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CONFIDENTIAL
FOR INTERNAL USE WITHIN CLIENT COMPANY ONLY
OPPORTUNITIES IN THE
FOOD INDUSTRY
MARKET INFORMATION
Business Sweden, China
June 2016
KEY TRENDS
AGRICULTURE
One of the largest producers in the world
in several categories
Strive for self-sufficiency in several crops
and foods
Increasingly import dependent
Strong investment activity
INDUSTRY AND MARKET
Food market and imports keep growing
despite economic slow-down
Foreign companies dominating in terms of
brand recognition and technology
Quality and safety standards in industry
are lagging behind
CONSUMERS
Growing middle-class driving growth
Food safety still high public concern
High trust in foreign brands
General health and quality trends
Post -85, -95, -00s and their families
are becoming important factors for food
companies
BUSINESS SWEDEN 2
THE CHINESE FOOD INDUSTRY SHOWS PROSPECTS FOR
CONTINUOUS GROWTH AND DEVELOPMENT
FOOD CONSUMPTION OUTPERFORMS GDP GROWTH IMPORTS NEEDED TO MEET DOMESTIC DEMAND
BUSINESS SWEDEN 3
THE WORLD’S LARGEST FOOD MARKET CONTINUES TO
GROW, DESPITE GENERAL ECONOMIC SLOWDOWN
SOURCE: NATIONAL BUREAU OF STATISTICS, 2015, BUSINESS MONITOR, EU SME CENTER
4,5
5,1
5,6
6,0
6,5
7,1
0
5
10
15
0
1
2
3
4
5
6
7
8
201
2
201
3
201
4
201
5f
201
6f
201
7f
Food Consumption GDP growth
CAGR +9,1
% CNY BN
China has become the world’s largest
food importer
The world’s largest middle-class
demands quality and has a strong
bias towards foreign brands
FOOD SAFETY
CONCERNS
MIDDLE CLASS
GROWTH
Chinese consumers are becoming
more health aware
Numerous food scandals have
severely damaged trust for domestic
food production
A LARGE CONTINENT, NOT A SINGLE MARKET
Many provinces have the equivalent GDP
levels of industrialized countries
Each province is like its own market with
unique prerequisites
Costal provinces, Tier-1 and high Tier-2
cities have strong purchasing power
Markets are more mature and becoming
highly competitive
Market grows and middle-class expansion
continues further west
BUSINESS SWEDEN 4
BUYERS OF IMPORTED FOOD ARE TRADITIONALLY
FOUND IN THE RICHER COASTAL REGIONS
SOURCE: THE ECONOMIST INTELLIGENCE UNIT, 2015, NATIONAL BUREAU OF STATISTICS OF CHINA, CBBC
PROVINCES SIZE BY GDP COMPARISON
1000 to 1,500
0 to 250
250 to 500
750 to 1000
500 to 750
GDP PPP, 2014 (USD billion**)
Over 1,500
*GDP PER PROVINCE IS BASED ON 2014 DATA, COUNTRY GDP DATA IN PPP
TERMS IS BASED ON 2014 DATA RELEASED 2014 BY IMF
**1 INTERNATIONAL DOLLAR $ NOMINALLY CONVERTS TO 6.40 CNY
ACCORDING TO THE AVERAGE 2014 EXCHANGE RATE, AND TO 3.7603 BY
PURCHASING POWER PARITY (ALTHOUGH PRICES VARY FROM REGION TO
REGION WITHIN CHINA)
Colombia Anhui
Jiangxi
Sweden
Lithuania
Morocco
Nepal
Cyprus
Ecuador
Vietnam
Chile
Pakistan
Malaysia
Australia
South Korea
Spain
Venzuela
Thailand
Libya
Belgium Norway
Netherlands
Iraq
Romania
Egypt
South Africa Israel
Hong
Kong Switzerland
UAE
Taiwan
Philippines
Italy
Botswana
THE MIDDLE-
CLASS
CONSUMER
BUSINESS SWEDEN 5
CHINA IS TODAY THE HOME OF THE WORLD’S LARGEST
MIDDLE CLASS, WHICH CONTINUES TO GROW
SOURCE: MCKINSEY, 2015 THE ATLANTIC, 2015, CREDIT SUISSE, 2015
CHARACTERISTICS OF THE MIDDLE-CLASS
31% Live in tier 1 cities Shanghai, Beijing,
Guangzhou and Shenzhen
79% Have a college education
or higher
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016f 2017f 2018f 2019f 2020f
