Suu JSC (the Company, SUU) is one of the largest and most respected companies in Mongolia with over 50 years of operating history as a true market leader in its field. Suu is the biggest domestic producer and distributor of various dairy products including milk, yogurt and ice cream in Mongolia.
The Company was initially established during the Communist period and has since been transformed into a joint stock company listed on the Mongolian Stock Exchange. As of 2008, Suu accounted for 59 percent of total domestic dairy production, which reached 13 million liters. With 51 different products on offer in a variety of categories, including packaged milk, yogurt, cream, butter, and ice cream, the Company far surpasses its domestic competitors.
In addition to its product diversity, Suu’s key competitive strengths are its large capacity (150 tons/day), the only powdered milk production line in the country, well-established procurement and distribution system and an aggressive marketing campaign. The market for processed milk and a dairy product has been growing at around 15 percent annually in the last several years, primarily driven by rapid urbanization and growing private incomes of Mongolians.
As these trends continue and Mongolians skepticism of imported dairy products grows after recent melamine scandals in China, demand for domestically made dairy products is expected to continue to increase. On the heels of this positive trend in the market, Suu has seen significant growth in sales and profits averaging 86 percent and 219 percent respectively over the past three years.
To that end, Suu has identified the key components of this long-term plan, which include upgrading its production facility, increasing milk procurement and outreach, and bringing overall operations in line with ISO standards. To complete Suu’s long-term investment program, the Company is seeking debt financing of USD 7. 2 million. The proceeds will be used for further upgrading its production facility (USD 1. 8 million), increasing milk procurement and outreach (USD 3. 95 million), and refinancing existing debts (USD1. 5 million).
Raw milk procurement
Raw milk is sourced from over 2,500 herders spread across a network of suppliers located at 19 different points. Suu boasts the only such milk procurement system among domestic dairy producers, offering the Company a key competitive advantage. The following diagram outlines the Suu’s network for procuring fresh raw milk: Suu began setting up Milk Collection Points (MCP) and Milk Cooling/Storage Unit (MCU) in 2005 in order to streamline the raw material procurement process, which has helped to lower raw materials costs.
The MCUs and MCPs create new jobs for the region and directly integrate herders into to the dairy supply chain. Before the establishment of these locations, milk trucks used to go on routes visiting each herder family to collect milk, a process that incurred high costs and provided lower quality assurances. Currently, herders and farmers bring in most of the milk to the nearest MCP or MCU location, although the Company still employs 13 trucks to procure milk at other areas in the countryside.
The price of raw milk varies throughout the year depending on the season, as supplies become more abundant during summer months and fall back in the colder periods. Throughout the year, the main cost of milk procurement outside of the purchase of the raw material remains transportation. After procurement, the milk is transported to Ulaanbaatar where it undergoes laboratory tests, primary cleaning, and measurement at the receiving station. The milk is then chilled to 4-6°С and readied to enter the production process.
Production and distribution
The Company carries out its production at its plant located in Songino Khairhan District of Ulaanbaatar City. The factory consists of five production sections of milk receiving and processing, yogurt, ice cream, curd and butter, and powdered milk production. Milk production All the raw milk arriving at the plant is weighed and stored in cooling tanks before it goes through a primary processing step where it is heated to 45-55°С and sent to the separator for milk and cream. The amount of fat content is adjusted according to the product type.
Some of the 3. 2% and 1. % fat milk undergo UHT sterilization process, which is then packaged into Purepak and Elecster packages. Milk to be packaged in Tetra Pak cartons also goes through an aseptic tank to ensure quality and long shelf life. During the summer, the factory processes 60 tons of milk per day, while in the wintertime this number typically drops to about 10 tons per day. Yogurt and sour cream production On average 10-12. 5 tons of yogurt and sour cream are produced through tank fermentation. The milk to be used for making yogurt has to be pasteurized at a temperature of 85-88°С for 20 minutes before it is sent to production.
