incotec creating and managing value in the value chain...incotec – creating and managing value in...

authored by: Silvia CastellazziPeer Ederer

August 2011

http://www.incotec.com/

©2011 Wageningen University --- EFAS All rights reserved. Cases are developed for discussion only, and are not intended to serve as source of data. No part of this publication may be reproduced, stored, transmitted or used without permission of Wageningen University.

Incotec Creating and Managing Value in the Value Chain

acknowledgementWe thank JanWillem Breukink, Ed Nobel and Ysabel Korver for their openness and cooperation in developing the case.

The case study makes use of the registered company name INCOTEC and the trademarks ThermoSeedTM, GeniusCoatTM, Natural IITM, and eXccitTM.

language advisorInternational Meeting Point, Joy Christensen ([email protected])

exhibit advisorGansser Consulting, Georgine Gansser ([email protected])

layoutGAW ontwerp + communicatie, Jeroen Brugman (www.gaw.nl)

printPrintService Ede (www.printservice-ede.nl)

Incotec – Creating and Managing Value in the Value Chain

European Food and Agribusiness Seminar 1

"A wise man will make more opportunities than he finds."

Sir Francis Bacon, English philosopher 1561–1626

Biodiversity Can Be Inspiring

Surrounded by rhinos, hippos, zebras, antelopes, and all sorts of flowers, birds, and plants, the Netherlands-based INCOTEC Group is holding its ninth senior management meeting at Durban, South Africa in January 2011. This innovative and still rather small company offers sophisticated methods to improve the quality of seeds, their sowability and the yields they bring. Sitting in the hotel lounge prior to the conference, CEO JanWillem Breukink reviews various data generated by Ed Nobel, responsible for marketing at Incotec. One striking example from the data concerns a new class of products derived from humic and fulvic acids, called GeniusCoat and Natural II, which Incotec is introducing through 2011. Seventy-three trials around the world have shown GeniusCoat to increase the yields of wheat by 4.5%. Use of GeniusCoat with another new Incotec technology called ThermoSeed should raise those yields further. Mr Breukink calculates:

"The worldwide wheat acreage totals 220 million hectares……3,000 kg wheat per hectare is a (conservative) estimate for the average yield……EUR 0.30 seems a fair price for a kg of wheat these days……5% yield increase means 150 kg more per hectare……150 kg x EUR 0.30 x 220 million hectares = approximately EUR 10 billion...

Assuming that we can eventually claim 5% of this value for us, we are talking about sales of EUR 500 million for Incotec."

These are dizzying numbers, and not only for their size. Considering that Incotec sales amounted to EUR 43 million in 2010, the above estimate is an increase greater than the factor 12. Moreover, Breukink's hotel lobby calculations are based on the introduction of just one combination out of several exciting yield-increasing Incotec technologies that are about to reach the market. For Incotec management this presents a bewildering array of choices in launching the new technologies on the market and gaining value for the company.

Having already witnessed a tripling of sales over the past five years, Incotec managers are rethinking company structures for an optimal support of this unfolding dimension of their business. The investment in these new technologies and actives1 is not only providing access to promising niches, but could develop into a game changer for the entire crop protection, seed development and seed treatment market, where companies the size of Monsanto and BASF set the rules.

1 Actives – industry-specific term for the active ingredients of chemical products


European Food and Agribusiness Seminar2

Nineteen managers from all corners of the world came to the meeting in Durban, each of them with the experience of different local realities and challenges in the regions they are responsible for2. Collectively they are called on to develop the answers to some fundamental management questions: How do we set this company up to make the most of the vast potential of Incotec technologies? How can we achieve independent verification of the value, and with it credibility towards large scale adoption of our Incotec technologies? How do we manage an expected annual 50–70% growth rate in the next couple of years? What sort of collaboration should we enter with our customers and our customer's customers in the value chain, when bringing these technologies to the market?

Incotec in the Dutch Seed Valley

INCOTEC Group BV is a leading company in the field of seed enhancement technologies worldwide. "Everything you can do on a seed without breeding and genetics, we do it," says Breukink, who has been with the company for the past 28 years. He explains further,

"It all starts with seed. As living material, each seed is unique. Unlocking the superior performance of your seed takes knowledge and processes which result in an increase in the number of good plants and a more uniform plant stand under all kinds of conditions. What we do is change the physiological and physical aspects of the seed." 3

Incotec is headquartered in the Netherlands, in a region that is proud of having specialized in seeds, their production, their breeding and their enhancement over the past hundred and fifty years – a region now branded as "Seed Valley"4. Incotec has 370 employees across its sites on all five continents. In 2010 the company reached sales of EUR 43 million, with an increase of 17.5% against the previous year, which followed a year of 28.4% growth from 2008 to 2009. Incotec China saw a growth of 328% from 2008 to 2009. (Exhibit 1 Incotec sales review, Exhibit 2 corporate structure, Exhibit 3 Incotec chronology, Exhibit 4 global presence)

Incotec activities began in 1968 as the coating department of the seed company Royal Sluis. In 1989 the name INCOTEC was registered as a trade name. In 2002 a management buy-out was successfully finalized and Incotec became an independent business. The success of the buy-out led to a secondary buy-out in 2007 when the majority of shares was obtained by the management team continuing the Incotec strategy.

2 Incotec has production sites in Europe (Sweden and Netherlands), USA (in California since 1978), Japan (Saitama, 1997), Brazil (São Paulo, 1999), India (Gujarat, 2004), Australia (Victoria, 2004), China (Beijing, 2006) and South Africa (Kwazulu Natal, 2008).

3 Incotec, brochure4 See for instance www.seedvalley.nl. The Seed Valley is located on the peninsular north of Amsterdam with a particular micro-climate.

With the North Sea to its west and the large IJsselmeer to its east, the area has a temperate climate that remains cool in summer and warm in winter, is moist throughout the year but windy, so never stays damp – ideal for seed cultivation. The region has therefore developed into a global hub of seed technologies.



Activities at Incotec

Seed enhancement is about adding value to seeds and providing technology on the input side of the agriculture chain (Exhibit 5 Incotec technologies). Specifically, the technologies developed by Incotec and its network of research partners are able to:

• improve the sowability of seeds and their handling, and create more space around the seed (encrusting and pelleting)

• boost the resistance to pests and insects with the application of actives within the space previously created around the seed (via film coating, application of actives)

• ensure the use of clean and disease-free seed (disinfection) • ensure the uniformity of seed germination (priming, upgrading).

