Wynca Chemical Acquires Xinfeng Seed

In June, Zhejiang Wynca Chemical Industry Group Co., Ltd (Wynca Chemical, SH: 600596) acquired 51% the shares of Shandong Xinfeng Seed Co., Ltd (Xinfeng Seed) for RMB62 million. It is the first agrochemical company in China to acquire a seed company.
Such M&As are not new to the global seed industry. The development of the global seed industry is a history of M&As of agrochemical companies. The top three seed companies in the world, Monsanto, DuPont and Syngenta, all have agrochemical backgrounds.
   The main business of Xinfeng Seed is the sale of crop (e.g. corn) seeds. In 2011, its operation revenue reached RMB45.16 million, and its net profit was RMB2.47 million. In the same year, glyphosate giant Wynca Chemical’s operating revenue reached RMB4.8 billion, of which RMB2.4 billion was from pesticides, and its net profit was RMB170 million.
   Since 2011, the status of the seed industry has been boosted to a "national strategic position." The seed industry has received a series of preferential policies, such as tax exemption and funding support, and has experienced ongoing consolidation through M&As since then.
   Besides M&As within the seed industry, companies in other industries such as food processing and especially agrochemical companies also invest in the seed industry. This year, in order to enter the seed industry in a high-profile way, China National Agricultural Means of Production Group Corporation (Sino-agri Group) invested RMB200 million to set up the Sino-agri Seed Holding Corporation. Then the latter company founded a joint venture, Shandong Sino-agri Huidefeng Seeds Sci-Tech Co., Ltd, with Shandong Huidefeng Seeds Co., Ltd. Moreover, several agrochemical companies, such as Qingdao Hailir Pesticides & Chemicals Group, have already started their plan to enter the seed industry. Nantong Jiangshan Agrochemical & Chemicals Co., Ltd and Jiangsu Kwin Pharmaceutical Co., Ltd have also made it known that they would not refuse to enter the seed industry.
   According to the deputy general manager of Beijing Tunyu Seed Co., Ltd, Mr. Han Junqing, who is a senior expert in the seed industry, agrochemical companies have inherent motivation to enter the seed industry. The development pattern of the global seed industry seems to confirm this point.
   Take multinational giant Monsanto for example: it has transformed from an agrochemical company to a seed industry giant through a series of M&As since 1996. Monsanto acquired 56 different types of seed companies of all sizes in the past 20 years. In 2000, the company proposed a new sales model in its annual report, which integrated sales of seeds and pesticides. Glyphosate is a broad-spectrum low residual herbicide popularized by Monsanto. After glyphosate had been widely used, Monsanto successfully found the specific gene which has drug resistance to glyphosate through gene screening and transferred the gene to corn and soybean seeds to obtain seeds which have specific resistance to glyphosate. Customers of these kinds of seeds must purchase specific herbicides from Monsanto. The new business model which integrates sales of pesticides and seeds so as to form a virtuous circle of promotion has brought Monsanto substantial attention.
   For agrochemical companies, to enter the seed industry is the best way to expand into the whole value chain of the agricultural industry, and to adjust the layout of the diversified product structure. Judging from the development stories of Monsanto and Syngenta, the strongly complementary business areas of agrochemicals and seeds can together promote sustained growth in corporate performance. A company focusing both in agrochemicals and in seeds can not only bundle sales of its products, but also build customer loyalty through providing the technical services made necessary by the interdependence of its agrochemical products.

However, can the same business model work well in China?
Song Gang, the general manager of Nanning Guifu Garden Agriculture Co., Ltd points out some important differences in the markets. First, he says, the large ranch model in some foreign farm production means a small number of end-consumers; second, foreign seed producers generally offer fewer product varieties than their domestic counterparts; third, the selected seed varieties have well understood characteristics and can be conveniently sold bundled with agrochemicals to promote each other. But bundling sales in China could be difficult because of the complexity of the domestic agricultural materials market, a dearth of product differentiation between agricultural companies and the numerous varieties of seeds being offered. Before merging, both sides of a transaction must think through whether they can find the best combination of agrochemical and seed industries to promote each other.
“The market competitiveness of domestic pesticides depends on price, sales channels and logistics; while for seeds, the competitive advantages are in variety and quality because of various characteristics for different crops. The two industries have different business models. Agrochemical companies cannot benefit from sharing management advantages with the merged seed companies,” said Wang Guojun, a professional manager with experience in both the pesticide and seed industries.
Sales channels of agrochemicals and seeds are separate in China. An agrochemical company cannot rely entirely on its already established sales channels to sell seeds. However, in Europe and American, since agrochemical companies are well-developed, the merged seed company can share capital and human resources with its parent company and develop with some reliance on the parent company. Both domestic seed and pesticide industries face severe competition from foreign companies. Domestic agrochemical companies have not developed well yet.
   The development of domestic agrochemical companies was also hindered by huge financial investment and time cost required. Pioneer Hi-Bred International, Inc. started selective breeding of seed varieties in China in the 1980s and invested tens of millions of RMB every year. It had not validated and promoted its first corn seed variety until 2004.
   Despite various difficulties, domestic agrochemical companies still want to enter the seed industry through M&As, mainly attracted by profits. Mr. Han Junqiang said that the gross margin of seeds is twice as large as that of agrochemicals. The average gross margin of the pesticide industry was 16.37% in 2011, while that of seed companies, which also belong to the agricultural materials industry, has been maintained above 30%.
   Furthermore, the extensive application of biotechnologies in crop breeding, such as gene modification and molecular labeling, brought up new generations of seed varieties. While for pesticides, active compounds could keep unchanged for years. For listed agrochemical companies in particular, the concepts of high gross margin and biotechnology acquired from the seed industry can often boost their stock price.
No matter the driving force roots in market pressure or in the development requirements of the company itself, agrochemical companies have an urgent need to find a new profit growth point to improve profitability.