May 20, 2017

Processors see potential in Chinese market

China is an enormous country with equally enormous potential, especially for exporters of fresh and processed food. While export market potential is huge, the country faces a number of challenges that make growth difficult. Two speakers, Oliver Huesmann, CEO of Fruit Consulting, and Steve Alaerts, director of marketing and sales at foodcareplus, provided their opinions in a closer look at China at Fruit Logistica, held earlier this year in Hanover, Germany.

Understanding China

A country in a state of transition, China is burdened with an aging population, but a growing middle class. The country is home to 1.4 billion inhabitants – one-fifth of the global population. It is also the world’s second largest economy. Recently, concerns have been raised about the country’s aging population. In response, the Chinese government changed its one-child policy, allowing families to have a second child. But that isn’t the country’s only challenge; two of the biggest issues in China are food security and food safety.

While China is home to one-fifth of the world’s population, it has only nine percent of the world’s arable land and seven percent of its fresh water. And while it aims to be self-sufficient by 2020, the country imports much of its food from Europe and North America. In fact, China accounts for 17 percent of U.S. agriculture exports, making it the largest agriculture export market for the United States, according to a special report released by the U.S. Department of Commerce.

While self-sufficiency is the goal, China doesn’t import food because it is unable to feed itself. Simply put, the export market to China is driven by food scandals. Years of scandals have virtually destroyed consumer trust. In 2004, there were the counterfeit baby formula and soy sauce made from human hair scandals. In 2006, there was a massive school food poisoning incident, a poisonous mushroom incident and a pesticide scandal. Regarding the latter, some 70 percent of vegetables tested in two Hong Kong grocery stores were found positive for illegal pesticides, such as DDT.

Perhaps the most famous incident, though, is the melamine scandal of 2008 in which tainted baby formula caused the deaths of six babies. Another 294,000 were made sick by the formula. But it didn’t stop there. In the next year there was a fake lamb meat scandal, which was followed by the dyed green beans incident of 2010. Meat scandals involving pork, lamb, fake beef and even cat meat dominated the headlines in 2013. The list goes on and on.

Oliver Huesmann, CEO of Fruit Consulting, gave insight into the potential of the Chinese market at Fruit Logistica 2017. Photos: Melanie Epp

As a result of these frequent food fraud and food safety incidents, consumer trust has taken a massive nosedive. Today, according to Huesmann, the CEO of Fruit Consulting, surveys show that only 10 percent of Chinese consumers trust national food.

“The Chinese middle class is very willing to buy mainly from the EU imported food,” he said to the mostly European crowd at Fruit Logistica. “This is due to the high European standards for Asians and strict controls on cultivation and production, which gives a much higher level of safety than national products.”

Lack of consumer trust has altered the ways in which food is bought and sold. While most consumers outside of first tier cities are said to purchase food products from traditional wet markets, e-commerce, particularly online food sales, has risen dramatically. According to the U.S. Department of Commerce special report, 400 million of the 632 million Chinese who use the Internet participate in online shopping. Between 2013 and 2014, online sales increased nearly 50 percent to $449 billion. Furthermore, it is estimated that sales will reach as high as $1 trillion by 2019.

In China, average consumption of fruits and vegetables per person per year is 56 kg of fruit and 120 kg of vegetables, said Huesmann. It would take 15.5 million shipping containers to ship that kind of produce. Packed together, the chain would be 186,000 km long and circulate the earth five times, he said. If growth patterns continue, Huesmann estimates that China will import 60 percent of its needs 15 years from now. “Then we could assume that 9.3 million containers could travel to China by 2030,” he said. “We are not talking about Asia yet.”

There’s no doubt that China has consumers and consumption, but what about transport? Is it possible to fuel demand with current transportation systems? According to Huesmann, the answer is yes. Railway and air cargo routes are frequent and work well, he said. There is also significant reefer traffic from almost all European ports to Asia.

Consumers, consumption and voneyance … Now what?

Despite the fact that China has consumers, consumption and means of conveyance, according to Huesmann, those wanting to do business with the country need to understand that it lacks cooling transport, storage and logistics.

“We need investments in refrigerated vehicles for short and long-haul routes, temperature controlled trans-shipment storage and optimized cooling logistics,” he said. “There are not enough offers of refrigerated trucks for transport from the port to the customer.”

Huesmann used Beijing as an example. For ten years, the demand for cooling logistics of the perishable food industry in Beijing has risen more than 11 percent per year. However, the logistics service providers have only been able to meet 20 to 30 percent of that demand. Furthermore, there aren’t enough refrigerated vehicles in Beijing to transport food. According to a study conducted by the Beijing Jiantong University, the number of refrigerators double to 2,405 in 2014; however, Beijing, the university noted, requires 5,868 vehicles.

“We have a huge market that needs our products and needs to be serviced,” said Huesmann. “This is not just about the business of supermarkets or online trading, but most of the sales in China are still about the small retailers.”

“We have had Chinese consumer who is not used to cold chains at the moment, and therefore makes his purchase every day,” he continued. “However, in order to sell high quality fruit and vegetables in Chia without any quality losses, we either have to invest in logistics ourselves as producers, sellers or distributors, or the freight forwarders will finally see the market and tap into the market with fast domestic cooling logisitics.”

Alaerts, however, questions the worthwhileness of investing in cool chain logistics, noting that the Chinese use e-commerce, not retail grocery stores. “Are we still going to build cold stores just around cities if you know maybe that the parcels will be much smaller than what we’re used to?” he asked. “I mean, there are little motorcycles with little parcels – maybe 6 apples – that are being delivered. We’re not used to buying fruit and vegetables like that.”

Alaerts pointed to two other potential challenges for exporters into China. Growth in China has been quick, he said, and while the government will accept foreign direct investment, that investment is limited. “Because, of course, they want to grow, but they also want Chinese companies, Chinese consumers to won the businesses,” said Alaerts. “They didn’t open the door for European and U.S. companies to go there and build the cold chain infrastructure. It would be built by foreigners and it wouldn’t be owned by the Chinese, which is a problem.”

Finally, doing business in China can create stress between local production and imports. As Alaerts pointed out, China is the biggest producer of potatoes in the world, and one of the world’s largest apple producers. They have their own bananas and citrus. It all comes down to one simple fact, though: Chinese consumers don’t trust locally produced food. This spells great potential for the rest of the world – if they can sort out the logistics.

“Trust in foreign produce has actually grown very fast,” said Alaerts. “Chinese consumers pay for that. They pay for food security and safety – and they pay a premium for it.”

— Melanie Epp, contributing writer


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