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Konstantin Y. Smolentsev
SMOLENTSEV & Partners » Press Centre » Inverviews & Comments »

Remove the follower

Tyumen group of companies AgroIntel lays an innovational way of development in agro-sector and independently struggles with grey market of seeds, not waiting for the government to create protecting measures.

Bewitching image: “crowd” of powerful maneuverable American tractors with satellite navigation on a big speed rush through a golden field filled with sun light. Clouds of dust – oat of new harvest flows into car wagons. “Don’t stand under oat dust, – Andrei Chalkov warns me and the photographer, – you’ll be itching for a week”. His group of companies “AgroIntel” in three years is planning to become the leader of Russian grain market.

Last two-three years it actually does show rapid growth: increased goods circulation by two and a half times, up to 930 million rubles, annually doubles areas of arable lands and sales of seeds, grains, has raised productivity up to unprecedented parameters in region – this year they will produce 800 tons per person as oppose to 168 tons as an average in the region. How those changes began in business, why company defined a new strategy, deciding to become an innovative international agrarian corporation – we talked about all that with the General Director of AgroIntel Andrei Chalkov and Chairman of Board of Directors of International Corporation “SMOLENTSEV and Partners” Konstantin Smolentsev. Cooperative work with consulting companies – is a standard for western agribusiness, but for our country it is something new. Business games became an everyday reality in AgroIntel.

Sew strategy for business

— Andrei Nikolaevich, how did the intense growth in AgroIntel start?

— We prepared and now we’re shooting. In 2005 we felt: changes are necessary but didn’t know what they are. Company was growing, processes became unmanageable, it became impossible to use old structure of management. 

But we didn’t know any new ones. That is why all of us, then it was four shareholders (now two), have completed MBA in Tyumen. By then we had nine branches of business: bakery, mill, seed production, trade of vet medicine, sales of spare parts, grain trade and others, even selling computers. In 2005 for the first time we projected ourselves for the next five years and cut off many branches, leaving only three: seed growing, grain trade, selling spare parts. Further diversification, I think, is not needed. The core is still seed growing – 60% of business. But we’re also seriously developing grain trade (increasing volumes by several times), and trade of spare parts (adding trade of machinery and service).  

— Did ÌÂÀ help you?

— We saw tools and mechanisms, but understood that it is difficult to do on your own, plus it’s impossible to come off operative work. Have invited a professional consulting corporation for strategic management “SMOLENTSEV and Partners”, together we’re building strategy. Konstantin Smolentsev works with us in Zavodoukovsk two weeks per month.

— How did the thought develop?

— Strategic planning was sewn to concrete business with great “pain”. Breaking the old started immediately. We thought that in two months we’ll completely rebuild everything – and shall rush off. But it took three years. When defined, what we want, suddenly have realized that goals and vision of all shareholders completely differentiate. That’s why in 2006 two shareholders left, taking to themselves our new direction – GPS navigation, satellite positioning. Back then it was simply amazing: trajectory of trucks’ movement was defined by satellite. And my vice Uri Shchetin and I started building a strategy for active development of the company.  

— What is necessary for leadership in seed growing of the country?

— Its enough to increase volume of grain sales up to 70-80 thousand tons per year: that’s how much large companies produce in Europe. In USA – up to 200 thousand tons. In 2006 we sold 8 thousand tons of grain, in 2007 – 16, this year we increased rod up to 32 thousand.

— How do you do that?

— We increase grain fields, last year we had 16 thousand hectares, this year 24, next year we’ll have 30.

— Only increase of arable land gives growth to sales’ volume?          

—No, of course not. Sold 16 thousand tons of grain last year – is a limit for our current processing capacities in a 24/7 regime. Potential ended. And we want to double grain sales this year. Those are not illusions. In late august we’re planning to start our new processing factory, which project capacity is 70 thousand tons of grain per year. But for now half of that is enough: adequately we cannot expand our cultivated land due to large capital expenses. Lands, which we buy haven’t been used for 10-15 years! We’re trying to restore them in a 24/7 mode. This year we’re doing outsourcing again. When we didn’t have enough of our own land, we had agreements with other agricultural enterprises. Such outsourcing gave loss to seed material – we didn’t control the entire process. Having received 100 kg of precious high-quality seeds, facilities could ruin them easy.

