A. General Environment
The general environment or the external environment are outside forces that may influence an organization’s performance. These are broad trends that affect all organizations and companies that operate in the same industry. Below are factors from the external environment that may potentially affect or have a significant impact on the performance and profitability of Central Azucarera de Tarlac.
Political Legal Frameworks
Summarized below are the political-legal factors that affect the Central Azucarera de Tarlac industry’s environment:
1. Political Inclination (Political History: Cojuangco Family)
2. Government Regulatory Bodies (Sugar Regulatory Administration)
2. Government Laws, Regulations and Taxes (R.A. 10659-VAT)
Central Azucarera de Tarlac was acquired by the Cojuangco Family in the year 1957. Jose Cojuangco, Sr., father of the late and former president Corazon Aquino and grandfather of former president Benigno Simeon Aquino Jr., received significant preferential treatment and assistance from the government to facilitate his takeover of Hacienda Luisita and Central Azucarera de Tarlac in 1957. Following the acquisition and grants of the government of loans to purchase the said sugar mill, and Hacienda Luisita as a whole, there was a condition set by GSIS, loan grantor, that “subdivided among the tenants who shall pay the cost thereof under reasonable terms and conditions”(GSIS Resolution No. 1085, May 7, 1957; GSIS Resolution No. 3202, November 25, 1957). With the land still partially undistributed and in dispute with some of the local farmers, and with the case against the owners still not dismissed, is a factor that may deeply affect the future profitability of the sugar mill.
Due to the history between the owners and farmers of Central Azucarera de Tarlac, there may be a high chance that conflicts may occur in the future. These conflicts that may arise can greatly affect CAT’s production efficiency and profitability. Aside from this, future costs and damages may result from the growing dispute which may lower the net income of Central Azucarera de Tarlac.
Being part of the sugar industry, Central Azucarera de Tarlac is governed by the mandate of the Sugar Regulatory Administration (SRA). SRA is a government-owned and controlled corporation which formulates responsive development and regulatory policies. It provides research development and employee services to ensure sufficient supply of sugarcane for a diversified, sustainable and competitive industry. The said services would improve productivity and profitability of sugarcane farmers and processing industries, and provides decent income for workers towards enhancing the quality of life of Filipinos. The legal mandate of SRA is embodied in Executive Order No. 18 dated May 28, 1986 creating the Sugar Regulatory Administration. It states that the policy of the State is to promote the growth ; development of the sugar industry through greater participation of the private sector and to improve the working conditions of the laborers. Thus, granting government specific control over CAT.
One factor that may affect Central Azucarera is the regulatory board instituted by the government, Sugar Regulatory Administration. The SRA does not necessarily control CAT. It, however, regulates it in a sense that any mandate that is issued by the SRA with respect to policies must be implemented in CAT. Change in policies can affect profitability and may increase cost with regards to the implementation of such.
Republic Act (R.A.) 10659 or the Sugarcane Industry Development Act of 2015 is a law governing the sugar industry. It determines the value added tax to be imposed on the sale of sugar by the sugar industry and thus determines the tax imposed on the sale made by Central Azucarera de Tarlac. As VAT is concerned, R.A. 10659 section 10 states that:
Value-Added Tax (VAT) Zero-Rated on Refined Sugar for Export.— Pursuant to Section 106(A)(2)(a)(1) of the National Internal Revenue Code, VAT zero-rated shall be imposed on refined sugar withdrawn from warehouses for actual physical export to the world market.
To differentiate refined sugar from raw sugar for VAT purposes, refined sugar refers to sugar whose content of sucrose, by weight, in the dry state corresponds to a polarimeter reading of 99.5° and above, and raw sugar means sugar whose content of sucrose by weight, in the dry state, corresponds to a polarimeter reading of less than 99.5°.
The Bureau of Internal Revenue, in consultation with the SRA and industry stakeholders, shall issue the necessary regulation to implement this section.
Although VAT is stated as a political-legal factor that affects Central Azucarera de Tarlac, it, in another sense, does not affect profitability at all since CAT produces raw sugar of which is subjected to zero-VAT.
Economic development is essential to the growth of the organization. The following are factors that affect the company’s economic growth: business unemployment, foreign exchange, interest rate and GDP.
From the last three years from 2015 to 2017 the unemployment rate decreased from 6.30% to 5.70%, which contributed to the economic growth of the country. The involvement of CAT in providing employment for its farmers helped lessen the unemployment rate in the region it is instituted. It has also an advantageous effect in the company because if it operates with full staffs, they generate an optimal level of products each day. This production efficiency means the company is able to meet customer demand and maintain good relationships with suppliers and buyers.
Foreign exchange rates vary daily, which is why it has a direct effect on the performance of CAT international operations mainly on imports and exports.
According to businessdictionary.com, socio-cultural trend is a set of beliefs, customs, practices, and behaviors that exists within the population. Companies include examining the socio-cultural trends prior to entering their target markets because it affects the buying decisions of the consumers.
