How to make it in China

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Related tags: People's republic of china

The rules of the game in the Chinese food market are not as
elsewhere, according to one of the world's leading authorities on
the region's agribusiness. Payment rests on building relationships,
and market positioning is best begun small and under the umbrella
of western retail chains, reports Anthony Fletcher.

Dr Beniot Rossignol has been based in China for the last ten years. Prior to his current position of managing director at Shiyao Investment, a niche investment bank focused on agribusiness and food processing, he was investment officer at the World Bank Group, in charge of investment in the food & retail sector for China.

Previous to joining the World Bank Group, Dr Rossignol was the head of Nichifutsu Kaikan, an Agri-food unit think tank based in Tokyo. He is also currently the chairman of the Food & Beverage Group of the European Chamber of Commerce in China.

"We have seen Fortune 500 companies losing lots of money in PRC by over-investing too quickly, too early and companies with less than $500 000 of investment being very successful within three to four years because they knew where to position themselves, and make the best use of their money,"​ he told

"Knowledge is the key to taking advantage of this lucrative market."

Indeed, for those who follow Rossignol's advice, the rewards are potentially huge. Manufacturing has accounted for 60 per cent of China's GDP growth over the past decade, with the low cost of production, coupled with favourable economic policies and preferential tax rates, among the drivers behind the growth.

A number of improved administrative measures for foreign investment in the commercial sector, which removed most of the barriers for foreign investors to access the Chinese domestic wholesale andretail markets, came into effect 1 June 2004. Such moves have attracted major firms such as Coca-Cola and Nestlé, who now record sales of over $1billion in the China packaged food market, which is now estimated to be worth over €30 billion.

Rossignol and his team have been instrumental in structuring and advising numerous transactions both in the food manufacturing sector and the fast growing food retail sector in China and Japan. But this is no easy pick-off. Rossignol points to a lack of distribution outside many of the main cities, and concern over the quality and quantity of raw materials.

"Usually this means the more inland you go the more challenging it is, but progress has been made following the Go West policy of the Chinese government."

Jacques Penhirin, a principal in the Greater China office of management consultancy McKinsey & Company​, argues that most foreign companies are neglecting 90 per cent of the market - more than 700m people - by targeting just the wealthiest minority.

If they hope to become large-scale businesses in China, foreign companies need to address the low and middle-income segments, says Penhirin.

Rossignol agrees with this general sentiment, but thinks it would be naive to immediately target the whole Chinese market in a bid to corner the market. Foreign business successes in the PRC, he says, have been built with time and through the inevitable process of trial and error.

"My advise is to first focus on a specific region and market and make it a business model you can replicate,"​ he said.

One of the reasons why he urges caution is the issue of payment within the Chinese market. The ease by which companies can extract payments can differ widely, depending on the region and of course those involved.

And many foreign small-medium enterprises (SMEs) will face difficulties, says Rossignol, if they simply rely on all contracts to be paid without putting in the groundwork first.

"Building up relationships and taking the time to do this is, according to our experience, the most important factor, especially for foreign SMEs,"​ said Rossignol. "Taking someone to court on the other hand takes time and money and the results is not obvious."

However, he thinks that some foreign SMEs are now on the right track, and are beginning to successfully target the Chinese mass consumer market. He points to a number of Taiwanese and Hong Kong-based firms, along with a few western corporations such as Coke.

"These companies were able to target the mass market after they acquired local companies that already had channels in place,"​ said Rossignol. "Also, people should remember that firms such as Carrefour and Wal-Mart have stores pretty much mapping out China's main regions, and a listing of these chains will demonstrate the key consumption regions of the PRC.

"I would recommend this strategy to start, with since these operators are very professional. This will allow local businesses in these regions to see your products, and if they do well you will start being contacted by other retailers who will want your products on their shelves."

In addition, Rossignol says that western companies can compete with low-cost Chinese production by staying away from markets where cost is driving up the market and differentiation can't be made with the thousands of local low cost producers.

Rossignol highlights the dairy powder business. Following the fake milk scandal, he says that Chinese consumers have realised that they can't play around with low priced dairy products for babies.

As a result, many have moved to foreign brands and China's most successful players to be on the safe side.

"Some of our clients in the food sector have also been able to develop their own brand in the PRC by being a first mover into a market where local companies had no experience in,"​ said Rossignol.

Related topics: Processing & Packaging

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