Participants of GIFT’s second open programme in 2009 spent eight days working on site with the Pohan Farmer’s Association (PFA) in order to develop a plan for the association to convert from conventional to organic cotton production and access new markets for their products. Cotton is among the dirtiest crops, using about 25 per cent of the world’s insecticides and 10 per cent of the world’s pesticides. Organic cotton production has the advantage of promoting soil fertility, and also allows for diverse agriculture while keeping human contact with toxic chemicals to a minimum. The briefing note also discusses the challenges facing rural farmers in China, such as environmental deterioration and inefficiencies of small scale farming.

1. Global Young Leaders Programme
Shanxi Project 2009
Innovative Development Model for
Rural Prosperity

2. Table of Contents
I. Executive summary
II. Background
III. Business opportunity
IV. Value proposition
V. Marketing plan
VI. Management
VII. Financial analysis
VIII. Economic, social and environmental benefits
IX. Risk assessment and mitigation
X. Implementation plan

3. I. Executive Summary
• Shanxi province has high levels of rural poverty where
agricultural growth is limited by small scale farming
structures and rural-urban migration.
• However, farming associations in the province are keen
to embrace new ideas especially for sustainable organic
farming to uplift communities.
• The Pohan Farmers Association is the first registered
farmers’ association in China comprising 3,800 farmer
members and is a successful model of rural
entrepreneurship and leadership.
• There is an opportunity for organic cotton due to growing
global demand (US$3.2 billion market in 2008), growing
green awareness and improvements to community
livelihoods through sustainable farming.

4. Executive Summary (cont’d)
•
The value proposition is to set up a JV company leveraging the association’s strategic
advantages by moving up the supply chain to process seed cotton into lint cotton and
commanding premium prices for branded cotton products. The association will have
dedicated land resources certified to international organic standards to supply the JV.
Proposed JV
Buyers
Farming
Seed
•
•
•
Ginning
Trading
Lint
•
•
•
Spinning factory
Retailer
Domestic/foreign buyers etc.
Yarn/Fabric
The JV, which has strong support from the Provincial Government, will brand the cotton to make
it attractive to high end buyers, provide stable market access for the villagers and will transfer
management know-how to the local community.
A strong branding and marketing strategy will be implemented by keeping the spending low in
early years to manage operating costs and ramping up marketing investments from year four
onwards.
The recommended structure is a contractual joint venture with limited liability of each party to the
cooperative agreement between the farmers association and the investor. Under CJV
agreement terms, the profit is negotiable i.e. parties can receive different distribution ratios in
different years. The management structure can be self determined rather than by governing
PRC laws.

5. Executive Summary (cont’d)
•
Financial summary:
–
–
–
–
Total investment cost of ¥2.32 million
Short payback period of 5 years
Project IRR (10 years) of 30%
Strong and consistent cash flows of ¥3.4 million from year 5 onwards
(after the organic conversion period)
– Excellent growth potential in the Extended Yellow River Region
•
Benefits to community
– By converting to organic cotton farming, the farmers will benefit from
organic price premium and increase their income level up to 40%.
– With organic cotton farming, use of harmful chemical fertilizers,
pesticides and genetically modified cotton seeds will be eliminated.
– The JV will create more than 30 job opportunities within the JV and
related business and retain young talents in the community.
– While the government provides subsidies, with increased funding to the
Community Development Fund, there is scope to provide healthcare
over and above primary healthcare services.

6. Executive Summary (cont’d)
Initiative
Marketing
channels
Yr 0
Mth 1-3
Set up online
presence (join
B2B portal, own
basic website)
Yr 0
Yr 0
Mth 4-6
Mth 7-9
Advertise on
China Textile
Accessories
Magazine
Certification Phase 1 land: apply for cert
SPOCTE
Operations
Set up T.E.
office, hire GM,
HR & Finance
heads
Ginning
Factory
Design factory
Training
Finance
Yr 0
Yr 1
Mth 10-12
Yr 2 Yr 3
Yr 4
Yr 5
Build
Start joining
interactive
trade fairs
website
Phase 1
land:
obtain cert
Phase 1 land: conversion period
Hire other key positions
Develop training plan & road
map
Approach
Negotiate &
potential
conclude JV
investors
Yr 6
onward
Construct factory &
Start
purchase machines
ginning
1st round of team
training
1st capital 2nd capital
injection: injection:
RMB1.2m RMB1.12m
Obtain
organic cert
Implementation Timeframe
6
Phase 2
land: apply
for cert

7. II. Background
China
Shanxi Province
The Cotton Industry
Pohan Farmers Association

8. China – Land of Hope and Despair
China is a rapidly
developing economy
Rural areas are not realising the
benefits of development

9. BACKGROUND: CHINA
Rapid economic growth and huge capacity
• 9% annual growth rate in 2008
• 4.4 trillion USD in 2008, No.3 in the world
Low per capita GDP
• USD 3,381 per capita, No. 104 in the world
Huge GAP in per capita income between urban and rural area
• Urban area: RMB 15,481
• Rural area: RMB 4,761
Rural community NOT benefiting enough from China’s robust
and rapid economic growth
9