Innovation is a key word at Incotec. Almost 14% of all Incotec employees worldwide are occupied with R&D, and Incotec invests 8% of annual sales in research and development. By far the greatest number of innovations at Incotec are developed in-house by their own staff. The company was awarded the prestigious Erasmus Innovation Award in 2009, and won the title of Best Business in North Holland in 2010.

Incotec offers solutions in four business areas: vegetables, ornamentals, field crops, analytical services. In the case of the seed for small-acre crops, for instance vegetable or flower seeds, most of the job is done in-house. Growers send the seed material to one of the Incotec production sites in the world, and receive it back in the improved condition. For large-acre crops, where it would be too cumbersome to ship seeds to Incotec sites, the company provides film-coating material for a "do-it-yourself" technique. For pelleting and encrusting, Incotec sells the software (meaning the recipe). They also develop and place the necessary hardware (machinery) on the market with the help of contract partners, so that seed companies can treat their produce directly on site. (Exhibit 8 for the most relevant differences among the business areas)

Incotec is governed by a team of thirty-one managers located both in Europe and on other continents, of whom eighteen are shareholders of the company – 65% of the capital of Incotec is in their hands, the remaining 35% being held by ABN AMRO Participaties5. Ten of the managers are located in the Netherlands at Enkhuizen, others are scattered throughout operation areas worldwide. The regional managers have a large degree of autonomy in developing solutions for their respective local markets.

5 ABN AMRO Participaties is a subsidiary of ABN AMRO Bank, which provides equity to Dutch medium-sized companies "…with a solid market position, clear growth potential (autonomously or by means of acquisitions) and an actively involved and decisive management team that is prepared to co-invest." (www.abnamroparticipaties.nl)



The Seed Treatment Industry

The Second World Seed Conference, held in September 2009 at the FAO in Rome, recognized the importance of the seed industry for efforts toward global food security:

"Urgent government measures and increased public and private investment in the seed sector are required for the long term if agriculture is to meet the challenge of food security in the context of population growth and climate change." 6

Several techniques and technologies can be applied to seeds to improve factors such as processability, resistance, adaptation to external environment, yields and thus productivity, all of which are key to meeting increased and increasing food demand (Exhibit 6 for an overview of the main companies active in these areas, Exhibit 7 for technologies offered by competitors). Roughly speaking, there are three basic methods of seed intervention, and Incotec is specialized in the third one listed here:

• breeding • genetic modification • seed enhancement treatments.

Seed enhancement treatments include both the techniques for improving sowability and germination, and processes aimed at the protection of seeds from diverse organisms, which may include fungi, insects, birds, nematodes (roundworms), bacteria and other pathogens. A seed is a delicate organic material which attracts a variety of organisms and hosts them either on the outer surface or inside. For protective action, they may be classified as follows:

• seed-borne disease carried inside the seed and on the seed • soil-borne disease hosted in the ground/soil (environment of the seed) • insects and birds.

Seed enhancement methods apply treatment to the seed instead of the foliage or the whole field, which bears an intrinsic advantage. For instance: for an insecticide treatment of corn, only 50 grams ai/ha (active ingredient per hectare) applied in the form of seed treatment can replace 1350 grams ai/ha in furrow application or 600 grams ai/ha on foliar application7. This translates both to capital savings and reduction of the environmental footprint.

The whole global pesticide market (all pesticides, all uses – not only seeds, not only agriculture) amounted to a value of USD 45 billion in 20098. Out of this, USD 2.5 billion were spent on actives for seed applications. Fungicides lead on a hectare basis, but insecticides are larger in market value. (Exhibit 9 on seed treatment sales per crop, Exhibits 10 and 11 on pesticide and fungicide markets)

6 www.worldseedconference.org 7 A Tool for Sustainable Agriculture, International Seed Federation, 20078 AgriMagazine



ThermoSeed Disinfection Technology – One Example of Game-changing Technologies at Incotec

At an international seed fair in 2007, the Swedish company SeedGard presented a new seed disinfection technology developed at the University of Uppsala and marketed by the Swedish cooperative Lantmännen to fight seed-borne pathogens. As Breukink recalls, "None of the visitors paid much attention to the small stand of the university, and most of them strolled past it to see the more chemical and renowned disinfection solutions." He and his team instead decided to spend some time on the new and rather unheard-of technique, taking the first step toward a long lasting collaboration and investment9.

When pathogens lie inside the seed, their presence becomes apparent only through the damage they provoke, reducing yields or jeopardizing the quality of a harvest10. To combat pathogens under the surface, every technique therefore seeks to strike a balance between killing pathological organisms whose presence cannot be directly observed, and leaving the embryo as fertile and fruitful as it was before the treatment.

Chemical solutions to this problem, although effective, are accompanied by multiple and significant environmental drawbacks. Workers have to protect themselves from toxic substances, and these treatments are not suitable for organic farming. Other green solutions developed in the last fifty years mainly employ hot water, with soaking-heating-drying phases. This method is not only labor intensive, but also entails the expense of drying the seeds before storage, in order to prevent deterioration. Furthermore, this technique does not fully exploit the fact that most pathogens lie just under the surface of the seed, and not in its most interior part, where the embryo is. Soaking the whole seed in hot water unnecessarily subjects the embryo to stress as well and can alter its germination potential.

