Market Scene : Sri Lanka Waking Up to a Troubled Tea Industry : Production costs and the popularity of tea bags threaten to topple the strife-torn Asian nation as world’s top exporter.

More than a mile above the Indian Ocean, where the mountainsides are covered by a soft green blanket of the bushes known as camellia sinensis , a revolution is brewing, stirred by consumers in far-off markets.

Changing tastes and technology are shaking Sri Lanka’s century-old tea industry, a business that provides work for more than a million Sri Lankans, more than any other economic sector on this ethnically and politically troubled island.

One cause is the tea bag, found in virtually every American home, a small convenience that, along with new practices in tea growing and processing and increasingly ferocious international competition, has put a good part of Sri Lanka’s venerable industry on the ropes.

Last year’s crop was a record 242 million kilograms, enough to make more than 100 billion cups of tea.

“That is virtually the only part that is good now about the industry,” said Lallith Ramanayake, managing director of John Keells Ltd., a Colombo-based brokerage firm.

“We have allowed our cost of production on the tea plantations to go sky-high,” explained Ramanayake, whose company, more than 100 years old, handles the sale of 28% of Sri Lanka’s crop. “As a result, based on international tea prices, we are no longer competitive, and most of our upcountry estates are incurring heavy losses.”

Because of its high-volume output and numerous quality teas, this tropical island, once known as Ceylon, is still the world’s No. 1 exporter, filling approximately a quarter of the teacups in nations that don’t grow their own tea.

But newer and more efficient producers, such as Kenya and Indonesia, have crashed into the world market with prices that Sri Lanka’s plantation managers cannot compete with.

Kenya’s industry, for instance, is less than 40 years old, and achieves high yields (and therefore lower prices per pound) from its rich volcanic soils and modern harvest techniques. The East African country’s tea industry now almost wholly utilizes a method specially developed for processing the leaves so they can be used in tea bags, known in the industry as CTC (Cut, Tear and Curl).

In comparison, by the end of 1995, Sri Lanka hopes to have 10% of its tea production running through the double-roller CTC machines, which are much more expensive than the simpler contraptions used for manufacturing so-called orthodox teas.

In the meantime, Kenyan tea has captured some traditional Sri Lankan markets, including nearby Pakistan.

Only a small percentage of the great plantations, or “estates” as they are called here, are now financially healthy. Some of their problems can be traced to the past policies of Sri Lanka’s government, which under the premiership of Sirimavo Bandaranaike, mother of current President Chandrika Kumaratunga, nationalized the plantations in a flush of socialistic zeal in the 1970s.

Plots of tea bushes were also allotted to poor farmers, who often had only vague ideas about how to grow a successful crop.

At an elevation of 6,200 feet, the Pedro estate near Nuwara Eliya in south-central Sri Lanka makes one of the country’s most prized teas: a light, astringent brew especially prized by consumers in Japan, Germany and Britain. Pedro is one of the country’s largest plantations, with 1,300 acres under cultivation and 1,265 workers, mostly women.

Bushes planted by the British on its steep slopes 70 years ago are still producing tea for export, while a newer planting method that utilizes cuttings to create an unbroken mass of tea plants, and much higher yields per acre, has been used on other hillsides.

Yet last year, the bottom line of this estate that turns out one of the champagnes of Sri Lankan teas was unimpressive. The yield per hectare, or 2.47 acres, averaged 1,140 kilograms, or 2,500 pounds, and the tea sold for 90 rupees, a little less than $2, a kilo wholesale. The cost of production, though, was around 82 rupees a kilo, meaning Pedro’s profit was just 8 rupees a kilo, about 16 cents.

At many of the island’s other high-altitude plantations, where the quality “high-grown” teas are produced, falling or stagnant prices on the world market meant the crops fetched no more than $1.25 a kilo, signifying a loss for the year.

At Pedro, labor by itself accounts for just under half the expenses. Tea brokers and estate managers complain that high wages and low productivity are pricing all but certain kinds of their teas out of the international market. Their wage bills, they say, are as much as 65% more than those of their Indian competitors.

Yet, the field workers, mostly Tamil women, who pluck an average of 30 pounds of leaves a day, cannot really be considered overpaid because of Sri Lanka’s higher cost of living. Rain or shine, or in the chilling milky mist that periodically rolls into the emerald valleys where the tea bushes grow, these barefooted women work 6 1/2 hours a day, six days a week.

With cracked hands stained yellow by years of handling tea bushes, the women deftly snap the two newest leaves and the unopened bud from each shoot on the bush. When their hands are full, they toss leaves and shoots into the wicker baskets they carry on their backs. For a day’s work, they earn about $1.50. It is a hard life.

