PESTLE Essay - Tea Industry in Sri Lanka

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Word Count 2074 Date Submitted 14.07.2023

Tea is the second world famous drink after water. Sri Lanka is one of the oldest tea
producers and considers as world best tea manufacturers and Sri Lankan tea known as
“Pure Ceylon Tea” (Gamage and Wickramaratne, 2022; Export development board Sri
Lanka, 2022; Sivashankar et.al, 2021). As per the Sri Lanka Export Development Board
(2022) Sri Lanka is a tea-producing country. Sri Lanka produces tea throughout the
year, with a total annual tea production of over 340 million kilograms. Prior to the
economic crisis, Sri Lanka's tea-growing regions, mainly in the central highlands and
southern provinces, saw a fall in exports. Tea exports used to account for $1.3 billion a
year and 5% of world output, but they have now dropped to their lowest level in more
than two decades (Krishnan, 2022).
According to the University of Sydney (2023) and Oxford Collage of Marketing (ca.
2016) PESTEL analysis is a comprehensive approach to understanding an industry's
environment, including political, economic, social, technical, legal, and environmental
factors. It helps corporations develop opinions on the elements influencing new
businesses or sectors and can identify risk factors for SWOT analysis. This essay will
identify and evaluate PESTLE factors that have influenced the Sri Lankan tea sector.

As for the political factors, Sri Lanka's difficulties come from political instability caused
by factors that are as different as they are interconnected (Snell, 2022). Several trade
unions have been formed by estate workers. The country has had a strong trade union
movement for a long time, and the ethnic origin of most estate employees provides an
incentive for the development of strong trade unions in the estate industry. Because
labour unions are directly or indirectly tied to political parties, their operations are
geared not just to obtaining rents, but also to achieving political aims. Labour regulation
and assistance, such as minimum wage and guaranteed workdays, are direct outcomes
of trade union activity. These laws are considered as important impediments to the
industry's improved profitability (Ganewatta, 2000). However, according to the BBC
(2022) further political unrest will make resolving the economic problem even more
difficult. Tea factory owners have been hard hit and tea exports are a vital source of
revenue, and the industry employs around two million people; nonetheless, production
levels have decreased. As per the Tea and Coffee Journal (2022) the crisis has
significantly impacted daily life, with citizens facing over 60% inflation and a shortage of
essential goods because of the political instability. As per the Sri Lanka Tea Board
(2022), tea production decreased by 18% in the first half of 2022, reaching 132.9 metric
tons. The restriction was lifted in November 2021, but Russia's invasion of Ukraine in
February 2022 led to global fertilizer prices rising. The Central Bank of Sri Lanka
depreciated the Sri Lanka rupee by up to 15% in March 2022, causing internal price
rises. The cost of fertilizer increased by 20 holds to SLR 600 per kilo in Q1 2021. In
June, the SLTB launched a low-interest credit program to help tea estates and
smallholders purchase fertilizer (Tea and Coffee Journal, 2022). Therefore, the tea
sector in Sri Lanka will suffer because of the negative impact on political issues. Political
turmoil, such as wars, civil unrest, and regime changes, can disrupt the tea supply
chain, resulting in shortages, price increases, and lower-quality goods. Furthermore,
geopolitical tensions and crises can result in trade disputes, boycotts, and embargoes,
affecting the operations and growth of the tea business.

In terms of economic considerations, Sri Lanka's economy is assessed based on GDP.