Increasing ratio of people 40 years old and above wanting to take control of their health is one of the socio-cultural trends that can affect Central Azucarera de Tarlac. According to a Pulse Asia survey, Filipinos were found to be health-conscious at the end of 2015 with three out of five individuals citing staying healthy is an urgent personal concern.
Another factor is the increase of temporary workers in the sugar industry. The urge to cut down cost to increase competitive advantage can also have a negative effect on the business because it can lead to unscheduled turnover, low staff morale and low productivity.
The developments in sugar cane processing as stated by Rein (2013) in his study are cane cleaning, diffusion, juice clarification, filtration, syrup clarification, crystallization, sugar handling, and boilers. Utilization of new technology affected the Central Azucarera de Tarlac in the company’s production efficiency.
Analysis of the Impact of the Macro-environment on the Business:
Political -Legal Frameworks
Today, Central Azucarera de Tarlac has already been sold and is no longer under the property of the Cojuangco family. The turnover minimized the risk of having losses that may arise from the dispute between the farmers and the family. If the new owner manages CAT and its farmers and employees well, the performance as well as its profitability will continually grow positively.
Central Azucarera de Tarlac is still and will still be subjected to the Sugar Regulatory Administration policies, the Republic Act (R.A.) 10659 or the Sugarcane Industry Development Act of 2015, and Value Added Tax. Any significant amendment on such will greatly impact CAT.
Recently, another government law on taxes has been passed and is known as the Train Law or Republic Act (R.A.) 10963. The Train Law is a tax reform package that contains amendments which impose higher taxes on certain goods such as cars, fuel, tobacco, cosmetic surgery and sweetened beverages. The law indirectly affects Central Azucarera de Tarlac as well as the sugar industry as a whole. The Train law raises taxes imposed on sweetened beverages. In hopes of reducing consumption of such beverages, the demand on sugar may decrease. Thus, revenue of Central Azucarera de Tarlac will probably decrease in the near future as well.
Central Azucarera De Tarlac have been providing job opportunities to a lot of people, mainly the farmers. Such actions helped, although minimal, in the decrease of unemployment rate in the region. Low unemployment improves efficient use of equipment and resources, which is beneficial to companies.
Foreign exchange affects the business in terms of importation and exportation of the products internationally. It varies on the fluctuation of exchange rates of domestic and foreign currency. When the value of peso decreases as opposed to the foreign currency, the business is unfavorable because the transportation cost might increase.
Changes in interest rates can affect the fair value of the financial instruments. When the interest is low, the company can buy more materials unlike when it is high, because the expenses are limited.
When the gross domestic product (GDP) of the country is stable or slowly increasing, the economy of the country is growing. As a result, Central Azucarera De Tarlac can increase the amount of production.
In line with the increasing ratio of health-conscious Filipino, Philippines just passed new tax revisions on sugar-sweetened beverages (SSB). The act was commended by the World Health Organization (WHO). The health organization disclosed that evidence has shown that SSB tax can reduce consumption of sugars and help prevent overweight, obesity and non-communicable diseases such as diabetes and cardiovascular disease. Since many are switching to healthy lifestyle sugar, people are finding new alternatives for sweetening beverages. For this reason, the sale of raw and refined sugar might decrease and can affect Central Azucarera de Tarlac.
Researchers in the sugar industry have been persistent in developing technology that concerns sustainability alongside the efficiency and cost reduction.
Technological advances in the sugar industry will affect the production efficiency and sustainability, the quality of the products, and the expenditure of costs. If the company utilizes the latest technology and production techniques, the production efficiency and product quality will improve while the manufacturing costs will decrease. The company will gain a competitive advantage and acquire a larger market share. Therefore, technological developments have a substantial effect to the company since it will affect both the company’s profitability and competitive position.
B. Industry and Competitor Analysis
Porter’s Five Forces Model:
Bargaining power of suppliers (HIGH)
The bargaining power of suppliers is incredibly high because the government allocates the realm of procurement and announces the acquisition value from farmers statutory minimum value and state suggested value. The government protects the interest of the farmers by implementing the higher than purchase cost.
Bargaining power of consumers (LOW)
The government regulates the price of sugar and therefore, buyers and consumers cannot negotiate the price set for sugar. Aside from the bulk or trade discounts offered, CAT cannot provide the discounts demanded by big firms. The government influences the worth of levy sugar 10% of mills manufacture should be sold at levy value to the public distribution system the quota releases of free sale sugar.
New Entrants (LOW)
New entrants will not have a significant effect in the business because starting up a sugar industry will require huge amount of capital. Government laws are also an issue since most of the owners of sugar mills are corporations. Other than Bureau of Internal Revenue (BIR) and Securities and Exchange Commission (SEC), the Sugar Regulatory Administration (SRA) is the government regulatory arm that oversees the operation and administration of the sugar industry. For this reason, people who would want to open and compete with the existing sugar mills corporation will encounter a tough challenge.
Intensity of the Rivalry among Competitors (HIGH)
Competitors in the industry will have a substantial effect in the company since it will affect the market share and profitability. Intense price competition exists among the sugar mills since the main product is a commodity. For the sugar by-products, the company can seek for and apply techniques in order to gain a competitive advantage.
