After almost two years in China working as the head of Alltech China, I've had some interesting insights on the point of inflection that the country's food industry stands at today.
There is often talk about consumer demands increasing, and it is becoming clear that consumers are less forgiving and will "quit" a brand if it cannot ensure safe food. At the same time, the feed and livestock industries are struggling to satisfy these demands -- 2013 went down as one of the industry's most challenging years.
Growth brings challenges
Massive growth of the Chinese feed and food industry is well-documented, riding on the back of the drastic explosion of the country's economy, but this has not occurred without challenges.
Alltech China will celebrate 20 years in 2014, and, while preparing for this, I have reflected on how the next 20 years will look very different than the first.
Will China continue as a country that produces more than 80 percent of its own food or one that imports the majority of it? Will China have a food safety system that looks more like an evolution of what it is today or a complete revolution? How will government policy change in the next few years?
There are so many unanswered questions, which is why we started our "China Now" program two years ago to put a special focus on China, bring more resources to this market and influence its development.
There have been numerous food safety issues in China over the past few years -- from the well-publicized melamine case, increasing nitrogen levels in milk, to criminally high levels of antibiotics used in chicken production and the illegal use of growth hormones in pigs.
It is not as though the Chinese consumer accepts this; in fact, the opposite is the case. Chinese consumers, like other consumers around the world, expect a clean, safe food supply chain and have become very impatient with the industry and regulators regarding these incidents. However, the real question still remains: Why do these cases continue to occur at such alarming levels?
It cannot be said that they are occurring because they are not being taken seriously. Food safety certainly is an important topic in China and one that is extensively covered in the media.
As with everything in China, the government will play a central role in determining the outcome. China has very qualified scientists and regulators to manage food safety in China. The Chinese FDA regulators and the Ministry of Agriculture have a great desire to learn from other places and implement new practices tailored for the Chinese context.
Chinese food safety laws were created based on the Japanese and American standards and are some of the strictest laws in the world. The difference between China and other countries, however, is in compliance and enforcement. The issue is not a question of law; in fact, China has had a Food Safety Law in place with clear guidelines and expectations since 2008.
So the question remains: Why do these incidences still happen?
Scale, incentives and technology
There are many reasons, but three that may provide some perspective are scale, differing incentives within the food chain and access and adoption of new technologies.
China is a massive country with fragmented industries, especially in meat production. While the number of farmers decreases every day as the pull to urban centers continues, there are still between 200 and 300 million farmers in China. More than 9 million people alone are employed raising poultry on farms -- the most integrated of all sectors. This scale poses the largest challenge in changing practices.
Most of the large food suppliers depend on small farms for their products. The industry has not focused on their upstream supply chains as they expand to meet constantly increasing consumer demand. While they have quality programs of their own within the aspects of food production they directly control, the food safety management programs to monitor suppliers are not adequate to deal with the complexity of the Chinese system.
Food manufacturers have quality assurance programs of their own. However, as developed as they may be, it is impossible for them to patrol the entire industry; not only is it not feasible, but also it would be extremely costly.
For the regulators, it is impossible to supervise each farm. Simply put, they do not have sufficient inspectors. As good as intentions may be, if the entire food chain is not monitored, it can be compromised. The Chinese context is fundamentally different in this situation, where competing incentives compromise the whole industry.
The Chinese agricultural industry has improved as farms have increased in scale and sophistication. However, there is a drastic and growing gap between developed cities and rural life in China, a country where it is often said you can see the developed and developing world at the same time in one glance.
This issue is exacerbated by the fact that competition is very intense, and price competition determines winners and losers. Therefore, a farmer who depends solely on animals to feed his family will do whatever it takes to ensure his animals do not fall sick or experience high mortality rates. From this point of view, the ends justify the means, and the use of antibiotics and other interventions that may put food safety at risk may proliferate.
Companies are now feeling extreme pressure to overcome these challenges.
The most significant example of this is YUM! China, which faced significant consumer backlash when Chinese television reported that YUM! suppliers were using very high levels of antibiotics to keep their chickens alive.
The impact was felt throughout the firm with footfall in stores in China dropping 11 percent in the third quarter 2013, and share prices in the United States plummeting. YUM!'s net income in the third quarter fell off a cliff, dropping a dramatic 68 percent to US$152 million. The situation even resulted in a CEO-level apology to Chinese consumers.