10. BACKGROUND: SHANXI PROVINCE
Demographics:
•
•
Population: 34 million
34 minority groups; 0.32% of
population
Economics:
•
•
2.12% of China’s annual GDP
• No.18 out of 34 provinces
Per capita GDP
•
•
RMB 20,398 (USD 2,985); RMB
2,242 lower than national average
Annual household income
•
•
Urban: RMB13,119
Rural: RMB4,097; RMB664 lower
than national average

11. Challenges and Opportunities in Shanxi
Challenges
Opportunities
• High levels of rural poverty
• Small scale farming structures
limit agricultural growth
• Rural-urban migration
• Environmental deterioration.
•
•
•
Converting to organic farming
can make a significant impact on
the environment.
Growing global demand for
organic products
Farming associations are already
established in the region and are
keen to embrace new ideas for
sustainable organic farming.
Shanxi Province can benefit widely from
improvements in farming techniques.

12. Cotton Industry
Worldwide:
World Lint Cotton Production Distribution in 2008
•
•
•
31 million ha (465 million
mu) or 2.4 % of global
arable land used for
cotton production.
50 million farmers
employed in over 100
countries
Production of cotton in
2008 = 23.3 million metric
tons.
U.S.A ; 3.2
Others; 5.1
12%
Uzbekistan;
1.1
20%
China; 7.8
4%
30%
5%
Brazil; 1.4
8%
20%
Pakistan; 2
1mu = 0.06 ha
India; 5.1
Million Tons

13. Cotton Industry
China:
•
•
The biggest cotton producer and consumer
Producing 7.8 million metric tons and consuming 9.9 million metric tons in
2008.
•
About 14 million Chinese farmers directly involved in cotton production in
regions as above.
Organic cotton is the way forward

14. Organic Cotton Farming
Organic agriculture combines tradition, innovation and
science to benefit the shared environment and promote fair
relationships and a good quality of life for all involved.
—International Federation of Organic Agriculture Movements[4]
•
•
•
•
Land Management
No Pesticides
No Herbicides
No Genetically
Modified Seeds
• Natural Fertilisers
• Fair Treatment of
workers
• Water
management
Organic cotton farming uses the earth’s
natural resources for sustainability

15. Organic Cotton Benefits
• Elimination of toxic
chemicals
• Water savings
• Elimination of genetically
modified seeds
• Long term soil fertility
• Organic certification
requires fair working
conditions for all worker
along

16. Pohan Farmers’ Association (PFA)
•
1st registered farmers’ association in China in 2004
•
Membership: approx. 3,800 farmers
(Average income: 2,400RMB/mu/yr)
•
Established in 1998 by Ms. Zheng Bin
(Nominated for the 1000
Global Women Nobel Peace Prize 2005,
Top 10 rural entrepreneurs in China in 2008)
•
Ms. Zheng: Visionary Leader
Current Status
- Well organized farmers’ association with a mission to uplift rural
livelihoods today and providing 28 full-time jobs

17. PFA Key Projects
Application of
Farming technique,
Hands-on
experiences
Youth Organic
Farming Group
Basic
education,
vocational
skills,
transfer of
farming
know-how
Transfer of
Experience &
Track Record
Farmers’ school
Organic Farming &
Trading Association
Growing
& Selling
of Cotton
Women’s Handicraft
cooperative
Fertilizers
based on
Chinese
tradition
medicine
Rural retail chains
Fertilizers
based on
Chinese
traditional
medicine
Green Family Group
Vision and Inspiration: Harmonious Society

18. PFA’s Vision
Strategic Goals:
• Promote entrepreneurship
and organic farming
• Strengthen bargaining power
• Improve quality of life
• Enhance community welfare
• Promote sustainable
• development
Implementation:
• Selling products
• Provide information
• Adult education
• Engaging youth
Promoting Sustainable Development and better MARKET ACCESS

19. Business Opportunity
Organic Cotton Opportunity
International Certification

20. Organic Cotton Opportunity
Global Organic Cotton Supply/Demand Mismatch
Strong & Increasing Global Demand
IRR of 30% within 10 years
30% Price Premium over conventional cotton
Growing Awareness of Green Movement
Great Social Impact & Improve Community Livelihoods
Source: Organic Exchange
Supply
45%
Demand
55%

21. Global Organic Cotton
Production
Global Production 2007
26%
Domestic Production
2007
18%
14%
42%
Others
5%
Xinjiang
95%
India
Turkey
China
Others
China ranked 3rd producer globally amongst 24 countries in 2008
with Xinjiang dominating China’s production market
Source: Organic Exchange, ‘Textile Information Weekly’

22. Organic Cotton in the World
Growing Demand & Internationally-Driven
Global Retail Sales of
Organic Cotton Products
3.5
3
2.5
2
Sales Value
($billion)
1.5
1
0.5
0
2005
2006
2007
2008
Growing demand from retail drives the global production
A 25 – 55% annual growth rate of organic cotton products in next 5 years
forecasted by Organic Trade Association.
Source : Organic Exchange & International Federation of Organic
Agriculture Movements