— What to do with outsourcing defects?

— The problem is solved now: we provide partners with technologies, adjust control of execution. Result: 16 thousand tons of seeds we have, more than 40 will be given to us by our factory, and same amount by Lesnovskoe HPP. We bought it this year, patching a gap before start up of factory. Here they are, required ambitious 100 thousand. We reached the line, before what seemed like a project, is beginning to come true.  

— What defined growth of the company?

—Key question, if company wants to develop and be competitive, – management, – says Konstantin Smolentsev. – Questions of gaps between advanced technical equipment of companies and management are humongous: life makes us work more energetically, intense, and people are used to living calmly. 

— Konstantin Yurievich, how do you define the essence of changes?  

— Classical linearly-geographical organizational structure in AgroIntel had traditional limits: it’s bulky. To eliminate that in 2005-2006 we started implementing project management system, balanced scorecard (BSC), which integrates well in management system of agribusiness. Formed a project group and tried on a joint of all services, divisions to define problems, solutions to which influence achievement of an overall objective — improvement of production quality. Analyzed main business process, completely re-engineered it, defined responsible figures, quality criteria, stages of achievement. First year has given such strong shift to the quality side, AgroIntel has never had before.

— Structure of the enterprise has been simplified, – Andrei Chalkov adds. – Center – managing group of companies. There is a scientific division; sales block, where all questions are handled by trading house; production block, which consists of four companies, knows only its own expenses and solves organizational questions. There are auxiliary services: energy, forks-spoons and other.

First set of solving problems: for the company to effectively work, it is necessary to operatively check current parameters. Firstly, we figured out what are they for every division and every employee. It turned out to be a large amount. To use them and react fast, automation of process was needed. However, the more indicators considered the more of a clear picture we have of what’s going on. And its not chocolate trying to explain to people for more than a year why their work is being “numbered”. Majority was “convinced” by double salary.

Second set of problems is connected with modernization of field technologies. From 2006 there are no old technologies on our fields. And old structure of management also turned out to be useless, with such technologies it can’t be used. Before company’s management was divided territorially, now there’s nothing on territories, but land, because machinery allows mobile industrial groups to move with the speed of 40 km/hour. Field technologies helped us define what machinery to consume. So one resulted from another. We buy expensive machinery, but don’t touch it for 3 years because we don’t need repair services.

At old management techniques, agriculturist worked only 10% of time as an agriculturist, because he solved all industrial questions up to delivery of fertilizers. We said: technologist will only work with technologies. All others will work with logistics.

— What did change in technologies give?

— Company, one of the first ones in Russia has carried out modernization for a non-arable system in agriculture. Sowing complexes used in manufacture (width of capture — 16 meters) have allowed to eliminate plowing, and within five years with a view to align fields only pre-seeding cultivation has been carried out. What did it give? Before in so-called stream of seeding 17 people were engaged: seeders, seed transporters, and others, productivity was 60-70 hectares per day. Now its only three persons, productivity is 350 hectares per day. Next step – full transfer to agricultural system No-Till, which will allow to decrease expenses on combustive-lubricating materials by 70%, from 90 to 18 liters per hectare.

— Did harvest increase?

— Harvest does not depend on way of processing. We achieved expenses reduction. Why is growth in yield needed? 

— But you wanted to grow lots of grain?

— Lots of grain – is one thing, high yield – is a completely different thing. Do I want to get record 50 centners per hectare, or do I need a cost price of thousand rubles per ton. These are two different goals. If goal is harvest, then we have to say good bye to economics: high risks. We’ll include expenses for 50 centners, and it wont rain or the opposite: will flood crops – and no more records. That is why our planned yield – 25 centners, and from that we’re planning our expenses. There are almost no risks, there’s always going to be 25. And if weather is good – then cost price will fall rapidly. Controllability of company also depends on achieving planned cost price. If plans are incorrect – everything else is unreal.

