Overview Of The Sugarcane Industry In Brazil Marketing Essay

Published Date: 23 Mar 2015

After United States, Brazil is the second largest ethanol consumer. The potential demand for ethanol in Brazil has increasingly been expanding. It continues to expand at a rate equivalent 3 billion litres per year. However, the extent to which this potential consumption is transformed into demand depends on the price of hydrous ethanol relative to gasoline (Rabobank International, 2012, p. 5). Over 96 % of the ethanol in Brazil is made for fuel and the remainder for industrial use. Consumption increased rapidly when the program Proálcool was introduced. With this program, the government introduced the first ethanol-fuelled cars in 1979 . (USDA, 2011b, p. 18)

Exports are the main driver for production of ethanol. For example, in 1990s trade grew from about 550,000 litres to 6.4 billion litres in 2010. In 2011, Brazil became a significant importer of United States Ethanol as result of weak domestic sugarcane production. In real terms, it accounted 3.93 billion litres in 2011. Brazil exports to 80 countries around the world; the major markets are the European Union, South Korea, the United States and Japan.

Brazil is expecting growth in the ethanol industry in the coming years. It will depend on the expansion in feedstock cultivated area, the competition for land with other crops and pasture, increases in feedstock productivity and efficiency improvements in ethanol conversion productivity. Not only high demand for ethanol for transportation but also additional demand is projected from the increased use of by-products, such as bagasse as renewable energy source. Bagasse is mostly used in sugar mills to produce electricity or steam. It also has environmental and economic benefits. Projections show that bioelectricity from sugarcane bagasse could supply 20 % of Brazil's electricity needs by 2018, compared with 16 % in 2008 (USDA, 2011b, pp. 30-35).

Overview of the sugarcane industry in Brazil

Sugarcane is needed to produce biofuels and sugar. Many mills already have the capacity to produce both. Brazil is the only country that can switch 5 % to 10 % of milling capacity between sugar and ethanol production, within a year in response to changes in relative profitability between both. This flexibility enables more export availabilities and adaptation to the demand and supply of the goods. Therefore, the sugar and biofuels industry is demanding increasing amounts of primary sugarcane products, which means that the sugarcane market is complementary and continuously growing (Brazil Economic Indicators, 2012). Moreover, the industry employs more than 1.3 million workers in different areas. The annual revenue of the sector is more than USD 50 billion.

Figure : Sugarcane producing regions in Brazil

Source: UNICA, The Sugarcane Industry - Production Map, 2011.

Figure 8 shows where sugarcane is produced in Brazil. The main production region is the South-Central area, with 90 % of production, and in the Northeast region with 10 % of the production. Brazil is the global leader in producing sugarcane followed by India, Thailand, Australia and Pakistan. Usually, farmers harvest twice per year, thus allowing the production of sugar and ethanol throughout year. It is used for the internal and external markets. In the late 1990s, liberalization came to Brazil. This means the government involvement in the industry opened into free market rules without subsidies. The industry managed the balance between demand and supply with market instruments such as future trading and developing new opportunities for sugar and ethanol through the removal of protections barriers. Standards for ethanol made the good a globally traded commodity (Sugarcane today, 2011).

Table 3 shows the prices of sugarcane according to UNICA, (2012a): the cumulative average sugarcane price for the 2011/12 crop from April to August is R$ 0.4942 per kilogram. Mainly it is measured in R$ per ton, which is R$ 70.34 per ton for 2011/12. Compared to the previous year, the price was R$ 57.66 per ton. It increased to R$17.36 per ton for same period from April to August in 2010/11 (Brazil - Sugar semi annual, 2011).

Table : Average prices paid to growers/suppliers or sugarcane in São Paulo State

Harvest year

Sugarcane quality (Kg of TRS/ton of sugarcane)

TRS final price (R$/kg ATR)

Sugarcane final price (R$/t)

2007/08

146,57

0,2443

35,81

2008/09

143,25

0,2782

39,85

2009/10

132,75

0,3492

46,36

2010/11

143,36

0,4022

57,66

2011/12

140,17

0,5018

70,34

Source: UNICA, Average prices paid to growers/suppliers of sugarcane in São Paulo State, 2012, p. 12.

The cultivation area has significantly expanded over the previous 25 years. From 1975 to 2010, the area has grown four times the annual average for the total area harvested for all field crops. The harvested cane are rose from 4.3 million hectares in 1990 to 9.2 million hectares in 2010, which equals 15 % of the total harvested area; 68,000 farms produce sugarcane in the country. However, growth has not been steady, as the expansion of the harvested area to sugarcane has responded to policies affecting both the sugar and ethanol sectors. During the first 14 years of the Proálcol regime (1975-89), sugarcane production grew 5.6 % per year. Since 2003, after the introduction of the first flexi-fuel vehicle, sugarcane production has grown 9 % annually, which means 4 million new hectares added during the period. (UNICA, 2012a) The domestic consumption of sugarcane was 10.4 Mt in 2010/11 harvests. However, the quality of the sugarcane is high, with 139.2 kg ethanol per ton of sugarcane (The Economics of the Sugarcane Industry in Brazil, 2012).

According to the article The Economics of the Sugarcane Industry in Brazil (2012), sugarcane-derived products rank second in Brazilian agribusiness exports just after soy products. However, the sugarcane industry has annual revenue of more than USD 50 billion and it exports 27.5 Mt to the following countries:

Russia (12.5 %);

India (8.3 %);

Iran (5.7 %);

United Arab Emirates (5.4 %);

Saudi Arabia (4.5 %).

According to UNICA (2012b), the forecast for the sugarcane harvest in the South-Central in 2012/13 calls for 509 Mt, which is 3.19 % more than the previous year, at 493.264 Mt. The data was taken with a satellite mapping of South-Central region obtained from the National Institute for Space Research, indicating an expansion of 3 % in the total area planted with sugarcane available for the 2012/13 harvest. Expanding the planted area should be a significant factor despite the projected increase in the total amount of sugarcane available for processing. Significant gains in agricultural productivity are not expected in the next harvest. The estimated agricultural productivity in the 2012/13 harvests considers factors such as crop flowering, a phenomena that happens under specific circumstances, which was a factor in productivity losses in the 2011/12 harvests. Furthermore, probabilities of frosts, pests, diseases, the extent of crop renewal, characteristics of sugarcane regions, harvest mechanization development and weather conditions are important aspects. However, it is not possible to forecast a significant increase in agricultural productivity; for this reason, the projection is working with a figure of 68.7 tons of sugarcane per hectare, which was the same as the previous year. The projections for total recoverable sugars per ton of harvested sugarcane indicate an increase of 1.79 % over the amount observed in the previous harvest. UNICA (2012b) expects an increase to 137.53 kg per ton in 2011/12 and to 140 kg per ton in the 2012/13 harvests. In terms of total production, the 2012/13 harvests are projected to achieve 71.26 Mt of total recoverable sugars per ton of harvested sugarcane, up to 5.04 % over the previous year, when production equalled 67.84 Mt (UNICA, 2012b, pp. 1-3).

