Deep pockets, patience needed for China

11 Aug, 2004 10:00 PM
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AUSTRALIAN agrifood businesses looking at expanding into China need to have deep pockets, patience and long-term strategies if they are to succeed.

That's the cautionary message from Rabobank food and agribusiness reseach division head Ben Russell, who has been examining the runaway Chinese economy, and its implications for Australia, since February.

Quoting an article from the Harvard Business Review, Mr Russell said a lot of companies had grand visions of doing business in China but had come unstuck through tangled and brambly joint ventures or been blocked by state interference.

"The Chinese legal system does not have a good track record of foreign companies successfully suing Chinese companies for breach of contract," Mr Russell said.

Mr Russell said the growth in China, population 1.3 billion, had been amazing with its 2004 GDP hitting $2.28 trillion ($2,280 billion) or US$1.6 trillion.

"Shanghai is the only city in the world where you can see GDP growing before your eyes," he said. "There are hundreds of building cranes littering the skyline."

He said Australia exported $9.1b of products and commodities to China, with agri-food comprising $2.2b, but we import $14.2b of goods.

China was a net food exporter and its total exports were $612b.

He said the Chinese Government was doing as much as was necessary to join the World Trade Organisation (WTO).

Tariffs had been slashed from 45-50pc in 1991 to 6pc as part of China's attempts to join the WTO.

"But every man and his dog is lining up to supply that market, and there is quite substantial competition," Mr Russell said.

China was also using non-tariff measures to control foreign investment in the country and protect its own industries such as quarantine regulations.

Mr Russell said there had been phenomonal growth in the standard of living and consumption habits in urban areas with the target market comprising 500-600m people.

One of the fastest growing agrifood retail sectors was supermarkets, comprising 30pc of the urban food outlets in urban regions ‹ with sales of $128b ‹ and 12pc in the regions since 1994 when there were none in the country.

The top 10 supermarkets were all Chinese-owned but there were 22 multinational companies trying to get a foothold into the emerging market.

But these companies have had to form joint ventures with the Chinese, owning no more than 49pc, and were not allowed to set up their own distribution networks.

Mr Russell said this experience had frustrated the multinationals, but the Chinese Government would be liberalising the market in December 2004, allowing the companies to set up on their own.

The government is also planning to merge some of its largest supermarkets to prepare for the move.

He said Australian companies hoping to take advantage of multinational activity needed to be aware that imported food made up less than 5pc of sales and their profit margins would be as tight, if not tighter, as existing margins.

"Supermarkets want to buy from as few suppliers as they can," Mr Russell said.

"You've still got to have the right product and show a difference in quality or availability.

"If you try to compete at the cheapest price you are going to get whacked."

A major challenge for China was setting up efficient internal logistics networks which could provide opportunities for Australian companies to import directly to cities.

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