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An appetite for China?

14 December 2010

EXCLUSIVE: Our economic future seems increasingly tied to China, a fact that hasn't escaped many UK machinery suppliers and food producers. But, as FP Express discovered, the general viewpoint is far from unanimous with some adopting a wait-and-see approach.

We recently reported US food company Kraft Foods has given itself two years to double the number of Chinese cities in which Cadbury products are sold (it currently sells in about 20). The announcement hardly came as a surprise to those who know revenue at Kraft China has quadrupled in the past four years.

According to CityAM, the company said it will achieve its goal by using its vast distribution network. Lorna Davis, president and chairman of Kraft's business in China, told Reuters the company would use its current distribution network in the country to build Cadbury's presence.

"China has been doubling every year, and the real challenge is to pick the right opportunities," she said. "If I had unlimited resources and unlimited people, I'd bring in everything Kraft has but right now the focus is really on integrating Cadbury and growing our line of biscuits.''

Cadbury was a British confectionery company, the industry's second-largest globally after the combined Mars-Wrigley, until it was acquired by Kraft Foods in February 2010. It was said the reason for buying Cadbury was because it would broaden access to faster-growing international markets.

Davis has signalled Kraft is also interested in China's breakfast market where it hopes to replace noodles, rice congee and meat buns with cakes and pop tarts. ''There's a hole in the breakfast market and we're moving to fill it. The problem is Chinese supermarkets traditionally haven't had a breakfast section and you don't want to put it in the cereal section where traffic is low. So there's a bit of trial and error right now.''

This interest in investing in China isn't new and over the past decade has become something of a ritual among many machinery suppliers. At about the same time of the Kraft announcement, a new report from IMS Research examined the production of industrial machinery by country. As part of this report, a quarterly-updated forecast is produced looking out to 2014. It also examined the immediate outlook for the major industrial nations.

Despite the world recession, China was still able to maintain growth in machinery production in 2009. Although there was a dip from the incredible growth rates of the preceding years, output still grew; in almost every other country there were steep declines.

Growth in China is predicted to increase in 2010 from the 2009 level, without quite reaching the 20% plus growth seen before the economic downturn. Continued growing domestic demand, with higher levels of disposable income and large government investment, underpins this return to stronger growth in machinery production.

It's no surprise UK-based machinery suppliers want to get in on the action. But the news isn't always rose-tinted. EU businesses involved with importing or selling food and beverage products from China are walking, often blindly, into a potential legal and media storm, warned Aon, risk manager and insurance broker.

While the EU has some of the strictest food safety laws in the world, and China itself has been making fast progress in making food safety a real priority, the EU has just reported 345 safety alerts of food and beverage products originating from China in 2009 in a recently published report, The Rapid Alert System for Food and Feed, Annual Report 2009.

This represents an improved number over 2008, when the EU reported 500 safety alerts of products originated from China. However it remains by far the largest number in comparison to all other countries worldwide.

China recently introduced a food safety act, similar to regulations seen in the EU, but traditionally, quality management systems, food standards and hygiene levels haven't been of comparable levels to those of EU manufacturers.

However, domestic contamination scandals in China over recent years, including the melamine case in 2008 which left six infants dead, a water supply contamination in South China and the recent report of carcinogens being found in 42 tons of Camellia oil in the Hunan region are likely to place renewed government focus on improving food safety standards.

``Many international machine builders such as Tetra Pak, Sidel and Bosch Packaging have transferred some production to China,'' said Bosch Rexroth, a German automation manufacturer with a strong presence in the UK, and which was headline sponsor at this year's Appetite for Engineering. ``This gives obvious benefits as today's lower costs benefit the company's competitiveness as well as its ability to gain local knowledge in order to service the indigenous market.

``As for Rexroth technology being used in processing plants, this isn't something that will happen in the distant future but which is increasingly happening now. Perhaps, when people read news of strikes in southern China where, after a few days of negotiation, workers got nearly a 100% salary increase it gives notice China might not be viewed as a 'low-cost country' in the near future. This encourages Chinese producers to become more sophisticated and invest in automation as labour-saving becomes key in the market.''

Another German manufacturer, OCS Checkweighers, which is prolific in the UK, has strong views on the subject. ``The Chinese food production market is certainly increasing with companies wanting to source for local products whenever possible at very low cost,'' said MD Ingolf Latz.

``The main obstacle is that high-end technology is expected at low cost which leads to discount demands of 35% and more. This is difficult to fulfil with our R&D and production costs. At present the demand for our products is mainly driven by large corporations with an international approach where local products aren't considered able to do the job. OCS's long-term strategy is to enter with a well-thought-out, appropriate plan as China has a completely different culture and works in some ways to unusual terms.''

