Olam in Africa: branching out

Olam, the Asian agribusiness, is looking to test out an ambitious diversification plan in Africa. In a way, it shouldn’t be a surprise – Olam started in Africa as part of an Indian conglomerate producing cotton for Nigerian markets, before it began exporting agri-commodities, and eventually morphing into a fully fledged rubber-to-cashews business listed in Singapore.

It is in Africa where the company is looking to branch out into fertiliser plants, plantations and consumer goods, according to Ranveer Chauhan, managing director and regional head for Olam in Africa.

Like many, Olam wants to tap Africa’s consumer markets – which could grow to $1.4 trillion by 2015, according to bullish predictions by McKinsey. The company launched ‘Tasty Tom’ in Nigeria in 2008, now the second largest branded tomato paste producer in west Africa.

Olam is selling biscuits in Ghana through its Royal brand, and hopes to be the second largest player in the market this year. “We have been in this area for about four years, but really we have made significant investments in the last year,” Chauhan told beyondbrics.

And there are the noodles – Cherie noodles, sold by Olam in Nigeria, one of the highest per capita consumers of instant noodles after southeast Asia and China, and one of the top five fastest growing noodles markets worldwide. “We see the African consumer as a wonderful opportunity not just today, but for years to come,” says Chauhan. “We do these products, brand them and we are trying to create a separate [packaged food] business, apart from our agriculture business.”

Even in its traditional agriculture sector, Olam is exploring new business models by pursuing direct investment rather than focusing only on supply chains – its historical niche. The company has established palm and rubber plantations in Gabon, coffee plantations in Tanzania, and rice farming in Nigeria, with a large hardwood timber concession (1.3m ha) in the Republic of Congo. Olam is eyeing upstream plantation opportunities in Mozambique, Uganda, Sudan and Kenya.

“The main part of our business has been supply chain management – buying somebody’s product and delivering it to somebody’s factory. However, investments and expansion into farming were a part of our strategy that gained impetus once we were able to secure access to long term capital,” says Chauhan. Profit returns in direct agri-investments can reach 20 per cent, compared to 2 per cent profit margins in the supply chain business. “This commitment to farming and plantations could transform the bottom line structure of our business,” says Chauhan.

This is also taking Olam into its first fertiliser plant in Gabon. The company entered the sector in 2012, aiming to become a dominant supplier in the African market, and began trading in fertiliser by sourcing externally and selling to growers. To meet its long-term supply requirements, Olam decided to build a greenfield, port-based $1.3bn fertiliser plant, in partnership with the Gabonese government and Tata, and hopes to benefit from a domestic gas supply to fire the plant. “We studied and felt for ourselves that there will be a serious fertiliser sector in Africa,” says Chauhan. The estimated volume for the west African market is 1.68 megatonnes per year. Despite a lengthy environmental assessment, “we are committed to the project. We have got the partners in place, and we have to find a financial closure.”

But Olam-bashing short-selling research house Muddy Waters doubts the company has the capacity to pull off this project. It reckons that high cost overruns of a Ghana flour mill, and Olam’s decision to make a rice farm investment in a flood-prone region of Nigeria, suggest a company with weak planning skills.

Olam argued against the criticism of the Nigerian rice farm, claiming the floods were a once-in-forty year event.

Luck may have turned against Olam as well, according to Muddy Waters, due to the shale gas revolution in the US. Gabon’s domestic gas supply was part of the fertiliser plant’s appeal, with the US a potential export market, but fracking has made US-based production more economical. However Olam argues the plant has a big enough market in Latin America and Africa if US imports decline. The estimated volume for the west African market is 1.68 megatonnes per annum.

More broadly, Olam’s Africa portfolio was criticised for being too reliant on government subsidies and incentives, especially in Nigeria and Gabon. Nigeria’s export subsidy incentives, called EEGs, are equivalent to a “disproportionately large amount of Olam’s profit after tax” says Muddy Waters. EEGs have a ‘colourful history of being suspended, changed and not being honoured by Nigerian Customs’ (the scheme has been suspended twice since 2007).

Olam disputes the claim, arguing EEG benefits are passed down the supply chain and are not a significant portion of profitability. “The offset is intended to make Nigeria a cost competitive exporter of value-added agri commodities rather than a source of profits for the exporter” says Olam’s rebuttal report.

Whatever the true scale of Olam’s reliance on export subsidies, the debate points to a broader feature of most big business operations in Africa: the central role of government relations. Olam is not alone in needing to strike up substantial relationships with government as part of their commercial engagement, especially in sensitive areas of land and agriculture.

And they appear to have cordial dealings. Olam are a ‘preferred’ partner of the Ghanaian government in its cotton industry plan. In Gabon, Olam has government agreements encompassing the fertiliser plant, and a joint venture for a 1,126 ha industrial park. “I’m pretty sure that President Obama doesn’t know us, but African policy makers love us,” says Chauhan. “They are not scared of us, we are well known in Africa”.

Additional reporting by Rob Minto. A version of this article appeared on This is Africa, an FT publication.

Related reading:
Olam’s strategy takes note of criticisms, FT
Olam – Muddied waters
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Muddy Waters rebuts key Olam accusation
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