“We don’t have any water to drink or bathe in at our place,” one picker, Pathmawathy, 26, said. Like many other plantation workers, she lives in a dim, dowdy barracks with eight other families.

Over the years, the Tamil tea workers have been a potent “vote bank” for politicians and labor leaders who could manipulate or mobilize them, and today S. Thondaman, the leader of the Ceylon Workers Congress, is such an important figure that he has been awarded a seat in the Cabinet.

For almost two decades, industry leaders complain, the CWC and Thondaman have been able to squeeze wage hikes for estate workers out of the government while output per acre has been stagnant, or even declined.

“Our yields are far below that of Kenya,” grumbles Clifford S. Ratwatte, chairman of the Sri Lanka Tea Board, the industry’s professional organization. “The labor component is a fixed quantity; you cannot bring that down. But we can decrease costs by increasing productivity per acre.”

Naturally enough, few workers would say they were overpaid, and a nationwide strike on the plantations has been scheduled for today by an umbrella organization of 19 labor unions. Their demands included a 16-cent-a-day wage increase.

The tea bag, which appeared in the mid-1940s, is cited by many in Sri Lanka’s tea industry as the event that changed the rules of the game forever.

With the advent of the opaque bag, the tea drinker no longer could see the tea. Blenders could--and did--fill the bag with cheaper “off-grades,” and know that no one would be the wiser. Speed in brewing became an essential ingredient in tea.

Therefore, the CTC method, which tears the leaf into smaller bits than orthodox processing methods, came to the fore. It allows the quick infusion of more cups per volume of tea, meaning less tea is needed. And, according to Pedro factory manager Premalal Upali, whose machines make loose “black tea” according to older techniques of twisting, pressing and drying, CTC blurs the flavor.

“Sri Lanka, with its many elevations and climatic conditions and planting methods, can make a great variety of teas,” Upali said. “But when you put it in the CTC, you get a standard, liquory sort of tea.”

Because of that blurring, quality in the leaf was not as important, so commercial blenders no longer had a reason to buy some of the better Ceylon teas, unless they could haggle the price down.

Eventually, also, the tea buyers devised and heavily promoted their own proprietary brands, like Lipton’s or Red Rose, which often mixed leaves from several countries to produce consumer-pleasing taste and color.

Consequently, the tag “Pure Ceylon Tea” on loose tea or tea bags became rarer.

“It’s sad for us, because the name ‘Ceylon tea’ is vanishing,” Ramanayake said.

Paradoxically, some of the cheaper, coarser low-altitude teas grown in Sri Lanka are thriving. They are keenly sought after in the Arab world, since the leaves can be boiled 10 times or more and still give off a richly colored brew, to which spices or mint can be added.

Likewise, industry leaders believe there will always be a market in countries like Germany and Japan for expensive, top-of-the-line “Pure Ceylon Tea,” sold in loose form by grade (like “broken orange pekoe” or “fannings”). The problem appears to lie in the middle range.

“About 60, 70% of the tea sold these days is to people not interested in quality. Something will have to be done,” Jeevaka Peera, Pedro’s assistant manager and the son of a tea executive, says.

Privatization of the estates, and the injection of outside capital and new, more efficient processing technology that ought to result, seem to be the answer hit upon by Sri Lanka’s leaders. In June, 1992, the management of the estates, which until then had been in the hands of two giant state corporations, was put in the hands of private companies. Now, in line with recommendations from the World Bank, the privatization of the land itself is under consideration by the government, industry leaders say.

“Workers have been working less and less in recent years. If they do an honest day’s work, then production costs will come down,” Ramanayake, the Colombo broker, contends. “That, and privatization, is the only way our tea estates can make money in the current market and in current economic conditions.”

The industry is also trying to improve overall quality. The small-scale grower who may have only an acre of bushes accounts for 44% of Sri Lanka’s tea-growing land but 58% of the total crop. Often, he or she is not a tea expert.

“We must improve quality because we can’t dump rubbish in the market,” the Tea Board’s Ratwatte said. “In the old days, Sri Lanka, or Ceylon as it was then called, had more or less a monopoly. Now, we have to face competition.”

But how to cope is a matter of acute debate. Today’s growth sectors seem to be those where low price, and not high quality, is the primary consideration: CTC tea for tea bags; stalks and other refuse from the manufacture of traditional “black tea” for the production of instant teas, or the newest consumer fad of all, “ready-to-drink” teas sold in cans or bottles.

Even Britain, the old colonial power and the driving force behind the creation of Sri Lanka’s tea industry, quaffs more than 75% of its tea from tea bags these days.