Rhian Burge, UK marketing manager of Ishida Europe, a Japanese weighing manufacturer said: ``There are genuine opportunities for UK/European/non-Chinese equipment manufacturers in China. The market appears to be mixed, owing to the presence of multinationals who buy the better quality imported or locally produced machines, then the vast array of emerging food companies who buy the lower-cost local equipment.''

A German manufacturer of factory warning lights based in UK, Werma, has manufacturing facilities in China. ``China is a big market for us in terms of investment,'' says Simon Adams, MD of Werma UK. ``We do far better in China than on the Indian Subcontinent.

``It's not untypical of German companies to invest in China. There are problems - copying of machinery is one. It's an enormous irritant. But the Chinese themselves are increasingly demanding their products be made by reputable machinery and not Chinese versions.''

MD of Starfrost, Neil Winney, provided a thoughtful response on his company's approach to investment in China. "I've a wealth of experience of working in China from my days as China market manager for my previous company, Sinclair,'' he says. "I therefore understand some of the challenges that would face Starfrost if we attempted to make a serious market entry in China.

"In my opinion the market in China for our primary range of spiral systems and fluidised bed tunnels is well served by local equipment suppliers. These companies can reap the benefits of low-cost local labour and economies of scale by offering a range of standard size freezing and chilling equipment. China isn't currently on our radar mainly owing to the difficulties in competing on price and the logistics of exporting equipment or having systems made in China.

"Starfrost is currently entering new markets, some of which are in developing countries such as India. We're still seeing growth in many of these regions where high quality manufacture, reliable operation and hygienic system design combined with our after-sales back up is valued by customers who are often prepared to pay a premium price.

"At present Starfrost is involved in the development of new equipment that could fit a gap in the Chinese market. In time we may well find a place for our unique offering in China, as more food manufacturers recognise the ever-increasing importance of equipment longevity and lifetime costs, as well as the added benefit of bespoke solutions rather than 'off-the-peg' systems.

"For this to happen, we'd need a partner in China to provide the local technical sales support that would be required to give customers the confidence to invest in Starfrost equipment."

Then there's the view of Carl Hollier, MD of Industrial Washing Machines, which specialises in washing and sanitising systems. ``We currently do very little business in China and, to be honest, we're presently concentrating our export efforts on other markets, particularly the US,'' Hollier said.

``We see China as a huge potential market but we also have concerns about doing business there. For example, the Chinese impose high import duties and they have a huge manufacturing capability. We've actually had exploratory discussions with the PPMA and, if and when we do decide to look more seriously at the Chinese market, we'll undoubtedly use the services of the PPMA office in China.''

Brian Hill of Abar Automation, a European systems integrator based in the UK & The Netherlands, said: ``There will be little opportunity for robotics within the food industry in China, mainly as labour is still cheap. Investment over the next few years will continue to be in the upstream process and packaging equipment - equipment which is necessary to supply the end customer.

``There may be a limited requirement for robotic handling where production line speeds are restricted by manual labour's ability to keep up. Initially this will be within the drinks or other fast-moving high volume sector and will primarily be palletising applications. As/if lifestyles and wages increase then we may see a more general acceptance in upstream case loading, primary food picking. This will be long after investment in the process and packaging equipment required to supply the end retailer.''

Grant Jamieson, MD of Winkworth Group, a British manufacturer and refurbisher of mixing machinery, is excited about the prospects China offers. ``We're seriously committed to selling and expanding our penetration into China,'' he said.

``We've appointed a China office manager. I believe the growth and development of tastes and preferences in China along with the significant changes in disposable income that will accompany the growth of the new urban classes in China will drive demand for ever-more processed products, with food being a significant market. I've visited twice already this year and will be returning again shortly to support our operations and continue our investment and development in China. If you don't go, you won't know!''

MD Nigel Hallett of IsoCool - a British manufacturer of energy-saving process cooling products - says much groundwork needs to be done before investment is undertaken in China. ``I'm mindful of the Chinese food processing market because of it's massive potential for process cooling machinery. But for a UK or European machinery supplier to have a chance of penetrating the market, let alone creating a sustainable business there, much groundwork would need to be covered.

``First, you'd have to have an excellent team around you - in-house or a distributor - which understands the Chinese manufacturing market inside and out, have good local contacts and importantly, have people you can trust. And then unless you have something totally unique which justifies import, you'd also need your own manufacturing facility in China because the cost of production there is so low.

``That said, I believe UK machinery suppliers who have these things in place have a good chance of seeing a great return on their investment, while adding value to the Chinese food processing market.''

``China is a hugely growing market,'' says Jo Collins, marketing manager of Puresep. ``It's said demand for water treatment products in China will soar 15.5% annually through 2012. Filters and membranes will be the fastest-growing segments, although all types will see double-digit gains. The pace of development in China is rapidly gaining momentum. It's something into which we're seriously looking.''