PRESENTATION AND ANALYSIS OF THE COMPANY BBM OPERTA GMBH

BBM Operta GmbH stands for Bau, Bergbau und Montage (Engl. Mining, Construction and Erection). The company offers a broad spectrum of services and diverse activities domestically and outside Germany. Therefore, it is sometimes called the BBM Group. The diversification of services is seen in various industries, such as open-cast mining, underground mining, structural engineering, civil engineering, underground engineering and focusing on new industries such as mechanical engineering.

Company profile

BBM is a family-owned company that operates in the mining, construction and machinery sectors. The company was founded in Mülheim an der Ruhr in North Rhine-Westphalia, Germany. The region where the company is based is known as the Ruhrgebiet, which is very well known for its industry sector. It has been active in the market since 1990 under the name BBM. The group occupies promising commercial fields, for example in mining: the excavation of raw materials underground, open cast mining or civil engineering. BBM requires qualified and hardworking employees across Europe; employing more than 2,000 across its industrial spectrum. Annual sales surpass EUR 100 million. It would not be possible to achieve that goal without the cooperation of many other companies in this area; good relationships with partners are very important to the company. In terms of size classification, BBM is a medium-sized company, likely to become a large company in the near future (BBM Operta GmbH, 2009a; BBM Operta GmbH, 2011b; BBM Operta GmbH, 2011c).

Figure 9 is the official logo of the company since 1990. Other companies and partners recognize the brand in BBM's industries. Therefore, no visual change has been planned (BBM Operta GmbH, 2009a; BBM Operta GmbH, 2011b; BBM Operta GmbH, 2011c).

Figure : BBM Operta's GmbH Logotype

Source: BBM Operta GmbH, Company's Internal Source, 2009a.

History of companies development

The history of BBM begins with the entrepreneurial commitment of the Operta family in 1990 in the region of Ruhrgebiet in Germany. This area was rich in coal, and industrialization was on the highest level. In the 1990s, the German government required the closing of old coal mines in exchange to open few high capacity coal mines. Restructuring of the region began and the majority of people began searching for jobs outside the coal-mining industry. Many coal-mining companies closed their businesses at that time. However, the 1990s saw a new wave of demand for coal and the companies could not cope with it. The Operta family saw a niche in this and entered the market (BBM Operta GmbH, 2011c). Coal mining is the main activity, but there are others that have been introduced. The milestones of the BBM according to the interview are (see Appendix C):

1990: Coal mining;

1993: Construction;

1997: Opencast Mining and development of own resources facilities;

2003: General company;

2009: Construction and concrete works in Netherlands;

2011: Acquisition of the mechanical engineering company Meran;

2012/13: Increasing international commitment to Mongolia, Brazil and Australia.

Unique qualities

BBM has proved its success in various ways, some of which are distinct to the operating market conditions. For example, BBM's knowhow in coal mining is unique. No other companies in Germany have this kind of knowhow. Additionally, BBM's knowledge about technology is transferable to construction and mechanical engineering. BBM's employees are professionally educated to create added value. Their flexibility and allocation of work is remarkable. It is very easy to switch from one construction site to another and sometimes even between branches, mainly because of the large pool of workers makes allocation simpler. This pattern evolved in recent years and involves a special procedure for hiring workers. What is important to BBM's customers is the high quality they create in their services (see Appendix C). Consequently, this is why BBM has so many long-term partnerships and so much cooperation. This brings continuity in the company and growth. The success is also connected with the management. This means that the management's operations function efficiently (BBM Operta GmbH, 2009a).

Internationalization process of the company BBM

The internationalization process differs from company to company (see Appendix C), and if the group is large, also between its own companies. BBM originally had operations only in Germany; there was no international commitment to foreign markets. It took from 1990 to 1997 to develop strategies and start operating abroad. Companies in the coal-mining industry usually start their business domestically and they are less likely to open up a company as a global start up (BBM Operta GmbH, 2011b).

In 1996, the management of BBM decided to apply for a tender in Bosnia and Herzegovina for an open-cut mine. The Bosnian and Herzegovinian government was keen to give projects to companies with German technology and the best price. In 1997, BBM won the tender and signed a contract in Vareš for operating in a reservoir. At this time, the strategy was to maintain operations in Germany and slowly to develop the operating mine in Vareš. The mine is still operating and generating profits. In addition, other smaller mines were acquired in Banovići, Breza or Kreka. Furthermore, an amphibolite quarry in Kota was acquired and proved to be successful (BBM Operta GmbH, 2009a; BBM Operta GmbH, 2011b; News, 2012)

International projects and entry modes

The first international involvement for BBM was good in terms of capturing experience for further growth. For more than a decade, the company stuck to just one project abroad. It took time to settle the affiliate for the first time and manage the difficulties involved in operating in a developing country. In 2009, the company opened its first affiliate in the areas of the European Union, in Rotterdam. The international and future projects are (see Appendix C):

Open cut mines and Amphibolite quarry in Bosnia and Herzegovina;

Construction services in Rotterdam, Netherlands;

Open-cut mine in Tavan Tolgoi, Mongolia;

The New Sugarcane Harvester in Capivari, Brazil;

Underground mining in Queensland, Australia;

TSM (road header) machines in Turkey and China.

The projects above are listed chronologically and the last two will be realized the few next years. The open-cut project and the amphibolite quarry are described above. Construction is a broad term, involving structural, civil and underground engineering. An affiliate was opened in Rotterdam in 2009. It offers all as described above but with a specialization on industrial facilities and cooperation with industrial companies. The Dutch affiliate applied for a few tenders, but most of their applications were unsuccessful. Therefore, a new strategy was needed: cooperation with the German company RWE, an electrical distributor. This company builds all types of electrical distribution industrial facilities, e.g. power stations, powerhouses or power plants. The cooperation was a success in terms of flexibility of logistics and country of origin. In 2011, BBM finished a power plant in Groningen, Netherlands. New industrial projects and cooperation are in sight for 2012. The entry mode can be described as a joint venture between BBM and RWE (BBM Operta GmbH, 2009a).