Gross domestic product is a financial measure of the market value of all completed
goods and services produced during a specified period. It measures the magnitude of
the economy. Sri Lanka is a developing country that has abandoned its socialist
ideology and opened its economy to foreign investment. The tea sector is significant to
the Sri Lankan economy. The tea sector contributed 0.7% to the GDP in 2019 and
11.3% of total exports in 2019 (Weerasinghe, 2022). Nonetheless, being the world's
fourth biggest tea growing country, Sri Lanka has a 10% worldwide production share
and is one of the world's main exporters, accounting for around 19% of global demand
(Export Development Board Sri Lanka, 2022). Although Sri Lankan tea industry directly
and indirectly employs about one million people in the country, in addition, the tea
industry accounts for around 15% of the Sri Lankan economy's foreign exchange gains.
A shift in the fortunes of the sector can have a substantial influence on the health of the
Sri Lankan economy. Without a doubt, the agriculture sector is the backbone of the Sri
Lankan economy (Hilal, 2019). According to the Gamage and Wikramarathne (2020)
more than 70% of the population relies on agriculture for a living. Tea has remained one
of the country's greatest crops in Sri Lanka. The agricultural environment and this
industry, which has long been a leader in the agricultural sector, are critical to the
country's economy. Therefore, the economic factors exert a positive impact on the Sri
Lankan tea industry. Moreover, economic growth is another important economic aspect
influencing the tea sector. Economic expansion opens new prospects for the sector by
enhancing disposable income, raising living standards, and broadening customer
markets.
Concerning the social factors, women's participation in the economy is an integral factor
for empowerment, enabling women to break away from traditional caregiving roles and
the limitations of patriarchal gender norms, while equipping them with equal
opportunities as men. A considerable portion of the tea industry workforce is comprised
of young women, with a minimum working age of twelve. The tea plantation is organized
into a social hierarchy, with women comprising 75%–85% of the workforce yet
occupying the most powerless social stratum (Munasinghe et.al, 2017). Another social
factor is that many tea growers who operate on a small scale lack the skills necessary
to manage their business effectively. They often rely on information from their green leaf
dealers, which can be unreliable. In addition, these growers have little understanding of
expenses, leaf sales and income, making them vulnerable to exploitation by green leaf
buyers. Lack of managerial and entrepreneurial skills in these businesses is a
weakness that can lead to decreased performance. On the other hand, asymmetric
information between green leaf buyers and smallholders creates inefficiencies that give
rise to potential problems (Rathnayake et.al, 2021). According to the Herath et.al,
(1998) the poor performance of stakeholders within the Sri Lankan tea value chain has
had detrimental effects on the competitiveness and sustainability of the industry in
comparison to its competitors in the global tea market. This is especially concerning,
given that the industry structure is over 150 years old and appears to be less able to
adapt to current changes than newly emerging competitors. Furthermore, consumers
are seeking convenience, resulting in the emergence of tea bags and instant tea
products that are speedy and effortless to make. Therefore, it is evident that social
factors have had a detrimental effect on the Sri Lankan tea industry.

As for the technological factors, fertilizer application, crop management, irrigation

systems, pest control, post-harvest management, processing machinery, quality
packaging, and improved transportation facilitate export marketing through commercial
cultivation technologies (Sri Lanka Export Development Board, 2022). However, the
market remains optimistic due to rising demand, technological advancements, and
investment in automation and digitalization. The Covid-19 pandemic has impacted
businesses, but those focusing on digitalization and process automation are better
positioned for long-term success. Balancing cost demands and quality is crucial for
survival and growth. New technologies like artificial intelligence, robots, and Internet of
things can enhance efficiency and production while lowering costs, potentially impacting
the manufacturing industry in 2023 (Statista, 2023). Therefore, technological factors
seem to have had a positive impact of on the Sri Lankan tea industry. Furthermore,
technological advancements have enabled tea businesses to better supply chain
management. Tracking technologies and monitoring systems have been utilized to
improve tea product traceability and transparency, allowing tea producers to track the
flow of tea from the field to the customer.

