WORTH THE EFFORT
THE KEYS TO UNLOCKING THE CHINESE MARKET
by Lawrence Taylor
China's size as a market is exceeded only by its dynamism. As of late 2003, total U.S. exports to China were up 27 percent year-to-year, and USDA forecasts show that exports of U.S. agricultural products will approach $60 billion in 2004, up from $53 billion in 2002. Products from biotech to black walnut are experiencing a rush of interest from China.
"However, the short-term gyrations of the market make people wonder if it is worth it," says Paul Burke, Asia division director of the American Soybean Association. Considering that China has now risen to become U.S. agriculture's fifth-largest market and has the world's largest feed milling capacity, the gravity of the opportunity makes the China market of strategic long-term importance. The question is how to approach this opportunity.
A recent survey of the American Chamber of Commerce members in China reports that 75 percent of respondents replied that their Chinese operations were profitable or very profitable; 42 percent said that profit margins were better than their global average. In addition, China is now the top worldwide destination for foreign direct investment — U.S. investment alone rose to $10.3 billion in 2002. Surprisingly, 62 percent of new U.S. investments are now Wholly Owned Foreign Enterprises (WOFEs) — a limited liabilities company that is wholly owned by foreign investors.
American commerce is taking the China market seriously. The winners include major categories of agricultural production and also some unique products and services. One biotech company, SENESCO, signed a $35-million deal to transfer their senescence technology. The key is to identify your individual fit in the market and then implement your business plan well.
STRATEGIC OR OPPORTUNISTIC?
Knowing that China will account for some 30 percent of world agriculture for the coming few decades might indicate that China will be a strategic market. For some it already is. The Taiwanese are the largest consumers of soy food per capita; as the mainland Chinese diet aspires to that level of consumption, there is not enough soy in the world to serve that market. "The Chinese government has by policy committed to the direction of genetically improved crops in recognition of their demographic imperative," says Val Giddings, vice president of the Biotechnology Industry Organization. For these reasons, ASA's Burke says, "We have just scratched the surface of the long-term potential."
American agriculture often has a strategic opportunity based on raw materials or know-how that is needed by the Chinese market. One animal feed ingredients producer has been successfully selling to China for 10 years. China has 450 million of the world's 940-million pig population but lacks a sufficient source of lactose for starter feed. China now takes 20 percent of this company's global exports. Ralston Purina's pet foods are successful in China due to Purina's advanced processed products and ability to deliver continuous innovation. Also, several American food processing companies have created joint ventures, adapting their process know-how to local products and selling to both the local market and to the export market. Hawaii sends 90 percent of its exports to Japan and views China as a strategic export market. Another example is a Chinese province that developed a new world-scale producing area of pyrethrum and sought a manufacturing venture with a major American manufacturer.
When you find your economic fit, it is worth the dedicated effort to make the Chinese market work for you. For example, the market for distribution of tractors and combines is still in its infancy, and most of the purchases are on tender. AGCO Corporation created a presence via its distributor; the company sells most of its heavy equipment through tender bids, a cost-effective way to be in the market early to build relationships and reputation.
Tapping China's low-cost production capacity is another opportunity. U.S. equipment manufacturers source castings from China as well as specialty equipment and small hand tools. "They are happy to make products that are viewed as 'buggy-whips' to U.S. manufacturers," explains Jim Wessing of KONDEX Corp. In the aquaculture arena, Wal-Mart in Louisiana carries crawfish produced in China. Even the most dedicated economists espousing "comparative advantage" might not have forecast the import of crawfish to Cajun country.
On the commodity market scale there is the corn market. "While China is currently the largest competitor to U.S. export corn, in the long term, China will be an ongoing net importer of U.S. corn," says Rick Tolman of the National Corn Growers Association. The major U.S. exporters will take the lead when the China market returns; smaller sellers and sellers of specialty grains will be best served by preparing their channel and being ready to act quickly when the time comes.
Timing of entry appears to be critical in tapping the China market. Robert Tse of the USDA has long been observing China's agricultural development and suggests that China will echo the U.S. development. Many trends that have developed in the United States will develop in China in due course. Convenience foods are a case in point. The rapid development of the urban economies with double-income families has given rise to a market for prepared foods that are "ready-to-wok." This is another opportunity for American processing know-how.
Selecting the market segment to enter is important to success. From a distance China looks unified, but it is composed of rather diverse geographies and consumer segments. Northern China has a surplus of corn. Southern China has a shortage of corn where the United States has a freight advantage in supplying to the area. Northern agriculture is more mechanized; consequently, John Deere's production is located in the north where the company manufactures small combines suited to the Chinese market.
Even American food products in urban markets experience very unique segmentation. Call it a generation gap, but seemingly similar products appeal to different people. Grandparents still like to shop frequently, so freshness and more traditional foods appeal to them. DINK (double-income, no kids) families favor KFC. And, as in the United States, young children prefer McDonald's. To accommodate, McDonald's offers rice-based foods for the grandparents who are fond of taking their progeny out for a treat.
Success can be found in how the product is presented. For instance, DuPont had great success with its high-unit-active herbicides, which were aided by its sachet packaging approach. A 500-acre field in China appears much as it would in Iowa; however, the stewardship of that field is divided up into individual plots that may be four rows wide and half a mile long. The individual farmer managing one plot only wants to buy a small quantity of product.
Monsanto found a new use for a corn herbicide in the Chinese rapeseed market. This China-specific opportunity was available because rape is hand transplanted — for time management purposes, following a rice crop - a process unimaginable in North America. If one takes the time to fully understand the cultivation practice it is possible to design and market accordingly.
A TOUGH MARKET
These profitable possibilities are also problematic. "Marketing in China is like baseball in that one has to win more than one loses if you want to survive past the end of the season," says Thep Ung of Ralston Purina.
Every successful China business story comes with travails that required patience and flexibility. One prime example is the regulatory environment. Tony Clayton of Clayton Agri-Marketing sells livestock to 44 countries and says, "This is the toughest market in the world."
With entry into the WTO, China's regulations are coming into line with international standards. Nevertheless, the devil is in the details. Companies report that, at the least, they have to insist on detailed discussion of the regulations interpretation, and in the normal case they are actually negotiating the interpretation. Western businesspeople feel that they are always in negotiations — the deal is closed, circumstances change slightly and then the deal is open again.
Lau Tsu, a Chinese contemporary of Aristotle, instilled in Chinese culture the process to continually search for the "way," the middle ground, a compromise. So success is found in negotiation. There is no shortcut.
There is one advantage for American agriculture marketers: agrarianism is important to Chinese culture. Two-thirds of the Chinese population still lives in the rural areas, and everyone's roots are in the venerated agrarian society. The traditional values of American agricultural business people are well suited to doing business with China. Its economy is opening, growing and modernizing. This creates an eager market for appropriately designed product and service offerings. With persistence, patience and good old marketing fundamentals, American agriculture will continuously find opportunity in China. AM
Lawrence Taylor founded Aziotics, St. Louis, after working and living in Asian markets for 25 years.