—What did you do with quality precisely?

Ê.S.: Have figured out, that 80% of seed quality depends on how seeds are dried. There, you can either lose everything, or gain. This business process turned out to be key, we have strengthened control there. For example, have written comprehensive instruction of what operator must do: every thirty minutes he has to write down temperature of heat-carrier in a journal. Head of each concrete territory has to control him once an hour. Technologist – twice a day has to do the same. Production Director – once per day. So it turns out to be a four-stage control, but that is crucially important.

Quality has improved: in 2006 we got 8 thousand tons of grain, and in 2007 – twice as much. From the same volume of initial materials, from nothing, didn’t spend a penny. Here it is necessary to explain: from grain delivered for processing, approximately half is taken for seeds, and what remains becomes foodstuffs wheat. AgroIntel has managed to increase amount of seeds. In quality program there are control points on every stage of production in agro-holding. All services participate in this program. Minimum half of motivation of every person in every division depends on this project.

In 2007 a decision has been made about building a factory. Before, part of shareholders definitely didn’t share a thought that factory is necessary, that it is expedient to invest 350 — 360 million rubles which will pay back in 39 months. Purchased equipment was covering in dust. It’s true: relations among shareholders and quality of operative management destroy all average Russian business!

When quality program was formed, it became clear that construction of a factory will solve lots of problems concerning selling production. Question from an emotional field – is it worth investing crazy money has transferred to a completely different one: how to make factory not an expense, but stabilizing part of company’s business.

A.C.: At first, we didn’t even talk about anything like factory, we were preparing modernization of existing lines. In parallel were moving in qualitative questions. It has helped to understand that plain replacement of equipment is the most expensive way to solve that question. Purchased new generation of machinery, created a fully automated process. Not one modernization would lead to such results. There’s no factory with such productivity (20 tons per hour) in Russia and in Europe. There are four times less drying capacities than required in AgroIntel. The faster collected grains are processed, the higher will be its quality. Crude grain, having lain in lots for a couple of days, from a seed material turns to fodder.

— What other project directions are being developed?

— Transport. When we start processing factory with huge capacity – then how are we going to transport grain? Domestic transport isn’t adapted, no suitable one. We decided to master in Tyumen area a project of assembly manufacture of vehicles for village: we are going to sign contract with one of the leading companies in Canada on manufacture of specialized grain trailers Doepker.

Opened opportunities

— How are questions of financing projects solved?

A.C.: Understanding, that traditional tools (credit plus leasing) aren’t enough, because they are limited by mortgaging base, we attract investments from market. Three years ago have let out first bill loan of the company. Till today, we have already carried out three issues.

K.S.: Result is not even in money, but in earning trust from financial market for agribusiness. On AgroIntel’s example, a counter movement has begun. First loan of 30 million rubles, when gradually has been concentrated in SKB-bank, has allowed bank to make a decision on carrying out financing of factory’s construction on 200 million rubles.

— Are those unordinary tools for agro-sector?

À.C.: In Tyumen region there are no analogues. No one believed that it’s possible. Experts of the company, accounting, economic services were engaged in developing the start. Such experience has taught people. Since last year, we’re implementing another tool, new on Russian market – factoring. That is too an innovation in agribusiness. We want to drastically increase volumes of grain trade: we need to make money circulate faster. Before that we were buying grain in small parties, uniting them in bigger ones on an elevator. It took 2 weeks to form a portfolio, wagons arrived to consumers in ten days, five-six days took to pay for delivery, basically the cycle lasted two months. And now factoring company pays for grain the moment we load it in wagons, – decreased by two circulation of money. The moment when consumer pays to the factoring company, we’re already buying another party. This way, we’re doubling the volume of grain trade.

Struggle with grey markets

— What is your market share?