As packing of yogurt is done manually, the production process suffers from low productivity and inefficiency, which is further complicated by occasional equipment and control panel failures, all of which the Company plans to renovate in the near future. Recently introduced products include probiotic yogurt and fruit yogurts, which have been successful with customers Ice cream production In 2006, the Company introduced an automatic extrusion line that was jointly designed and developed by Italian and Czech engineers. The line has a capacity to process 1800 liters of ice cream mix a day.
Currently, this section produces 13 types of ice cream. Curd and butter production This section processes 8000 liters of milk per day and depending on the season, it produces 900 kg wet curd and 60 kg aaruul (dried curds), each day. The wet curd has added sugar and raisins and is packed in 100 gram containers. The butter production reaches 3000-4000 liters of butter and 1200-1600 kg of sour cream, each with 72% fat. The equipment used in this section has low production capacity and requires further upgrades to improve efficiency. Powdered milk production
In the summer, Suu typically produces 2500 kg of powdered milk daily. The powdered milk is primarily stocked for winter dairy production as raw materials are scarcer during this period. As the only domestic Company with a powdered milk line, Suu is able to take advantage of the excess milk supply in the summer and by storing extra powdered milk for the winter, the Company minimizes the impact of higher prices for raw materials that inevitably results. Thus, Suu’s powdered milk production offers a key competitive advantage. Laboratory In 2002, the Company’s laboratory received official state accreditation.
The works-in-progress are tested every 2 hours; however, currently the lab is not able to obtain final test results on products for three days. The new BactoScan lab and testing equipment Suu plans to acquire will provide product quality results within approximately 1 hour after production, which allows for much greater assurance of quality. The chief technologist manages and oversees the production department, which runs non-stop 24 hours a day in 3 shifts. Although the Company’s dairy factory has the highest production capacity in Mongolia, the majority of machinery and equipment have become obsolete and outdated.
Also technology used in production has become outdated. Due to these issues, the utilization cost is high and the Company encounters many breakdowns and stoppages; therefore, it has become difficult to increase product range. In order to increase efficiency of costs, increase product range and improve quality, Suu is planning to introduce more advanced technology and to make necessary technical renovations. Final products Suu offers 51 different types of dairy and juice products, the most of any domestic dairy producer. The Company prides itself on its products’ purity and freshness, ensuring customer satisfaction.
Traditionally, Suu’s main product has been milk, but as the Company has evolved over the years it has continually expanded its offerings. Most of the sales revenue was generated from fresh milk and yogurt sales with 54 and 33 percent of total sales in 2008 respectively. Figure 4. Revenue by products 2008 Distribution channels Suu sells its products through four wholesale centers in Ulaanbaatar and via five chain stores owned by Max Group, 19 stores of Minii Delguur chain, six stores of Nomin chain, three stores of Orgil chain, and five stores of Sansar chain.
Including these established stores, Suu products are sold through 2,500 outlets across Ulaanbaatar. The Company delivers its products to these sellers using 25 smaller delivery trucks. Distribution to the countryside is mainly done through rented trucks going on routes in four general directions. Suu uses 20 ton trucks that go on these routes once a month to deliver mostly TetraPak packaged milk cartons which have higher shelf lives and can withstand the demanding travel conditions in the countryside. In the summer, Suu also distributes ice cream to rural areas using 3. ton trucks with coolers that maintain the required -20°С temperature level.
The modern dairy industry began in the early 1940s during the communist regime when the government of Mongolia began establishing large centralized dairy farms and production facilities near major urban areas, such as Ulaanbaatar, Darkhan, Erdenet and Choybalsan. Suu Company, established in 1958, was among these early facilities. Through this centralized system, Mongolia became self-sufficient in milk, reaching approximately 26 large facilities with 19,000 dairy cows, producing above 60 million liters of rocessed dairy annually.
However, during the transition from a centrally planned economy to a market-oriented one in the mid-1990s, almost all of these producers went bankrupt due to the economic recession and inadequate management capacity. The dairy cows were distributed to a variety of owners and much of the processing equipment was dismantled. As a result of the destruction of the dairy farms.
