Feeding the dragon

By Elaine Watson

- Last updated on GMT

Related tags Market China

Feeding the dragon
China is an export market no manufacturer can afford to ignore. But do your homework before you catch the next plane to Shanghai, warns Elaine Watson

It's got a fifth of the world's population, an economy growing at more than 10% a year and a burgeoning middle class with cash to spend. If you're serious about developing your business in growth markets, China is a market you cannot ignore, says consultant Rohit Talwar. But be prepared for a culture shock. Head for Beijing without some serious preparation, he says, and you could get your fingers badly burned.

Talwar, whose consultancy Fast Future advises companies trying to build a presence in China, is now writing a book about its future. He adds: "It's easy to get seduced by the size of the market. Some big brands have come in thinking they could do business the same way they do at home and got a nasty shock. Some, like British American Tobacco, have effectively locked themselves out of the market by failing to understand how things operate over here."

Others have come in with completely unrealistic expectations of how long it will take to make a return on investment, he adds. "You won't make the same margins as you will in other markets. China represents 3.8% of Coca-Cola's global volumes and less than 1% of its profits, for example. But it's gone in there because you can't ignore a market this size - you have to be in it for the long term."

According to market development consultancy Food from Britain (FFB), UK exports to China were up a whopping 59% to £96.4M last year, propelling China into the top 20 export markets for UK food and drink for the first time.

FFB marketing and international management director Simon Waring says: "China is really starting to figure as an export market for UK products now. Something like 13% of the population can afford high-end goods - that's 175M people. There are a lot of foreigners in the big cities, but urban Chinese like to experiment with foreign foods as well." The big sellers from the UK have historically been spirits, fish and crustaceans, he says, but there are opportunities in everything from breakfast cereals to biscuits, confectionery, condiments, babyfood and sauces. Sales of carbonated drinks were up more than 21% last year, while the dairy market is worth more than $20bn (£10.5bn).

You can't please everyone

But don't expect to do a deal with one company and see your goods grace shelves across the nation, he cautions. "The retail market is very fragmented, and there isn't a national distribution infrastructure." While overseas retailers including Tesco, Metro, Wal-Mart and Carrefour, have all entered China in recent years, they account for a negligible proportion of the overall market, he adds.

Given that even small chunks of a market the size of China could prove extremely appetising however, this simply means that you should target your investment carefully, points out Talwar. "A lot of companies have burned at the bottom end of the commodity food market by trying to please everyone. Forget that - the action is at the top end. By 2025, China will be the biggest economy in the world on a purchasing power parity basis [based on what you can buy with your dollar]; if you can tap into even a tiny chunk of that, you're talking about a huge market opportunity. Not one of China's 600 cities is growing at less than 10% a year. It's already the sixth largest luxury market in the world."

This is a fact that has not been lost on the premium spirits sector, with UK exports to China of Scotch whisky alone topping £46M in 2005, an 86% increase on the previous year, says the Scotch Whisky Association. Before China joined the World Trade Organisation in 2001, import tariffs were 65%, it says. "Five years later, they have come down to 10%, so the market has definitely opened up. People in the big cities have more disposable income and they want to drink international brands. However, there is still a lot of red tape."

One company set on making inroads into the market is premium spirits maker Blackwood Distillers. "Like just about every ambitious drink producer we are trying to get into China with a decent distributor," says director Tom Porter. But this is easier said than done: "Chinese law requires only one company to have the import rights for a brand, but as you are not allowed to freely transport goods from one province to another, you need to ensure that your provincial partners work with each other as there are very few national distributors."

He adds: "It is not unheard of to appoint a partner in say, Shanghai who imports and then acts as a local distributor for Shanghai and a different partner for, say, Shenzhen who just distributes in that region. The Shanghai partner then decides on his own to supply to a different Shenzhen-based distributor from the one you have an agreement with. Or perhaps he takes it on his own 'initiative' to supply several distributors in Shenzhen unofficially, which inevitably causes pricing difficulties, as Shenzhen effectively becomes a grey market instead of a primary one.