The ThermoSeed concept overcomes these difficulties with the precision of an innovative system based on hot, humid air. Its pivotal element is a non-waterborne heat which kills the pathogenic organisms under the surface while leaving the embryo untouched and its genetic material unaffected. "It's sort of a pasteurization for seeds," Breukink explains. To be effective, the treatment has to kick in within a narrow interval: too little heat leaves the pathogens alive – too much heat damages the embryo (Exhibit 12). Because no evaporation takes place in the seed (as no water is involved in the process) the kernel is protected from any form of protein denaturation or deterioration of the capacity to germinate. The patent document explains:

"The interesting interval is where the treatment disinfects the seed from pathogens without a decrease in germination. …The greater difference between the death of the pathogen and the host, the better chance for a successful heat treatment."11

9 For press release on the SeedGard acquisition by Incotec, see: http://www.thermoseed.com/news2.html10 In the case of Ustilago nuda, the pathogen responsible for the loose smut of barley: "The kernels and glumes (chaff ) are converted into

black fungal spores which blow away, leaving only a sooty appearing rachis or spike." Ohio State University Extension, College of Food, Agricultural and Environmental Studies, http://ohioline.osu.edu/ , February 2010

11 United States Patent 6350409 B1, February 2010; http://www.freepatentsonline.com/6350409.html



The position and width of this useful interval varies not only among different seed types, but also from one seed lot to the other. Several factors (moisture content, age and strength, size, cracks in the seed coat, type of pathogens) affect ThermoSeed treatment and need to be duly analyzed before the process can be initiated. First, a sample of the individual seed lot is tested to determine the correct heat level for that particular lot. Only after a series of tests and cross checking with mathematical models and databases can the treatment actually start – the whole process being software-steered by Incotec with the help of an IT system that the company has developed for this purpose. The value of the technology does not lie so much in the machinery (which would be easier to replicate), but in the seed-specific know-how required to fine-tune the machine and preserve the quality and characteristics of the seeds.

This technique has been evaluated in seven European countries since 1999, and the test results indicate high performance for cereals12, and good prospects for vegetable seeds. The results of ThermoSeed treatment are comparable with those of chemical treatments (Exhibits 13, 14 and 15 on trial results and Exhibit 21 for magnified seed images). Effectiveness being equivalent, however, ThermoSeed outdoes the rival techniques in many other respects:

1. It is environmentally friendly. "It's totally green, it's sustainable!", Breukink says enthusiastically. There are indeed no toxic exhaust materials to be disposed of – no additives or chemicals are used. As a consequence, left-over seeds can be employed as animal feed. Workers are glad to leave protection masks and gloves hanging in their lockers, seed companies save on the safety measures and risk management costs which chemicals incur, and image improves.

2. In Europe, where organic farming has strong supporters, the absence of chemicals opens the doors of the organic market for this technology13. ThermoSeed is part of a project for organic compatible disinfection systems that is financed by the European Union.

3. The process is fast and does not require drying, so the seeds can be packaged and shipped immediately after treatment, saving on storage costs.

4. In the seed industry, every micrometric layer of space on the seed surface is valuable, as more and more specific actives are piled onto it. Freeing the seed from the need for several fungicide layers and coating which serve the same purpose that ThermoSeed fulfills, this technique saves space on the surface of the seed. That opens opportunities for the companies that commercialize other active ingredients to apply their seed treatments in greater quantities.

5. Not being chemical-based, ThermoSeed does not need to have market authorization, so it can be rapidly introduced to new markets and countries. The greenness of the technology translates not only to a better and cleaner image for Incotec, but also for those who treat their seeds with ThermoSeed. The use of chemicals always involves a

12 Cereals = grains such as wheat, rice, barley, oats13 STOVE project, http://ec.europa.eu/research/agriculture/projects/qlrt_2001_02239_en.htm, February 2010



series of supplementary costs, for instance registration fees and tests for the toxicity of each active substance. An in-depth study conducted by the European Union for the comparison of the registration costs for chemical and biological products shows that these costs can amount to EUR 1,410,000 for the chemical product or EUR 860,000 for the biological product – which is per crop and per country of commercialization. Considering that these techniques may be registered for implementation on several crops in ten or fifteen different countries, savings due to ThermoSeed could be expected in the order of several million euros per annum14.

6. Ongoing trials show how effective ThermoSeed is in creating a perfectly clean seed to be planted in the ground. This disinfection creates the basis for other treatments to act on a cleaner and stronger seed. Trial results are showing that chemicals can be dosed at lower levels after ThermoSeed treatment.

7. Internal trials at Incotec have shown that ThermoSeed disinfection can even enhance the effects of subsequent treatment. This applies to treatment with Rhizobia (for legumes) and to the new Incotec products Natural II (for spinach and other vegetable crops) as well as GeniusCoat for the root development of cereals (Exhibit 20 for GeniusCoat impact on roots). Incotec presented these research results in spring 2011.

In summary, this cleaner and less expensive treatment does not involve chemicals and it saves on the registration cost. It is able to create more space on the seed – thereby increasing room for other treatments – and it possibly enhances the performance of the subsequent treatment in multiple ways. Incotec acquired SeedGard for the merits of ThermoSeed technology. Now they need a plan for its utilization to get the best returns. That is a task for Mr Nobel, manager corporate marketing, who says:

"The technology is good, and every approach will be good in the end – but which is the best one?"

Creating the Value

The strategy that Incotec is developing will be linked to a definition of the value created by ThermoSeed. For whom does ThermoSeed represent a value? Who will be willing to pay for it, and how much? In the seed complex and among the relationships which regulate the processes of growing, breeding, cleaning and planting seeds, various stakeholders might have an interest in the technology. Besides Incotec, these are the seed industry (chemical protection companies, breeders, biotechnologists), and the growers. Although value which Incotec will be able to create with ThermoSeed will have to be divided among all participants in the value chain in order to accelerate adoption, Incotec can influence the size and quality of each share of the value pie. (Exhibits 18 and 19 on value chain and value ladder)

14 http://www.endure-network.eu/about_endure/all_the_news/in_depth_biological_controls#1G. Although investment costs and production costs are higher for the biological option, ThermoSeed technology does share the fate of new technology platforms with quite high transaction costs. It is a technology that requires a long lead time, in-take and grow-out tests, analyses, a considerable initial investment – and promises long-term revenue.



The company follows a pragmatic approach in defining this value. Being a small organization, Incotec does not have the financial resources or the know-how to start an exhaustive market research to identify the best entrance. Breukink strongly believes that they "…need to get started, one way or the other". They need to start by putting the technology on the market, in order to see how it works in the value chain. In order to define total value, Incotec refers to the particular share of market that ThermoSeed can theoretically replace, and that is the global market for the fungicide treatment of seeds. Based on this working hypothesis, Incotec has developed a multiannual plan to position and distribute the technology worldwide, developing a progressive entrance strategy and setting key objectives in terms of market shares, sales volume, country targets.

In the first phase of commercializing the technology, Incotec analyses are focused on the wheat, barley, and oat segments. For these three grains, fungicidal seed treatments are the alternative to ThermoSeed, with an estimated total market size of EUR 212 million in 2007. As long as the efficiency is comparable, Nobel does not foresee adoption issues on the part of growers:

"Growers will choose the chemicals-free option as long as efficiency is ensured."

