Monday, April 30, 2007

China’s Great Teas: A View from the U.S.

[[EDITOR'S NOTE: We are fortunate to be able to present here the full text of a plenary address delivered last week at the 2007 International Tea Exposition in Liyang, China, by Peter Keen, Chairman of Keen Innovations. Dr Keen works globally, as a professor, adviser to senior management in business and government organizations, author, executive educator, and public speaker. He has held faculty positions at Harvard, MIT, Stanford, Duke, Fordham and Wharton in the United States and Delft, Oxford, The London Business School, and Stockholm in Europe. He is the author of almost 30 books, mostly in the field of business innovation. His next book, however, Great Teas for Everyday Pleasure, is on a subject of central interest to readers of this blog; it is due out later this year. For more information on Dr Keen, see]]

China’s Great Teas: A View from the U.S.

Dr. Peter G.W. Keen
Senior Fellow and Director of Research and Innovation Development
Global Strategic Corp, Virginia, USA

In this short speech, I want to introduce you to what is happening in the United States that offers many new opportunities for Chinese producers of what I call great teas: whole leaf, hand-processed specialty teas with distinctive names and histories. They are entirely different from the mass market teas. Most of them are produced by smallholders and many of the best are not exported.

America is discovering great teas. This is very new. Most Americans are used to either coffee, low quality tea bags, instant teas, powdered green tea, iced tea or herbal teas. The consumption of tea per person in the U.S. is about one tenth that of the big tea-drinking nations, such as Britain, Ireland, Germany, Pakistan and Iraq. That is changing very fast. There is a growing interest in really special teas and Made in China will be as commonplace for tea as it is for manufactured goods. There are now three very different U.S. markets for tea. The first is bulk tea, largely for iced and instant drinks, many of them flavored. This is a ferociously competitive business in which countries compete against each other. Kenya is very much the driver. It produces just 10% of the world’s black teas but accounts for 25% of global exports. China is a major player, too, with 60% of green tea exports. Prices have fallen by around 40% in the past decade. There is massive long-term overcapacity. The economics of production push towards more and more mechanization. The tea is not whole leaf but basically ground up to make it suited to tea bags and iced and instant teas. It is part of the drinks industry, with a flow of innovations in how the tea is packaged and used. The multinational giants are flooding the supermarkets with new products, but the tea is just a raw ingredient and a commodity.

The second market is for fine teas. These are the ones that are heavily marketed under generic names like Earl Grey and English Breakfast or a historical name like Twinings or Jackson’s of Piccadilly. Much of this business is built on the Indian rather than Chinese tradition, simply because it was until recently dominated by black teas from India and other ex-colonies, British tea drinkers, British blenders and British names. It includes many good teas, but few great ones. It is also marked by counterfeiting and misrepresentation. The sales of Darjeeling teas, for instance, are four times the production of them. A package of “Japanese” green tea may well originate from Brazil. A China Oolong is often not whole leaf tea but dust and fannings. The fine tea providers are largely aiming to provide a reliable and well-packaged product that is also convenient. They rely heavily on blends. They build strong brands and in general satisfy the tastes of most tea drinkers.

The third market is for great teas. These are “different” and very individual. They are the ones that Americans are discovering. They are bought by tea enthusiasts rather than just tea “drinkers.” They are as much a personal choice as vintage wines. Great teas have shared features, whichever country they come from and whether they are a black, oolong, green or white tea. First, they are grown in special places, mostly on hillsides, in moist climates and in rich soil. Darjeeling in India, Yunnan and Anxi in China, Guranse in Nepal, Shizuoka in Japan, Nuwara and Ratnapura in Sri Lanka are just a few examples. In China, though not yet in the U.S., Liyang is noted for its great green teas.

