Apr 17, 2014
China offers challenges, potential for produce

It is impossible to survey China without considering an impressive list of superlatives. It is the world’s largest producer and consumer of fruits and vegetables and is in the midst of the largest migration in human history, from the Chinese countryside to the nation’s cities.

This makes China a glittering prize for fresh produce companies, and an increasing number of them are making investments into the market, as described during a session at the most recent Produce Marketing Association Summit last fall in New Orleans.

With the world’s second-largest economy and annual economic growth of 8 to 10 percent over the last two decades, China has become a middle-income country, said Eric Trachtenberg, director of the agriculture and sector at McLarty Associates, an international strategic advisory firm. His background includes service in China with USDA’s Foreign Agricultural Service, working from the U.S. Embassy in Beijing.

“Agriculture still contributes almost 10 percent of China’s GDP and employs 40 percent of the workforce,” Trachtenberg said. “At a mere 305 million people, that’s the equivalent of having the entire United States working solely in agriculture.”

Other factors are contributing to a favorable environment for produce exports to China. The country has a shortage of arable land, with planted acres and total production in decline. Consumers are expressing an increased demand for higher-value products. A new middle-class society is hungry for global brands, largely due to concerns about the safety of domestically produced food.

Trachtenberg said that 30 years of sustained economic growth in China should continue. There are 300 million Chinese who are now considered “middle class,” a number that is expected to double by 2020. The poverty rate was 77 percent in 2005 and should plunge to 15 percent by 2020. Annual wage growth of over 10 percent is expected to continue.

“This urban middle class is spending more on food and spending more on eating out,” Trachtenberg said.

This new middle class will also demand more imported high-quality foods and new foods, which creates a market for more luxury, exotic and value-added products.

The quality of Chinese food is improving, due to increased investments in postharvest technology, state-of-the-art packing systems and the cold chain. Despite these improvements, Chinese consumers are uneasy about the quality of domestic food, rating food safety as their number one concern “by far,” said Patrick Vizzone, regional head of food and agribusiness with National Australia Bank.

“They are more afraid of unsafe food than they are of developing cancer,” Vizzone said. “The government is taking concrete steps to try and rectify the situation. The previous problem was a ‘matrix muddle,’ where there were five or six agencies involved but no one really driving the issue. Now there is a new agency that does that.”

Food safety concerns are one reason why Chinese consumers crave global brands such as Zespri and Sunkist, and will pay a premium for them. Vizzone said this demand is also fueling the emergence of online sales of fresh produce and half-hour television infomercials devoted to produce.

Expect domestic Chinese food companies to respond by developing domestic brands built around enhanced food safety practices. This will help these companies grab their share of the higher prices traditionally paid for well-branded foreign products.

“For sure, domestically people are starting to use their own brands. But it will take some time for consumers to trust those brands,” said John Wang, CEO of Lantao Shanghai Great Harvest, which imports produce into China.

Significant barriers still exist for United States companies attempting to get their products into China. Importers encounter trade obstacles, such as import bans and preferential trade agreements with other countries, such as the agreement between China and New Zealand. Other issues are specific to fruit and vegetables, such as phytosanitary certificates and certificates of origin.

Trachtenberg offered advice to firms thinking about exporting produce to China.

Find a knowledgeable local distributor to help deal with bureaucratic matters and to help find the best market niche and retail locations.
Have an alternative plan in case of trade retaliation. “China tends to retaliate against U.S. exports when we upset them for any other reason. So you always have to have a Plan B in case the Chinese get upset about steel or tires,” Trachtenberg said. If the Chinese are upset about what they see as unfair trade practices in steel and tires, they can strike back at a completely unrelated sector, such as produce.
Understand that there can be a lack of transparency from the Chinese about import rules.

For companies considering an investment in the Chinese market, Wang advises getting first-hand knowledge.

“Go there to see the market and see what they are looking for,” he said. “What kind of products and packaging are they looking for? What kind of color and firmness? You need to know these kinds of things first.”

Trachtenberg advises consulting USDA agricultural trade offices in China, which are staffed by people who can help make connections. Those kinds of relationships are vital to success, and often require a company to deal with the key decision-makers.

Above all, understand that wise practices know no boundaries.

“Don’t leave good business sense at the airport,” Vizzone said. “This means that you must make the same sound business decisions in China that you would make at home.”

Lee Dean




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