23. Organic Cotton in the World
Growing Demand & Internationally-Driven
Major Consumer Countries (2006)
Metric Tons
1) United States
9,500
2) Switzerland
2,500
3) Germany
1,500
4) United Kingdom
750
5) France
650
6) Sweden
350
7) Japan
350
8) Italy
250
9) Netherlands
100
23

24. Organic Cotton in the World
Growing Demand & Internationally-Driven
Brand Demand for Organic Cotton is on
the rise
2008 Green Initiatives of two of
the global largest users:
173,272MT
92,998MT
74,839MT
2007
33%
2008
2009
25%
Source: Organic Exchange, Nike & Wal-Mart Company
Website
Purchased more than
12.7 thousand tons of
organic cotton and an
additional 5.5 tons of
transitional cotton from
1000 farmers at certified
organic prices.
For every cottoncontaining apparel
product to contain
at least 5 percent
organic cotton by
2011.

25. Organic Cotton:
Opportunities & Challenges
Opportunities
•
•
•
•
•
Challenges
•
Growing global demand for organic
cotton (2008: US$3.2 billion vs. 2007:
US$1.9 billion)
Increasing demand for organic cotton
from brand-name buyers
Growing awareness of the green
movement
Environmentally friendly: eliminating the
misuse of pesticide and fertilizer
Improve community livelihoods with
sustainable farming system
•
•
•
25
Sales may be susceptible to economic
cycle
Currently in the start-up phase and
testing land-conversion
High certification-associated fees and
lengthy implementation process
Less credibility in the domestic
certification process -> gives rise to many
potential entrants in the organic market

26. Why International Organic Certification is
Required
1) Certified products command organic cotton premium
2) Most end-buyers require international certification
3) Certification from China is typically not recognized in the
international market
4) Largest organic cotton end-consumers are US, EU & Japan
Main Market Standards: 1) US NOP, 2) EU 2091/2, 3) Japan JAS
• Certain brand-name retailers may have other sets of
requirements
International Certification
• Standards need to be applied across the value-chain down to
the farm & ginning factory
• Need to engage a accredited certification company for the
application process
• Certifies both the land & specified product
• Annual inspection & renewal
26

27. Organic Certification Process
Engage
Certification company
Pre-Conversion
Cost: 25,000 RMB /year
Engage certification
company which are
accredited by the
standards bodies
Certification company
execute first inspection:
1.Farming standard
2.Requirement
1.Application form
2.Documentation etc.
Timeframe: 6 months
Conversion
Period
85,000RMB /year
Yearly
Renewal
85,000RMB /year
Certification company
inspect conversion
process
Required Conversion
Period
US: 3 years
EU: 2 years
JPN: 2 years
2 months to complete
certification process
2.5-3.5 years
Certification Process Requires
4 Years
Validity Period: 1
year
Inspection required
every year

28. Value Proposition
Value Proposition
JV Vision
Business Model
Rationale
Competitive Advantage

29. Value Proposition
•
•
•
•
The value proposition is to set up a JV company leveraging OFTA’s
strategic advantages and moving up the supply chain to process seed
cotton into lint cotton.
The JV company will focus on organic cotton with a dedicated ginning
factory for organic lint cotton production.
Through its trading arm, the JV will command premium prices for its
branded organic lint cotton.
The OFTA will have dedicated land resources certified to international
organic standards to supply organic seed cotton to the JV
Proposed JV
Buyers
Farming
Seed
Ginning
Trading
Lint
• Spinning factory
• Retailer
• Domestic/foreign buyers etc.
Yarn/Fabric
By trading directly with the JV, farmers will avoid being exploited by the middlemen and
obtain fair prices for their products.

30. JV Vision
1. China’s Leading Organic Lint Cotton Producer
– Provide branded organic lint cotton, which will be certified to
international standards and sold at a competitive price to high end
buyers
2. Future Growth
– To achieve annual compounded sales growth of 30% over 10 years
3. Opportunities for the Community
– To provide economic opportunities for the community through
employment of young farmers as well as nurturing local talent,
management capabilities and leadership skills
4. Sustainable development
– To promote sustainable development in Shanxi Province and the rest of
China through the elimination of chemical fertilizers, pesticides,
herbicides and genetically modified cotton seeds as well as reduced
water usage.

31. The Business Model
OFTA
Investors
Jointly Owned
JV
Other Organic
Cotton Growers
Purchases
seed cotton
Consists of
• Ginning Factory
• Sales and Marketing
Sales of
Excess
Seed
Cotton
Other Ginning
Factories
Sales of Organic
Lint Cotton
• Spinning Factories
• Domestic Buyers for
international Market
Sales of Cotton
Seed
Buyers

32. Relationship Between OFTA and the JV
OFTA
• Facilitates organic conversion
of land
• Provides technical support to
farmers on organic farming
• Part ownership of JV
JV
• Ownership of ginning factory
• Buys organic seed cotton from
farmers through OFTA
• Converts seed cotton into lint
cotton
• Branding of organic lint cotton
(西 厢 棉)
• Markets and sells lint cotton to
high-end buyers
• Sells by-product cotton seeds
• Profits distributed to OFTA

