January 6, 2015
Rabobank offer tips on investing in China''s protein market
In its latest report, "Bulls in a China Shop,"Rabobank advises investors to focus on adding value to the supply chain, collaborating with better positioned local partners, improving relationships with local governments, and diversifying to manage risks.
According to the report, China''s demand for foreign animal protein products shows great growth potential. However, the path to success for western animal protein companies in China will remain complex and challenging.
"Western companies have struggled to make sustainable profit and to compete in China''s animal protein industry due to infrastructural and cultural challenges," explained Rabobank analyst Chenjun Pan. "However as the industry accelerates the consolidation and modernisation process that is underway, more opportunities are opening and this (process) is likely to continue."
China''s animal protein industry is still fragmented and underdeveloped despite recent consolidation and modernisation. The supply chain can often be inefficient and difficult to access. As a consequence, some western players choose to establish vertically integrated (VI) operations in order to isolate their business from those structures.
However, the VI model can only provide a temporary solution in China and it requires much higher capital investment. Foreign companies need to clearly differentiate themselves by bringing great value additions, such as new products, western culture or better services, to justify these higher operation costs.
In addition, local culture plays a strong role in Chinese consumers'' lives and influences the way business operate. To tackle this, western companies can hire management people who know better how to deal with local suppliers, distributors and governments, or team up with local companies with good access to markets. For example, Nestle acquired Yinlu and Hsu Fu Chi, but continued to use local brands in each market to achieve localisation.
Political goodwill is also crucial to help cut red tape. Local authorities expect foreign companies to establish best practices regarding food safety, traceability and technological improvements.
On the bright side, western companies still have many advantages over local companies when it comes to quality assurance, food safety and other aspects of advanced technology, the report says.