MIDDLE-CLASS AS SHARE OF TOTAL POPULATION
no1 The world’s largest
middle class since 2015
80% Are aged between 18-45
years
FOOD SAFETY IS A MAJOR PUBLIC CONCERN… … PUSHING PREFERENCE FOR IMPORTED FOOD
BUSINESS SWEDEN 6
FOOD SAFETY ISSUES MAKE CONSCIOUS CONSUMERS
TURN AWAY FROM DOMESTIC BRANDS
SOURCE: PEW RESEARCH CENTER 2015 GLOBAL ATTITUDES SURVEY
Trust foreign brands
Willing to pay premium for
the best product
Food from foreign brands is considered safe and nutritious
Imported food is regarded as a premium product, generally
distributed at a higher price
With increasing affordability among the growing middle-class, the
demand for imported food is growing
62%
52%
DOMESTIC COMPANIES CAN NOT MEET DEMAND NEITHER IN TERMS OF SUPPLY OR PREFERENCES
0 20 40 60 80 100
Unemployment
Education
Health care
Food safety
Inequality
Air pollution
Corrupt officials
Very big problem Moderate problem
CONSUMER PREFERENCES
71%
DEMOGRAPHICS (% OF WORKING POPULATION)
BUSINESS SWEDEN 7
ONLY MIDDLE CLASS AND AFFLUENT CONSUMERS CAN
AFFORD PRICE PREMIUMS FOR IMPORTED PRODUCTS
SOURCE: GOLDMAN SACHS, CHINESE NATIONAL BUREAU OF STATISTICS
BUSINESS SWEDEN ANALYSIS
PR
ICE
QUALITY
Domestic
brand
Imported
high-end
Domestic
premium
Locally
produced
HIGH
HIGH LOW
19,0%
30,6%
50,2%
0,2% Wealthy
Middle-class
Migrant
workers
Rural
workers
Rural workers
Migrantworkers
Middle class
Wealthy
AVERAGE ANNUAL INCOME (USD)
PRICE STRUCTURE OF FOOD PRODUCTS
500 000
11 733
5 858
2 000
100% = 780 million
PRODUCTION CONSTRAINTS
Development of domestic production has been
neglected for past decades
Have not developed in line with other
industries
Hampered by inefficacies in production,
much more labour dependent than foreign
counterparts
Still highly fragmented, but under
transformation
Sustainability challenges from decades of poor
natural resource management put great
constraints on production capacity
FOOD SCANDALS A number of food scandals have damaged trust for
domestic food production and local brands
Milk melanin scandal
Decades-old rotting meat
Dumping of dead pigs
CONSUMER TRUST
The trust for domestic food production has
reduced significantly during recent years
Strong bias for imported brands
Imported brands means retailers can charge
a price premium
Leading domestic players are investing a lot
in developing their own premium
BUSINESS SWEDEN 8
REOCCURRING FOOD SCANDALS ARE SHAPING THE
FOOD INDUSTRY IN CHINA
OVERVIEW OF SELECTED NOTABLE DEALS AND INVESTMENTS 2013-2016
BUSINESS SWEDEN 9
INTERNATIONAL INVESTMENTS ARE USED AS
SHORTCUTS TO TECHNOLOGY AND BRAND UPGRADES
CHINESE OVERSEAS INVESTMENTS
Chinese companies are investing overseas for strong
brands, technology and intellectual know-how to bring
back to the Chinese market
FOREIGN DIRECT INVESTMENT
International companies investing for market
entry and expansion
BLOOMBERG, LEXOLOGY, JPOST, FOOD BUSINESS NEWS, WALLSTREET JOURNAL, BUSINESS WIRE,
FORBES, MORNING WISTLE, SVENSKA DAGBLADET, PULSE NEWS, 4-TRADERS
0,165
0,4
0,556
0,622
0,8
2,57
0 0,5 1 1,5 2 2,5 3
Heinz - Foodstar
Coca-Cola - Culiangwang
Fonterra - Beingmate
Inbev - Ginsber
Cheiljedang - Meihua
Inbev - "Greenfield"
0,3
1
1,9
4
4,6
7
0 5 10 15 20 25
Shangdong Ruyi - Cubbie
Bright Food - Tnuva
Bright Food - Weetabix
COFCO - Noble Agri
Shanghui - Campofrio Food
Shunghui - Smithfield Foods
ChemChina - Syngenta AG 43