Incotec strategy relies on that assumption, entering the market at a lower price than the price of fungicides for the three cereals:

• Wheat seed cost: EUR 0.02/kg with ThermoSeed vs EUR 0.025–0.03/kg with fungicides • Barley seed cost: EUR 0.02/kg with ThermoSeed vs EUR 0.025–0.04/kg with fungicides • Oat seed cost: EUR 0.02/kg with ThermoSeed vs EUR 0.025–0.05/kg with fungicides15.

Within this framework, value would mean profit for Incotec and better margins for seed companies, which they can also partially pass on to growers. For companies that sell the fungicides, ThermoSeed represents a threat – as their products would be replaced one-to-one by the new technology. (Exhibits 22 and 23 for ThermoSeed machinery and field trial with barley)

Taking the wheat market as an example, an approximate estimate of the use of ThermoSeed returns the following numbers:

• About 140 kg of wheat seed are needed to harvest one hectare of wheat. • In the year 2010, wheat was harvested on 226 million hectares of farming land

around the world. • Given the above, more than 31.5 billion kilograms of wheat seeds were sown

on that farming land in one crop cycle. • If every wheat seed were treated with ThermoSeed at a selling price of EUR 0.02 per

kg, the potential market for Incotec would be worth about EUR 630 million.

15 Most common fungicides on the market are: Dividend, Thiram, Captan, Vitavax, Celest/Maxim, Panoctine.



However, the total worldwide market for the alternative, fungicidal treatment, is only EUR 212 million, which apparently means that only about one out of three wheat seeds is treated. Therefore starting cautiously in 2011, projections indicate that a market share of about 0.05% translates to sales for Incotec in the range of EUR 300,000. A share of 6% in the year 2019 would indicate sales potential of EUR 40 million for application of the ThermoSeed technology in the wheat crop only – this alone would double the amount of their sales in 2010. (Exhibit 16 on projected market value of ThermoSeed wheat seed treatment)

But this first value calculation is not fully satisfying for Incotec managers. They wonder whether they might be underestimating the potential of the technology and giving it away at a price too low. Furthermore, replacing chemical fungicide in the seed treatments with a non-chemical and cheaper technology is merely the first step in defining the potential of ThermoSeed. To combine it with active ingredient treatment such as GeniusCoat for root development could multiply the marketing possibilities. (Exhibit 17 on projected market value of GeniusCoat wheat seed treatment)

Nobel remarks:

"Especially the combination of ThermoSeed with new growth stimulating actives like GeniusCoat and Natural II – two other innovations we have just brought to market – should reflect higher value creation as well, because of the significant yield-increasing effects."

The prospects of this combination substantiated by field trial results is what excited Breukink on reviewing the figures together with Nobel in Durban in January 2011. But where and how to begin to capture the value? The more complicated definition of the potential represented by ThermoSeed is that it creates more space on the seed for further applications and enhances their results due to the addition of significant yield-increasing effects. Seeds need to be treated with different processes and they need to be covered by several active ingredients, which are provided by the seed and crop protection companies. In this constellation, value creation lies in offering ThermoSeed together with a custom-made combination of actives provided by others, wherein Incotec would provide the disinfection technology. This way, customers could purchase a package of different technologies and treatments based on ThermoSeed.

For growers, i.e. the Incotec customer's customer, this would result first of all in increased performance and easiness of treatment, as they could buy treated seeds together with a complete and tailor-made mix of actives enhanced by the previous ThermoSeed process. In this way, Incotec could decouple from the fungicide price level and aim even higher. Much would depend, of course, on the readiness of seed companies and actives producers to collaborate in a package offer – because it is the seed companies who are Incotec customers.

Recent occurrences of EHEC bacteria (enterohemorrhagic Escherichia coli) on food products throughout Europe have raised awareness for other ThermoSeed applications beyond seed diseases: besides pathogens that attack seeds, there are also pathogens which are in principle innocuous for the plant but can be dangerous for human beings. ThermoSeed might offer an answer to this threat too. As E. coli bacteria are sensitive to heat, Incotec is setting up



trials with experts to investigate whether E. coli infested seeds can be effectively treated with ThermoSeed without damaging the embryo.

Managing the Value

JanWillem Breukink likens the situation of Incotec in the seed market to that of the elephant and the mouse walking over a bridge, where the mouse says to the elephant: What a noise we are making! In a market ruled by big players Incotec is a rather small company, but a fast growing one. These are dynamics that put pressure on the structures of a company and require firm strategic planning of the issue "what next?". This is even more the case for a company in the midst of handling several potential breakthrough technologies that require contacts and negotiations with some of the biggest corporations worldwide, of which Breukink says picturesquely: "If they sneeze, we are gone."

Bringing ThermoSeed to the market and deciding how to deal with the crop protection companies, Incotec has three principal choices:

1. cooperate – find a profitable way to share assets and efforts, 2. compete – engage in a race and commercialize the technology alone, or 3. cash in – sell out to a bigger company.

The third option has been ruled out, as the company wants to remain independent and resist those tendencies in the seed world which see some of the companies managing increasingly extensive portions of the value chain. This decision for independence also has to do with the nature of the business Incotec would like to be. Providing customized packages demands enough independence to engage in different cooperation agreements with more than one supplier of actives, in order to offer the whole spectrum of products to the customer.

The second option, to run alone without the partnership of other companies, does not seem viable to Incotec. Although fast-growing, Incotec still lacks the experience of managing a value the size of that which might come from ThermoSeed in combination with new actives. Also, Incotec does not have the logistics or the network resources to deliver alone on such a scale.

At first sight, Incotec management therefore believes that the best opportunity lies in cooperating with the big players. But this generates some pragmatic issues: How do we envision the cooperation setup? What assets do we put on the plate and share? How do we identify the right person to approach and show what relevance this cooperation could have?

In Enkhuizen, next to the Incotec factory, big players such as Syngenta and Monsanto are lined up along the same road. Nonetheless, it is not easy for a small company to establish contact with them. The first hurdle for Incotec is to understand exactly who is the right person for them to approach, even in those neighboring firms. The members of a small company with very flat hierarchies and expedient decision-making processes do not readily understand how corporate business operates. The small business has to invest time and energy in building contacts (the right ones) and networks, in understanding how the other company works and what its real interest is. Moreover, some of the Incotec counterparts in these large



groups are smallish business units not equipped with the authority to make changes in the corporate production program. Even if the unit recognizes the opportunity of collaborating with Incotec, they might still have difficulty bringing the deal potential to the attention of the top management.

