Most entrepreneurs like businesses where they control a commodity no one else has. Competition is the last thing they want to encounter. Hebei’s Chenguang Biotech is no different. Over the past 11 years it has exploited a first-mover advantage to turn itself into the largest maker of red pepper pigment globally.
But that success could be short- lived if it fails to respond to the threat of new, low-cost rivals.
By last year, Chenguang had risen to a position in which it had managed to corner half of the red pepper, or capsicum, pigment market. In Chenguang’s case, the pigment is primarily sold as a dye for food, cosmetics and medicine.
“In 2006, the top four red pepper pigment firms in the world were Indian,” boasted boss Lu Qingguo. “But soon our production and global market share exceeded the entire country of India.”
Chenguang started out life as a ‘collective enterprise’ in 1998. It was founded by state-owned hardware firm Tianjin Jianmin and the employees (who were the nominal owners) had little say in its operations. Just two years later it was $118,000 in debt, a serious sum for the firm at the time.
What happened next was a complex privatisation. Lu Qingguo (then a manager at another local hardware factory) and twelve other workers were sold the company for the humble consideration of just $14,500 in cash and $31,400 in ‘inventory’.
Lu’s own contribution saw him receive a 15% share in the company (though that’s down to about 10% after subsequent capital raisings).
The changes that followed at Chenguang were significant. “At the time Chenguang, like all its Chinese counterparts, was using the most traditional technology,” explains The Founder magazine. But trial-and-error and a willingness to experiment with a range of different equipment dramatically changed the nature of red pepper pigment making at the firm.
Chenguang threw out much of the old labour-intensive method. For example, it stopped manually removing pepper stalks before the drying process. “This didn’t require any technical knowledge,” Lu told The Founder, “the key was that no one had thought of it.”
That was crucial in 2002 when prices fell. By then the company was financially robust enough to take advantage of the glut. “Prices continued to fall and other companies didn’t dare purchase red peppers,” says Lu. “I have a farming background and we knew that farmers were already selling at a loss, so prices couldn’t slide much further.”
Alongside market savvy, management remained focused on innovative processes. Lu’s factory was now using a mix of cotton, rice, animal feed and oilseed processing equipment, and experimenting with new production techniques.
Luck played a major part in Chenguang’s fortunes too. In early 2008 it made the mistake of paying too much for its red peppers. The financial crisis that year then sent prices plummeting, so management decided to punt on a huge volume of peppers to make up for their earlier mistake. It worked. “In 2008, our sales doubled and our dominant position in the global market was established,” says Lu.
In October Chenguang raised $106 million in a listing on ChiNext in Shenzhen – it had sales of $90 million last year. But the company was soon fending off copycats. “Around 60 to 70 pigment factories have opened up in Xinjiang and now there’s intense competition for [red peppers],” Lu explains. “Chenguang has no long-term advantage.”
Currently the market is limited. Hence a move into other plant extracts (like anti-carcinogenic lycopene and capsaicin). That’s also led Lu to conclude that the firm needs a cheaper pepper source to survive. To that end, he’s opening Chenguang’s first processing plant in India – to exploit a ready supply of low-cost red peppers. And far enough away, Lu hopes, for few of his competitors to follow.
Shareholders will hope so too. Since Chenguang listed late last year, the stock price has declined from Rmb30 to Rmb28.85. Not terrible, given the performance of local stocks. But not red hot either…
© ChinTell Ltd. All rights reserved.
Sponsored by HSBC.
The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.