The last three projects (the open-cut mine in Mongolia, the New Sugarcane Harvester in Brazil, underground mining in Australia and TSM Machines in Turkey and China) are from 2011; since that time, the vision of the group has changed to moving more operations overseas. Before 2011, there was not much focus on the international markets. The restructuring of the group has also brought forward ideas for new international commitments. Other contract mining companies, such as the Australian companies Macmahon or Leighton, the Brazilian Vale, the British Rio Tinto and the American-based Peabody, have been successful with their internationalization process. Thus, new profits have been generated with the modernization of their visions in the previous decade and introductions of the internationalization processes to their businesses (BBM Operta GmbH, 2011b).

The project in Mongolia is, in terms of size, the biggest of the projects in 2011. Mongolia has huge amounts of different natural resources, especially high quality brown coal. BBM's unique knowhow offers all the resources necessary to operate on this project. The main idea of the investment is to develop the Mongolian infrastructure and to educate local employees with the knowhow from more developed countries. The deposit in the Gobi desert region is approximately 540 km from the capital Ulaanbaatar. It is going to be one of the world's largest power plants and coking coal deposits. The process began with a complex tender. The Mongolian state-owned company Erdenes had a range of international companies from Germany, Australia, Japan, and USA to choose from. Fortunately, BBM and the Australian company Macmahon were successful in the tender. (News, 2012) The two companies entered into a joint venture. This is also the entry strategy of the company (BBM Operta GmbH, 2011b; BBM Operta GmbH, 2009a).

Another very promising project is the New Sugarcane Harvester, which is something new to BBM, because it comes from the mechanical engineering branch. This project has potential because it is a new invention and the demand for harvesters in Brazil is enormous. The entry strategy in this case is foreign production or ownership (BBM Operta GmbH, 2011c). Underground mining is BBM's specialty. The Australian coal-mining industry is booming. The coalmines are in the area of Bowen Basin in Queensland and in Newcastle in New South Wales. The Australian companies are very well developed in operating in open-cut mines. In underground mining however, they still lack knowhow and experience, while Germany is the leader in this industry. In the Bowen Basin in the next 10 years, 17 new underground coal mines are expected to open. All these mines are estimated to operate until 2040 and 2050. The ten already operating underground mines are expected to operate until approximately 2030. To enter the market, ownership is required; a new affiliate has to be opened in Brisbane, where all coal-mining companies are stationed (BBM Operta GmbH, 2011c). The newly acquired mechanical engineering company Meran has brought a new notion to the BBM. Now the company can build and maintain their machines in their home facilities. The road header (Ger. Teilschnittmaschine - TSM) is a promising project for the near future. It is used for underground drilling in coal mines or tunnels. China and Turkey seem to be very attractive markets for BBM. Especially, China's development in infrastructure and their need for coal have increased. Therefore, the company would use the entry mode exporting. It would partly produce the machines at home and partly in a low-income country such as China or Brazil (BBM Operta GmbH, 2011c).

The company has divided international projects into two groups: developed countries and developing countries. The management made this step after the second project in Netherlands, mainly because of the business environment. For all projects, environmental analyses were done such as PEST analysis. However, one must be on the site to get the real picture of the environment. For example, the outcome of the open cut project in Bosnia was bigger than the construction project in the Netherlands. What the company determined is that in a developing country there are more possibilities to generate higher incomes than in developed countries. However, the effort is twice as large as in developed countries. Sometimes, it also depends on the industry, because it is hard to benchmark different industries and projects. Many factors influence the internationalization process. For example, having good relations in the industry is very much worth the effort. All in all, the significance of the internationalization process at BBM is increasing. More chances to generate profits exist when acting globally (BBM Operta GmbH, 2011b; BBM Operta GmbH, 2009a).

Table : SWOT Analysis - Strengths and Weaknesses

Strengths

Weaknesses

+ Vision is modernized and adjusted to International commitment

- Little international experience

+ Incubator for top projects

- Lack of young engineers and managers

+ Experience from top projects

- Mix between experienced and young is missing in the company

+ Creates High performance

- Controlling

+ Goal-oriented

 

+ Flexible workforce

+ Entrance into the Mechanical Engineering industry

The SWOT analysis is a systematic situation analysis. The S stands for strengths and the W stands for weaknesses of the company. These are situations that are analysed internally in the company. For example, internal issues are finance, human resources, organization and technology. The O stands for opportunities and the T stands for threats. These situations are analysed externally. For example, external issues are competition, technology, customer expectations or policy (SWOT - Analyse Geschichte und Tipps zur Anwendung, 2012).

The SWOT analysis (see Appendix C) has shown prosperity in the international environment for the BBM. What is significant to emphasize is the high performance that the company creates in their services. Furthermore, in that case high performance is related to high quality services. Despite having already captured international experiences, these are not enough for entering serious top projects. This can be described as a serious weakness of the BBM. Besides strengths, weaknesses are also shown on the previous page in a SWOT typical form (see Table 4):

The global economy is facing upturns and downturns but natural resources are constantly growing. Mining companies such as Rio Tinto or Vale have grown immensely in the last global economic downturn. (Rohstoffe und Schwellenländer im Anlagefokus, 2012; Latin American mining investment boom continues unabated, 2012). The situation is similar with BBM. The greatest of the opportunities is the international development. Most likely, the majority of the companies operating abroad are facing potential threats. Possible opportunities and threats for the company are listed on the next page in the SWOT format (see Table 5):

Table : SWOT Analysis - Opportunities and Threats

Opportunities

Threats

+ International development

- Small pool of experienced workforce and too little young workforce might cause expanding threats

+ The company has potential to establish their brand

- Threat of not sufficient work personnel for an international project

 + The company could expand in more niches

- Threat of not sufficient machines prepared for an international project

+ Regenerative resources (e.g. sugarcane), implementing technology from mining

- Risk minimization might cause lower profits

+ Emerging markets: BRIC

 

+ Mining boom in Queensland, Australia

Porter's five forces: The New Sugarcane Harvester and the sugarcane harvesting industry in Brazil

The purpose of Porter's five forces analysis in this thesis is to understand the competitive intensity and therefore the attractiveness of a sugarcane harvesting market. The concept identifies the forces that influence the business situation and understanding of the market. It aids in understanding the strength of a company in the competitive environment and potential entry. The idea is also to understand whether the product or machine is profitable. If the source of the forces is known, then the company can identify its strengths and improve its weaknesses. The five forces are: "Supplier power, buyer power, competitive rivalry, threat of substitution and threat of new entry" (Porter, 2004).