Great teas must be organic, both for reasons of quality and law. Darjeeling is losing much of its reputation and revenues because of soil erosion, aging of its tea bushes, and overuse of pesticides and insecticides. More consequentially for the global industry, European and Japanese regulators are setting very strict standards concerning “green barrier” laws for tea imports. The three main growth markets for great teas are Germany, Japan and the U.S. Chinese exports to those countries fell by 40% in 2001 because of the new regulations. Only organic teas can capture the high end tea consumers in these countries. Increasingly, too, Fair Trade or Eco Exchange certification is a differentiator for both tea drinkers and retailers. This has important implications for social development in Asia, Africa and the Indian subcontinent. As much as 60% of the national labor force work in agriculture, at an average daily wage of $1-2. Fair Trade and organic methods increase this by as much as 50%. The elite U.S. grocery stores and online retailers uniformly select Fair Trade teas; organic faming is a requirement for Fair Trade certification. The tea drinkers who know and carefully select the teas they choose, instead of buying supermarket tea bags, have shown how important they view this as being; they pay an extra 10% premium for Fair Trade products.

Great teas are hand-processed, in contrast to the mechanization of bulk tea production. The motto here is, of course, “Two leaves and a bud.” Every element of their production is selective, from the time of harvesting, the selection of buds and leaves, the timing of fermenting and oxidization, the shaping of the leaf, and the packaging. For bulk teas, the leaf is just the raw ingredient and in many instances is turned into an extract; green tea comes in pill form, as a cosmetic, and even as a cure for baldness. For fine teas, the brand is the generic blend or the seller’s name. For great teas, the leaf is the distinction.

Great teas rely on great names. These are not the fine tea packages labeled “A blend of…” or “Ingredient; green tea”, but Dragonwell, Silver Needle, Toucha, Houjicha, White Peony, Iron Goddess of Mercy, Lapsang Souchong, Pu-erh, Gyokuro, Se Chung and Oriental Beauty. Liyang’s Nanshan Shoumei, Gui Ming Xiang, and Longtan Qinfeng are local examples. In many instances, great teas are marked by a specific producer within a region. Ambootia Estate and Poobong stand out from most other Darjeelings. In a country that mainly produces bulk black teas, Sri Lanka’s Kenilworth Estate is a premium name. The growing number of enthusiastic buyers of pu-erh teas looks for specific factories, the recipe number and the age. For a hundred years or more, Nepal was noted mainly for leaf smuggled into India to be mixed in with Darjeeling to produce a fake product and increase revenues. Now, Guranse Estate stands in its own right as a rival to Darjeelings.

With a great tea, the ingredient is not substitutable. For bulk teas or even fine teas like Earl Grey and English Breakfast, the blender can substitute, say, a Kenyan tea for an Assam or a Korean green tea for a Brazilian one. The only real issue is cost. Kenya is losing exports to Vietnam because of differences in labor costs. There is little it can do, since the tea itself is just a commodity. That is not the case for, say, an Imperial Dragonwell, an Ambootia White Darjeeling or a Liyang Shoumei. There are many differences in grade and many tricks in labeling, say, fannings from oolong production as a premium tea, but discerning buyers know the differences. And they choose the grade they want, with most looking for the overall best value combination of price and quality. They will, for instance, pay for a first rate second flush Darjeeling but not for a top-end Gyokuro.

Most of the distinctive characteristics of great teas that I have listed are highly historical and traditional. There is one new factor that is sure to transform many aspects of the entire global industry. This is science. The quality of harvesting and processing the leaf can hardly be improved and will remain hand-crafted and dependent on the skills of pickers and tea masters. But the leaf and soil will improve dramatically. In Malawi, cloning of new bushes has doubled the production yield per plant. Darjeeling’s revival rests on replacing old bushes with clonal ones and adopting organic methods. Research on the biogenetics of tea is rapidly moving ahead. Tea research institutes in Taiwan, China and even Kenya and Malawi are aggressively looking to upgrade every element of quality, product innovation and productivity. Jiansu Province’s published list of research projects combines advanced technology, manufacturing, agriculture, tea and water.