Negotiating with these companies, Incotec can generate a variety of value propositions based on combinations of ThermoSeed and actives: sale of a green disinfection technology first of all; sale at a lower price than traditional chemical solutions; assembly of custom-made treatment packages; a guarantee for better performance, potentially causing some treatments to disappear from the market; entrance to markets that offer higher margins (for instance, vegetables or organic foods). More generically, Incotec offers 3,500 years of combined seed experience in its pool of managers and scientists. What they can offer is highly specialized knowledge about seeds and how they interact with the environment. Nobel explains:

"It is a world of specialization. Genetics companies do genes, crop protection firms do actives, seed treatment companies like Incotec know and do seeds. It is wrong to think that a genes company can do seeds just because they treat seeds genetically. We are talking about two very different and highly specialized fields of knowledge. One of the large crop protection companies understood this quite a while ago, and they have us run all of their tests for seed treatment, because we know seeds, and they know that they do not know seeds – they know other things. Now we are waiting for the other companies out there to realize this."

Among all these options, what is the best shot that Incotec has, when and if they propose collaboration with these multibillion sales companies? How does one begin to build that kind of relationship? How much should Incotec charge, and for which services exactly? The price question is, of course, sensitive. At Incotec, they are thinking that if the new seed treatment method is mainly understood as a substitute for fungicides, the sales value will be underestimated. Still, they realize that if they set the price level high as long as the technology is relatively unknown and initial investments are still considerable for the customer, the price might be a hurdle and adoption of the technique could be slowed down. A low price might result in a surge of demand, which might be difficult for Incotec to handle. Finding the right balance is an art.

All these considerations stretch the financial and human resources available to Incotec. They also pose a much more structural question, both concerning resources and the governance aspect. Incotec currently has eighteen shareholders and managers worldwide, eighteen people who might react differently to the challenge posed by the new technology. As shareholders, they will be faced with the cost of the ThermoSeed opportunity and will have to declare their readiness to provide the necessary financial support to a big-scale commercialization of the technology. Moreover, they will have to invest in more people and knowledge, as the company needs to sustain its growth with more know-how and management capacity. The seed world is a small world, and the possibilities for Incotec to win highly specialized personnel generally involve the acquisition of other companies in one way or the other. Will the shareholders be willing to invest in those options and start integrating new entities into Incotec? Or will they prefer to exit with their dividends?



Besides winning new resources, they need to be injected into the company without making the system unstable. Will a "new team" and the "old guard" work together well? The increasing size of an organization makes more coordination, more streamlined action, and more control a necessity. The management is considering which levers to actuate in order to create the best results in governance with the least stress for members of the company. What elements should be changed to implement more coordination and still ensure leeway for managerial and entrepreneurial decisions?

CEO Breukink says he wants to stay with the company for some more years – all the way to see Incotec master these questions and challenges. Approaching a corporation with revenue in the billions like Syngenta or Monsanto, raising capital to support the technology development without losing shareholders, attracting and integrating new management capacity with an entrepreneurial attitude – it will take more than one meeting in Durban to find the best solutions. In the end, having mastered the technologies may turn out to be the smaller challenge compared to mastering the business model around them.



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Corporate structureExhibit 2

INCOTEC

Special Projects BV

100%

INCOTEC

India Ltd.

Central Asia

100%

INCOTEC

Analytical Lab.

100%

INCOTEC

Mediterranean

Srl. Italy

99%

INCOTEC

Holding BV

100%

INCOTEC

Sweden

100%

INCOTEC

Beijing

Trading Co. Ltd.

100%

INCOTEC

Analytical Lab

South Africa

Pty. Ltd.

85%

INCOTEC

America do Sul

Ltda.

South America

100%

INCOTEC Inc.

North America

100%

INCOTEC

Holding North

America Inc.

100%

INCOTEC

Japan Ltd.

Pacific Rim

97.5%

Kriset Pty. Ltd.

Australia

90%

Premium

Seed Coaters

25%

Source: Incotec materials

INCOTEC

Group BV

INCOTEC

International BV

Europe

100%



Highlights in the development of the INCOTEC company

1968: Start as coating department of Royal Sluis in Enkhuizen1978: Start of INCOTEC production in USA1989: Introduction of INCOTEC as trade name1996: ISO 9001 status for INCOTEC EUROPE1997: Start of INCOTEC Japan1999: Start of INCOTEC Brazil2002: Management buy-out and INCOTEC's independence2004: Start of INCOTEC India2004: Start of INCOTEC Australia2005: Acquisition of Flower Seed Technology2006: Start of INCOTEC China2006: Acquisition of PROTEIOS2007: Secondary management buy-out2008: Acquisition of shares in SeedGard (ThermoSeed)2008: Start of INCOTEC-PROTEIOS South Africa2009: INCOTEC awarded "Erasmus Innovation Award"2010: INCOTEC awarded "Westfriesland More Prize 2009"2010: INCOTEC named "Best Business in North Holland 2009/2010"2010: July, acquisition of remaining shares in SeedGard (ThermoSeed)2011: Acquisition of AgriCoat


Incotec chronologyExhibit 3

Global presence of IncotecExhibit 4


Production locations: ( )

1. Salinas CA, USA

2. Holambra SP, Brazil

3. Enkhuizen, Netherlands

4. Uppsala, Sweden

5. Kwazulu Natal, South Africa

6. Ahmedabad, India

7. Beijing, China

8. Saitama-Ken, Japan

9. Seaford VIC, Australia

Sales offices: ( )

10. Omaha NE, USA

11. Westfield IN, USA

12. Blainville QC, Canada

13. Corbera de Llobregat, Spain

14. Modena, Italy

15. Angers, France



Seed enhancement technologies offered by IncotecExhibit 5

1. Upgrading

• Problem: Seedlings are not uniform/are weak and germination potential can be improved. The presence of dust, chaff, other seeds or inert material decreases the productivity of the seed and needs to be eliminated in advance. This cleaning is also necessary for application of the coating in a further step.