Threat of Substitutes (HIGH)
Central Azucarera de Tarlac is only one among the many the sugar producers in the Philippines. Sugar produced by different companies in the sector are substitutes to each other. Thus competitiveness amongst each is high, as stated above. Aside from that artificial sweeteners have already emerged in the market appealing to health-conscious individuals, gaining them as their patrons. The introduction of these substitute pose a great threat to Central Azucarera de Tarlac. Demand for sugar may drastically fall since people ever so often change preferences and lean more towards being health-conscious. In order to minimize, if not completely remove possible damages with regards to the decline in demand, it would best for CAT to open a new product line of sugar (less calories) that would appeal to individuals. This may incur cost of implementation but such cost may be recovered and revenue will increase.
Aside from artificial sweeteners, there are other substitutes to sugar such as honey, maple syrup, lemon, and other natural sweeteners. Although there may be a possible decline in the demand of sugar, it remains as a widely used ingredient in manufacturing a lot of food products such as sweets, snacks, biscuits, and pastries.
Current Situation of the Industry:
Market Size and Growth Rate
Central Azucarera de Tarlac has a current sales growth rate of 7.48% and has a current estimated market size of 9.88% in the Philippines. As the industry continues growing, the market size and growth rate of CAT will also continue to expand. CAT manufactures refined sugars and distributes to many industrial partners the commodity used as food ingredients or can be repacked for resale to other retailers. CAT can gain more industrial partners, buyers and customers as the market size increases.
Current Buyers and Suppliers
The bargaining power of consumers is low because the buyers always prefer a cheaper price but with high quality products. Low buyer bargaining power makes the business more attractive and increases profit potential for the seller.
Central Azucarera de Tarlac, is one of the leading distributor of sugars to industrial users and large companies. The bargaining power of suppliers is high because even though the company has been producing and supplying its own products, the government is the one monitoring the price of their products. High supplier power makes the business less attractive and decreases profit potential for the buyer.
Developments in the production of sugar in the industry are steadily progressing because of the improved technology today. The studies in the processes are becoming more concerned in environmental issues and sustainability rather than focusing solely on the reduction of costs.
The selling price of the sugar will have a minimal effect on the company because the company’s main product is sugar, which is a commodity. Commodity products are sold freely on the market and for this reason the prices are closely similar to each other.
Critical Success Factors in the Industry
The sugar industry, as an industry involved with a commodity widely used in most consumables, has buyers that are not price sensitive. However, the least expensive sugar appeals the most to the consumers.
On the other hand, the quality of raw materials used in the production of other products, especially for food products that require much attention to health risks and taste, is vital. Cost and quality are the two critical success factors important in the sugarcane industry.
Other Issues That May Affect the Business:
1. Climate Change (El Nino and La Nina)
Although sugar is a crop cheaper and easier to grow, the possible effects of climate change are still imminent. Extreme heat cause droughts as well as typhoons cause flood, both of which results to almost 50% of wilted crops. Moreover, the quality as well as the quantity of the sugar produced may drastically drop due to these fortuitous events. This poses danger on the revenue as well as increases plantation cost.
2. Pest Infestations
Just like climate change, pest infestations are unforeseen events of which affect the quality and quantity of the crops as well as the sugar production.
Opportunities and Threats:
The consumption of sugar and its by-products is measured by their withdrawal from the mills by the firms, retailers and other consumers. A recent report by the Sugar Regulatory Administration showed that withdrawals of the product remained constant at 2.140 million metric tons from 2015 to 2016. Consumption in the year 2017 rose but not as high as expected due to the presence of lower-priced sugar substitutes that are used by manufacturers of carbonated drinks. Prices of sugar contribute to the demand of the product. Due to restrictions on the importation of sugar substitutes, the consumption of sugar will increase as compared to last year. Demand for sugar is expected to continue rising due to an expanding food processing and beverage manufacturing sector and a growing population.
Product and Services Offered
Central Azucarera de Tarlac produces and sells sugar and sugar by-products primarily in the Philippines. The company offers raw and refined sugar, molasses, rectified spirits, absolute alcohol, and denatured alcohol, and liquid carbon dioxide. It also develops, leases, and sells real properties, and provides property management, water distribution, and wastewater treatment services.
Intensity of Competition
There are 27 sugar mills in the Philippines and the only competitor of Central Azucarera de Tarlac in the Region III is the Sweet Crystals Integrated Sugar Mill Corporation. The presence of competitors will result to the continuous improvement of every company’s aspect and determination to be the leading sugar mill and refinery in the region and Luzon. However, the intensity of competition may adversely affect the company’s market share and profitability.
Suppliers and Distributors
Raw materials are readily available since Central Azucarera de Tarlac grows its own sugar cane. There are no wasted products after producing their main product, raw sugar, because they further process it in the refinery to produce refined sugar. They also produce alcohol from the combined captive molasses of the mill and refinery is processed further in the distillery to produce alcohol. Climate change will be one of the company’s threats because it could make it more difficult to grow crops unlike it the past and thus an increase production cost.