Trouble Brewing? How Sri Lanka’s Tea Industry Can Prepare for Future Challenges
By H.N. Thenuwara with Nisha Arunatilake
Last year Sri Lanka celebrated the 150th anniversary of its tea industry. Will the tea industry survive another 150 years? The prospects for the growth of the industry are promising. Helped by the health benefits of tea and the growth of an increasingly health conscious population and per capita incomes, the global demand for tea has risen over time. However, Sri Lanka’s supply of tea has not kept up with the growth in global demand for tea. H. N. Thenuwara — currently an Adjunct Assistant Professor attached to the University of Iowa, USA who served as the Director of Economic Research and Assistant Governor of the Central Bank of Sri Lanka — in his chapter on “The Future of Tea Industry,” in the forthcoming Sri Lanka Tea Industry in Transition – 150 years and Beyond, examines the challenges and opportunities facing the tea industry of Sri Lanka and provides recommendations on different strategies the tea sector can adopt to take advantage of global prospects. Following is an expert interview on the main findings from his chapter.
Q: Has the Sri Lankan tea industry increased supply over time? How have we performed compared to our competitor countries?
Sri Lanka’s production has been increasing, but at a low rate of 0.8 per cent, over the last 50 years. Meanwhile, Sri Lanka’s share in the global supply has dropped from 21 per cent to 6 per cent during this period.
Tea grows only in some parts of the world. Only about 50 countries grow tea, according to statistics published by the Food and Agriculture Organization of the United Nations (FAO) in 2017. However, 10 countries produce over 90 per cent of world tea output, namely, China, India, Kenya, Sri Lanka, Vietnam, Turkey, Iran, Indonesia, Argentina, and Japan. Of these countries, China was the largest producer with a production of over 35 per cent of world tea. This was a result of an impressive annual average growth of 6.5 per cent from 1961 production of 79,000 metric tons, compared with the growth of 0.8 per cent recorded by Sri Lanka. In 1961, Sri Lanka produced a substantially larger amount of tea (206,000 metric tons) than China, which produced only 79,000 metric tons, and was only second to India. However, over the years, Sri Lanka’s growth was slow, and it fell back to the fourth position in global tea production.
Q: What are the challenges tea producers in Sri Lanka face, when attempting to increase the supply of tea?
The world of tea supply is controlled by two factors; the increase in area harvested and the increase in yield. The increase in harvested area is seen in countries with large amounts of arable land. Those countries also have large populations that can facilitate the labour requirement in the tea industry. Sri Lanka, on the other hand, has the smallest land mass and the smallest population. These factors limit Sri Lanka’s future production and supply of tea. The increase in production in Sri Lanka is purely due to the increase in the yield because the area harvested has not increased over the years.
Sri Lanka’s exports are also facing a similar fate in terms of production. Sri Lanka beat India to become the world’s largest tea exporter in the 1990s. Since then, Sri Lanka has fallen behind Kenya and China. Sri Lanka is now at the third position, competing with India and Vietnam.
Q: Apart from the ones mentioned above, what are the main challenges facing Sri Lanka’s tea industry?
Sri Lanka has the ability to maintain a healthy production level, though it may not be able to compete in terms of production quantity with other players, who are better endowed to increase production levels. Thus, major challenges facing Sri Lanka are keeping up a healthy production level, maintaining the high quality, and raising unit price while cutting costs of production.
The above challenges can be met by taking a series of critical measures, which include developing natural resources and human capital needed for the industry, developing physical infrastructure, maintaining sound macroeconomic policies, adopting appropriate trade policies, enhancing competitiveness, fostering a unique brand, integrating deeper in the global value chain, and benefitting from external economies while overcoming external dis-economies.
Q: What are the strategies for developing human and natural resources needed for the tea industry?
The tea industry in Sri Lanka is more intensive in land and labour, and less in capital. While the industry uses the land for its growth, it also gradually degrades the land with pollutants associated with fertilizer, and engendering soil erosion. Thus, the long term sustainability of the industry depends on how well the land is conserved.
In a growing economy, it is difficult to retain manual labour over long periods of time, as younger generations do not wish to render manual work in plantations. One solution is mechanization. Another is harvesting tea under different models, rather than the traditional employer-employee model. Sri Lanka’s plantations have already experimented with out-grower systems, where workers receive plots of land from plantations to independently cultivate, and supply green leaf to factories. This could solve various incentive problems associated with hired labour.
Q: How can the global competitiveness of the industry be increased?
The critical pillar of the sustainability in the tea sector is enhancing global competitiveness. Competitiveness increases with the quality of the product and the profitability of suppliers. The higher unit price indicates the existing high quality of Sri Lankan tea.
Sri Lanka’s best opportunity in sustaining the tea sector is strengthening the unique brand of ‘Pure Ceylon Tea’. Sri Lankan tea already commands a premium price. Improving quality and brand uniqueness are essential to continue the command in high price.
Sri Lanka can also raise earnings from tea by integrating deeper into the global value chain. This can be achieved by increasing the share of value added tea production and exports. Sri Lanka has a great potential to engage deeply in the global value chain with entrepreneurial strength of private firms and institutional support from the government.
Q: How can the sector benefit the economy in other ways?
The tea sector provides an economically significant positive externality (or external economies) mostly to the tourism sector. The colonial heritage of tea and the unique taste of ‘Ceylon Tea’ provide additional incentives for tourists to choose Sri Lanka as a prime destination. The tea sector in turn can introduce pure Ceylon Tea to tourists to initiate and develop a lasting desire for its tea.
Tea lands can also be used for various other economic activities with external economies, such as dairy farming to supplement the income of the plantation and its workers. The tea sector also provides forward and backward linkages to a large number of other economic activities.
So to summarize …
The future of the tea industry in Sri Lanka depends largely on the quality of tea, and not on the quantity. Thus, the growth of the industry will depend on maintaining the high quality of tea, and producing value added tea, developing Sri Lanka’s own brands, and stamping a reputation as an environmentally friendly and ethical tea producing country in order to draw buyer interest and a higher price.
Nisha Arunatilake is Director of Research at the IPS. This interview is based on a chapter by H. N. Thenuwara in the forthcoming IPS publication ‘Tea Industry in Transition – 150 years and Beyond.’