The New Sugarcane Harvester is a unique product on the sugarcane harvesting market. The product was the inspiration of coal-mining engineers working with underground drilling machines. Its development stage showed promising harvesting and crop data. Moreover, BBM emphasized the international commitment in the emerging markets with various strategies for entering the Brazilian market.

However, it is necessary to understand the meaning of the market analyses of the sugar, ethanol (biofuels) and sugarcane industries that have been done. The agricultural sector is the most important sector for economic growth and foreign exchange earnings in Brazil. Multinational companies have already recognized the potential in the agricultural sector and therefore created subsidiaries there to expand their businesses. BBM has also seen the potential of entering the Brazilian agriculture sector in the sugarcane harvesting industry. The sugar industry in Brazil is becoming one of the most important ones in the world, which has an important effect on the world sugar prices. Furthermore, Brazil is also one of the major suppliers of ethanol to the world market, which also means they have the power to influence world ethanol prices. In Brazil, the majority of engines use ethanol for fuel. These industries would supply global markets without sugarcane. The sugarcane industry is becoming increasingly important for Brazil. The mechanization of sugarcane harvesting has long been in process; however, some areas of Brazil cannot be harvested with existing machines.

Threats of substitution

According to Porter (2004), substitute products are products in other industries. A threat exists when a product's demand is affected by the price change of a substitute product. In the case of the sugarcane harvester, the direct substitutes are manual harvesting and mechanical harvesting. Three million farmers work every day, cutting sugarcane, which has a dangerous effect on their health. Therefore, the government is in the process of forbidding handwork, but delays this every year. By the end of 2014, the State of São Paulo finally wants to stop cutting by hand to prevent modern slavery. Probably, farmers will cut by hand only in the North-west of Brazil in higher grounds (Brasilien setzt alles auf Zucker, 2010). Threats exist if the government extends the law: farmers will then choose manual harvesting instead of the New Sugarcane Harvester. Mechanical harvesting is expensive but efficient. If the price of large harvesters decreases, then this could also present a threat to the New Sugarcane Harvester. The switching cost from the big machine will be five times lower, which means five New Sugarcane Harvesters (which operate like the manual harvesting but mechanically) cost the same as one big machine. One small machine will replace ten hand workers, which means (BBM Operta GmbH, 2011c):

(1)

(2)

Indirect substitutes, which could present a threat, are artificial sugar sweeteners or gas/oil. These two substitutes have an indirect impact on the New Sugarcane Harvester. The artificial sugar sweeteners (aspartame, cyclamate, saccharin, stevia, sucralose or lead acetate) can affect the sugar industry through price reduction. However, this will have an indirect impact on the sugarcane harvester industry (Artificial Sweeteners, 2012). Another indirect substitute is petrol. Biofuels have an image as environmental friendly fuels. However, if the petrol price changes, it could influence the biofuel industry, which also would have an impact on the sugarcane harvester industry. According to Porter (2004), substitute products affect the product's price elasticity and the same holds true in the sugarcane harvester industry. If there are many substitutes on the market, demand becomes more elastic, because customers have more options to choose from.

Buying power

According to Porter (2004), the force of buying power is the impact that customers have on a manufacturing industry. The New Sugarcane Harvester will be a standardized product, which means the relationship to the producing industry is close. In the sugarcane harvester industry, powerful buyers generally dictate their terms to their suppliers. The buyers can be structured according to industry (BBM Operta GmbH, 2011c):

Agriculture;

Beverage producer;

Power plants;

Biofuel producers;

Sugar producers.

In the agriculture sector, small and medium-sized farmers are the potential buyers for the product. This group of buyers mostly demands not only low prices but also on the high performance and efficiency of product. Their loyalty is essential to firms due to the competitive nature of this industry. However, the large part of creating business is the aftersales service and maintenance (Wang, 2010, p. 7). One idea is that many small farmers buy the harvester and use a sharing system, as is done in Germany. These societies may be the first buyers of the sugar cane harvester. These buyers are not educated or at least not well educated. They are price sensitive. However, they know the efficiency rate of harvesting, the price, the local demand and the supply.

Beverage producers using sugarcane are the next buyers in the industry. For example, in Brazil there are 30,000 small and medium producers of Cachaça (a Brazilian spirit) and few large producers. These producers have their own fields and their own types of sugarcane, and they are usually well educated. However, they need to harvest their fields with a harvester. They use manual or mechanical harvesting, and the New Sugarcane Harvest presents a valuable option for them. If they use manual harvesting, they could be forced to stop within the government law, which would mean they have to close their business. Another option is a mechanical harvester, which is expansive. Despite being expensive, it would not bring the efficiency they need. The efficiency of beverage producers is approximately 30 % to 50 % of the mechanical sugarcane harvester for their harvesting. (BBM Operta GmbH, 2011c).

Another industry that might need to buy the product is biomass power plants. They use bagasse, a remnant of sugarcane, to create bioelectricity. These plants have the highest bioconversion efficiency of capture of sunlight though photosynthesis, and are able to fix around 55 tons of bagasse (remnants of sugarcane) per hectare of land under sugarcane on an annually renewable basis. It is a new trend in Brazil and the government supports it with subsidies (Deepchand, 2005, p. 1-5).

The last two industries are also the major buyers: sugar and the biofuels producers. These are the large players in the industry, and they buy large mechanical harvesters. For example, the company Cosan mills, cultivates, collects and processes sugarcane. The main raw material they produce is sugar and ethanol, i.e. biofuel. Cosan produces 5 % of the sugar and 4 % of the ethanol consumed globally. It has 23 plants, which occupy 600,000 hectares of land and employs 45,000 people. Therefore, they have a great need for efficient sugarcane harvesters. However, large harvesters are costly and they face difficulties on rough fields. Furthermore, the efficiency is good but their price and service costs are too high. (BBM Operta GmbH, 2011c; Cosan Limited, 2012).

