China: the devil is in the detail

Q: How do you eat an elephant? A: One bite at a time.​

The above might be a cliché, but it is true. Many firms talk of “entering the Chinese market”​ and for a very good reason: growth opportunities. But China is an elephant, metaphorically speaking, and not one that can be eaten whole, but simply one bite at a time.

This was made all too obvious to me during a recent trip to China – specifically Beijing, Shanghai, Guangzhou and Hong Kong. My assignment was to identify opportunities for foreign food processors and exporters to get their products “into China”.​ This is an entirely logical ambition.  

With 1.4 billion consumers getting progressively richer and a range of food imports covering meat, dairy and other commodities all on the rise, because they are perceived to be higher quality, it is a great opportunity. But it is also one that needs to be taken one bite at a time. In this particular case, the first bite was to negotiate market access.

One of the most challenging aspects of entering any foreign market is getting the entry strategy right; this is particularly the case in China due to the sheer scale and complexity of the market. Working with Chinese partners seems to be de rigueur at the moment. After trying to go it alone, Tesco has recently (October 2013) signed a joint venture deal with China Resources Enterprise – the second-biggest grocery retail chain in China.  

In the pork sector, Shuanghui International, the largest Chinese meat processor is set to complete a takeover of Smithfield Foods. The agreement will provide Smithfield with the opportunity to expand its presence in China, through Shuanghui’s local distribution network. The size of the prize is massive. While China is relatively self-sufficient in terms of overall production, imports in 2012 reached over 500,000 tonnes – still just around 2% of total pork supply.

The latest OECD-FAO Agricultural Outlook 2013-2022 report details that China is set to become the largest consumer of pig meat in 2022 at 34.1kg per capita. This will see China overtaking the EU, where consumption is set to remain static over the coming years at around 31kg. Pork production is set to grow by 20% by 2016/17 to 62.9 million tonnes (mt). A higher availability of vaccinations and ongoing commercialisation of the industry will also boost output in the coming years. Increased meat consumption in China is also set to drive further soybean consumption by 23% to 89mt.

And this is not just happening in the pork sector. In the dairy sector, Arla Foods established a presence through a £184m deal to become an indirect shareholder of Mengniu; in a separate deal, Danone will also establish a joint venture with Mengniu for the production and sales of chilled yoghurts in China, owning a 20% stake in the new company.
There are lessons to be learnt from these examples. They emphasise the importance of working with local partners to establish a presence in the market, which can be built upon and, crucially, while the deals are not ‘small’, they represent manageable forays into a very large and complex market.
As consultants, we emphasise to our clients the importance of understanding the bigger picture, but also by being obsessed with the detail, because it is in the detail where you can identify opportunities to add value and create sustainable competitive advantage. I think that detail matters even more when the market you are trying to enter is the size of an elephant.
 
Matt Incles is a senior consultant with Promar International, the value chain consulting arm of Genus plc, and can be contacted at the following email address: matthew.incles@genusplc.com.