50
FDI 2013-2016, Bn USD OFDI 2012-2016, Bn USD
ALMOST 20% OF GLOBAL CHINESE M&A’S IN 2014 WERE IN THE FOOD OR AGRICULTURE SECTORS
THE YASHILI INFANT FORMULA CASE
BUSINESS SWEDEN 10
OVERSEAS PRODUCTION AND SALES STRATEGY AIMED
TO BUILD CONSUMER TRUST
SOURCE: NZ HERALD
OVERSEAS SALES AND PRODUCTION
CN Yashili moves to sell its infant formula in NZ
Production takes place in Yashili's plant in NZ, a
USD 220 mn investment
THE “COUNTRY OF ORGIN” EFFECT
Chinese parents tend to trust imported formula
brands more if
Also sold in country of
manufacture
Produced solely for
export >
NZ Retail price
24 NZD
CN Retail price
61 NZD <
CHINESE PRODUCERS STILL STRUGGLE TO REGAIN TRUST AFTER 2008 MILK SCANDAL
DOMESTIC CONSOLIDATION
The acquisition of intermediaries and suppliers
further up the chain of production demonstrates the
desire of firms to consolidate absolute control of the
entire process
Increased cost of compliance with new
regulations and general cost of production are
also pushing smaller players out of business
Trend is shifting towards fewer and larger players
LARGER PLAYERS GO FOR VERTICAL INTEGRATION
BUSINESS SWEDEN 11
LEADING COMPANIES ARE ALSO CONSOLIDATING FOR
INCREASED CONTROL AND SAFETY
SOURCE: BUSINESS SWEDEN ANALYSIS
INPUTS
PRODUCTION
PROCESSING
RETAIL
Illustrative
THE FOOD INDUSTRY IS SLOWLY SHIFTING TOWARDS FEWER AND LARGER PLAYERS
GOVERNMENT PUSH
STRATEGIC
ACQUISITIONS TO
BUILD GLOBAL
COMPETITIVENESS
THREE MAIN INVESTMENT MOTIVES
Companies are encouraged to extend their value chain
overseas and to strengthen positions in international
commodities trading
The ultimate goal is control both supply and pricing
BUSINESS SWEDEN 12
GOVERNMENT ENDORSED INVESTMENTS AIM TO
UPGRADE THE CHINESE FOOD INDUSTRY
BUSINESS SWEDEN, XINHUA NEWS SERVICE, 2014, FARMER'S DAILY, 2014
FOOD
SECURITY
SAFETY &
PRODUCTIVITY
PREMIUM
BRANDS
Domestic food companies acquire well-known Western
food brands and bring products back to the domestic
market
Grasp ready-to-grow & well-established brands within
short-term period
Food safety concerns motivate investors to acquire premium
agricultural assets, including dairy farms, animal husbandry
pastures and food processing plants and advanced
technologies
“Borrow foreign chickens to lay golden eggs in our yards”
1
2
3
CHINA’S SHARE OF WORLD FOOD PRODUCTION AGRICULTURE IS OF GREAT POLITICAL IMPORTANCE
BUSINESS SWEDEN 13
CHINA HAS ALSO REACHED A POSITION AS THE
LARGEST PRODUCER IN SEVERAL CATEGORIES
SOURCE: GIANNINI FOUNDATION OF AGRICULTURAL ECONOMICS, FAO
Agriculture has traditionally been the back bone of
China’s economy and development
Currently launching the largest reform since 1980s:
Tighten up regulations to improve food safety
Increase consolidation and shift towards more
large scale farming
Amend property legislations to improve
operation and property rights
Raise the technological level to increase
productivity and over-all standards
Strive for self-sufficiency in main crops
0 20 40 60 80
Milk
Soybean
Beef
Chicken
Corn
Wheat
Rice
Fruits&Veg
Eggs
Pork
Seafood
%
= World’s largest producer
CHALLENGES TO CHINA’S AGRICULTURAL SECTOR
China holds 20% of the world’s population
With a strong urbanization movement and
changing diets
CONSTRAINTS IN ARABLE LAND
BUSINESS SWEDEN 14
CHINA’S SUSTAINABILITY CHALLENGES PUT GREAT
CONSTRAINTS ON ITS AGRICULTURAL OUTPUT