As mentioned above, potential buyers come from different industries. In particular, the sugar and biofuel producers are very powerful. The buying power from them might be very strong, which could force prices down and create higher demand with a potential loss of industry profits. However, this is not the only threat; for example, a credible backward integration might be possible from them. They could use their financial resources to buy the supply chain.

Supplier power

Every manufacturing industry needs raw materials, labour, components and other supplies. This requirement leads to buyer-supplier relationships between the industry and the firms that provide it the raw materials used to create products. If the suppliers are powerful, this could influence the producing industry, for example, raw materials at high price could capture some of the industry profits (Porter's 5 Forces, 1999). In the connection between the sugarcane harvester industry and its suppliers, the power lies in the industry's favour. The New Sugarcane Harvester is going to be a standardized product and therefore the suppliers would be weak. BBM will supply with the control system, the hydraulic system and the cutter head. Despite these very specific components, others, such as steel, transistors, belts or chain drives, linkages, cam and follower systems, brakes, clutches, and structural components, such as frame members and fasteners, are also needed. These raw and structured materials will be needed to assemble the harvester and would come from Brazilian suppliers. The knowhow and mechanical engineers will be brought from Germany. Other working capital is much cheaper than in Germany, which is a significant fact. The area around São Paulo is also a good location for a contract manufacturer. All other raw materials and labour will be contracted from Brazil in the greater area of São Paulo.

The suppliers' bargaining power does not create a significant threat, as suppliers are not in a position to leverage their status and raise prices or reduce quantity suppliers. What could possibly occur is that the buyers overwhelm the suppliers; their bargaining power would then be high. The switching cost from one supplier to another would not create a significant difference, except for suppliers from Germany who could possibly delay or somehow influence the production. However, the German supplier who would supply the control and steering, the cutter head or cutting unit and the hydraulic, would have a higher bargaining power. These products are unique and highly differentiated. The parts are sold just for underground coal-mining machines. However, the supply of these inputs is essential in the open market, and specific parameters for supply to this industry are negligible, accordingly reducing supplier differentiation and negotiation power. The suppliers in the industry retain the option of multiple supply sources and consequently organization and concentration on the part of certain suppliers may not affect the market price. However, BBM's long-term relationships also ensure frequent variations and would not affect the input costs. All in all, the Brazilian suppliers would not present a significant threat; their bargaining power is low. Substitute products are also present on the market, but it would not present a major threat, either, as the New Sugarcane Harvester uses different technology than to other harvesters (BBM Operta GmbH, 2011c).

Threat of new entrants and barriers to enter

In theory, any company should be able to enter and exit the market; therefore, profits should be nominal at free entry and exit conditions. In reality, companies have methods to protect their high profits and themselves in the market, and inhibit additional competition from entering the market. Despite these barriers, not only new firms create a threat but so do incumbent rivals to firms in the market. Therefore, barriers are more than the normal equilibrium adjustments that markets typically make. For example, if the profits increase in a particular industry, more companies should be expected to enter. When profits decrease, it is then expected that companies leave the market to restore the market equilibrium. Another issue is expensive start-up costs; as a result, companies may be reluctant to enter markets that are uncertain. However, a company can create a low price strategy or barrier to prevent potential entrants, i.e. entry deterring pricing strategy. It has to be said that every industry has its own barriers that are distinct to it. Barriers reduce the rate of entry of new firms, thus maintaining profits for those already in the industry. In other words, barriers can be created to enhance a firm's competitive barriers (Porter's 5 Forces, 1999).

The sugarcane harvesting industry is not prepared for reorganization. Companies for processing sugarcane either buy sugarcane harvesters or hire people for manual harvesting; only these two options are fixed. In recent years, new products have been seen on the market, but they all somehow failed to reach the efficiency of the manual harvesting. These new entrants were mainly Brazilian companies and some minor Chinese companies. Barriers also arise through different channels (BBM Operta GmbH, 2011c). According to Porter (2004) barriers arise from different sources:

Government;

Patents and propriety knowledge;

Asset specificity;

Organizational (internal) economies of Scale.

Although the main role of the government is to preserve healthy competition though anti-trust actions, government also restricts competition through the granting of monopolies and through regulations. In the sugarcane harvesting industry, it can be seen that the government has tried to ban manual harvesting for years. However, the ban has been delayed every year, although the government says it will be definitely illegal by 2018. With this action, the government allows sugarcane harvester producing countries to enter the market. It will stimulate new developments of the harvesters and new investments in the sugarcane harvesting industry. However, the government has set high import taxes, which means the production has to be in Brazil. The main parts of the New Sugarcane Harvester come from Germany. BBM could avoid the tax barrier by producing parts in Germany and assembling the harvester in Brazil (BBM Operta GmbH, 2011c).

Ideas and knowledge provide companies competitive advantage. The process is patent protected, which gives an exclusive use for the company that invented the invention. This creates barriers to entry for other companies. The New Sugarcane Harvester's parts such as control and steering, cutter head or cutting unit and hydraulics, are exclusively BBM's. However, not only parts, but the entire way the machine is operates is patent secured as well. If the New Sugarcane Harvester will be a success, no company will be able to copy their technology (BBM Operta GmbH, 2011c).

When an industry requires highly specialized technology and equipment, potential entrants are reluctant to commit to acquiring specialized assets that cannot be sold or converted into other uses if the venture fails. Two types of barriers to entry exist: first, when companies already hold specialized assets, they fiercely resist efforts by others from taking their market share. New entrants can anticipate aggressive rivalry. The second reason is that potential entrants are reluctant to make investments in highly specialized assets. Both of the cases could happen to the New Sugarcane Harvester (Porter's 5 Forces, 1999; BBM Operta GmbH, 2011c).

