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U.S. food on a fast boat to China

U.S. food on a fast boat to China – Inside the News

Betty Mohr

With expectations that China will become the second largest market in the world within the next decade, many food companies are rushing into the fast-changing Asian nation’s marketplace.

Recent visitors to Beijing might be surprised to see Chinese citizens sipping Coca-Cola in the shadow of the Great Hall of the People, or chewing Wrigley gum in Tiananmen Square, or drinking Maxwell House instant coffee at the edge of the Forbidden City.

The gates of the Great Wall of China, which in the past marked the frontier of Chinese civilization, are now open to an expansive array of Western food firms and their branded products.

With 1.2 billion people eager to snap up products of every kind, China’s total economic growth continued at a 13% pace in 1993, with coastal areas accelerating at a 20% rate.

For many U.S. companies, China, with one-fifth of the world’s population, is one of the most attractive locations for foreign investment. “China is quite clearly one of the top growth markets for Nestle,” says the company’s corporate spokesman, Francois Perroud.

Nestle S.A. has a factory in Shuangcheng (northeastern China) where production capacity for milk products is currently being tripled. A plant in Dong Guan (south China) that produces instant coffee and coffee creamers also is expanding. Still another factory in the same area is producing snacks.

Nestle recently signed two contracts valued at $45 million to establish new enterprises in the Quingdao Province of Shandong in eastern China.

According to Perroud, “Nestle has plans to open, within the next two years, an ice cream and yogurt facility in Shuancheng, and to open one plant a year for the next 10 years.”

Pepsi, which owns eight bottling plants in China and has already invested $100 million, just announced plans to spend another $350 million in China within the next five years.

“China has the potential to be the second largest market for us,” says Brad Shaw, Pepsi’s international spokesman. “Mexico is second now, but in a decade or less China could surpass it.”

Coca-Cola, whose association in China goes back to the mid-1930s with bottling plants established in Shanghai, Tianjin and Quingdao, is pushing to enlarge its 12% share of the Chinese soft drink market.

Coke invested $100 million in 13 bottling plants in 1992, and in 1993 spent another $150 million to build 10 more bottling plants. And the company intends to invest another $500 million by 1996.

Kraft General Foods International is opening its first dairy joint venture with the General Corporation of Beijing/Agriculture Industry and Commerce to the tune of $42 million. Kraft has a joint venture with Tianmei Food Corp. in Tianjin producing Tang instant drink mix, plus a joint venture with Guangtong Food Corp. in Guangzhou to produce Maxwell House coffee.

U.S. PRODUCTS POPULAR

The Chinese seem to especially appreciate American products. “For the Chinese, there’s a lot of cachet to having Western products,” says Rich Collins, manager of corporate affairs for Kraft. “Tang has a lot of appeal as the drink the astronauts took to the moon during the Mercury Mission and we advertise it that way.”

And even though the coffee is sold in China, Kraft’s Maxwell House retains its English lettering while adding Chinese.

Heinz baby food containers also have both Chinese and English lettering. The baby foods have supplanted home-prepared foods to become a leading source of nutrition for Chinese babies.

Pepsi’s Shaw notes that “a lot of research shows a clear indication towards colas. All we have to do is get the products in their hands.”

The growth potential, according to Shaw, is tremendous. “In 1992 in the U.S., the per capita consumption of an 8-oz. serving of a soft drink was 766 while in China during that year it was 13 per person. With that low per capita consumption and a billion people, the volume potential is huge.”

FOOD PROCESSING IS GROWING

With an annual growth rate of 8% over the last five years, food processing has become the third largest industry in China, according to a study by the Food Processing Machinery & Supplies Assoc. The processed food industry in 1990 comprised 11% of China’s total industrial output, and by 1992 the value of processed food had grown to approximately $24 billion.

Chinese government officials are encouraging food industry growth for reasons that include spoilage of fresh produce and changes in nutritional needs. According to FPM&SA, only 5-10% of total food output is processed, and a stunning 20-40% of all food in China is spoiled before reaching the market.

Dairy products especially have become a high consumption item over the last few years with an annual 15% growth rate. Dairy products have not traditionally been a staple of the Chinese diet but with the recent availability of milk, consumption has increased more than 25% in the past five years.

Kraft officials feel they’re getting in on the ground floor. They say China’s per capita consumption of dairy products is less than one kilogram per person annually–although in certain areas, such as Taiwan and Hong Kong, it already averages more than 10 kilograms per person annually.

With this in mind, the Beijing Kraft Food Co., with its annual production capacity of 50,000 tons of dairy products, plans to nearly double its capacity for yogurt, cheese, ice cream, pasteurized milk and butter. Total annual capacity will be $42 million.

China’s spectacular growth started in the southern coastal provinces because of their proximity to Hong Kong and Taiwan.

Guangdong province, which includes the city of Guangzhou (formerly known as Canton), has been the center of all the activity in southern China. Consumers in this area are the wealthiest in China and the food industry there is the most developed.

It also has the most freedom in which to operate, and hard currency is more accessible for purchasing imported equipment. Average growth rate for the past decade in the Guangdong food industry has been 12 percentage points higher than the 9% national average. Total processed food output of the region in 1990 was $2.2 billion.

While most western companies are on the coast of China, some companies are beginning to follow the ancient trade route known as the Silk Road into the Chinese interior.

Pepsi’s soft drink expansion is going inland for 10 plants. “We’re pretty well situated in the coast and inland China is largely untapped,” says Shaw.

Middlemen were buying cans of Pepsi on the coast for 50|cents^ and reselling them inward for 75|cents^. By moving into the interior, Pepsi will eliminate this exploitation.

OBSTACLES AND OPPORTUNITIES

While there are many tempting opportunities for adventurous U.S. companies to enter the Chinese market, the road does have some obstacles.

A lot of work and frustration can accompany efforts to tap into this market. According to FPM&SA’s observations on a recent trip to China, barriers to investments include hard currency problems, political shifts, Most Favored Nation status renewal, and a complex system of ministries, bureaus and associations.

According to Kit Yam, assistant research professor of food packaging and engineering at Rutgers University, the common way to do business in China is through joint ventures. He also says, “It helps to know someone who has a relationship with the government.”

“It’s true,” adds Collins of Kraft. “You really do go through a lot of formalities and exchanges even before starting a dialogue.”

With Most Favored Nation renewal linked to human rights in China, U.S. government policy changes are another concern of companies seeking to enter China.

By June, President Clinton must decide whether China has made “significant overall progress” toward improving its human rights record in order to renew China’s trade status. Every country that trades with the U.S. and holds most favored trading status has significantly lower duties on its exports to the U.S.

In the wake of Secretary of State Warren Christopher’s trip to Beijing, dissidents have been jailed and human rights are once again in jeopardy.

U.S. trade appears to be contributing to the rapid decentralization and transformation of China’s economy. “We have found throughout the world that free enterprise makes positive changes in society,” notes Shaw. “The influence of capitalization and free enterprise allows for free choices.”

And speaking for himself, Nestle’s Perroud adds: “With time, free economy produces free politics. With free markets comes freedom.”

COPYRIGHT 1994 Business News Publishing Co.

COPYRIGHT 2004 Gale Group