Market Access Report: Agriculture, Food and Beverages
July 02, 2002 | BY
clpstaff &clp articles &Jones, Day, Reavis & PogueChinese consumers spent a whopping US$300 billion on food and beverages (F&B) in 2000, accounting for 43% of total consumer…
Jones, Day, Reavis & Pogue
Chinese consumers spent a whopping US$300 billion on food and beverages (F&B) in 2000, accounting for 43% of total consumer spending. Foreign agricultural products have made inroads into this massive market, with US soybean exports to China, for example, amounting to more than US$1 billion in 2001. And foreign invested F&B ventures are flourishing; Pepsi-Cola and Coca-Cola products now account for 49% of the entire carbonated beverage market in China. Now that China has joined the WTO, foreign F&B companies will find a more accessible Chinese market with lower tariff rates and a better investment environment.
Agricultural Products
As agreed by China in its WTO Accession Protocol, China has already amended the Customs Import and Export Tariffs of the People's Republic of China to increase quotas and reduce tariff rates on agricultural imports, such as wheat, corn, rice, soybean oil, palm oil and sugar. For example, tariff rate quotas (TRQs) for soybean oil, which increased from 1.5 million tons in 2001 to 2.5 million tons in 2002, are subject to in-quota tariff rates of 9%, while out-of-quota tariff rates have declined from 121.6% in 2001 to 52.4% in 2002, and will be further reduced to 9% by January 1 2006 when quotas on soybean oil will be entirely eliminated. The government has pledged transparency in the distribution of agricultural TRQs and has already implemented a schedule that will see annual increases in the TRQs granted to the private sector. In the case of soybean oil, 90% of quotas will be reserved for the private sector in 2005 as compared to 50% in 2002.
Due to concerns over self-sufficiency and farmers' incomes, grain imports were a thorny issue during China's lengthy WTO negotiation sessions. According to the US Department of Agriculture, China's commitment for overall grain imports remains at 5% of total consumption, ensuring a self-sufficiency rate of 95%. The commitment for wheat will be roughly 8%, but this will be balanced by lower commitment rates for corn and rice. In 2002, TRQs for wheat, corn and rice are set at
7,884,000 metric tons (mt), 5,175,000 mt and
1,662,500 mt, respectively.
China's WTO accession also requires a reduction in non-tariff barriers for agriculture imports. China has agreed to fully abide by the terms of the WTO Agreement on Sanitary and Phytosanitary Measures (SPS), thereby better ensuring that import health requirements will be based on sound science, not on political or protectionist concerns. Certain SPS bans were already lifted in April 1999 on US citrus, fruit, meat and wheat, and China has also promised to cap and reduce trade-distorting domestic support, which is generally in the form of domestic agricultural subsidies.
Processed and Packaged F&B
As disposable incomes increase, so has demand for processed and packaged F&B in China. Consumers have increasingly shown an interest in exploring foreign tastes and the government has shown support. For example, in the recently revised Foreign Investment Industrial Guidance Catalogue (外商投资产业指导目录)(Investment Catalogue), the processing of grain, vegetables, fruits, poultry, livestock products and aquatic products, and the production of various beverages, nutritional food and dairy products are listed as encouraged foreign investment industries. Among the international giants seeking market share in China is Nabisco, the American manufacturer of popular brands such as Oreo and Ritz. Its China holding company, set up in 1995, has operations in Beijing and Suzhou and aims to be the pre-eminent biscuit producer in China.
The manufacture of carbonated beverages with foreign trademarks is classified as restricted in the Investment Catalogue. The State Economic and Trade Commission has thus far been unwilling to approve foreign investment enterprises in this sector with more than 60% foreign ownership. In spite of this restraint, Pepsi-Cola has seen its business booming in China. As evidenced by a recent ACNielsen survey, Pepsi has become the favourite soft drink among young people in China. So far Pepsi has invested over US$300 million in more than 20 joint venture companies in China and employs more than
7,000 people.
Restaurants
Foreign companies are allowed to construct, renovate and operate restaurants in China in the form of joint ventures. Foreign majority ownership is now permitted and wholly foreign-owned restaurants will be allowed to operate in China by 2005. Kentucky Fried Chicken (KFC), which already operates 640 outlets in 120 Chinese cities, is opening a new outlet every five days. Despite not yet being able to establish franchise operations, McDonald's has seen successful expansion in China through its joint venture vehicles with partners in Beijing and Guangdong. Both KFC and McDonald's have benefited from their localization strategies, with tens of thousands of local employees and domestic sources accounting for most of their total raw material procurement. Their localization efforts will get a further boost as China is scheduled to officially permit franchising by foreign companies by the end of 2004.
Conclusion
China's gradual implementation of its WTO commitments combined with the fact that Chinese consumers are becoming more receptive to foreign F&B offers foreign F&B companies greater opportunities in China. Although it may still take years for China to conform to international standards and to fully implement its WTO commitments, the rewards for foreign F&B companies with appropriate business strategies and commitment to China may very well be worth the extra time and effort necessary to succeed in this market.
By John Sheng, Jerry Han
and Mitch Dudek
Jones, Day, Reavis & Pogue,
Shanghai
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