• Solution: Different techniques are available to sort seeds out according to shape, width, length, color and density (through X-ray analysis, for instance).

• Techniques: X-rays display details of the seed interior, making it possible to see if the seed is complete and if it is damaged or diseased. To use this technique at its best, seeds need to be primed beforehand. Incotec developed a fully automated X-ray seed sorting system for this purpose (2005). Fluid density upgrading makes use of the difference in liquid densities to separate the fractions of seed and non-seed material. Germination capacity is improved by progressively removing foreign particles.

• Effects: Seed quality is higher and more uniform, yields and efficiency increase.

2. Priming

• Problem: Seeds normally sprout only within a certain range of light and temperature conditions.

• Solution: Priming techniques aim at overcoming the thermo- or photo-dormancy of seeds (i.e., the ranges of temperature and/or light outside of which the seed cannot be made to sprout), thus enabling use of the seed in a wider range of conditions.

• Effects: Germination is faster and more uniform. Seeds germinate in a broader light/temperature range.

3. Film Coating

• Problem: Need for improved incorporation of treatment chemicals, addition of nutrients or strengtheners, inclusion of colorants, improvement of the plantability of the seed

• Solution: Coating is added as a thin layer of polymer binder, often together with other components such as color, pigments, additives, actives. Coats can differ in water solubility of the binder, pigmentation, functionality of the additives.

• Technique: Incotec has developed a rotary coater. It utilizes a rotating basket in which a fluid is spread on the almost horizontally rotating seeds, simultaneously adding a powder (the actual material) that mixes with the fluid to form a coating on the seeds.

• Effects: Given the high rotation and the large seed surface offered to the liquid, the coating is much more uniform and complete compared to traditional, non-rotating coating equipment. Moreover, there is no need for high-skilled operators, as the process is totally automated.



4. Pelleting

• Problem: Sowability can be improved by making mechanical planting feasible. This requires a certain consistency in the shape of the seeds.

• Solution: The seed is encrusted or pelleted, i.e. a layer is applied to round out the shape of the seed. Often more than one layer is applied, for instance encrusting for size and uniformity, plus fungicides, plus color. The seed may gain up to two times its original weight.

• Effects: Characteristics such as smaller size, smoother surface, decreased weight and dust-freedom are enhanced, thus enabling more efficient planting by means of pneumatic seeders, which are replacing the mechanical sowing machines more and more often. This technique allows better singulating of the seeds, so that precisely one seed is put into every germinating slot (and not two or none, as it may occur otherwise). Since fewer seeds are required, this translates to higher productivity. Moreover, this makes it possible to respect the optimal distance between seedlings and thus achieve more precise dosage of chemicals.

5. Actives

• Plant Protection Products (PPP): Actives that improve the germination, growth and development of seedlings by controlling pests and diseases

• Stimulants: Micronutrients, plant growth regulators, activators of genes, activators of systemic resistance, plant growth promoters

• Biologicals: Living organisms used to control diseases or enhance the growth of plants

6. Disinfection

• Problem: For a healthy crop it is of importance to start with healthy starting material, the seeds.

• Solution: The seed is treated to eradicate pathogenic micro-organisms. The specific seed disinfection treatments are developed in such a way that also internal micro-organisms are affected, while the germination capacity of the seed remains good. The eXccit disinfection treatment is used in combination with the priming of seeds of Brassica plant varieties. ThermoSeed is a treatment with hot humid air.

• Effect: Disease free seeds for a healthy start of the crop and less need for chemical control ofplant health.


Seed enhancement technologies offered by Incotec, continued

Exhibit 5



Main players in the global seed treatment marketExhibit 6

Monsanto is the world leading company in bio-tech solutions as well as seed and land treatment with fungicide, herbicide, pesticide and nematocide products. The company had sales in the amount of USD 10.5 billion as per August 31, 2010 (11.72 billion in 2009), earning a net income of USD 1.09 billion (2.10 billion in 2009). Monsanto generated sales of USD 7.611 billion in Seeds and Genomics and USD 2.891 billion in the Agricultural Productivity Division in the fiscal year 2009/2010.

"Our business is structured in two segments: - The Seeds and Traits segment consists of the company's global seeds and traits business, and genetic

technology platforms – including biotechnology, breeding and genomics. - The Crop Protection segment consists primarily of agricultural and industrial, turf and ornamental

herbicide products.

Monsanto invested more than $980 million last fiscal year (2010) researching new tools for farmers. The annual research-and-development (R&D) budget is targeted at roughly 9% to 10% of sales. The company concentrates the vast majority of its R&D efforts on new biotech traits, elite germplasm, breeding, new variety and hybrid development, and genomics research. Other R&D projects support the company's current products, including improved formulations of the Roundup® herbicide."

Syngenta achieved sales of USD 11.641 billion in 2010 with net income of 1.538 billion: USD 8.878 billion of the sales were achieved in crop protection and USD 2.805 billion in the seeds business. The company employs a staff of over 24,000 people in more than 90 countries.

"Research and development (R&D) investment in 2010 was over $1 billion, reinforcing our industry-leading position. We employ nearly 5,000 people at R&D centers and field stations around the world, and continue to invest in the development of our human resources, technical capabilities, and external partnerships.

Our pipeline encompasses a broad range of chemical and biotechnology solutions, which we will progressively merge to reflect our holistic approach by crop. The current Crop Protection pipeline, with peak sales potential of over $2 billion, covers all our main product lines. In 2011, we expect the first registration of sedaxane, a broad spectrum seed treatment fungicide that can protect against diseases that are difficult to control in a number of crops."

Bayer CropScience achieved sales of EUR 6.385 billion in 2008. Sales totaled EUR 5.493 billion in crop protection, with EUR 1.337 billion in environmental sciences and bioscience. The company earned an EBIT of EUR 261 million (-67% YOY) and employed 18,300 people. In 2006 the R&D investment was EUR 649 million.

"CropScience is active in the fields of chemical crop protection, non-agricultural pest and weed control, seed breeding and the improvement of plant traits. Organizationally, our CropScience business is divided into the Crop Protection segment and the Environmental Science, BioScience segment. Reflecting its product offering, Crop Protection is comprised of the Herbicides, Fungicides, Insecticides and Seed Treatment business units. Within the Environmental Science, Bio-Science segment, the Environmental Science business unit markets non-agricultural pest and weed control products while the BioScience business unit focuses on seeds and plant traits."



