A series of laws and regulations on food safety have been released in recent years, which may accelerate the M&A process in China's food industry. They are Food Safety Law of the People's Republic of China released in 2009, Notice of the General Office of the State Council on Rigorously Cracking Down on Illegal Adding of Food Additives on 21 April 2011 and the latest Standards for Uses of Food Additives (GB2760-2011) coming into force on 20 June 2011, and so on.
The promulgation of them is triggered by successive food safety incidents, such as the 2008 melamine scandal, milk tainted by leather protein, clenbuteroltainted pork and steamed buns containing illegal yellow coloring. These laws and regulations not only restrain food producers from illegally using food additives to ensure civilians' health, but also create the best time for M&A in food industry.
Food Safety Law of the People's Republic of China and Standards for Uses of Food Additives (GB2760-2011) stipulate the process of food production and operation and the application of food additives, helping eliminate the hidden danger of food safety in the aspects of man-made pollution and overuse of food additive. Some of the provisions will accelerate the M&A directly or indirectly.
In the Food Safety Law, the government requires food producers to implement the license system of production and operation. At present, there are more than 400,000 food enterprises in China, almost with small production scale, chaotic management and dispersed distribution difficult for supervision.
In order to strengthen the supervision of food industry, the government raises the market access threshold by implementing the license system. It's reported that there are only more than 100, 000 food enterprises having the ability to get the license, which means a large part of enterprises have to withdraw from the market. This is a great time for large food enterprises to expand bushiness through M&A. Take the dairy industry for example, General Administration of Quality Supervision, Inspection and Quarantine issued an announcement in December 2010, requesting all of the dairy enterprises to reapply for the production license. As of 31 March 2011, only 643 among 1,176 dairy enterprises have passed the reexamination, with a passing rate of no more than 55%.
And some provisions indirectly increase the production cost of food enterprises, making those small players' operation hard to continue and thus providing a great chance for large players to carry out M&A. The Food Safety Law stipulates that food producers and operators must possess production equipment in accordance with the food variety and production volume; it also requires food producers to check the license and certification of suppliers of food raw materials, food additives and other food related products. Meanwhile, Standards for Uses of Food Additives (GB2760-2011) clearly formulates the application range and application amount of food additive.
According to the data from National Bureau of Statistics of China, there are more than 2,000 dairy companies in China, but only 1,176 reapply for production license—about 1,000 voluntarily give up the reexamination. One of the reasons is that they can't afford the huge funds needed in production process to meet the requirements of reexamination. In the Food Safety Law, Chinese government requires local governments to encourage large-scale food production, which is beneficial for large enterprises to get policy support and integrate resources of food production. Therefore, launching M&A is one of the effective ways to realize the goal. Henan Province launched a series of positive policies to support the scale development of food enterprises in 2009, such as reducing the tax of leading enterprises, setting up exclusive funds for the upgrade of food enterprises, increasing the amount of funds invested in food related enterprises to promote scale development from multi-channel.
According to the research done by Zero2IPO Researcher Center, one of the most professional and authoritative research institutes in China, totally 52 M&A cases happened in China's food and beverage industry from 2009 to Q1 2011; 10 have been finished in Q1 2011, which is half of the whole cases in 2010. It's estimated that the number of future M&A will increase rapidly, promoted by the laws and regulations on food industry.
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(Guangzhou China, September 24, 2011)
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