Chaoda's Green Revolution

Big, profitable, and upmarket, it's just what Beijing wants

Kwok Ho got his first farming experience the way millions of his contemporaries did: He was forced to work the fields during China's Cultural Revolution. At the time, Kwok had no inkling that he would one day start an agribusiness, never mind one listed on the Hong Kong Stock Exchange. His successful second foray into farming began in 1994, shortly after Beijing slammed the brakes on an overheating economy. Kwok, by then an electronics salesman, deemed agriculture more recession-resistant than high tech. After all, he reasoned, folks "need to eat."

Kwok started Chaoda Modern Agriculture (Holdings) Ltd. in Fuzhou, capital of coastal Fujian province, and never looked back. Chaoda is today China's largest non-state agribusiness, with 4,000 employees, and a presence from Guangzhou in the south to Jiangsu in the east. Chaoda also is a major exporter, selling tomatoes, carrots, and melons to supermarkets from Hong Kong to Tokyo, where high-end produce fetches at least six times what it would in China. This year Chaoda is expected to earn $45 million on $72 million in revenues, says Simon Cheng, an analyst with CLSA Emerging Markets in Hong Kong. "Chaoda has good fundamentals, and its prospects are quite good," Cheng says.

WAR CHEST. With an $81 million war chest from its December listing, Chaoda is now embarking on a rapid expansion. It is leasing vast new tracts to plant fruits and vegetables, moving into the fertilizer business, opening wholesale and retail outlets around China, and gunning to become a force in the $10 billion global market for organic produce--that is, grown without chemical pesticides or fertilizers.

Chaoda is emblematic of where the government wants agriculture to go. The company is one of the few profitable agribusinesses in an industry that remains stranded in the Dark Ages. Most farms are tiny and inefficient, require bushels of state support, and are still required to produce wheat, corn, and rice as part of China's obsession with being self-sufficient. But Beijing now realizes it must prepare ordinary farmers for the fierce competition expected once China joins the World Trade Organization and tariff barriers on farm products fall.

To make the agricultural sector more competitive, Beijing is freeing up prices and markets, welcoming investment in value-added crops, and encouraging start-ups to work with state-owned research facilities. Not only do the likes of Chaoda open up new export markets, they also provide jobs for thousands of rural workers. Kwok, now 49 and president of Chaoda Group, sees the deal with Beijing this way: The state leases Chaoda the land, "and we hire the farmers."

Chaoda already enjoys the advantage of ultralow costs, but it is constantly searching for ways to lower them even more. Hence its emphasis on research and development, which consumes 5% of revenues. At one of Chaoda's five experimental farms near Fuzhou, for example, researchers--many from the Fujian Academy of Agricultural Sciences--are experimenting with low-water and soilless cultivation. The aim is to boost fivefold the yield of melons, tomatoes, and peppers.

Though crop research is a major focus, Chaoda is no longer merely a producer of crops. It has opened 20 organic fertilizer factories and is cooperating with the same Fujian academy to produce organic pesticides--a good business given the rising demand for organic produce. The company also runs wholesale markets in 10 major Chinese cities and some 130 retail outlets in cities in the east and south.

China's upcoming membership in the WTO is expected to hammer such behemoths as state-owned Heilongjiang Agriculture, one of China's biggest wheat growers. But Chaoda hopes to escape unscathed. Japan, South Korea, and Taiwan, all of which import Chaoda produce, must cut tariffs on Chinese agricultural products after the country enters the WTO. Chaoda reckons annual exports will grow by at least 30%, especially if Europe and the U.S. become customers, too. WTO entry is also expected to provide China future protection against some punitive trade measures--such as the duties that Japan recently slapped on Chinese shiitake mushrooms, tatami reeds, and leeks.

Finally, Chaoda can count on continued backing from the state. Beijing will continue to exempt fresh fruit and vegetable growers from paying income tax, as well as provide low-interest loans and cheap land, a practice China is allowed to continue after joining the WTO. "The government's aim is to develop China into the largest agricultural kingdom," says Chaoda's Kwok. Chinese farmers may not be quite the walkover that foreign players assumed.

By Dexter Roberts in Fuzhou, with Mark L. Clifford in Hong Kong

— With assistance by Mark L Clifford

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