33. Rationale
•
The JV will brand the organic lint cotton to make it attractive to high
end buyers such as buyers for brand retailers (e.g. Muji, Walmart,
C&A, Nike, Hugo Boss etc.) and as such obtain a 30% higher
premium
•
The JV will also provide stable market access for the villagers,
which will encourage them to make long term planning and be more
responsive to market changes.
•
The JV has strong support from the Commerce Administration
Department of the Provincial Government who wish to stimulate
development of rural enterprises.
•
Working with an investor partner, OFTA will benefit from financial
support and management know-how (which will be eventually
transferred to the local community).
Model is consistent with worldwide organic fair trade best practice

34. Competitive Advantage of JV
•
International Certification in Organic Cotton Production
– aimed to achieve in 4 years time to command a higher price
•
•
•
Geographical advantages
– Suitable weather in growing organic cotton
– Possesses land reserve which can expand to larger scale production to meet
demand from larger buyers
– Possesses transportation, utilities and production infrastructures (one of the 5
conventional cotton production bases in China.)
Integrated process controlled by PFA
– includes a ginning factory to provide more value-added products and eliminate
middlemen
Early Mover
– strategically positioned for early market entry with strong presence and brand
recognition among handful of established producers
Local but Global
34

35. Organic Cotton – Goods of the Future
35

36. Marketing Plan
Objectives/Strategies
Branding
Logo
Product Channels
Pricing Strategy

37. Marketing Objective
Become the Most
Respected, Ethically
& Socially
Responsible Organic
Cotton Producer in
China
37

38. Branding Objectives
Objectives of
branding the
trading
the entity
Branding
Signifies
•
•
•
•
•
Delivers a clear message
Confirms credibility
Connects with target customers
Motivates the buyer
Concretes User Loyalty
•Name of the JV Company Shanxi Pohan Organic Cotton
Trading Enterprise (SPOCTE) signifying the province, name
of the farmers association, product and business.
A Social Enterprise for the Pohan Farmers Association

39. Branding Strategy and Positioning
Branding Strategy
Economy
Penetration
Skimming
Brand
Positioning
Logo
Brand name
Brand identity
Premium
Brand Positioning:
- Premium Organic Cotton
• Creating a distinctive Brand Image
• Differentiate product
• Top Organic cotton product in China
• Green and environment friendly Product (Organic cotton)
• Top Organic cotton product in China
• Key Themes – going green, Organic and local significance
• XiXiang Mian（西厢棉）
• Xixiang Ji （西厢记）is one of the most well known classic love stories in China, which
39
happened in Yongji City (Location of SPOCTE)
• The brand identity indicates green farming, healthy and environmental friendly product and
local significance

40. Recommended Brand logos for SPOCTE
西 厢 棉
Chinese No.1 organic cotton
西 厢 棉
Chinese No.1 organic cotton
Chinese No.1 organic cotton
西厢棉
西 厢 棉
Chinese No.1 organic cotton

41. Marketing Campaign Plan will align with
Production Ramp-Up
Year 1
•
•
•
•
Year 2
• Advertising in the textile magazine with two insertions per year.
Year 3
Creating a static content website for SPOCTE
Advertising in the textile magazine with two insertions per year.
Listing SPOCTE on B2B website’s (e.g. Alibaba)
Register SPOCTE with the nearest cotton exchange
• Advertising in the textile magazine with two insertions per year.
Year 4
• Advertising in the textile magazine with two insertions per year.
• Upgrade website to an interactive with e-marketing website
• Participate in trade fairs
Year 5 Onwards
• Advertising in the textile magazine with four insertions per year
• Advertising in Textile Newspaper
• Participate in trade fairs

42. Marketing Campaign Plan will align with
Production Ramp-Up
Available Land for Cotton Production
30,000
25,000
mu
20,000
Scenario 1
15,000
Scenario 2
10,000
TOTAL mu
5,000
Year Year Year Year Year Year Year Year Year Year Year
0
1
2
3
4
5
6
7
8
9
10
Scenario 1: Utilizing the 80,000 mu available in Pohan
Scenario 2: Utilizing 300,000 mu available in Yellow River Region
1mu = 0.06 ha

43. Breakup of Marketing Spends
Assumption: inflation rate is 7% YOY
Marketing spends and intensity ramps up with increase in production.

44. Marketing Strategy
Media Plan
Advertising in textile magazine: Niche targeted magazine to ensure higher
reach in the most cost effective way.
Advertising in Textile Newspaper: Niche and cost effective.
Online
plan
•Creating the static content website in year 1; Upgrade to an interactive emarketing website in year four
•List SPOCTE on B2B website's (e.g. Alibaba) to get access to the online
fraternity
On ground
plan
•Register SPOCTE with the nearest cotton exchange.
•SPOCTE takes part in trade fair’s since that will provide direct access to
interested buyers.
Strategy: keep the spends low in early years to manage operating costs and
ramp up marketing investments from year four onwards.