Main players in the global seed treatment market, continuedExhibit 6

Dow AgroSciences is a fully owned subsidiary of Dow Chemicals. With its divisions Health and Agricultural Solutions it achieved global sales of USD 4.869 billion in 2010, also reporting:

"Agricultural chemistry pipeline filled with high-value solutions and proprietary formulations; new products anticipated to yield $800 million in sales by 2013;

Significant technology-driven growth, led by SmartStax™ technology today, coming with Dow Herbicide Tolerant Trait (DHT) Technology System in future;

Leading-edge insecticide, herbicide, fungicide and fumigant solutions for growers; Bolt-on seed acquisitions continue to strengthen channel access."

The key drivers of the company growth are thus synthesized in one of its presentations:

"Goal of $1 billion corn seed and trait business and >10% share in U.S. corn; Agricultural Chemical division pipeline full with high-value solutions and proprietary

formulations for the next 10 years; Proprietary herbicide resistant technology has opportunities in key row crops."

BASF is the leading chemical company worldwide. Its Agricultural Solutions division achieved sales of EUR 4.033 billion in 2010. The R&D strategy at BASF:

"We are primarily focusing our research efforts on fungicides and insecticides, while pursuing selected opportunities in herbicides. In addition, we are pressing ahead with our dedicated research into plant health and seed treatments."

The business objective of the relatively recently created (1998) affiliate company BASF Plant Science is:

"...to optimize crops for more efficient agriculture, renewable raw materials and healthier nutrition through the development of biotechnologies".

Between 1998 and 2008, BASF spent EUR 1 billion on plant biotechnology operations.

DuPont offers Crop Protection solutions (fungicides, insecticides, herbicides, pesticides) and also has a biotech arm in Pioneer Hi-Bred, a DuPont owned company.

"Pioneer produces, markets and sells hybrid seed corn in nearly 70 countries worldwide. The company also markets and sells hybrids or improved varieties of soybean, sunflower, canola, rice, sorghum, alfalfa, and wheat, as well as forage and grain additives. Worldwide, Pioneer sells products through a variety of organizations, including wholly owned subsidiaries, joint ventures, sales representatives, and independent dealers.

Research and Product Development develops hybrids of corn, sorghum, sunflower, canola, and rice, and varieties of soybean, alfalfa, wheat, and canola for worldwide markets. The group operates more than 90 primary research locations involved in developing and testing new products."

Source: Companies' materials



Competitor technologiesExhibit 7

1. Nitrogen fixation and Rhizobium bacteria

Rhizobium bacteria-based inoculants for legume seeds catalyze biological nitrogen fixation by means of organic material. "Nitrogen fixation" consists in converting the nitrogen of the air into ammonia and then into amino acids and proteins that fuel the seed production and are necessary to optimize yields. Whenever the soil is short of these specific, coadjuvant bacteria, they have to be artificially introduced. This is how it works:

"…the Rhizobium bacteria penetrate the plant root via the root hairs, and multiply to form the core of visible root nodules which appear 2–4 weeks after sowing. These nodules become active approximately three weeks after sowing, and act as a small nitrogen factory – fixing gaseous nitrogen from the air via the enzyme nitrogenase."

These inoculants are a suitable fertilizer for organic farming. This technique is offered by Becker Underwood (home office Ames, Iowa, USA).

2. Steeping

"Steeping" is a technique used to remove natural germination inhibitors. Literally, steeping means "soaking to remove an ingredient"; in the specific case, seeds are soaked in synthetic liquids so that inhibitory substances or seed-borne contaminants are released. Seeds must be dried afterward.

There are also "alternative" steeping systems which do not use chemical substances and can be utilized in organic farming. This technique is offered by Germains Seed Technology (home office Gilroy, California, USA).

3. Temperature Switch Technology

"Temperature switch technology" is a seed-applied technology aiming to ensure optimal conditions for uniform germination in a seed lot. Seeds in the soil might be imbued with water before external conditions are favorable for germination. In this case the seed germinates because of water presence, but will not survive because of the cold. In this technology the trick lies in the polymer, which – upon reaching a certain, pre-set temperature – allows the structure of the coating substance to go from crystalline form (impermeable to germination moisture) to amorphous form (permeable).

"When the soil temperature is below a pre-set temperature, the coating is impermeable to water and protects the seed from chilling injury. When the soil warms above a pre-set temperature, the coating becomes permeable and allows the seed to absorb water and germinate under ideal conditions."

The induced change in the physical structure protects the seed from adverse conditions and ensures germination and growth uniformity, thus maximizing the yields. This technique is offered by Landec (home office Oxford, Indiana, USA) in cooperation with Monsanto.

Source: Authors' summary based on the companies' published materials



Main differences across Incotec business areasExhibit 8

Characteristics Field crops Vegetables OrnamentalsSeed value Per kg: Per 1,000 seeds: Per 1,000 seeds: low medium to high medium to high (price increases with genetic trait modifications)Seed volume High to very high 200 g to 1,000 kg 5 g to several kg (tons of seeds)Planting system Direct drilling in Precision planting in Precision planting at open field the open field and plant raisers via plant raisingCustomer Global operators Local and some Few global players, global operators (90% of the market)Product price Incotec Low High Medium (based on added value) (price driven)Volume for Incotec High to very high Medium Low (15,000 kg/hour) (200 kg/hour) (lab-size equipment)Point of application Customer sites Incotec sites and via Incotec sitesfor Incotec technology license holders


Sale of seed treatment for selected crops worldwide 2008Exhibit 9

Source: Kline and Company, Inc. 2009

0 100 200 300 400 500 600 700 800

Rice

Sugar beets

Potatoes

Cotton

Soybeans

Wheat

Corn/Maize

20

25

37

43

180

205

670

million EUR

Total:1,180 million EUR



Global market for pesticides 2009Exhibit 10

* All pesticides sold in 2009, also in non-crop use and households

Source: Kline and Company, Inc. 2009

45.0 3.911.9

7.9

8.3

11.0

1.8

0

10

20

30

40

50

Total

*

Easte

rn Eu

rope

North

Ameri

ca

Wester

n Euro

pe

Centra

l and

South

Ameri

ca

Asia/

Pacif

ic

Africa

and t

he M

iddle

East

billi

on U

SD

Global fungicide seed treatment sales 2007Exhibit 11

* For wheat, barley, and oats


0

50

100

150

200

250

Total

*

Easte

rn Eu

rope

Ocean

ia

North

Ameri

ca

Wester

n Euro

pe

South

Ameri

ca

Centra

l Asia

Northe

rn Afr

ica

Easte

rn As

ia

South

ern Af

rica

mill

ion

EUR

212.4 67.8

6.9 0.8

48.5

31.4

21.518.9

8.4 8.1



ThermoSeed intervention curveExhibit 12

ThermoSeed treatment aims at the greatest interval between destruction of the pathogen and impediment of germination