À.C.: Its hard to say. Market isn’t see-through, grey schemes prosper.

Ê.S.: Small example. Together with a delegation from Ministry of Agriculture and RUIE we went to Canada for a congress on agribusiness. Talked about forages, animal industries, expensive wheat. Not one ever mentioned seeds. Why doesn’t that topic exist? Everything else – is its aftermath. Underestimation by experts of Ministry of Agriculture of seed market’s value affects entire chain from plant growing up to animal industries. Positions of the government in seed growing have to be precisely formed, and seed manufacturers protected from grey schemes, they stir development.

— But demand still exceeds supply?

À.C.: Seeds is an absolutely liquid product. Doesn’t matter if we increase supply – it’ll all be sold. But there’s no real price. If we legally seed-grow, we’ll have more expenses than those who do it illegally. We spend on promotion of product, research of grades. And then some farmer is going to buy a small party from us, plant, collect harvest and sell it 10% cheaper. And he starts to compete with us! Hence, our competitors are grey schemes. Farmers don’t want to buy seeds, because they are twice as expensive, than food wheat. Seeds are an intellectual product, control and responsibility are needed here.

— How much do you lose because of grey schemes?

— Half of profit. Microsoft loses the same amount when sells certified programs – situation is the same.

— You have a peak, which company needs to reach – to become the market leader. But there are no concrete parameters, how much seeds are going to be in demand: how do you orient then?

— Analytics point out that in Russia 8-9 million tons of grain are consumed as seeds. That’s the market volume. But legally last year it has been sold only 268 thousand tons of seeds of grain crops.

— Do you have direct competitors on domestic market?

— There are no direct ones, we were able to build our business this way. We can’t physically have any competitors in peas seeds, because we got patent on them. AgroIntel is famous on agrarian market for selecting unique kinds of peas. Nearest competitor for wheat seeds is Kurgansemena, but in grocery lines grades don’t coincide. Kurgans are focused on steppe areas, and we are focused on northern forest-steppe and taiga zone, meaning absolutely different target markets. Hence, there is no direct civilized competition. The worst competitors for us are “followers” on grey market, duplicating our grocery line. They intercept the costumer. 

Ê.S.: Absence of competitors did not happen on its own. When a couple of years ago we were thinking about grocery lines, decided to avoid them. Were looking for segments which weren’t closed.

— How do you fight with such followers?

À.C.: With help of innovations. Every year we test new grades, renew grocery lines, offer something new on the market. That decreases risks.

— But consumers usually get used to certain grades? Or do they trust the brand?

— We study our costumers: why does he have to purchase from us? It turned out, that knowing company’s name is a serious argument for making a decision. That is why primary goal is to become famous. We organize demonstration crops in many regions, costumer can see everything for himself, feel all.

Second goal: unconditional trust of clients in product’s quality, for that we started modernization. All our actions concentrated on innovations: fast change of grades, blocking intellectual property by signing agreements with a selector, whose grade we grow and promote. We pay him for the invention and sales volumes, something government doesn’t do. In advance we start duplication of a new grade to sell thousand tons at once as soon as registered. Without us, no one can officially sell that grade, unless concluding a license agreement with us. In this case, grey market backs off.

— Your competitive advantages?

— In seed-growing it is first of all grocery line, how it is competently and well made in terms of cultures and grades. Due to a certain grade, it is possible to increase harvest by 25%.

 Ê.S.: I will emphasize – innovativeness of a company is not only in renewing grocery lines. In a sum with using financial tools (bonds and bill releases, factoring) it increases enterprise’s competitiveness. And when grey market sells 10% cheaper, company due to technological and management innovations can beat off those 10%. It starts independently fighting with grey market, not waiting for the government to implement protecting measures.

Foreigners are not stupid

— Do you manage to grow faster than the market?

À.C.: Market of seeds doesn’t grow. Additional seeds will be required when country increases crops. Nevertheless, expanding the share, we change policy of sales. Customer doesn’t have enough turnaround means. And we demand 100% advance payment. Will we manage to sell, rapidly increasing volumes by starting a factory? What are the ways to expand client base?