Meanwhile, Rob Stephens, CEO of Systems Integration, says: "It's a commonly held view that despite recently overtaking Japan to become the world's second largest economy, China presents a double-edged sword for technology firms. As a leading supplier of software and hardware solutions for the food processing sector, China should be an important target market for Systems Integration.

``The country hosts about 500,000 food processors and its government recently passed extensive new food safety laws. Despite a strong legislative emphasis on traceability, one of Integreater's key benefits, China isn't a region we're currently considering. This is mainly because despite ongoing development and enforcement of intellectual property law, China's software and hardware sector is still such a minefield, technology firms remain apprehensive about targeting this market at present".

Paul Courson, UK MD of steel-wire cable containment specialist, Cablofil, says: "Both global brands establishing manufacturing operations in China and Chinese companies (often producing well-known brands under license) are using Italian and German OEMs to ensure they've the best quality equipment in place to underpin quality and consistency.

"For Cablofil, that's a fantastic opportunity as the quality of the Cablofil system makes it the system of choice for these OEMs. As a result, our stainless-steel product is pre-installed on the food processing machines when they arrive in China.

"Once the machines are in place, it makes sense for the manufacturers to use the same containment system to link the equipment to the rest of their production process and we've been manufacturing Cablofil in China for the Chinese market to address this requirement since 2006. What's more, we work closely with integrators to help them design and install a complete containment solution for new production facilities in China and the Cablofil containment will grow with the plant, adapting to changing needs and providing a practical, durable solution in any industrial environment."

Eco-Solids International, which has developed a range of wastewater and waste-to-energy technologies for food processors, says it's enjoying a healthy, productive experience in its bid to establish itself in the Chinese market.

"As a relatively small company in such a huge country, we've made excellent progress with water and environmental equipment company Shenyang Yinuo Science and Technology Company ('Yinuo') in northeast China, with whom we've signed a licensing agreement for our Eco-Solids Process equipment to be manufactured,'' says sales, marketing and IP manager, Dr Peter Barratt.

"They found us through the Environmental Expert website about 18 months ago, and following reciprocal visits, our agreement was signed six months later. Yinuo has shown much initiative in building local contacts with the government officials and municipalities who ratify new water and waste management technologies - for which there is plenty of enthusiasm for the expertise the UK can bring.

"Joining the China Britain Business Council has been invaluable,'' says Barratt. "They've ensured we've been speaking to the right people. Even though our first Eco-Solids Process is just nearing completion - we're already receiving interest from other provinces.

"We should have allowed more time to persuade government officials there about the technologies we were offering but their spending cycles work much like the UK water companies, where if you miss a certain cutoff date you have to wait patiently for the next opportunity. Overall, from 18 months to now seeing our first unit built, with the likelihood of 20 more required, we've undoubtedly come a long way with our experience into China in a very short space of time".

China isn't the only focus of this intense attention, however. Bosch Packaging Technology, a supplier for total solutions in packaging and process technology, has acquired 33,000sqm of land in the Verna Industrial Estate in India to build its new plant. The company is planning to invest E4m. Speaking at the announcement, Karthik Viswanathan, MD of Bosch India said: "This investment will fuel our ambition to grow in the packaging industry."

Bosch's Packaging Division started its Indian operations in Bangalore in 1995 before moving to Verna/Goa in December 2007. By the end of 2012 it says it's aiming to have a fully operational plant integrating the whole Indian production. With the new plant the division will see an increase in the production capacity and its number of employees.

To mark this occasion, Friedbert Klefenz, president of Bosch Packaging Technology, said: "We have a strong position in the emerging markets, and to cater to the rising demands we're looking into expanding our existing portfolio. This approach has brought us closer to our customers but has also helped us strengthen their confidence in us. Today, India is the hub for SAARC (South Asian Association for Regional Cooperation) countries as well as the Middle East and Africa."

India has enjoyed substantial growth in fast-moving consumer goods, the food and beverage sector as well as the pharmaceutical industry, which in turn stimulated the demand for packaging machines. Bosch India is said to have entered the market mainly for horizontal flow-wrapping machines.

"In India the demand for packaging machines is expected to grow 10% per year," said Ashok Gourish, business head of Bosch Packaging Technology's Verna plant. "The development of food parks in India, increased hygiene standards in the food and beverage industry, adoption of Western-style medicines in the pharmaceutical sector and attracting global players of the confectionery industry to India - all these are factors which have acted as key catalysts for this growth."

So there's much to consider for food processors thinking of investing in China, India and other parts of the developing world, and whether or not they ultimately do so is a decision laden with pitfalls. But the biggest one is undoubtedly making a rash decision. As can be ascertained from the above quotes, examination has to be done of the pros and cons. The biggest oversight may be to overlook 'developing world' investment, then regret that choice when China, India, Brazil etc truly take off.

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