"Therefore, choosing an importer who will play fair is vital. It is also a very bureaucratic process, in some ways similar to Alabama in the US - once you have a partner they are pretty much your partner for life - so choose wisely!"

Blackwood has had "plenty of offers from Chinese and western-operated companies to handle our brands", he adds. The big problem is money. Large multinational brands have deliberately sacrificed margins in order to build market share in China and have "lavished the market with extensive promotional marketing budgets", he claims. "It comes as a surprise to many potential partners that we do not have similar budgets and that more creative methods are needed to build the brand profiles."

As for the target outlets, the pattern will be similar to that deployed by Blackwood in the rest of South East Asia, he says: "Bars, clubs, karaoke bars and restaurants with a smattering of retail presence in high-profile venues. Chinese continue to drink socially in restaurants and bars, but not that much at home."

Finding the right partner is critical, agrees Ahmad Tea senior export manager Justin Tate, who admits his company's attempts to sell tea to the Chinese have not proved a roaring success to date, although things are beginning to change. He says: "There is definitely a market in department stores and upmarket retail outlets, it's just a question of putting in the time and effort." He adds: "We first went in eight years ago, but got stung by a distributor that was putting a 500% mark-up on our products, which probably explains why they weren't selling very well. We've since started working with a partner in Taiwan who also has offices in Shanghai, so we're hoping that this time we'll have better luck. But you have to cross all the t's and dot all the i's here or you can get into trouble."

The British Curry Company, which recently started supplying the Pines supermarket chain in Shanghai with curry sauces, pickles and chutneys, is currently targeting expats, says sales director Maria Hellyer. However, this is not where the market opportunity ends, she insists. "Chefs in the big hotel chains are desperate for authentic, western-style foods like Stilton, olive oil, sun-dried tomatoes and genuine Indian curries. Everyone is gearing up for the Beijing Olympics in 2008, when there will be a huge influx of visitors expecting high quality international cuisine."

To get this in perspective, the market for dining out in Shanghai alone is $4bn (£2.1bn), points out Talwar, who recently explored UK business opportunities in China at a seminar organised by communications consultant Razor: "There has been phenomenal growth in foodservice in the last few years. Last year, the Chinese spent 140 times more on eating out than they did in 1975."

According to a survey recently conducted by business advisory firm Deloitte, a large percentage of UK manufacturers with an interest in emerging markets anticipated significant growth in China. However, only a fifth enjoyed higher gross margins in emerging markets than mature ones and just 5% sold a significantly different product range in these markets compared to the UK. Those that did typically enjoyed higher margins, says Jane Lodge, Deloitte UK manufacturing industry leader: "Manufacturers must understand the unique needs of each local market and develop new offerings accordingly."

If you're looking at making a more serious commitment in China via a joint venture or takeover or even setting up your own factory there, says Talwar, you should do some "serious networking" to find out who you need to deal with both from a commercial and a political perspective. You should also engage with academics, who are very highly valued in Chinese society and can open doors, he adds. "There are loads of incentives out there for companies that want to do research and development in China, but you have to do your homework: in some cases, the rules may vary within the same city." While red tape can be a problem, however, things can also move very quickly, he says.

"It sounds strange to us, but many Chinese see the democratic process as slowing down decision making. In the time it would take us to argue over whether we should have a fifth runway at a UK airport, the Chinese will build 274 new airports!" FM

The size of the prize

Population:​ 1.3bn

GDP:​ $1.8trillion [£944.1bn]

Foreign direct investment 2002-5:​ $170bn [£89.1bn]

Cities with more than 1M people:​ 174

Share of global economy by 2035:​ 30%

Size of Chinese middle class by 2020:​ 520M people

Major food and drink companies with a presence:​ Kellogg, Coca-Cola, Danone, Nestlé, Kraft, Parmalat, Fonterra

Source: Fast Future (futures and innovation consultancy)

Speed boat to China

UK food and drink exports to China 2005:

Drinks, spirits, vinegar £48.8M 86%

Fish, crustaceans £33.2M 72%

Sugars, sugar confectionery £3.4M 39%

Other £11M -15%

Total food and drink exports £96.4M 59%

(Percentages refer to year-on-year growth) Source: HM Revenue & Customs

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