45. Products and channels
Product Range: - Cotton Seed, Raw cotton and Lint cotton
Sales process
Sales channels
Shanxi Pohan Organic Cotton Trading Enterprise
Local farmers/factories
(ginning / spinning etc )
provide
Farming
(raw cotton)
“Raw cotton”
Raw
Cotton
Trading
Section
(marketing
/sales)
provide
“Raw cotton”
Ginning
(Lint cotton)
provide
“Cotton seeds" and
“Lint cotton”
Direct Sales to
Domestic buyers
Cotton
Seeds
Lint
Cotton
Advertising on Online
BtoB market place
(e.g. alibaba)
Web-site
(links to sales team from
Trading company)

46. Pricing Strategy
Quality
Objective
Short to medium term
(3 – 5 years)
- To launch the product successfully
- To gain and expand market shares in
target markets
Long term (5+ years)
- Premium product image
- Top Organic cotton producer in China
P
r
i
c
e
Low
High
Economy
Penetration
Skimming
L
o
w
Premium
h
i
g
h
Rationale
- Demand exceeds Supply
- Xinjiang is the only dominant producer in domestic market
- Pro-organic cotton and domestic sourcing policy of Chinese government

47. Pricing Strategy (cont’d)
Market Entry
Pricing
• Conversion
Stage I1
Price = avg. market
price4 X 80% (20%
discount)
Marketing
Penetration
Pricing
• Conversion
Stage II2
Price = avg. market
price4 X 90% (10%
discount)
Steady Stage
Pricing
• Certified
Organic3
Notes: 1- Year 1&2
2- Year 3&4
3- Year 5 & onward
4- Prevailing Organic Cotton Market Price
Price = Xinjiang product
price X 95%

48. Management &
Governance
Objective
Structure
Governance
Training and Development

49. OBJECTIVE
•Assist SPOCTE’s sustainable organic cotton production through:
– Structure – clear
organizational chain of command
– Leadership – commitment
towards accountability, efficient
operations & profitability
– Transparency – open and
regular communication with
various stakeholders on key
compliance and financial
indicators
http://www.wilsenachvanwyk.co.za/images/Management%20Team.jpg

50. Corporate Structure of SPOCTE
•
Creating most favourable partnership between PFA and Investor to ensure SPOCTE
as most reliable ethically & socially responsible organic cotton producer in China while
sustaining profitable growth.
Recommended structure
Contractual Joint Venture (CJV) as Limited Liability Company
–
–
–
–
–
–
Limits liability of each party to the cooperative agreement
Established through cooperative agreement between PFA and Investor
Governed under CJV Agreement terms as negotiated between PFA & Investor rather than
governing PRC laws.
* Profit negotiable; parties can receive different distribution ratios in different years as
agreed by PFA and Investor under CJV Agreement
Investor may receive profit prior to CJV corporate income tax & prior to CJV distribution of
profits
Management Organization Structure can be self determined under CJV Agreement terms
rather than governing PRC laws.
N.B. See appendix for Cost & Procedure diagram of incorporating CJV
* Investor receives higher % profit for stated period of time for purposes such as recovering invested capital.

51. Organization Structure of SPOCTE
Board of Directors
General Manager
(1)
Company Audit
(1)
Sales & Marketing
(2)
Production &
Supply Chain
(2)
Financial
Controller and
Deputy Controller
(2)
Factory Workers
(Part-time)
(15)
Technician
(1)
Quality Assurance
(1)
( ) denotes headcount
HR, PR & Community
(2)

52. Leadership Roles & Responsibilities
General
Manager
Oversees all of the company's sales & marketing as well as the daily operation
of the company, and reports to the Board of Director.
Sales &
Marketing
Promoting the product to the market to develop business opportunities for the
company and ensure the implementation of the annual sales target.
Production
To source the raw material for the factory and be responsible for all the
& Supply
production processes in the factory.
Chain
Financial
Responsible for the accounting issues, prepare monthly financial report and
prepare budgeting proposal to the General Manager as well as the Board.
HR, PR &
Responsible for the management, training and development of the organization,
Community and liaising with relevant parties, such as government & certification companies.
Company
Audit
Responsible for management, training & development of CJV, liaise with relevant
parties such as governmental department, certified agents.
Ensure governance of CJV in meeting Financial, CSR and Organic
Production commitments, reporting directly to Board of Directors.

53. Members in Board of Directors
•
It is advised that the Board of Directors contain executive & nonexecutive members as follows:
EXECUTIVE
PFA
Representative
General
Manager
Investor
Representative
NON-EXECUTIVE
Local
Government
Representative
Independent
Director
(Accounting
background)
Related NGO
Representative
(e.g. FuPing)
Independent
Director
(Agricultural
background)

54. Governance Challenge
Several predictable challenges:
•
•
•
•
•
To recruit competent audit talent, who possess the knowledge and skills for
finance, CSR and Organic cotton farming and ginning in local;
Governance should be strengthened because some the farmers with small
plots can potentially damage the credibility of the organic cotton due to
some of their practices;
To raise the awareness on health, safety, and labor issues in the Ginning
factory and seek compliance with the overall mission to be ethically and
socially responsible;
Meet the international and domestic standard on Health, Safety &
Environment
Meet the international and domestic standard on labor
54

55. Governance - CSR check list
Environmental, Health & Safety
• Is the noise level monitored in the workshop?
• Is the management aware of noise hazard?
• Is the management aware of hazards of dust?
• Are the workers provided with necessary personal protective
equipments（个人保护用品）n the factory
• Are there regular safety and health trainings for the factory workers
Labor
• What is the local minimum hiring age?
• What system is in the factory to prevent child labor hiring?
• What is the local minimum wage?
• What is the lowest basic salary in the factory?
• How does the factory pay Saturday and Sunday work?

