China Food Industry: My Top 3 Trends and Predictions

1) Greater Regulation of Crossborder e-Commerce:

• China's seemingly unstoppable e-Commerce sector is facing its first major hurdle since the inception of the 7 provincial crossborder eCommerce pilot cities. Regulation of China's Crossborder e-Commerce channels has been skirting the boundaries of illegal, dangerous to conspicuously unethical for a long time. All that may come to an abrupt end with recent revelations that AQSIQ is attempting to instill a modicum of regulation over the current "free-for-all" system in place and hopefully give some semblance of a well regulated and supervised food supply chain......... much to the displeasure of China's major e-Commerce platforms including giants like Tmall, Koala, Yihaodian and Jingdong.
• At present goods imported through cross boarder e-Commerce are exempt from even the most basic regulatory requirements including the use of Chinese labels. Health foods that have not undergone China's overly stringent "blue hat" registration and do not comply with other elements of China's extremely stringent health food requirements can also be freely imported. Labeling of GM Foods and ingredients of GM origin is also not required despite the emphasis placed on this in China's pending new food safety law. In addition to this numerous other products and product categories that do not comply with a host of China's GB standards including foundation regulations like GB 2760-2014, GB 13432-2013, GB 28050-2011,GB 7718-2011 can also be freely imported. 
• The can of worms (...maybe literally) opened by reducing regulatory requirements for foods and cosmetics imported through crossborder e-Commerce is unlikely to be appreciated until China witnesses its first major e-Commerce food scandal, as they say its all fun and games until...someone drinks melamine tainted formula.........

Further Reading

• A Comprehensive Analysis of China Crossborder e-Commerce
• Hangzhou to Assess the Feasibility of New Crossborder e-Commerce Policies

 2) Supply Chain Connectivity and Integration

• China is rapidly integrating and connecting the most important links of its food supply chains. Food production, distribution, processing, marketing and consumer purchasing are all undergoing a period of rapid electronic integration which when fully realized will represent the worlds most expansive food traceability system.
• Two major factors fueling growth in this sector are the existing, well developed mobile technology infrastructure and the widespread acceptance of mobile purchasing and brand specific marketing applications .
• When we look at the purchasing behaviors of Chinese consumers we can see how online purchases particularly mobile purchases have grown in recent years. The use of QR codes on food labels integrated with popular mobile social media platforms like Wechat allows customers to interact with brands, verify product authenticity, view marketing information, avail of promotional offers and ultimately purchase in an extremely convenient way. Another benefit is that manufacturers get unprecedented access to consumer demographics and real time sales data, ultimately affording enterprise the flexibility to quickly respond to market demand and tailor new marketing campaigns.  

Further Reading

• Authenticateit Private Sector Traceability: Protecting Consumers Empowering Brands
• Food Safety and Traceability: Crisis Precipitating Change

3) Growth of a Competitive Domestic Dairy Sector: 

Recent data suggests that China's domestic dairy sector is performing poorly. However what the data fails to convey are the recent developments in China's domestic dairy sector.  According to the AQSIQ's white paper " National Imported Food Quality and Safety" in terms of total trade value dairy products still rank as the number 1 imported food commodity. The key factors fueling the continued influx of foreign dairy is the widespread belief among Chinese consumers that domestically produced dairy is both inferior and potentially poses health and safety risks.  Given the development and growth trends of the Chinese dairy sector over the last several years, particularly the signing of merger and acquisition deals and the implementation of increasingly stringent regulations for foreign infant formula brands exporting to China we can see how China's government and its dairy sector (very difficult to see where one ends and the other begins) is attempting to spend and regulate its way towards a healthier domestic dairy industry. Major Chinese dairy companies now have  access to key overseas dairy markets, stakes in major overseas dairy enterprise and access to overseas pastures, processing facilities and ultimately high quality raw materials of foreign origin. The major deciding factor for Chinese consumers purchasing infant formula i.e the geographical origin of the infant formula raw materials will become a thing of the past.Combined with the obvious "on-the-ground" advantages enjoyed by domestic enterprise including lobbying power and their ability to harness the rise of new more efficient routes to market such as e-commerce and crossborder e-commerce the outlook for the Chinese dairy industry is looking good in the long term.

Aggressive Global Expansionism and Domestic Market Consolidation

• Yili signed contract with Dairy Farmers of America to build the United States largest dairy production facility.
• Yili to build worlds largest integrated dairy production facility in New Zealand titled the Yili Oceania Production Base
• Fonterra purchased 20% of Beingmate- Beingmate is a major player in China accounting for 10% of the total domestic market and is found in over 80,000 retail outlets nationwide
• Mengniu buy Yashili (2013)
• Yashili sign strategic cooperation with JD.Com for exclusive distribution rights of its e-Commerce only IF product Merla. 
• Key growth areas are infant formula, yogurt, UHT milk and probiotic dairy based beverages. 

What will this mean for International Interests?

It is estimated that by the end of 2016 over 60% of China's domestic industry will be merged. In theory the end result will usher in an epoch in China's dairy industry characterized by a domestic market monopolized by China's dairy super manufacturers that will have the technical capacity and financial clout to match that of its international counterparts. In addition China's domestic industry will have unprecedented access to raw materials from regions rated top of Chinese consumer preference lists which will mean that many of the advantages enjoyed by imported products will cease to be a deciding factor in consumer purchasing behaviors. At present there is simply too much demand for infant formula and dairy for the Chinese domestic industry to supply, as such the government has no choice but to allow importation of massive amounts of imported infant formula and dairy. However when the expansion plans of domestic enterprise finally come to fruition we can expect a change in the regulatory strategy of the Chinese government.When the time is right it is entirely possible that Chinese authorities will institute another series of regulatory technical barriers to trade. Given some of the current and past developments in China's food industry and legislative framework, the pending changes in food law and proposed changes to e-commerce regulation I can envisage future regulations which:

• Bans the import of all OEM infant formula and dairy brands
• Requires mandatory traceability systems for all imported products
• Requires registration of all infant formula brands

Further Reading

• China Regulatory Environment for Imported Infant Formula
• China Dairy Regulations (Chemlinked Foodpedia)

* If you are interested in learning more about Chinese eCommerce or wish to launch a product using eCommerce here in China, please do not hesitate to contact me on [email protected]