Regarding the legal factors, the Sri Lanka Tea Board, established in 1976, is a
government-owned agency combining various departments to promote the growth of
the Sri Lankan tea industry, promote Ceylon tea globally, and implement regulatory
regulations. Under the Ministry of Plantation, the Board's main objectives include
promoting Ceylon tea worldwide and implementing regulatory measures (Sri Lanka tea
board, ca. 2020). Nonetheless, beyond the traditional plantation boundaries, most the
island's tea estates have demonstrated their large-scale commitment to the environment
and social component within the estate by achieving Rainforest Alliance certification,
Fair Trade and UTZ certification. Evidence of tea beyond the traditional and traditional
trading framework, but with the existence of the Sri Lankan tea industry is already
exposed to the global market (Gamage et.al, 2020). Hence, a green leaf processor is
legally obligated to pay a set proportion of the price realized for tea sold at auction
under this plan, and the government has committed money to construct green tea
companies. Any decrease in tea prices will harm the country's trading conditions. Any
government action aimed at restoring equitable distribution divergences in the economy,
resulting in suboptimal resource allocation. Thus, increasing equality comes at the
expense of efficiency, depending on the policy process governing industry, labour, and
small ownership (Jayasundera, 2019). Therefore, legal factors appear to have
influenced the Sri Lankan tea industry positively. This may be seen in the fact that the
rules controlling the use of pesticides, herbicides, and other chemicals in tea cultivation,
as well as rules governing packaging and labelling, must be followed by producers.
Producers that do not follow these laws risk penalties and product recalls.

Environmental and ethical factors refer to markers of single-origin ownership, the

"Ceylon Tea" brand is currently recognized as the most ethical, chemical-free, ozone-
free and purest tea in the world. It is ethically managed, does not employ children and
follows all sustainable agricultural practices, including environmental stewardship and
product traceability to ensure global compliance. Food Safety and HACCP, Good
Agricultural Practices, Good Manufacturing Practices, Rainforest Alliance, Forest
Stewardship Council Certification, Ethical Tea Partnership and United Nations Global
Compact are all global certifications for tea in Sri Lanka (Gamage et.al, 2020). The Sri
Lankan tea industry faces significant challenges due to environmental, geographical,
and weather changes, as it is an agricultural economy. Tea crop production is
vulnerable to excessive rainfall and environmental disasters, accounting for 90% of
natural disasters in the region. The country has two primary monsoon seasons and two
inter-monsoon seasons with high rainfall levels. The most pressing threat to the Sri
Lankan tea sector is the persistent possibility of drought, which is the most severe
natural risk. (Brabaharan, 2018). Therefore, the environmental factors have had positive
impact of on the Sri Lankan tea industry. The tea industry is influenced by several
environmental factors. Climate change is a significant environmental element
influencing the tea business. Tea plants require precise environmental conditions to
develop and thrive.

To conclude, this research identified and evaluated the PESTEL elements that influence
the tea sector in Sri Lanka. It can be seen that because of the detrimental influence on
political concerns, the tea sector in Sri Lanka could suffer significantly. Warfare, social
upheaval, and regime changes can all disrupt the tea supply chain, causing shortages,
price rises, and lower-quality items. Furthermore, geopolitical tensions and crises can
lead to trade disputes, boycotts, and embargoes, impacting the tea industry's operations
and growth. However, economic factors play a positive impact on tea industry in Sri
Lanka. Moreover, economic growth creates new opportunities for industry by increasing
disposable income, elevating living standards, and expanding client markets. However,
societal issues have had a negative impact on the Sri Lankan tea production. Cultural
considerations have an important role in determining tea business operations and
customer demand. Tea is deeply ingrained in many cultures and relates to many rites
and customs. Moreover, technology factors play a vital and positive role in tea industry
in Sri Lanka. Technology advances improve tea supply chain management, enhancing
traceability and transparency through tracking and monitoring systems. Similarly, legal
factors and environmental factors have positive impact on tea industry in Sri Lanka.
However, several environmental conditions have a detrimental impact on the tea
business. Climate change is a major environmental factor impacting the tea industry.
Tea plants require specific environmental conditions to grow and thrive. Therefore, the
government needs rapid answers to these issues to maintain the industry's long-term
viability.

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