56. Training & Development
Aim
•
To refresh and upgrade employees’ and farmers’ knowledge and skills, so as to
achieve SPOCTE’s production and sales goals
Focus Areas
•
•
•
•
•
Organic agricultural standards and methods
Health and safety standards and methods
Business-related concepts and skills e.g. marketing, law
Leadership and team building
IT and technical skills
Modes
•
•
Classroom workshops (leveraging on farmer school)
On-site field training
Resources
•
•
•
•
SPOCTE HR staff
Farmer school teachers
OFTA leaders & experts e.g. technical support team, YOTG members
External experts e.g. agriculture university academics, certification company experts

57. Training & Development
– Improve farming techniques
Invite external agriculture experts to
improve current farming school’s quality of
training.
– Expand knowledge
Invest resources into current farming
school and educate teachers to expand
and modernize training

58. Training & Development
Company vision
• Company culture
• Safety awareness
• Employee attitude and behavior
• Company policy
• Organic agriculture and environment
Knowledge
• Reading
• Basic English for young leaders
• Communication
• Team building
• Time management
• Effective Supply Chain management
• To be a modern farmer
Skill
• How to learn by computer
• How to do business-sell products
• Basic international trading knowledge
• Negotiation skill
Technical
• Organic cotton planting
• Organic cotton quality control
• Environment (soil, water) for organic
Cotton
• Ginning techniques
• Quality control on ginning

59. Financial Analysis
Investment Requirements
Key Assumptions
Financial Projections
Summary

60. Investment Requirements
•
Benefits of SPOCTE funding:
– Higher price premium with more value-added products
– Increased income by dealing directly with buyers
– Both OFTA and SPOCTE will benefit by fair returns
•
An upfront ¥2.32 million capital injection to cover the investment
costs, which will be incurred in first 12 months comprising:
– ¥ 2.2 million initial investment for the ginning factory, including:
machinery and installation, land, workshop, office, and initial working
capital
– ¥0.12 million investment for the sales and marketing department to set
up the company’s website
60

61. Key Financial Assumptions
•
•
•
•
•
•
•
The financial model is based on equity
funding for ginning factory with
capacity of 6 tons/day of lint cotton for
10 years.
The conversion ratio of raw cotton (raw
material) to lint cotton is 3:1.
2 sources of revenues are available:
lint cotton and cotton seeds.
Straight line method is applied for
depreciation.
4-year conversion period for organic
certification will be observed.
The organic cotton enjoys a premium
of 30% after conversion period.
Relevant expenses contain
certification, maintenance, marketing,
salaries, operation and set up cost.
Ginning Factory
Assumption
Yield –steady
200kg/mu
Planted area-steady
15867mu
Raw cotton
Variable operating cost
¥5/kg
¥0.3/kg
lint cotton
Fixed operating cost
¥100,000/year
Maintenance cost
¥30,000/year
Pre-operating cost
¥200,000
Training cost
¥30,000/year
Cotton seed
¥2/kg
Organic lint cotton
Certification fee
61
¥19.5/kg
¥85,000/year

62. Key Financial Assumptions
• The organic conversion process will be carried out in 2 phases:
 Phase 1 – Utilizing the 80,000Mu available in the Pohan area
 Phase 2 – Utilizing the 300,000Mu available in the Extended Yellow River Region
Land converted to Organic Cotton Production (Mu)
30,000
25,000
mu
20,000
Phase 1
15,000
Phase 2
TOTAL mu
10,000
5,000
Year
0
Year
1
Year
2
Year
3
Year
4
Year
5
1mu = 0.06 ha
62
Year
6
Year
7
Year
8
Year
9
Year
10

63. Financial Projections (Net Income)
Net Income Projections
- Phase 1: Current Pohan area
¥ million
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
1
2
3
4
5
6
7
8
9
10
-1.0
Year
Steady net income of ¥3.2 million from year 5 onwards (after the
organic conversion period)
63

64. Financial Projections (Net Income)
Phase 1
Net Income Projections
- Phase 1 + Phase 2 (Extended Yellow River Region)
Phase 1 + Phase 2
12.0
10.0
¥ million
8.0
6.0
4.0
2.0
0.0
1
2
3
4
5
6
7
8
9
10
-2.0
Year
Strong growth potential from the Extended Yellow River Region
64

65. Financial Projections (Cash Flows)
¥ million
Free Cash Flow Projections
- Phase 1: Current Pohan area
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
0
1
2
3
4
5
6
7
8
9
10
Year
 Strong positive cash flow of ¥3.4 million from year 5 onwards
 Short payback period of 5 years
65