Degree of rivalry

The degree of rivalry between existing companies affects the profits of a company. However, the degree of rivalry in an industry can be measured with various methods, such as market share, Herfindahl index, price cost margin or relative profits (Boone, Griffith, & Harrison, 2005, p. 5). For companies, it is harder to generate profits if the rivalry is high, for example, an industry is competitive if a large amount of companies are present, but not competitive if there are just few companies present. In the sugarcane harvesting industry in Brazil, there are just few multinational companies present. These are John Deere, Case, New Holland (bought by Case) and Klaas. The concentration ration is low, which means much rivalry characterizes the industry. For example, in 2010 Case had a 65 % market share, John Deere 25 % and others 10 %; in 2011 Case had 60 %, John Deere 27 % and others 13 % of the market. The rivalry among the companies is considered to be low, which also means the sugarcane harvesting industry is disciplined. It might result in the history of their competition in other countries, for example in countries in Europe. However, the company's internal sources (2011) have seen a change in the manner of conducting sugarcane industry. The rivalry is slowly intensifying and the first counter-response can be seen. For example, Case guaranteed that if a spare part is not delivered after 24 hours, then the customers gets it for free. John Deere responded with a 24/7 service hotline. These counter-response actions are weak and they have a positive effect on the industry (Porter's 5 Forces, 1999; Porter, 2004; BBM Operta GmbH, 2011c).

According to the company's internal source (BBM Operta GmbH, 2011c) the New Sugarcane Harvester poses competitive advantages in:

Price;

Differentiation;

Creatively using distribution channels.

However, the intensity of rivalry in the sugarcane harvesting industry is influenced by various industry characteristics. For example, more companies in the industry would increase the rivalry and the competition would be tougher. The high market growth has a positive effect on the industry, but the companies will not compete harder for the revenues. However, it could invite more entrants and they could decrease the profits. The industry may become crowded with products and the market can be quickly saturated. Nonetheless, the New Sugarcane Harvester has a patent. This could prevent imitations by competitors, at least for the start-up stages. High fixed costs are the biggest disadvantage of the MNCs (multinational corporations), while the New Sugarcane Harvester avoids that. High storage costs might affect both the MNCs and the New Sugarcane Harvester but it might harm the MNCs more than BBM. The high switching costs could be an advantage for BBM, because the New Sugarcane Harvester is one fifth the price of a machine from the MNCs. However, BBM has high exit barriers, entailing high exit costs for abandoning the product. Therefore, the company must compete and must have a motivation to stay in the industry.

C-Analysis of sugarcane harvester producers in the Brazilian market

Multinational companies already recognized the potential in the Brazilian sugarcane harvesting market. The prosperous sugar and ethanol (biofuel) market are booming, and both depend on the sugarcane market. Therefore, major competitors have already created subsidiaries or other types of entering the market in Brazil. This industry requires mechanization for two reasons. One reason is that manual harvesting will be banned soon by law. Another reason is hard-to-reach terrain. The New Sugarcane Harvester replaces manual harvesting and is able to harvest on hard-to-reach terrain. However, competitors are building different machines, which are bigger than the Sugarcane Harvester and require difficult repair systems. One of the main competitors and their main facts are described below in this subchapter.

The term "benchmarking" is not used only as a management tool but also for comparing companies. The process identifies the best company in the industry or any similar products, in that it measures quality, time and cost. It is a collection of quantitative and qualitative techniques within an overall framework (Boxwell, 1994, p. 5; Francis & Holloway, 2002, p. 290). The benchmarking process of the sugarcane harvester uses quantitative data and compares the companies that might directly or indirectly influence the competition.

The company John Deere has a history of 165 years of service in the agricultural machinery manufacturing industry. It is the largest manufacturer of farm equipment in the world. It is present in important markets such as Brazil, Australia and Mexico, where it has been very successful in initiating its strategy. Their competitive advantage is through product differentiation, brand recognition and superior customer service (Benton et al., 2005, p. 4). The American company Case is one of the largest mechanical agriculture producers. It has 4,900 merchants and has affiliates in 160 countries around the world. It is centrally directed from its United States based headquarters in Racine, Wisconsin. It offers agricultural equipment, financial service, parts and support service. The range of the agricultural products are tractors, harvesters, tillage tools, combines, planting and seeding systems and sprayers and applicators (Case IH Agriculture, 2012). The manufacturer of agricultural machinery New Holland was founded in New Holland in Pennsylvania, USA. It produces tractors, combines, harvesters, balers, haying tools, grape harvesters and equipment used in lawn, ground and turf care. Nowadays, its headquarters are in Turin, Italy. The production of the equipment is spread over 18 plants globally. It has six joint ventures in the Americas, Asia, and the Middle East, and is present in 170 countries. The New Holland brand is known as an innovative and creative producer with products such as hydrogen-powered tractors, the ABS Super Steer System, the Opti Fan System or the Intellifill System (About New Holland, 2012). Case IH and New Holland merged in 1999 into the company CNH. After 2005, the company recovered from its integration and operates now in three main segments: "agricultural, construction and financial" (Wang, 2010, pp. 9-10). Claas is a German based manufacturer founded in 1913, with headquarters in Harsewinkel. In the United States, the company distributes its products under the name Lexion (Caterpillar dealers). The company sells under the name Claas in other parts of the world. It produces combine harvesters, forage harvesters, balers, mowers, rakes, tedders and other harvesting machines. In 2008, Claas purchased the French based company Renault Agriculture and in 2010 opened a new technology centre in Harsewinkel (Claas, 2012).

POSITIONING OF THE NEW SUGARCANE HARVESTER IN BRAZIL

The analysis of the sugarcane harvesting industry as presented above showed potential for new developments and rising demand for harvesters in Brazil. Some MNCs have already entered the Brazilian market and are operating there; their products and brands are positioned. Therefore, BBM needs to put effort to position the New Sugarcane Harvester properly and to enter into a new unknown market for them, combining coal-mining technology experiences with agriculture.

Positioning strategies

Kotler (1999, pp. 443-445) says, "a product's position is the way the product is defined by consumers on important attributes". It is the place that the product occupies the consumer minds relative to competing products. Furthermore, positioning can be described as a prospect's perception of a product. In other words, Kotler (1999, p. 444) explaines that: "a product's position is the complex set of perception, impressions and feelings that consumer hold for the product compared with competing products".

According to Fuchs and Diamanopuoulos (2010, pp. 1766-1768), companies can position their products in an infinite number of associations. The positioning bases underlie the positioning strategy of a brand. Fuchs and Diamanopuoulos (2010) created a table of positioning strategies (see Table 6). It describes the types of positioning strategies with description. Described are features, abstract attributes, direct benefits, indirect benefits and surrogate positioning.