From 1990 to 1995, domestic dairy production decreased by 97 percent, from 61,500 to 1,900 tons of processed dairy. The collapse of the domestic industry lingered for seven years with minimum increase in the production volume. However, in 2002, production picked up and has grown rather steadily since. In 2008, production reached over 20,000 tons, a more than fourfold increase from 2002. The recovery of the industry was mainly due to the entrance of new producers, investment and upgrading of obsolete technologies, and government support.
However, enormous potential for expansion remains, as the production volume in 2008 is a mere 33 percent the levels in 1990. In spite of the progress made by the domestic milk processing industry, only a small portion of all milk in Mongolia goes through a modern processing system. Suu holds a 19 percent share in the overall milk and dairy industry, and is by far the largest producer among domestic milk processors accounting for 59 percent of all domestic milk processing.
Domestic dairy producers processed 21,660 tons of raw milk in 2008. Suu alone accounted for 59 percent of this total, making the Company the clear domestic market leader. The key strengths of Suu that have contributed to its strong market position are the well-established network of raw milk suppliers, production capacity (150 tons per day), product diversification, aggressive marketing, and expansive distribution channels. In addition, Suu is unique among domestic producers with its powdered milk production line. During winter months, when the amount of raw milk from local herders and farmers is reduced substantially, Suu utilizes powdered milk produced during the summer as raw materials.
In addition to Suu, the following producers represent the primary domestic competition: Monfresh Milk LLC Monfresh Milk was established in 2004 to provide dairy products utilizing UHT technology and Tetra pack packaging with a capacity to produce 6,000 1 litre packs and 6,000 250ml packs per hour. The company currently only offers liquid milk products, which include: Oulen milk (3. 6% fat content), Monfresh milk (2. 5%), Chocolate milk (2. 2%), and Calcium milk (2%). Monfresh Milk Company does not have its own dairy farm or a network of contracted local herders or farmers.
Thus, the factory uses powdered milk imports from China and New Zealand as raw materials for its products. Consequently, the company faces two key problems: the high fluctuations in price of whole powdered milk on the world market, and Mongolian customers’ preference of dairy products made from liquid milk. APU JSC In January 2009, APU, a leading Mongolian beverage manufacturer and wholesale operator, established a new milk factory. The factory utilizes UHT technology from New Zealand with a capacity to process 30 tons of milk per day. Currently, the company produces only one product, Fresh Milk, in 1 litre package.
Similar to Monfresh milk, APU milk plant faces the problems of heavy dependence on powdered milk and a lack of product diversification. Consequently, the plant has not had a significant impact on Suu’s market share. Khan Yembuu LLC Khan Yembuu is a new player, with its “Jargalan” dairy plant, which is to commence operation early October, 2009. The plant is equipped with new UHT technology and has a capacity to process up to 10 tons of milk per day. The plant has two key advantages. First, being located in Jargalant soum, Tuv province, the operators have easy access to the local herders and farmers.
Second, the plant’s Czech technology is able to produce a variety of products, including fresh milk, yogurt, cream and butter. However, the plant is still hindered by its absence of industry experience, financial constraints, relatively limited capacity, and the isolated location two hours from the target market, Ulaanbaatar. In addition to the above companies, about six factories are each capable of producing over 1 ton of processed milk per day, although their combined total output is on average 5 tons per day. These factories are not well-equipped as cooling and hearing processes are done using outdated equipment.
Typically, such smaller-scale operations only remain in business for three to five years. Some of these dairy facilities include Monsuu, Gum and Suu-Vit.
Since the early 1990s, when the domestic production fell dramatically, imported milk products have gained a large share of the processed milk market reaching 27. 6% in 2008. Imports exert substantial competition, especially in tetra pack fresh milk, yogurt and ice cream segments. In 2008, Mongolia imported approximately 18. 56 million tons of dairy products at a value of USD 9. 35 million. Compared to 2007, this represents an increase of 24. percent.