100

80

60

40

20

0

%

Suitable interval

Min Max

Germination Infection rate

Trial results of ThermoSeed impact on soil emergenceExhibit 13

Trial results showing ThermoSeed effects on soil emergence of seeds in lots highly infested with the following pathogens:* Bipolaris, Fusarium spp** Fusarium spp*** Fusarium spp, Septoria nodorum


0

20

40

60

80

100

Barley, 12 lots* Oats, 18 lots** Wheat, 16 lots***

Soil

emer

genc

e of

pla

nted

see

ds (%

) Control

ThermoSeed



Field trial results for ThermoSeed across countriesExhibit 14

Based on average yields calculated across field trials, the yields of ThermoSeed crops are markedly higher than the control crop yield* 43 trials in 6 countries** 49 trials in 3 countries


0

20

40

60

80

100

120

Barley* Wheat**

Perc

enta

ges

of m

ean

yiel

d in

tria

l cro

ps

Control

ThermoSeed

Trial results for ThermoSeed on carrot seedsExhibit 15

Controlled trial of ThermoSeed impact on carrot seed infection with three pathogens; average of 10 lots considered


0

20

40

60

Alternariadauci

Alternariaradicina

Alternaria sp

Perc

enta

ges

of in

fect

ion

Control ThermoSeed



Projected market for wheat seed treatment with ThermoSeed 2011–2019

Exhibit 16


0

10

20

30

40

2011 2012 2013 2014 2015 2016 2017 2018 2019

0%

2%

4%

6%

Market share value (million EUR)

mill

ion

EUR

Market share (%)

Projected market for wheat seed treatment with GeniusCoat 2011–2019

Exhibit 17


0

20

40

60

80

100

120

2011 2012 2013 2014 2015 2016 2017 2018 2019

mill

ion

EUR

0%

2%

4%

6%

Market share value (million EUR) Market share (%)



Seed enhancement value chain with four beneficiariesExhibit 18

* I

P: In

telle

ctua

l pro

pert

y**

GM

O: G

enet

ical

ly m

odifi

ed o

rgan

isms

Sour

ce: A

utho

rs' d

iscus

sion

with

man

agem

ent

CR

OP

P

RO

TE

CT

ION

C

OM

PAN

IES

acti

ves

for

trea

tmen

ts

Ben

efits

fro

m T

herm

oSee

d ap

plic

atio

n fo

r ea

ch s

take

hold

er in

the

cha

in

SEE

DS

MA

CH

INE

RY

INC

OT

EC

Phy

sica

l pr

oces

ses:

co

atin

g,

pelle

ting

, pr

imin

g,

upgr

adin

g,

disi

nfec

ting

;IP

app

licat

ions

: T

herm

oSee

d so

ftw

are,

gen

etic

an

alys

is,

bree

ding

- R

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ed c

osts

of

prod

ucti

on-

Leve

rage

of I

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know

-how

- N

o st

orag

e re

quir

ed-

No

regi

stra

tion

/ en

tran

ce fe

e-

Furt

her

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ts

are

mor

e ef

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ive

CR

OP

P

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CT

ION

C

OM

PAN

IES

- H

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r va

lue-

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d pa

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f act

ives

- M

ore

spac

e on

the

seed

to a

dd a

ctiv

es-

Hig

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valu

e ad

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wit

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stom

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GR

OW

ER

S

- N

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xic

mat

eria

l w

aste

- Le

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ver s

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can

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ated

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No

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requ

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CO

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ME

R

GO

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S C

OM

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IES,

R

ET

AIL

ER

S

- G

MO

** fr

ee-

Pest

icid

e fr

ee

FIN

AL

C

UST

OM

ER



Conceptual model: value ladder for ThermoSeed treated seeds

Exhibit 19

Sour

ce: A

utho

rs' d

iscus

sion

with

man

agem

ent

Whi

ch b

enefi

ts a

re h

ow v

alua

ble

to w

hich

pla

yer?

- R

educ

ed c

osts

of p

rodu

ctio

n-

Leve

rage

of I

P kn

ow-h

ow-

No

stor

age

requ

ired

- N

o re

gist

rati

on/e

ntra

nce

fee

- Fu

rthe

r tr

eatm

ents

are

mor

e ef

fect

ive

Val

ue fo

r

Inco

tec

Val

ue fo

r

crop

pro

tect

ion

co

mpa

nies

Val

ue fo

r

grow

ers

Val

ue fo

r

cons

umer

goo

ds

com

pani

es

and

reta

ilers

Wha

t is

the

to

tal v

alue

of

The

rmoS

eed

tech

nolo

gy?

- H

ighe

r va

lue-

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d pa

ckag

es

of a

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es-

Mor

e sp

ace

on th

e se

ed to

ad

d ac

tive

s-

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her

valu

e ad

ded

wit

h cu

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ized

pac

kage

s

- N

o to

xic

mat

eria

l was

te-

Left

ove

r se

eds

can

be

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oyed

as

feed

- Sa

ving

in c

ost o

f saf

ety

regu

late

d ha

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g of

ha

zard

ous

mat

eria

l-

No

stor

age

requ

ired

- G

MO

free

- Pe

stic

ide

free



GeniusCoat impact on roots developmentExhibit 20




ThermoSeed impact on infested seedsExhibit 21

Spinach seed without ThermoSeed Spinach seed with ThermoSeed

Carrot seed without ThermoSeed Carrot seed with ThermoSeed




ThermoSeed impact on barley field in a controlled field trialExhibit 23

ThermoSeed machineryExhibit 22

Barley field in controlled field trial of ThermoSeed: control crop in the foreground, thicker green ThermoSeed crop in the background



incotec creating and managing value in the value chain...incotec – creating and managing value in...

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