Subsequent news stories and an outbreak of H7N9 in poultry resulted in a much-lower-than-expected expansion in China this year. The company is confident a full recovery is in store, but more time and effort will be required. Some fear that a generation of consumers has now taken KFC off their personal menu. What is most clear from consumer response is that, for many, the halo that KFC may have had in terms of food safety is tarnished.
Managing and regulating each farm is a major challenge and very difficult to do in such a large country with highly fragmented industries. The problem is also one of mindset and education; a commitment to food safety must exist throughout the food chain and not only at the top. Each stakeholder should do their part in ensuring a clean product all along the way.
Former YUM! China Director Joaquin Pelaez discussed in his presentation to more than 150 Chinese nutritionists and leaders at the recent Alltech China Nutritional Poultry Summit held in Qingdao that there are five areas the industry needs to further examine:
Educate small farmers; help them grow
First, we must have deeper education at the farm level, particularly with the farmers of small-scale operations. Second, there needs to be better support, particularly veterinary services, for the very small farms when issues occur.
A stronger drug management program in China is required, allowing only qualified and certified veterinaries to buy and dispense veterinary drugs. The government should enforce this fully, and those people and companies that sell illegal drugs should be strictly penalized according to the law.
These farmers also need access to several things that could propel their growth. Lack of land, capital, know-how, equipment and the ability to improve yield inhibit development. Labor costs in particular are on an upward trend. However, the other factors can be positively impacted through support of the government and the private sector. Supplier development will be a key factor in the success and continued growth of the food industry in China.
Develop biosecurity models, risk analysis plans
The Chinese food trade is booming, from street vendors to food outlets; just imagine trying to regulate each and every one of them. Again, there are simply not enough inspectors to accomplish this task.
It is also not realistic to expect large companies to fix the entire issue for the country. Large corporations have brands they need to protect, and they do what is necessary to protect their food chain supplies; but this will not solve the entire country's problem.
Each industry needs to put into place a biosecurity model to self-regulate and manage their specific food categories since each category is different with varying critical control points. The model should be comprehensive in nature and include producers, veterinarians, local communities and public health agencies.
Additionally, each industry should develop a comprehensive risk analysis with full awareness and understanding of the risks. With this, each industry will become better equipped to prevent problems and avoid crises.
One of the greatest values of a risk management program is that it provides a systematic, science-based approach to solving problems. Crisis management and risk management are competences that Chinese companies and those doing business in China must develop quickly.
Support and reward the right practices
Local governments should provide more education and support to small farms and create the feedback mechanisms to self-manage and regulate these programs.
The food industry at large needs to continue to reward those with best practices and high integrity programs and not discriminate on price alone when selecting vendors. I believe that price alone as a decision-making point is a thing of the past, since neither the consumer nor the regulators are willing to accept products with inferior quality for less cost.
Pay attention to quality
Farmers and animal growers should utilize the best technologies available to feed their animals efficiently and effectively. The technology already exists and has been proven in other parts of the world; however, one of the biggest challenges to its adoption is support and further education from all sectors.
Attention must be paid to the quality of the feed and the technologies available for animal feeding.
What is needed is an integrated approach where government, industry farmers and all parts of the supply chain are involved in real dialogue and action.
This type of action should not be just in conferences or in speeches, but it must be real action by well-intentioned and active participants who can make a difference.
Global companies can provide unique insights into how this process takes place in other parts of the world and, if they have the ability to tailor ideas to the Chinese reality, make proposals that may help to speed up this process.
The Chinese want their children to eat safe food from a secure food supply chain. The consumer is no longer willing to accept bad products and will have high expectations of regulators to ensure food is safe. The media has an important role to play, moving from sensational news reporting to educating and promoting best practices.
Over the past 30 years, China has seen incredible growth in its economy, so it is only natural that parts of the system may lag behind the expectations of consumers, who now want the best every time. This does not mean, however, that those expectations cannot or should not be met. The food industry must move at the same speed in providing safety as it has in providing volume.
In the end, what is at stake is "Brand China."
In these times in which news travels around the world in an instant, creating trust is paramount for any brand. It takes years to build brand trust, and at the same time, it takes one incident to damage that brand's credibility or reputation.
Due to some cases in China over the past few years, many countries have become skeptical about Chinese food safety practices. The Chinese consumer has also become distrustful of their industry and will remain skeptical until the results show different outcomes.
The time for change is now. The government wants it, and the consumer expects it. China's role in the global economy continues to grow, which makes this vital food safety change even more important for Brand China.