66. Financial Projections (Cash Flows)
Free Cash Flow Projections
- Phase 1 + Phase 2 (Extended Yellow River Region)
Phase 1
Phase 1 + Phase 2
12.0
10.0
¥ million
8.0
6.0
4.0
2.0
0.0
0
1
2
3
4
5
6
7
8
9
10
-2.0
Year
Excellent growth potential from the Extended Yellow River Region
66

67. Summary of Key Financials
• Total investment cost of ¥2.32 million
• Short payback period of 5 years
• Project IRR (10 years) of 30%
• Strong and consistent cash flows of ¥3.4 million from
year 5 onwards (after the organic conversion period)
• Excellent growth potential in the Extended Yellow River
Region
67

68. Economic, Social and Environmental
Benefits
Impacts
Benefits
Empowerment

69. Sustainability of Community Benefits
Sustainable environment is
fundamental for future economic
growth
Establish JV
Invest in Organic Farming
Environment
Knowledge leads to
higher awareness of
action impacting the
environment
Economic
Social
Provide continuous
education through Farmers’
School
Increased Income
leads to better
livelihood through
social
development

70. Economic benefits to community
• Setting up JV
– Create jobs within the community
– Provide a platform for farmers to increase their bargaining power
for organic cotton trading
– Buffer income shocks from crop variability and volatile
commodity prices
– Provide opportunity to take ownership in the company
– Encourage agricultural entrepreneurship
By converting to organic cotton farming, the farmers will benefit from
organic price premium and increase their income level up
to 40%.

71. Economic benefits to community
40% of PFA’s share of overall JV’s profits will be
directly distributed to farmers in form of bonuses.

72. Environmental impacts
Conventional cotton farming has
following impacts:
•
High usage of chemical
fertilizers and pesticides
leaking into surrounding
ecosystems
•
Accounts for 22.5 - 25% of
insecticide and 8-10% of
pesticide usage worldwide
Every year 20,000 deaths result from pesticide usage worldwide, many
of which are due to cotton farming.
Source: World Health Organization (WHO)

73. Environmental impacts
Conventional cotton farming has following impacts:
•
•
•
Every year 2.6 % of the world’s water is used in cotton production
(20,000 liters of water is used for the production of a T- shirt and a
pair of jeans)
73% of global cotton harvest comes from irrigated land
As cotton farming requires abundant water reserves, low humidity
and long daylight, the existing farm sites often face constraints in
expansion due to lack of water reserves.
Water management is key component of
successful organic cotton farming

74. Environmental benefits
Two key benefits of converting to
organic cotton are:
1. Soil Fertility
– With organic cotton farming, use of chemical fertilizers,
pesticides and genetically modified cotton seeds will be
eliminated.
– Traditional methods will be used as a substitute (Chinese
medicine and use of manure).
2. Water conservation
– In the long term, we will introduce Drip Irrigation Systems which
will save about 50% of the water currently being used.

75. Social impact and benefits
Rural Urban Migration for Shanxi Province between 2000 - 2005
In
Shanxi
Out
Net
255,000
827,000
-572,000
-1.5%
 Currently there are limited opportunities in rural China
 572,000 people left Shanxi province between 2000- 2005 in search of
a better life and higher income
Our plan will create more than 30 job opportunities within the JV and
related business and retain young talents in the community.
Source: White Paper: Internal Labor Migration in China (University of Washington, Seattle)

76. Social impact and benefits
Education
Healthcare
Social Wellbeing
Harmonious Society
30% of the Profits of the JV will be allocated for Community Development

77. Empowerment through education
•
Additional Funding will directly benefit the expansion of the Farmers School
and the Community:
i) Farmers
• Empower farmers through continuous technical education (organic farming methods including
soil fertility management, technical training on ginning practices)
ii) Women
• Empower women through continuous adult education and increase of self-esteem
• Additional income for women through more job opportunities
iii) Youth
• Empower rural youth with no tertiary education through education especially in IT and
management skills.
•
In the long term the School could be expanded to provide specialized
education in organic farming beyond the Shanxi Province .
Education is key to sustainable development

78. Healthcare benefits
– By lessening the exposure to chemical fertilizer and pesticides, we
can improve the health conditions of farmers.
– While the government and PFA provide subsidies, with increased
funding to the Community Development Fund, there is scope to
provide healthcare over and above primary healthcare.
78

79. Risk Assessment
Risk Priority Mapping
Mitigation Measures

80. Risk Priority Mapping
• Not enough organic-related skills
• Pollution of water, air, soil
• Increased foreign competition (including
lower tariffs)
• Drop in available financing
High
Likelihood
• Not enough raw materials e.g. non-GM
seeds, organic fertilizers
• Bad weather e.g. floods
• Export restrictions
• Customers unconvinced of organic benefits
• Counter-party risks e.g. buyer non-payment
• Increased local competition
Low
•
•
•
•
•
• Currency risks
• Dissatisfaction from farmers due to
unrealized benefits
Not enough fertile land
Not enough labor
Setting up of heavy industry nearby
Speculative dive in organic cotton prices
Lower government support
Low
Impact
80
High

