ChemChina will acquire Syngenta. What are the supply chain implications?

Though it has been over a year since the state-owned ChemChina first submitted its plans for the acquisition of Syngenta, the finalisation of the deal last week was nonetheless headline news.

At a price of US$43bn, the deal represents the largest ever acquisition by a Chinese SOE. Not only does the agreement serve to drive China’s agricultural development as a nation, it is also reflective of an ongoing market consolidation within the agrichemicals industry; the EU Competition Commission recently approved a $145bn merger of Dow Chemical and Dupont, whilst the German drugs and crop chemicals producer Bayer is in the process of acquiring Monsanto for $66bn.

Though regulators are likely to demand concessions from some of these companies, consolidation appears inevitable. The structure and organisation of the new entities will certainly vary, with substantial consequences for supply chains. In the case of Syngenta, though, the most surprising outcome is likely to be continuity, rather than change.

Syngenta CEO Erik Fyrwald has consistently stressed that his company will continue to operate as an independent business following the takeover, whilst ChemChina will play the role of financial benefactor. It is worth reiterating that Syngenta accepted the latter’s takeover offer after fending off a prior bid from Monsanto, with the former’s desire for autonomy non-negotiable.

ChemChina does not threaten this as its interests are not primarily commercial. Instead, the SOE is driven by a government desire to modernise Chinese agriculture, which is a growing national issue.

By gaining ownership of the intellectual property and R&D infrastructure of Syngenta, the Chinese Government hopes reduce a dependency on imports by combating the impact of climate change and resource scarcity within its own borders. Moderate to severe soil degradation affects 40% of China’s arable land, whilst the country’s water supply, though vast, is becoming increasingly stressed.

The takeover arrives in tandem with legal reform. Due to the Communist Party’s hostility to private land ownership, the vast majority of the China’s farms are small-scale plots leased to farmers by local government. The resulting inefficiencies of this system mean that even staple crops are over twice as expensive as in the USA. However, a law enacted in November last year now allows local authorities to lease land management rights to corporations; effectively allowing smallholdings to consolidate.

The transfer of best practice from Syngenta, along with technology, will include supply chain management. This is particularly significant as Syngenta has adopted an unprecedented degree of logistics outsourcing through a global fourth party logistics agreement comprising DHL, XPO Logistics and Damco.

Under this arrangement, initiated in 2015 and expanded in March 2016, Damco coordinates the entirety of Syngenta’s global freight forwarding needs, including planning, procurement, execution and monitoring. In North America, overland logistics operations are overseen by XPO Logistics, whilst DHL replicates the process in Europe, the Middle East and Asia. 

Each of these companies will be hopeful of expanding their purview as ChemChina adopts Syngenta’s best practices, though political considerations represent a potential stumbling block. As Ti has previously reported, the involvement of foreign companies in domestic Chinese production and logistics operations is often restricted, with protectionist policies favouring domestic companies.

Moreover, given the geostrategic factors which led to the acquisition in the first place, it is a fair assumption that ChemChina will be unwilling to outsource the management of its domestic supply chain anywhere near to the extent of the current Syngenta arrangement. Nonetheless, the company is unlikely to interfere with the current execution of the best practices it seeks to adopt.

Source: Transport Intelligence, May 12, 2017

Author: Alex Le Roy

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