Besides, sales depend on seasons, and the factory is planned to be working 24/7. It’s expensive to build warehouses. We go different way, using techniques of management, precisely financing sales. Customer takes seeds, and pays when harvest is collected. To give away seeds, means of protection, fertilizers, – is not a problem. The question is how to get money back. Technological, financing support of agreement is necessary – factually bank activity, transferred on goods market. We’re creating structures of control of credit in the company.   

— Are you the first ones here too?

— Agribusiness hasn’t done anything like that.

— Why does demand exceed supply?

— A lot of money were attracted from other sectors to agro-complex. Five years in Tyumen region profile investors, large poultry-farming and cattle-breeding complexes are creating own raw-material base. Retaining low prime cost of grain in the holding (and in cattle-breeding it defines prime cost of end product), they can manage profit. After, processors came into AIC. And in the past two-three years investors with absolutely different motives arose: land is underestimated, majority of arable land isn’t officially registered, it can’t be an object for rent, buying or selling. It is the biggest problem. When it’s solved, market and prices on land will drastically increase.

A system of seed-growing is needed in Russia, along with protection of intellectual property. Selectors disappear, because they’re not paid enough for inventions. World selections lagged behind Soviet ones by 20 years. Today it’s the vice versa situation. We have already lost vegetable growing – foreign grades dominate there. Government is now worried about food safety, but where does it start? If tomorrow our grades are blocked – there’s nothing scarier than that.

— Why is domination of foreign grades bad?

— If you take beer brewing industry, grades used in it are 100% of foreign selection. Foreigners aren’t stupid, they created a stable selling market: deliver first reproduction, meaning beer brewers are hooked, compelled to annually buy seeds abroad. If supplier stops that – there will be no more beer in Russia.

— Why do you need international part of business in the company?

— When developing strategy and estimating risks, we decided that it would be better to leave competitive battle, which ends as a price war. No one ever wins anything in it. The most powerful potential competitors – foreign companies, they can enter the market and create problems for us: from barriers they have only time, three-four years. It is a very serious threat.

West finances have absolutely different opportunities. Government is not going to protect us. We decided, why fight when we can cooperate. It’s the third year we’re trying to better our relations. We researched who can enter the market. To define competitors, seed growers have to pay attention to similar breadth and climate conditions, grocery line. That’s how we got to Canada, created a “daughter” there: developing relations with the largest companies. Exchanging information, specialists, grades, we represent their interests in Russia.

— Do they not view you as competitors?

— In general they’re open. In reality it’s not that simple as it seems, of course, but for now they’re afraid to get in here – used to working in a different environment. Today contacting with us is very advantageous – they are researching our market. Cost of seeds in Canada is twice as high: world prices, and not all of their grades show good results here. That’s why they’re not going to export seeds to us in near future. That’s why for now only grey market is on the way. In grain market we work at world prices. Direct correlation of those markets in necessary, there’s only one basis anyways – grain price. Seeds are much underestimated.

AgroIntel clearly understands that Tyumen region is more favorable for agro-software producers in comparison with other areas. But now company needs to build competitiveness in relation to other regions too, because if that budget support caves in, we’ll still be ahead in all our business echelons.

Additional materials:

Andrei Chalkov, General Director of group of companies “AgroIntel”, 49 years old. In 1981 graduated from Leningrad Agricultural Institute, worked as an agriculturist, then as a main agriculturist, including in Zavodoukovsk OPH, traditional seed-growing facilities, in 1994 became its Director. Since 2000 – entrepreneur. In 2002 bought CJSC “NPF Siberian Agrarian Company”, in 2003 – CJSC “Niva”, in 2004 – CJSC “Uzhnoe” – structure of Zavodoukovsk OPH, making on the basis of all that group of companies “AgroIntel”. Married, has two sons.  


Expert-Ural ¹33 (341), 2008


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