Great teas are often produced in locations that are isolated, hard to reach and harsh in their climate. However, a growing number of these regions are also becoming eco-tourist centers. This is the growth opportunity for Darjeeling, Adam’s Peak in Sri Lanka, and, of course, Liyang. Tourism is the world’s largest industry. Costa Rica has built its entire economy on eco-tourism. In California, high-tech Silicon Valley is next to the beautiful vineyards of Sonoma and Napa Valley, which draw millions of tourists. Here, technology, tourism and agriculture add to each other, instead of being in conflict. I term this combination as the eco-path to development. I believe that this path is a key to innovation for regions that produce great teas. This is apparent in Liyang’s economic plans. These include the technology and industrial parks, international collaborations, and education programs that mark Bangalore and Singapore. They also, though, emphasize “zero pollution” and a “One Village, One Product” movement. Tianmu Lake is core to Liyang’s eco-tourism, which is complemented by its agriculture and tea-growing. I note that travel agents and tour operators in the U.S. highlight Liyang’s teas and farms as one of its attractions.

The eco-path in my view will become more and more a source of economic and social development. Much of the tea industry is moving in a different direction: from great tea to bulk tea production, to more pesticides, and mass mechanization. In Anxi, the source of many of the globe’s best oolongs, small growers are putting their future at risk through overuse of pesticides. Assam, the largest tea-growing region in the world, is producing worse tea at ever lower prices, losing thousands of jobs and destroying its environment. If Darjeeling continues to move in the same direction, it will, in my view, follow the same erosion. If it combines eco-tourism with a sustained shift to organic teas and preservation of its great tea names and estates, it will thrive. The Liyang development plan is a blueprint for other regions: tea, tourism and technology acting together.

So far, I have focused on a supplier perspective on great teas. Let me now shift to the buyer view. There are three main reasons why the U.S. is taking off as a market for great tea: information, availability and accessibility. Basically, most Americans know little about tea; very few green and black tea drinkers, for example, are even aware of oolongs and whites. They buy what they see on the supermarket shelf. They are changing their habits, though, as they hear more about the health benefits of tea, mostly green tea. They are sharing information via the Internet. Dozens of sites provide discussion groups where tea lovers provide expert advice and opinions that are quite amazing in their breadth and depth. I learnt more about pu-erh from one of these groups than I could have ever have gathered otherwise.

The size of the great tea market in the U.S. is small, but the demand is growing, fed by such information. The interest in the health benefits of tea is now immense and a topic of daily conversation. In many ways, this is nothing new. Tea and medicine have always been identified with each other. The very first known reference to a tea was made by a Chinese surgeon, almost 2,500 years ago. The first book, 1,400 years ago, stresses its medical benefits. When tea was introduced into Europe, it was sold in apothecary shops. The first English newspaper advertisement, 500 years ago, claimed it would cure any ailment. The demand for information on the tea-health link is indicated by the number of references to it on the Internet: 38 million.

China has the supply of great green and white teas and the U.S. has an explosively growing interest in green teas, many of them very inferior to the elite Chinese names, and more and more tea drinkers are discovering white teas, an area in which China is predominant. That enthusiasm is expanding as they explore oolongs, which have been almost entirely unfamiliar to most people, and pu-erh teas, which have been very limited in their accessibility. I have never seen one offered for sale in a U.S. or European store. These teas have been available for a thousand years and anyone who comes to Hong Kong or Yunnan could choose from hundreds of varieties. But they have not been accessible. By this, I mean easy to locate and buy.

The fundamental shift in the U.S. market is that all the best teas available in the world can be made accessible via Internet retailers. From a hotel in Mexico, I was able to buy aged oolong. Here at this Exposition, I could in the next twenty minutes or so buy any of around 300 pu-erh teas on the Web, plus one of 200 Yixing teapots. On Amazon, I have 8,000 teas to pick from, including 350 oolongs and 450 white teas. I have 900 choices of Dragonwell greens and 78,000 Silver Needle options. Many U.S. online providers of great teas are visiting the producers to buy direct, instead of relying on the complex trading systems for tea that, in the case of Indian black tea, involves six levels of intermediaries: brokers, agents, shippers and other parties. This adds heavy costs; a Guranse cooperative receives 50 cents a kilo for a superb black tea that will sell for $100 a kilo. Direct relationships between producer and seller increase their profits and provide a far better deal for the consumer. I estimate that the teas I buy online cost me 20-40% less than the same ones in specialty stores – and in most instances they are not accessible in any type of store. Individual companies in Hong Kong and China are beginning to sell direct to the consumer via the Web. The best Japanese green teas, rare pu-erhs and exotic oolongs are becoming more and more accessible in this way.