In 2008, Mongolia imported approximately 1,200 tons of milk powder (equivalent to 9. 3 million liters of milk) for a value of roughly US$2. 22 million, 92. 2 percent of which originated from Russia, New Zealand, Singapore and China. Except for Suu Company, most domestic dairy producers are the primary importers of powdered milk, as it is used as raw material for production. Although Mongolia imports dairy products from about 18 countries, Russia and China account for 88. percent of the total dairy imports as of 2008. The remainder originated from Ukraine, Singapore, Germany, New Zealand, Australia, South Korea and Poland, among others.
In terms of packaged milk, the leaders are Russia’s Krasnoyarsk factory “Arta”, Inner Mongolian “Yili”, and Meng Niu Group’s “Monmilk” from Huh-hot. In general, Mongolians are suspicious of imported products as they fear they contain harmful chemicals needed in preserving the products during the 7 to 30 day transportation period.
In televised reports, inspection agencies, the Ministry of Health and other experts have highlighted the risk of freezing and thawing of such products during transportation. Mongolian fears came true in 2008 as a toxic chemical, melamine, was found in the products of the biggest Chinese producers. The scandal prompted many countries importing Chinese dairy, including Mongolia, to ban the all dairy products from China. As a result of these events, Mongolians lost trust in Yili and Mengniu dairy products and will be reluctant to consume any other Chinese dairy products in the future. Thus, increasing efforts have been made by Mongolians to develop the domestic producers’ capacity to allow a shift to locally produced dairy.
The rapid urbanization of Mongolian cities has led to increased demand for processed dairy products. The migration from the rural areas to the cities, has been most evident in Ulaanbaatar city (capital of Mongolia), Darkhan city of Darkhan-Uul province of Mongolia and Erdenet city of Orkhon province. In Ulaanbaatar, the number of households has been increasing at around 5. percent per year in the last 5 years, which is on average 11,600 new households each year. While the rural population has access to fresh, unprocessed milk due to its close proximity to herders, urban Mongolians rely on longer-lasting processed milk supply. Currently, approximately 1. 22 million people, including the growing number of foreign expats, live in Ulaanbaatar, Darkhan and Erdenet.
As disposable income increases, Mongolians have tended to shift their consumption habits towards healthier products, such as packaged milk (rather than unprocessed milk). As economic expansion is expected to continue in the near future with the commencement of major mining projects, demand for processed dairy products should grow substantially in years to come.
Additionally, the Mongolian government has been active in supporting domestic producers with tax rebates and government sponsored programs, such as the School Meals program which sources domestic dairy products to provide packaged milk daily to secondary school students. As tax incentives, dairy farms are exempt from the 10 percent VAT and dairy producers receive a tax concession, freeing 50 percent of sales from corporate income tax.
Given the above market drivers and their trend in the future, the share of domestic production in the total dairy consumption would continue growing while the share of imports and raw milk consumption would continue shrinking. MICC estimates that the demand for domestically processed products would continue to grow at around 15% annually. Consequently, in 2013, the consumption of domestically processed products would account for 75% of the total consumption.
Development and Environmental Impacts
Suu’s plan to introduce automated packaging systems at its plant will replace some of the redundant processes currently being done by hand. At the moment it’s not possible to determine exact number of workers to be displaced, however the Company plans to transfer these employees to positions within Mr. Ganbaatar’s other operations. Although the management regrets the need to relocate and perhaps lay off some of its employees, the improved efficiency and more hygienic production practices provided by this investment outweigh the potentially undesirable consequences.
Due to the improved operational efficiency and greater production capacity, Suu must expand its raw material procurement. As a result, the Company expects to indirectly provide employment to 1500 additional herders and small-scale dairy farmers by incorporating them into Suu’s dairy production supply chain. Additionally, Suu plans to use the older milk processing line that is currently being replaced to establish a smaller plant in Mongolia’s second largest city, Erdenet. The new plant, which will have a daily processing capacity of 20 tons, is set to open by December 2009 and will employ 10 workers.