Table : Types of positioning strategies

Types of positioning

Description

Examples

Features (concrete attributes)

Company highlights the concrete attributes of the brand in order to create a differential advantage; Concrete attributes are characteristics of the brand advantage; they are objectively measurable, mostly Tangible and typically "search features"; they are also specific to the product category

Knee airbag; cylinders; horsepower; price; air-conditioning; hybrid engine

Abstract attributes

Often regarded as bundles of concrete attributes; attributes that are frequently comparable across product categories; they are not tangible

Quality; style; sporty; fast acceleration; innovativeness

Direct (functional) benefits

Communicate advantages of (the usage of) a brand; the personal value consumers assign to product or service features; closer related to oneself than product attributes; not directly observable; reflect whether a brand works as intended; mostly attribute-based benefits; refer also to problem solutions and functional needs

Cost reduction; park in smallest lots;

Comfort; convenience; durability; superior service; ease-of use

Indirect (experiential/symbolic) benefits

Benefits that satisfy experiential/hedonic needs; psycho-social consequences out of the use of the product that have a hedonic, expressive, or symbolic function; give consumers an indirect advantage of the consumption of a product; perception of a self-or a social-image benefit

Car X draws people's looks; makes driver feel younger; gives you respect; driving experience; driving fun

Surrogate positioning

Designed to create consumer associations about external aspects of a brand; says something about the brand that allows the consumer to come to individual conclusions; not attributes and benefits; creation of inferred (secondary) associations; refers to intangible aspects of the brand

User type "for people who never grow up"; making associations with Formula 1 or great writers; highlighting the pioneer status; product category disassociations; "the bestselling car"

Source: C. Fuchs & A. Diamanopuoulos, Evaluating the effectiveness of brand-positioning strategies from a consumer perspective, 2010, p. 1766.

These are examples of various positioning strategies described. As said before, there are different strategies that a company can implement, even combining two strategies. Regarding the New Sugarcane Harvester, there should be a combination between abstract attributes and direct (functional) benefits. The product's attributes will be frequently comparable with machines from John Deere or Case by the consumers. The usage of the product will increase and the consumer will realize the benefits of a product, especially those who will use the full efficiency of the New Sugarcane Harvester. If the product is working properly, then the first consumers (the sugarcane small farmers) will spread good word-of-mouth about the product.

Therefore, the New Sugarcane Harvester has to be positioned between the manual harvesting and mechanical harvesting. It is important to differentiate between the mechanical harvesters from CASE or John Deere, because the New Sugarcane Harvester operates differently and uses technology from coal-mining machines. Therefore, to influence consumer minds a good positioning strategy have to be evolved. Apart from that, the choice of positioning strategy is not simply a question of marketing communications but encompasses the entire behaviour of the company (Kalafatis, Tsogas, & Blankson, 2000; BBM Operta GmbH, 2011c).

Overview of the product The New Sugarcane Harvester

The New Sugarcane Harvester is an invention of the company Schalker Eisenhütte from Germany. Despite the fact that the company had already tested the prototype, it had to abandon the project because of insolvency problems. They were searching a new investor, and BBM was a suitable one. It had all attributes to take over the project and lead it to success. For example, the basics of the company come from coal mining and the newly acquired mechanical engineering company Meran gave the competitive advantage to take over the project. The project included Brazilian Partners Hibrema and EMME2. Hibrema started with the idea of the New Sugarcane Harvester and will provide fields for testing and the potential network for sales. Hibrema is also a local steel distributor, owns retail services and has a small mechanical engineering facility. EMME2 is a Brazilian company with a German background; they provide contacts and have done the sales and marketing thus far. They can be described as networking company. However, BBM's role would be to invest and to assemble the project and provide the control and steering, the cutter head or cutting unit and the hydraulics (BBM Operta GmbH, 2011c).

The New Sugarcane Harvester is a multi-line assembly machine, which realizes a new crop flow. It is a unique invention and therefore there is no such similar product on the global market. Companies from China and India have tried to build similar products but (fortunately) failed. It is patent secured, and prototypes have already been tested. Furthermore, given the fact that Brazilian sugarcane markets are booming, the development of new harvesters may be needed in the future, such as the New Sugarcane Harvester. According to the company's internal source (BBM Operta GmbH, 2011c) it differs in various characteristics, such as:

Whole crop topping;

Wedel sits next to sugarcane stock;

Sugarcane outputs / erection;

Removing leaves from the rotating brushes;

Sugarcane rods and fix support;

Stems separated by an oscillating cutter;

Sugarcane stalks continue to promote and pass.

These technical attitudes differ from other producers, which should bring the competitive advantage in harvesting. John Deere, Case or Claas operate with different technologies. For example, their products cut the whole plant and it is chopped into small pieces. It is effective to a point, but these machines are big and cannot operate on every field. Additionally, the chopped pieces include bagasse, leaf and stalks. However, stalks are only important to sugar and ethanol producers. This requires major, expensive efforts for mills to separate the sugar and ethanol from other by-products. On the market there are also other companies from China and India that have failed to reach the relevant efficiency. Moreover, they are all traditional agricultural producers. The founders of New Sugarcane Harvester searched their ideas in different industries, especially in mechanics of coal mining. Therefore, some parts of the New Sugarcane Harvester were brought from the coal-mining machinery industry.

The production should be in the city of Capivarí in the São Paulo State. The company Hibrema would give the production facility for producing the New Sugarcane Harvester. The prototype has been tested in one of Hibrema's facilities in Capivarí. The first sale of the machine is expected in the beginning of 2013. The New Sugarcane Harvester can be seen below (Figure 10).

Figure : The New Sugarcane Harvester

P1110693.JPG

Source: BBM Operta GmbH, Daten zu Erntemaschine, 2011c.

Compared with other companies that produce sugarcane harvesters in the industry, it has advantages and disadvantages. According to the BBM Operta GmbH (2011c) the advantages the advantages of the New Sugarcane Harvester are:

Defoliation by brushing;

Quiet rod harvest;

No burning or scraping by hand;

Quite rod harvest;

Less juice loss;

Less corrosion;

Eye injuries prevention;

Multi-day shelf life;

Harvest on slopes up to 30 %;

More harvest opportunities of different field types;

Lower weight;

Reduced soil compaction, which means a portfolio of sugarcane can be longer harvested;

Disconnection of the frond of the sugar cane rod;

Utilization of green bulk as an energy carrier, humus and cattle feed;

Lower energy consumption;

Tractor as an energy source, no rapidly rotating cutters;

Lower acquisition and maintenance costs;

Suitable also for small businesses;

Lower fuel consumption.