81. Mitigation Measures
Risk dimension
Mitigation Measures
High Impact, High Likelihood
• Not enough organic-related skills
• Regular training, monitoring and inspection
• Pollution of water, air, soil
• Frequent analysis of water, air, soil
• Increased foreign competition
(including lower tariffs)
• Build local industry network, ensure consistent
high quality and even production, lock-in buyers
• Drop in available financing
• Secure strong investor with long-term, social view
81

82. Mitigation Measures
Risk dimension
Mitigation Measures
High Impact, Medium Likelihood
• Not enough suitable raw materials e.g.
non-GM seeds, organic fertilizers
• SPOCTE to source for alternative suppliers,
conduct careful testing before usage
• Seek government support (materials sourced
locally will be assured full supply by provincial
government & incorporated into province plans)
(Provisions for the Encouragement of Foreign Investment in Shanxi)
• Bad weather e.g. floods
• Monitor climate and geographical developments
• Export restrictions
• Build local industry network, join lobby group if
necessary
• Customers unconvinced of
organic benefits
• Build brand in China, build local industry network
and support industry promotion efforts
• Counter-party risks e.g. buyer
non-payment
• Use trading facilities e.g. Letter of Credit
82

83. Implementation
Timeframe

84. Implementation Timeframe
Initiative
Marketing
channels
Yr 0
Mth 1-3
Set up online
presence (join
B2B portal, own
basic website)
Yr 0
Yr 0
Mth 4-6
Mth 7-9
Advertise on
China Textile
Accessories
Magazine
Certification Phase 1 land: apply for cert
SPOCTE
Operations
Set up T.E.
office, hire GM,
HR & Finance
heads
Ginning
Factory
Design factory
Training
Finance
Yr 0
Yr 1
Mth 10-12
Yr 2 Yr 3
Yr 4
Yr 5
Build
Start joining
interactive
trade fairs
website
Phase 1
land:
obtain cert
Phase 1 land: conversion period
Hire other key positions
Develop training plan & road
map
Approach
Negotiate &
potential
conclude JV
investors
Yr 6
onward
Construct factory &
Start
purchase machines
ginning
1st round of team
training
1st capital 2nd capital
injection: injection:
RMB1.2m RMB1.12m
Obtain
organic cert
84
Phase 2
land: apply
for cert

85. APPENDICES
85

86. Appendix A. List of Organic Cotton
Suppliers

87. 87

88. 88

89. 89

90. 90

91. 91

92. Appendix B. Preliminary Costs for
incorporating JV

93. Set Up of Cooperative Joint Venture
Joint Venture Cooperation (JV) in China
PFA / Domestic-investor
Foreign-investor (FI)
Obtain Letter of Opinions
1. Acquire Permission reports from county
level or industry authorized dept.
2. Apply foreign-funded enterprise license
3. Obtain feasibility research report
4. Establish foreign enterprise constitution
5. Report the legal person or director candidates
6. Obtain FI legal dox and QC dox
7. Get approvals from local gov’t and related depts.
Apply Project Application Confirmation Report
Perform JV Name Check
Obtain the Contracts & Articles of Association
Handle registration procedures and receive business license
Open Bank Account
Apply Customs
Registration
Apply Taxation
Registration
Apply Foreign
Exchange Registration

94. Preliminary Costs for incorporating JV
Procedures
Fee(RMB)
Company name approval
80
Company approval
20
Trademark Registration
1000
*Company registration fee (base on USD$200,000 capital)
1333
Business IC card
280
Company Seal
500
Organization Code license
228
RMB currency a/c IC card
250
Foreign currency a/c IC card
250
Tax registration
100
Custom registration
175
Check capital (base on USD$200,000 capital)
3000
Statistical license
20
Finance license
20
Total:
Approx. RMB 6,600
* < RMB 10 million, 1‰ of registered capital
> RMB 10 million, portion over 10mil charged at 0.5‰. Portion > RMB 100 million not charged.
N.B. Figures may fluctuate slightly in accordance with local & central government laws

95. Appendix C. List of Participants

96. List of Participants
•
Mr.
Robert Zhou (Nike Inc.)
•
Ms. Marike
•
Mr.
Hideki Oka (Infotree)
•
Ms. Sandy Hsu (HKUST)
•
Ms. Melinda Mears (Meinhardt)
•
•
Mr.
Liu Chi On (Meinhardt)
Ms. Janelle Zai (Chinese
University of Hong Kong)
•
Mr.
Phillip Xiao (Lever Style)
•
Ms. Jie Zheng (Tsinghua
University)
•
Ms. Feng
•
•
Ms. Sherin Goh (IMC)
Ms. Sherry Ma (Tsinghua
University)
•
Mr.
Sin-Hong Leong (IMC)
•
•
Mr.
Takashi Kumon (JETRO)
Mr. Jeffrey Song (Tsinghua
University)
•
Mr.
Rohit Suri (Turner)
•
Ms. Hui -Yi
University)
•
Mr.
Zero Sham (Awake Limited)
•
Ms. Reimi Imaizumi (CLSA)
Li (Lever Style)
Jensen (HKUST)
Lin (Tsinghua

97. Thank you
If you are interested in this investment opportunity, please contact Chandran Nair at GIFT
at (852) 3571 8103 or cnair@global-inst.com.