receipt of cucumbers to the crossing of the border, with a total elapsed time of 24 hours to Colorado. The central and critical element is freshness.
Role of logistics
Logistics are extremely important. Al uses the Mexican carrier Aguilas de Oro with a handoff at the border to Middleton Trucking, which has a fleet of 110 trucks. The crossing point is Laredo, Texas, which is extremely hot. Therefore, the produce has a high risk of perishability. Success is partly a matter of minimising transportation costs. In July and August, at the height of the
cucumber-pickling season, trucking rates are seasonally low due to excess capacity and AI is able to negotiate rates averaging one cent per pound for ordinary cargo to Laredo, and 2 cents for cooled cargo-a saving of almost 33 per cent over normal tariffs. AI negotiated directly with the trucking companies such as Middleton, choosing Middleton over competitive bids from Freymiller and Prime.
Another bottle neck is the availability of containers and major clients such as Vlasic guarantee the availability of containers at the border. In general, it is important to first arrange the U.S. transportation leg with Middleton before closing the link by entering into a contract with the Mexican partner. An alternative is to sell the cucumber in a brine solution for pickling, with the cucumber in brine sent to the United States for further processing: washing slicing and then sale to clients such as McDonalds or a major pickling company such as Vlasic Foods. AI cucumber sales reached 2.75 million pounds of brine pickles in 1992.
For shipment to Europe, the company contracts for a certain number of containers each month to transport its products, currently 10 to 12 containers a month, on terms typically set out separately as FOB plant, plus freight, in-bond expanses, transloading and ocean freight. For 1993, shipping estimates were at 150 containers of produce, split 70 percent broccoli and 30 percent romanesco, which is gaining a market Three hundred tons of romanesco were shipped in 1992, with an estimated 1,000 tons to be shipped in 1993 Romanesco is costlier to grow, however with a pound of seed costing $2,500 versus $200 for a pound of broccoli seed Al buys the seed and provides it to the better growers who are more likely to grow a crop from the expensive seed. Costs and regulations
Al’s food processing is labour intensive though seasonal. For example, The grapefruit segment preparation requires an assembly line of about 2,250 women who cut, peel, segment, and can the grapefruit A key is intelligent buying of raw materials, signing contracts with growers in advance and never growing one’s own produce. For 1992, AI sales were $16 million, yielding a profit of $1.5 million. For 1993 estimates were .for sales of S27 million, with a net profit target of about 8.5 per cent.
As a Mexican company, capitalisation is also critical, especially in export markets where working capital requirements are higher. To enable Al to take a longer-term perspective on export markets, Al’s partners contributed an additional $1.5 million in capital in order to reduce borrowing costs (over 30 percent on peso denominated debt in Mexico).
A complication is divergent agricultural standards in different export markets Regulations differ across countries about permissible levels of chemical additives and fertilisers. Hence the two supervisors assigned to grower relations must monitor the farming process. AI often deliberately supplies chemicals and fertilisers to facilitate certification of additive levels in the export produce. In addition, AI will carry out the necessary inspections prior to export, as in the case of strawberries destined for the U.S. market, where permissible chemical parts per million have been lowered from .5 to .05
Duties are a concern as most advanced nations protect agricultural products. For example, duties on
vegetable to the United States have averaged 17 per cent, on strawberries 14 per cent, and on average about 13 percent of shipment value. With the passage of NAFTA, these duties will be lowered but will not disappear. In comparison, central America enjoys duty free access to Europe and the United State, a considerable advantage over AI produce. Similarly in Japan, there is a 17 percent duty on products in a sugarcane based syrup, but syrup with a corn bases syrup can enter duty free. At the same time, quality standards are such that exports to Japan must meet higher quality standards than exports for the market in the United States.
AI is serious about expanding its export business. Its owners believe that in International business, once they make a deal, hey must honour it. In one case they bought lemons out of season at six times the regular price, and air—freighted the cell sack product in order to meet a commitment
to a customer. The customer’s satisfaction led to a large order the next year. The partners are convinced that Al can only succeed by building up long relationships in export markets, Timely delivery is also a must, given the perishable and seasonal nature f the products. Third, there is no question that AI must deliver the best-quality products, both to win customers and to get repeat orders.