The strongest attribute of the New Harvester is: "The only sugarcane harvester that crops the stalk and leafs separately, and leaves the plant still alive". According to Kotler (1999, pg. 457), the New Harvester possesses a unique selling proposition in this. There is no such sugarcane harvester at market right now in Brazil (or globally). However, this is not the only attribute that the New Harvester has. Another attributes are (BBM Operta GmbH, 2011c):

Country of origin;

Automated harvesting;

Safety at work;

Environmental responsibility;

Re-use of by-products;

Performance.

Kotler (1999, p. 453) stated that origin positions product by association with its place of manufacture. German technology is recognized as one of the best machine products. The New Harvester will be a "Made in Germany" product, with intentions to position the product in categories such as quality and expensive to moderately expansive. The New Harvester may replace manual harvesting sooner rather than later. The workers who work in sugarcane fields are risking serious injuries and respiratory problems while burning the fields; meanwhile, the New Harvester offers a completely safe usage of the machine. This is one of the main reasons the government wants to put an end to manual harvesting in Brazil. The New Harvester is the leader in environmental responsibility among harvesters. It does not burn the field as by manual harvesting; burning destroys the land, rendering it unusable for the near future.

Despite the fact that mechanical harvesting does not burn the fields, it nevertheless cuts the whole plant, and the plant cannot be replanted again. Planting on the Amazon forestland has always been a sensitive topic to environmental organizations, the original inhabitants of Brazil, and politicians. The New Harvester does not pollute the environment, as there is no need for burning fields and replanting twice per year (the sugarcane plant can survive eight harvests with the New Harvester). The re-use of the by-products is not possible with mechanical harvesting, because it is too costly to separate the by-product in the refinery. The New Harvester separates the stalk and the by-product in the process of harvesting and therefore allows re-using or selling by-products for biomass.

Types of sugarcane harvesting in Brazil

To understand the production process, it is important to clarify the classification of the production. Depending upon the scale of production and the kind of the product, the New Sugarcane Harvester can be classified as appropriate for batch or medium-size production. This means that the order will be in small quantity at least at the beginning of the production. The orders will be repeated and standardized, while the machinery and plant used is general-purpose type only. The production relies on skilled and semiskilled labour; robots are not planned yet (BBM Operta GmbH, 2011c)

In Brazil, two types of sugarcane harvesting exist: by hand (Ger. Manuelle or Händische Ernte) and by machine (Ger. Maschinelle Ernte or Vollernter). Manual harvesting is dangerous and farmers soon become fatigued. However, the plant still grows further and can be re-harvested eight times. Mechanical harvesters are safer for the farmer but not for the land and replanting. These agricultural machines are designed to cut the plant and prepare stalks for processing. The machinery slices stems, compacts soil and transports stalks to sugarcane mils (What are the benefits of a sugarcane harvester?, 2012). However, mechanical harvesters have a few disadvantages, e.g. the plant is taken from the roots and another plant must be planted. While with manual harvesting, the plant is cut until the secondary shot or tiller, so that plant can grow again (eight times per lifecycle). Another disadvantage is the field burning after the harvesting. It destroys the land and its recovery takes some time. Also, from the cost perspective these disadvantages are expensive and probably might be saved with The New Harvester (Ger. Teilernter), which could be a better solution (BBM Operta GmbH, 2011c).

On the next page, Table 7 shows a good comparison between the three harvesting methods. The duration of manual harvesting is the highest but the New Harvester has high asset duration as well, while the mechanical harvester has an average duration of four to five years. The maintenance costs of the New Harvester are below €1 per ton, which is low in comparison with the mechanical harvester (€3 per ton). With manual harvesting, maintenance costs include working clothes, repairing knives, machetes and other tools for harvesting. Labour costs are a deciding issue: the New Harvester (€1.76 per ton) has competitive advantage to the manual harvesting (€3.46 per ton). Mechanical harvesting has the lowest labour costs but the education costs are high. Manual harvesting has no acquisition cost, but is considered to be modern slavery, while the mechanical harvester is considered the most expensive. The New Harvester costs about €140,000 and the acquisition is moderate. Crop capacity is an issue for calculating costs. Here, the manual harvesting method uses 35 workers to create ca. 400 ton per day (10 hours of work). The mechanical harvester harvests about 1,200 ton per day (16 hours of work) while the New Harvester harvests 400 ton per day (16 hours of work).

Table : Comparison of manual, mechanical and the new harvester

Manuel Harvesting

Mechanical Harvesting

New Harvester

Duration

8-10 years

4-6 years

max 8 years

Maintenance costs

€0.23/harvested T

(knife, work safety, etc.)

€3/harvested T

< €1/harvested T

Labour cost

€3.46/T

(low education)

€1.01/T

(high education)

€1.76/T

(moderate education)

Acquisition cost

No costs

€450,000

€140,000

Crop capacity

35 workers=ca. 300 T/day (10h of work)

Max. 1200 T/day (16h of work)

Max. 400 T/day (16h of work)

Crop costs (without planting and transport costs)

€4.44/T

€5.43/T

€4.64/T

Soil consolidation

Low

High

Low

Replanting

Up to 3 %

From 12 % up to 18 %

Up to 5 %

Source: BBM Operta GmbH, Daten zu Erntemaschine, 2011c.

The costs of the crop (without planting and transport) are the highest at mechanical harvesting while manual the lowest. Again, the New Harvester has moderate crop costs with €4.64 per ton. The self-consolidation for the mechanical harvester is high while for manual labour and the New Harvester it is low. Replanting is an issue connected with costs that means every replanting costs more for the planting. Manual harvesting (3 %) has the lowest replanting rate followed by the New Harvester (5 %), while the mechanical harvester has 12 % to 18 %. Finally, the New Harvester has a competitive advantage against the mechanical harvester in attributes such as durability, consistency, reliability and reparability. Furthermore, since pollution and modern slavery are a major problem for the state of São Paulo, the New Harvester will have a competitive advantage over manual harvesting.

Companies create added value not only with product differentiation, but also with lines of service, personnel and image (Kotler, 1999). The New Harvester is a new product on the market and it will need time to adapt to small technical flaws). Therefore, the service and the service team becomes an important part of the positioning. To create a competitive advantage among competitors, consultancy will be provided to the farmers to educate them about the new product.

How to use the product to be as efficient as possible, how to take advantage of th