China’s great teas are a national asset, India’s black teas were such an asset for a century but failure to move along the eco-path has put its industry at great risk. Let me end with some brief strategic principles for Chinese producers to leverage this asset. My recommendations apply to the European and Japanese markets as well as to the U.S.

1) Organic production and certification are vital, together with Fair Trade.
2) Information drives consumer interest and demand. The Internet is the most powerful information and hence marketing resource.
3) Science and technology must enhance traditional methods: clonal bushes, soil management and environmental protection are priorities. China differs from India in two main regards, both of which need strong direction from economic and regional planners. First, it is dominated by small producers, who need assistance in applying new methods and reaching new markets. Cooperatives are the building blocks of a strong international export capability. Second, China’s productivity needs to increase. The large Indian tea gardens produce around 2,000 kilograms per hectare. At its peak, the average Chinese yield was 900 kilos; it is now just 500 kilos. Local government, tea associations, research institutes and universities must help improve individual growers’ operations and methods.
4) The eco-tourism/eco-tea combination is an opportunity for the tourist industry and the tea industry. Collaboration across these sectors will be a powerful source of economic growth, help improve the wages of tea workers and preserve the profits of the labor-intensive harvesting and processing great tea demands.
5) The Internet is the most effective distribution and sales vehicle for great teas. Indeed, the better the tea, the bigger the opportunity to reach buyers and for buyers to reach producers.

I wish to thank the organizers of this Exposition for inviting me to an event at a location and on a topic that illustrates the eco-path and its impacts on Liyang. I also offer my thanks to the Mayor and his senior planners for the opportunity to help extend that path from Liyang to the U.S. I do not think it is at all an exaggeration to apply the word “great” to the teas, the location and the Exposition.


Hobbes said...

Fascinating, thank you for posting it.

Prof. Keen's stance in favour of Fair Trade and Organic produce is praiseworthy, though I sense this is as much for its marketing potential ("differentiation") as its potential social and ethical benefits.

This was somewhat underlined by his comparison of hectare yields between Darjeeling and typical Mainland plantations. After stating how Darjeeling plantations were losing market credibility through use of artificial means to boost production, he then directly compares them to Chinese yields, suggesting greater exploitation.

Higher yields and "clonal bushes" are not necessarily consistent with fine product and "product differentiation" (in fact, perhaps the opposite). The professor might try asking a Margeaux vineyard to double its output in favour of making "better" product; it would laugh him all the way to the local wine exchange.

A mixed message, methinks.

Thanks again for the posting, and toodlepip,


Brent said...

I have similar feelings as Hobbes. Keen seems to switch gears completely when he starts talking about boosting production, though he had already commented on the wonders of careful hand-picking and high standards in production.

It is only a matter of time before a cooperative group of farmers forms a company, which inevitably leads to various combinations and blends, and diminishes the uniqueness of each grower's product. Though economically this makes sense, I feel that it is in conflict with the author's appreciation for "great teas."

Brent said...

I just realized that my last comment was a bit more negative than I meant it to be. I feel that Keen made a lot of good points, despite the mixed message, and I enjoyed reading it. Thanks for the post!

Ecclenser said...

I enjoyed reading this comprehensive overview of tea. The trends were accurately represented and the history and future were appropriately contextualized. Fascinating. I had no idea Kenya and Nepal were gaining so much ground in the tea business.

I've been drinking some black Kenyan tea recently and find it quite palatable. I'm also experimenting with Guranse estate oolong from Nepal, which is like a Darjeeling crossed with Oriental Beauty.

"The first English newspaper advertisement, 500 years ago, claimed it would cure any ailment."

This cracked me up though, as this struck me as 500 year old marketing hype to increase profits for the English tea trade. Even today, evidence is suggestive of health benefits, but not proven, and we see massive marketing hype.

Thanks for sharing this!