Big Business in Bhutan: How the Humble Hazelnut Could Help Bhutan

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Big Business in Bhutan: How the Humble Hazelnut Could Help Bhutan

Stanford graduates Daniel Spitzer and Justin Finnegan aim to help Bhutan farmers boost their income by growing hazelnuts.

Mountain Hazelnut of Bhutan has set its sights on a triple bottom line: financial gain for investors, alleviating poverty among farm families, and restoration of an eroded, hilly landscape.

The typical rural household in the Kingdom of Bhutan has a cash income of less than $500 a year. Families are mostly farmers growing maize, rice, and vegetables for their own use. Many adults abandon the land and head for the city to seek work, leaving the family behind. It is this dearth of choice that the country's leaders hope to change. The choices could change dramatically in a few years for thousands of farmers in this small land-locked Asian country because of Mountain Hazelnut Venture Ltd., a company led by Stanford graduates Daniel Spitzer and Justin Finnegan. They aim to help farmers boost their income by growing — you guessed it — hazelnuts.

The company is Bhutan's first foreign-owned business, and one with a triple bottom line: financial gain for investors, alleviating poverty among farm families so there is less pressure on the younger generation to migrate to urban slums, and restoration of overgrazed, deforested foothills in a section of the southern Himalayas.

To most Americans, hazelnuts may not seem like a big market opportunity, but they are the globe's second most valuable tree-nut crop after almonds, thanks to a large European confectionary market, which includes Nutella, a sweetened nut spread that is a relatively recent addition to American supermarket shelves. California farmers have made billions expanding the market for almonds, and markets for hazelnuts are surging too, thanks in part to the health consciousness of consumers seeking the protein, vitamins, and antioxidants in tree nuts. Perhaps more important to Bhutan, the growing middle classes of its neighbors, China and India, are rapidly increasing their purchases of this once-too-expensive luxury food item.

"It's a significant opportunity," says Spitzer, who cofounded the company six years ago with Teresa Law, his wife and the company's chief financial officer, on their own dime. "This could become the single most-exported good from Bhutan," he says, estimating that Bhutan could achieve a 3% share of the global market for hazelnuts, the same as the United States' share, which is mostly grown in Oregon.

Spitzer, who grew up in Palo Alto, earned a degree in economics from the University of California at Berkeley and a master's in international development from Stanford's School of Education. He sought intern help from Stanford MBA students, and one of them, Finnegan, who graduated in 2009, is now the company's managing director. Over the next few years, they plan to distribute 10 million hazelnut tree seedlings to 15,000 farmers, who will plant and tend them on their own land. Working with Bhutan's elected government, the company will train and advise those farmers, not unlike the way that the U.S. Agriculture Extension Service serves U.S. farm commodity groups. The Bhutan farmers must agree to sell their future nut crops to the company, which plans to process them and in turn sell them to wholesalers and food makers, after the nuts are transported in trucks to the Indian border for a train trip to the port of Kolkata. As part of its social mission, Mountain Hazelnut has pledged 20% of its future free cash flow after expenses to a Bhutanese fund targeting poverty alleviation and environmental rehabilitation.

The project's environmental benefits will occur in the Himalayan foothills of eastern Bhutan, where goats often graze on steep deforested slopes. Repopulating vegetation on grades of up to 45 degrees should reduce erosion and protect watersheds.

Mountain Hazelnut's timing seems near perfect, but agricultural ventures in poor communities with subsistence farming carry plenty of risks and potentially unpleasant surprises. Crops can turn out disappointingly skimpy, irregular, or low quality, sometimes because the farmers are completely inexperienced with growing the crop or producing quantities large enough for the international market, says Stanford supply-chain expert Hau Lee, the business school's Thoma Professor of Operations, Information and Technology. Or, companies might fail to win the support of the government or earn the trust of enough farmers and others in local communities. Or, other countries growing the same crop may have access to better technology or growing conditions and boost their production, flooding the market and depressing prices. Because hazelnuts will tolerate a range of growing conditions, others in both developed and developing countries have their eye on the growing market demand. Spitzer, however, has a number of advantages: He speaks Tibetan (to which most Bhutanese languages are related), has worked in Asia for more than 25 years, and has involved student interns, alumni, and faculty from Stanford GSB.

Mountain Hazelnut is still in its early, risky stages. In mid-2011, it delivered the first batch of seedlings to 1,000 farmers, and the first processing plant is to be built in 2013, with the first batch of trees producing nuts a year later.

What gives Mountain Hazelnut the potential to thrive? Lee, who wrote a case study with researcher Dave Hoyt, MBA '79, on the company in 2011, notes that from the start, its leaders pinpointed a variety of tree that can be cultivated in large numbers and produce big quantities of nuts. They also took pains to build credibility with government officials and people in the villages. Spitzer and others at the company spent many months in discussions with about 100 Bhutanese government officials. Seeking a full collaboration, Spitzer, Law, and Finnegan worked with government experts on agricultural studies, land surveys, and training programs for the farmers. Public officials continue to help spread the word about the company to prospective farmers. "That partnership we built with the government enables us to get things done quickly and more efficiently," Finnegan says.