In tandem with the major factory renovations and equipment upgrades, Suu will be working to meet ISO 22000 standard, a derivative for food safety of the general ISO 9000. As part of this transition, the management foresees that each employee will receive 15-20 hours of training per month related to general food production quality and hygiene.
In addition, for each of the new packaging machines Suu plans to acquire trainings will be given by the supplier over a month period in order to incorporate the equipment into operations and teach Suu employers how to operate it safely and efficiently.
Suu’s current operations and expansion project will not have any direct negative environmental impact. The factory building is directly connected to the central water supply system and central sewage system. The waste water coming from the production sections is further diluted before being discharged into the sewage line.
The primary solid waste generated by the Company’s operations includes paper and plastic bags, and packing materials. All solid wastes are removed in cooperation with the “Solid Waste Fund”, which removes the waste in trucks and disposes of it independently. The Company has begun developing a plan to cooperate with specialized companies in establishing a waste water treatment plant as well as a solid waste sorting and recycling plant. The chemical laboratory of the company uses different types of chemical agents for tests and analysis.
These substances are kept in specialized containers, each with its own label and instructions. The Company strictly follows all laws, regulations, and procedures related to the disposal of hazardous substances used at its laboratory and other sections V. Conclusion Mongolia is more than three times the size of France. Broadly speaking, moving from south (China) to north (Siberia), the country is divided equally in to desert, desert-steppe and steppe regions, each with mountain ranges, some rising to well over four thousand meters.
Being so far from the sea, the climate is extreme continental with temperatures ranging from as low as minus 50 degrees Celsius on the steppe in winter to plus 40 degrees Celsius in the Gobi desert in summer. Ulaanbaatar is the coldest capital city in the world. Throughout 2006, the 800th anniversary of the founding of the State of Mongolia by Chinggis Khaan is being celebrated. Milk is both sacred and a staple food. Livestock contribute more than one fifth of GDP and almost half of all employment in what in what was, until very recently, a predominantly nomadic culture.
Dairying in particular provides much-needed nutrition, regular incomes and jobs and is set to play a major role in helping the country to become more food secure and, in so-doing, achieve MDG 1 (Millennium Development Goal) of halving poverty and under-nutrition by the year 2015. This means reducing the number of under-nourished people living below the poverty line from 800,000 to 400,000. Mongolia used to be self-sufficient in milk. During the rapid transition from state-run to market-based economy in the 1990s, the dairy industry collapsed.
By 2002 most of the processed milk sold in urban areas was imported. Until very recently, the industry was characterised by obsolete infrastructure and technologies, a chronic shortage of trained people and consumer concern about the quality and safety of domestic milk and milk products. Like other countries in the East Asian region, Mongolia is rapidly urbanising and products now need to be tailored to modern market tastes, though the huge wealth of traditional milk products will continue to play a central role in Mongolian culture and the livelihoods of nomadic herders.
The dairy industry needs to become even more market-oriented, providing products that meet the growing shift to western consumer tastes. Due to the already high milk availability and consumption levels, at least by Asian standards, once imports are replaced and urban consumption levels increased, market growth is expected to stabilise around 2 to 3 percent per annum, assuming disposable incomes continue to grow. With the recent growth of the mining and tourism sectors GNI (Gross National Income), has been expanding at about 12 percent annually since 2002.
Mongolia can substitute the majority of its dairy imports with clean, quality, domestic milk and dairy products by 2015. Given the huge distances involved in importing milk to Mongolia, the companies reconstituting UHT milk can now be persuaded to gradually switch to using domestic milk in place of imported milk powder. Mongolia has an international comparative advantage for producing and exporting milk and milk products because of its large livestock herds and its vast natural grassland resources.
Hardly any pesticides, animal drugs or milk production-stimulating hormones are used. To realise these opportunities more effort needs to be placed on. First, improving breeding for more profitable cows. Second, quality feed and fodder conservation. Third, export approval for milk products and technology transfer and training.
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