SOURCE: FOOD SECURITY PORTAL, CHINA DAILY , THE WORLD BANK
10,6
10,8
11,0
11,2
11,4
11,6
11,8
12,0
12,2
12,4
12,6
1,22
1,24
1,26
1,28
1,30
1,32
1,34
1,36
1,38
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
Population Arable land
Billion % of total land
CHINA NEEDS TO FIND WAYS TO ACHIEVE INCREASED PRODUCTION AND QUALITY FROM DIMINISHING RESOURCES
POPULATION
LAND
WATER
China has only about 10% of world’s
arable land
40% is degraded
20% is polluted
China has 6% of global water resources
80% of groundwater in the major river
basins are unsafe for human contact
China’s largest lakes have big dead
zones caused by fertilizer run-off
VAST USE OF FERTILISER AND PESTICIDES LATE ACTIONS TO TACKLE ISSUES OF OVERUSE
BUSINESS SWEDEN 15
HEAVY BOOSTING OF HARVESTS IS JEOPARDISING
BOTH ARABLE LAND AND FOOD SAFETY
SOURCE: FAOSTAT, CHINA DAILY, CHINA NATIONAL BUREAU OF STATISTICS
0
50
100
150
200
250
300
350
0
2
4
6
8
10
12
14
16
18
20
199
2
199
4
199
6
199
8
2000
200
2
200
4
200
6
200
8
201
0
201
2
Pesticides Grain yields Nitrogen fertiliser
Mn tonnes 100k tonnes
China today consumes one third of world’s total
consumption of both nitrogen fertilisers and
pesticides
Fertilisers and pesticides have been strongly
advocated by the government to boost agricultural
production
Issues of overuse are now becoming evident and
actions are being taken
PESTICIDE AND FERTILISER USE KEEPS GROWING WHILE YIELDS HAVE PLATEAUED SINCE THE 1990S
1/3 Of total global use
Other 68%
WATER USE
0%
20%
40%
60%
80%
100%
Water use
TOP 4 FARM PROVINCES ARE IN THE DRIEST AREAS
5 SEPTEMBER, 2016 BUSINESS SWEDEN 16
THE AGRICULTURAL SECTOR IS CHINA’S SINGLE
LARGEST USER OF WATER
CHINA WATER RISK 2015
Agriculture
(61%)
Industry (24%)
Municipal
(13%)
100%=590 bn m3 100%= total agriculture output
Shandong 12%
Hebei 10%
Henan 6%
Jiangsu 4%
BUSINESS SWEDEN 16
34% OF SOWN LAND LOCATED IN WATER SCARCE AREAS
BUSINESS SWEDEN 17
DISCREPANCY BETWEEN CHINA’S ARABLE LAND AND
WATER RESOURCES CAUSES FURTHER STRAIN
SOURCE: CHINA WATER RISK (BASED ON CHINA STATISTICAL YEAR BOOK, AVERAGE BY PROVINCE 2003-2012, HSCB GLOBAL RESEARCH
<500 Extreme scarcity
500-1000 Scarcity
1000-1700 Stress
1700-2000 Borderline adequate
>2000 Adequate
Water resources per capita (m3)
Sown
Irrigated
Heilongjiang
Jilin
Liaoning
Shandong
Jiangsu
0.0 – 2.4
2.5 – 4.9
5.0 – 7.4
7.5 – 9.9
12.5 – 14.9
10.0 – 12.4
Beijing
Shanghai
Inner Mongolia
Guangdong Guangxi
Sichuan
Shaanxi
Henan
Hubei
Hunan
Xinjiang Hebei
Anhui
Gansu Area in mn hectares
FURTHER POLICIES REQUIRED FOR WATER ALLOCATION TO AGRICULTURE
BUSINESS SWEDEN 18
FOOD SAFETY AND SUSTAINABILITY ISSUES ARE
SHAPING THE INDUSTRY AND DRIVE DEMAND
AGRICULTURE
FOOD
INDUSTRY
Modernisation of agriculture
Severe production limitations
Consolidation for control
Building domestic premium
Investments in brands and safety
CONSUMERS
Increasing awareness
Willingness to pay
FOOD
SAFETY
AND
SUPPLY
SECTOR KEY TRENDS KEY ISSUES
KEY TAKE-AWAYS
CONTACT BUSINESS
SWEDEN IN CHINA FOR
MORE INFORMATION
Business Sweden
Shanghai Office
12F, Sail Tower, 266 Hankou Road, Huangpu District,
Shanghai 200001, P.R of China
T: +86 21 6218 9955
F: +86 21 6217 5152
www.business-sweden.se
BUSINESS SWEDEN 19
Business Sweden
Beijing Office
Room 609, 6/F, CYTS Plaza, No 5, Dongzhimen Nandajie
Beijing 100007, P.R of China
T: +86 10 5815 6006
F: +86 10 5815 6223
www.business-sweden.se