Adds Lee: "Daniel recognized you couldn't have a sustainable business unless you establish good relationships with local communities. You have to get local governments to be willing to trust you. It's not simple. We often underestimate that task."

Part of the company's appeal to the Bhutanese, Lee says, is that in its business model, the farmers develop business skills as they manage their land and labor for a commercial operation. In return, Mountain Hazelnut plans to pay them a guaranteed minimum amount by weight, so the more nuts farmers produce, the more money they can make. That model is more appealing to the community than one in which the company owns the farms and hires workers earning a set wage, Lee says.

A government representative expresses hope that the model "sets the stage for [other] startups. Mountain Hazelnut actually has the potential to bring about the big impact that we've been waiting for … a win-win situation for the country and for the farmers," says Pema Gyamtsho, Bhutan's minister of agriculture and forests. Currently the country's primary income comes from tourism and hydropower sales to India.

Once trees are fully productive, nut sales will double the typical farming household's yearly cash income, the company estimates, while farmers continue to grow other things for their own subsistence. If Mountain Hazelnut hits its target of 15,000 farming households averaging 6 members each, it will directly affect 90,000 people, or about 15% of Bhutan's population. Achieving that goal would make a serious dent in Bhutan's rural poverty. With greater income, rural young adults might choose to remain on the farms, helping to preserve traditional culture and keep families intact, instead of migrating to the city.

Bhutan "is a place with a carefully designed approach to development, which includes the economy but also respect for the environment, cultural continuity, and social equity," Spitzer says.

Finnegan adds: "We're working hard to help address some of the big issues the country is facing, which aligns us closely with the government, farmers, and other key stakeholders."

There are lots of details to getting the infrastructure right. In 2006 the company funded a hazelnut tissue-culture facility at Kunming Advanced Tissue Culture, an existing lab, in China's southern Yunnan Province. It buys all its tissue-culture plantlets from there, air-ships them via Thailand to the city of Paro in western Bhutan, and then sends them by truck over Bhutan's Lateral Highway, a narrow route crossing the country, to its plant nursery in Lingmethang. The plantlets spend several months growing in a nursery staffed largely with local residents, before they're loaded onto trucks headed for the farms.

The company also trains farmers by bringing them to demonstration farms to let them see young trees and learn planting techniques. It gives them instructions on laminated sheets and ropes with knots spaced to show the right span between trees. It figures out distribution: Once the nuts are processed and packed, they must be trucked over imperfect roads 25 to 40 miles to the northeast Indian border and loaded onto a train.

It helps that Spitzer has related experience. In 1993, he formed with an Asian investment partner Plantation Timber Products Group, making wood paneling in western China. It ultimately partnered with more than 700,000 tree farmers and was backed by the World Bank and the private-equity arm of J.P. Morgan Chase, among others. International Paper Group acquired Plantation Timber in 2004, yielding strong returns to investors, Spitzer says.

He and Law initially planned to build their hazelnut business in western China, but the May 2008 earthquake prompted many farmers there to leave the land to work on reconstruction. At about the same time, Bhutan held its first democratic elections and announced it would consider foreign investments. Spitzer and Law researched Bhutan and, finding that its land and climate are conducive to growing commercial crops of hazelnuts, proposed their idea to the Bhutanese government.

Mountain Hazelnut is now looking for outside investors. Spitzer says that although its expected financial performance would appeal to traditional venture-capital firms, the company's exotic locale and long-term nature make it better suited to wealthy individuals and foundations. The venture found its first outside investor in July 2011: The blue moon fund, created after the 2001 reorganization of the W. Alton Jones Foundation, took a minority stake for $2 million. That fund, which says its mission is "increasing human and natural resilience in a changing and warming world," gives grants mostly to nonprofits but invests in some businesses as well.

For Mountain Hazelnut, Stanford and its business school have proven a valuable noncash resource. Through the business school's Global Management Immersion Experience (GMIX) program, three recent alumni have interned at the company. They worked in various areas, including developing a system letting employees use smartphones to transmit reports containing data on orchards and harvests, among other information.

On a recent visit to campus, Finnegan said Stanford has "done a great job giving visionary support to social entrepreneurship," noting in particular the business school and its newly formed Stanford Institute for Innovation in Developing Economies (commonly known as SEED), which seeks to support anti-poverty enterprises in developing nations and fund research in alleviating poverty through entrepreneurship.

Having potential partners at Stanford, Finnegan said, including "advocates as well as advisors, to help us create something that can be replicable around the world is exciting."

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