In the news: Fonterra and KKR invest in food safety and local officials lure factories to their regions

Investments surge in food safety

New Zealand's Fonterra Cooperative Group just agreed to pour US$500 million into a deal with the Beingmate Baby and Child Food Company, a Chinese infant formula manufacturer. The next day, US private equity firm KKR announced a US$400 million investment in China's largest chicken breeder, Fujian Sunner Development. This marked KKR's fourth food safety related investment in China. Fonterra, which put millions of dollars into a partnership with the Sanlu Group (infant formula maker) six years ago, had to write down the entirety of its investment into the venture when the Sanlu Group went bankrupt and had its executives imprisoned. Fonterra said that its current investment has been made in a completely different environment and with a completely different partner.

Sources:
Reuters
The New York Times

Food scandals have been hitting China lately in disturbing numbers. This week authorities seized more than 30,000 tons of chicken feet poisoned with hydrogen peroxide and arrested individuals in Zhejiang province for selling 38,000 tons of dog meat that was poisoned when the animals were slaughtered with cynanide or anesthetics. Heinz also apologised to Chinese consumers last week after being forced to recall infant cereal from high levels of lead. Last month, McDonald's, KFC and other fast food chains were hit by a scandal involving meat that was expired and picked up from the floor. Though foreign companies are perceived to have higher standards of quality and safety, the recurring events indicate they still face the same issues. Experts have said the biggest challenge faced by big foreign food companies in China is ensuring their standards are enforced by all workers at all stages of the food supply chain, as unawareness of standards is often the main problem.

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Local officials lure factories to move inland

Chongqing officials met with a group of watch industry executives last week and offered packages for them to relocate their factories to the region, even saying they would pay for moving costs. Incentives also included heavily discounted land, less-intrusive environmental inspections and lower worker wages. The Renley Watch Manufacturing Company was one of the firms present at the meeting and its managing director said at least 10 watch factories were already preparing to move.

Source:
The New York Times

With foreign investment falling in the inland areas, these provinces are fiercely competing to attract domestic industries, subsequently offering financial incentives to companies and even challenging each other in important areas such as environmental regulations. Businesses are taking these offers seriously and some have voiced that this is a problem that violates the transparency of the market. But the manufacturing hub of Guangdong is losing lower-wage jobs to inland provinces, and increasing numbers of university graduates will not consider factory work, leading to a labour shortage. Moreover, the province has taken a strict stand on tackling pollution and has forced many factories to install new equipment, move away or even close. More manufacturers are considering relocating their production operations to inland regions or other countries. How this plays out will be interesting to follow.

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