How Chinese companies can feed the world

Marcos Fava Neves

27 Ago 2012 04:32

Special to China Daily, 24/08/12

At a recent international food and agribusiness congress in Shanghai there was a debate about the ability of Chinese food companies to become international companies in the coming years. That means departing from their activities in China toward a more global presence, like the major food multinational corporations. 

At the root of the issue are three key matters: why Chinese food companies are not internationalized based on a strategy to supply food from China to the world; the major difficulties that Chinese investment faces abroad; and the internationalization opportunities for Chinese companies in this new era where food and biofuels will be an important trade topic in the coming years.

First, it must be recognized that China has several brands becoming international and as that happens the complexity of international operations need to be learned. There has been a concerted push to innovate, and in several areas Chinese products are regarded as being of very high quality.

These are companies that take advantage of a strong Chinese domestic market and are mostly engineering-led companies with the ability to invest in key assets, maintaining their core business with a global leadership team and global structures and strategies. It’s a beautiful story: taking advantage of economies of scale and scope, these Chinese companies have gone outside China and are having some success.

But an intriguing question arises after studying the success of engineering companies and others that have gone global: Why does this internationalization not happen with Chinese food companies? That this is so becomes clear when you consider that none of the world’s 25 largest food transnational companies is Chinese.

It is argued that the Chinese food industry is handicapped by low investment in research and development, by issues of food safety and quality in the production process, by the fact that there are no recognized large brands outside China, and by difficulties in marketing due to a general perception that its brands are of poor quality.

Although the Chinese government can subsidize this internationalization strategy, other difficulties stand in the way of Chinese food companies wanting to go global: the lack of water, soil, uneven development of infrastructure, production yields, the structure of rural society, lack of agribusiness talent for large-scale operations and the huge internal market to consume what these companies produce.

The list of difficulties is long, but this does not mean Chinese food companies cannot go global. It is only a matter of time, and I see two major groups with the best chances of achieving this.

The first group consists of food companies that produce specialties or other products where the internal market can be easily supplied and there is surplus to export. These are mostly companies whose products do not demand large amounts of soil, water and other resources. They may be among the first to go global. The second group consists of Chinese companies that produce and mostly source food in other parts of the world, and who market their products worldwide, first bringing them to the large Chinese internal market.

For the moment, it is clear that Chinese agricultural and food business investment overseas faces many hurdles. First, management styles and the global mindset, particularly considering language and culture, present a difficulty for Chinese. 

Next, there may be a perception by local communities that Chinese investment represents a “new colonialism”, that it results in the extraction of local resources with no discernible benefit to the local community.

Chinese food companies may also find it difficult to understand the local institutional environment and the complexity of laws and regulations, resulting in higher costs. 

Another issue is protectionism in some markets, which will close the door to Chinese investment.

There are at least four more problems: Chinese insurance system does not offer enough protection against the risks of international investment by Chinese food companies or Chinese entrepreneurs; Chinese tax policies do not encourage such investment; some countries see it as a labor export strategy for China and reject it, arguing that all the labor force will be Chinese; and Chinese companies fail to work together so that they can learn from each other and help each other to avoid pitfalls.

Although these hurdles need to be negotiated, there is every opportunity for Chinese food companies to become global, particularly because in several parts of the world there is an abundance of natural resources to expand food production but the capital to do so is lacking. In this regard, Brazil, Argentina and African countries come to mind. Brazil, for example, is highly receptive to Chinese investment and the institutional framework for this, to some extent, is already in place.

With China’s large and growing internal food market, we cannot expect that in general it will be a large supplier of food to the world; it will continue to be a large food importer. But in some specific markets, food produced in China will reach the world, and Chinese food companies will become international food exporters.

There is a large opportunity for Chinese companies to source food in several parts of the world, mostly in the countries that have natural resources, thus making the companies real food multinationals. This could be done by acquisitions or by building from the ground up.

So confident am I that this will happen that I am ready to bet that by 2020 at least three Chinese companies will figure among the world’s 25 largest multinational food corporations.

The author is professor of strategic planning and food chains at the School of Economics and Business, University of Sao Paulo, Brazil (www.favaneves.org). The views do not necessarily reflect those of China Daily.