THE BUSINESS MODEL ITC
A pure trading model does not require much
capital investment. The e-Choupal model, in contrast, has required
that ITC make significant investments to create and maintain
its own IT network in rural India and to identify and train
a local farmer to manage each e-Choupal. The computer, typically
housed in the farmer’s house, is linked to the Internet
via phone lines or, increasingly, by a VSAT connection, and
serves an average of 600 farmers in 10 surrounding villages
within about a five kilometer radius. Each e-Choupal costs between
US$3,000 and US$6,000 to set up and about US$100 per year to
maintain. Using the system costs farmers nothing, but the host
farmer, called a sanchalak, incurs some operating costs
and is obligated by a public oath to serve the entire community;
the sanchalak benefits from increased prestige and
a commission paid him for all e-Choupal transactions.
The farmers can use the computer to access daily closing prices
on local mandis, as well as to track global price trends
or find information about new farming techniques either directly
or, because many farmers are illiterate, via the sanchalak.
They also use the e-Choupal to order seed, fertilizer, and other
products such as consumer goods from ITC or its partners, at
prices lower than those available from village traders; the
sanchalak typically aggregates the village demand for
these products and transmits the order to an ITC representative.
At harvest time, ITC offers to buy the crop directly from any
farmer at the previous day’s closing price; the farmer
then transports his crop to an ITC processing center, where
the crop is weighed electronically and assessed for quality.
The farmer is then paid for the crop and a transport fee. “Bonus
points,” which are exchangeable for products that ITC
sells, are given for crops with quality above the norm. In this
way, the e-Choupal system bypasses the government-mandated trading
mandis. Farmers benefit from more accurate weighing,
faster processing time, and prompt payment, and from access
to a wide range of information, including accurate market price
knowledge, and market trends, which help them decide when, where,
and at what price to sell. Farmers selling directly to ITC through
an e-Choupal typically receive a higher price for their crops
than they would receive through the mandi system, on
average about 2.5% higher (about US$6 per ton). The total benefit
to farmers includes lower prices for inputs and other goods,
higher yields, and a sense of empowerment. The e-Choupal system
has had a measurable impact on what farmers chose to do: in
areas covered by e-Choupals, the percentage of farmers planting
soy has increased dramatically, from 50 to 90% in some regions,
while the volume of soy marketed through mandis has
dropped as much as half. At the same time, ITC benefits from
net procurement costs that are about 2.5% lower (it saves the
commission fee and part of the transport costs it would otherwise
pay to traders who serve as its buying agents at the mandi)
and it has more direct control over the quality of what it buys.
The system also provides direct access to the farmer and to
information about conditions on the ground, improving planning
and building relationships that increase its security of supply.
The company reports that it recovers its equipment costs from
an e-Choupal in the first year of operation and that the venture
as a whole is profitable. In mid-2003, e-Choupal services reached
more than 1 million farmers in nearly 11,000 villages, and the
system is expanding rapidly. ITC gains additional benefits from
using this network as a distribution channel for its products
(and those of its partners) and a source of innovation for new
products. For example, farmers can buy seeds, fertilizer, and
some consumer goods at the ITC processing center, when they
bring in their grain. Sanchalaks often aggregate village demand
for some products and place a single order, lowering ITC’s
logistic costs. The system is also a channel for soil testing
services and for educational efforts to help farmers improve
crop quality. ITC is also exploring partnering with banks to
offer farmers access to credit, insurance, and other services
that are not currently offered or are prohibitively expensive.
Moreover, farmers are beginning to suggest—and in some
cases, demand—that ITC supply new products or services
or expand into additional crops, such as onions and potatoes.
Thus farmers are becoming a source of product innovation for
ITC.
Development Benefit
The e-Choupal system gives farmers more control over their choices, a higher profit margin on their crops, and access to information that improves their productivity. By providing a more transparent process and empowering local people as key nodes in the system, ITC increases trust and fairness. The increased efficiencies and potential for improving crop quality contribute to making Indian agriculture more competitive. Despite difficulties from undependable phone and electric power infrastructure that sometimes limit hours of use, the system also links farmers and their families to the world. Some sanchalaks track futures prices on the Chicago Board of Trade as well as local mandi prices, and village children have used the computers for schoolwork, games, and to obtain and print out their academic test results. The result is a significant step toward rural development.
Key Lessons
The e-Choupal model demonstrates that a large corporation can
play a major role in recognizing markets and increasing the
efficiency of an agricultural system, while doing so in ways
that benefit farmers and rural communities as well as shareholders.
The case also shows the key role of information technology.
In this case provided and maintained by a corporation, but used
by local farmers—in helping bring about transparency,
increased access to information, and rural transformation. Critical
factors in the apparent success of the venture are ITC’s
extensive knowledge of agriculture, the effort ITC has made
to retain many aspects of the existing production system, including
maintenance of local partners, the company’s commitment
to transparency, and the respect and fairness with which both
farmers and local partners are treated.
