China is rapidly changing from a manufacturer to a consumer nation. With its rise in economic status, the country and Chinese businesses are playing an ever larger role on the world stage.
Dr. Mark Lyons, Alltech’s global vice president and head of greater China, explained that the rapid maturation of the Chinese economy will drive great changes in its domestic poultry industry and potentially effect the larger global market. Lyons, who spoke at an Alltech event on February 1 at the International Production & Processing Expo in Atlanta, offered advice for understanding the world’s second largest poultry-producing economy and doing business in China.
Dr. Mark Lyons, Alltech’s global vice president and head of greater China, speaks at an Alltech event at the International Production & Processing Expo in Atlanta. | Austin Alonzo.
Above all else, people should understand three things about China, Lyons said:
- It’s different than anywhere else in the world: it is fast-paced, demanding and not for everyone.
- Things change rapidly in China, but transparency is highly valued.
- To do business in China, there must be a commitment to being Chinese by investing in human and financial resources staying in the country.
China’s poultry industry in transition
While China is known for its industrialization, its government continues to highly value agriculture. Lyons said the government’s “Number 1 Document,” the first official document produced every year and updated daily, is about agriculture. This year, the document vows that China will protect its farmland and lend more to farmers to narrow the wealth gap between rural and urban areas. This will be achieved through agricultural modernization, ecological agriculture policies, and the country’s strictest-ever food safety law.
In China, consumers are concerned with food safety, want better quality and healthier food, and a self-sufficient food supply. But, Lyons said, food safety leads all of the concerns due to the continued fallout of the 2008-09 melamine crisis. The tainted milk and infant formula scandal, one of the biggest ever events in global food safety, totally changed China’s perception of agriculture and food safety.
As a response, the Chinese are moving away from smaller farms to more industrialized operations that are perceived to be better for food safety. In the poultry industry, concerns about food safety are creating greater demand for antibiotic-free poultry. Chinese consumers, and the government, are also increasingly concerned with pollution and placing pressure on farmers to lessen their environmental impact.
In spite of being the world’s second largest poultry meat producer and largest egg producer, the Chinese poultry industry is fragmented. However, that’s changing as all agriculture becomes more integrated. Large-scale feed producers and other food and non-food-related companies are assembling integrated agriculture operations in an effort to consolidate the market.
Lyons said Chinese consumers also prefer slower-growing yellow and black broiler breeds – traditional Chinese breeds – rather than the white broilers eaten in the West. The notable exception is U.S. fast-food chain Kentucky Fried Chicken, but even that famously successful company is facing slower growth. Lyons said the KFC brand lost some credibility with consumers due to high levels of antibiotics found in some of its chicken meat.
Nevertheless, chicken occupies a generally low status in the Chinese diet compared with other proteins and improving fortunes may drive consumers to continually pick pork or beef over chicken. Factories commonly buy the meat to serve to workers, but as the factories slow so does the demand for chicken, he said.
New and old challenges to the industry
In spite of all the positive forces in the Chinese economy, its poultry industry faces serious challenges: namely, the persistence of highly pathogenic avian influenza (HPAI).
Lyons said factors like the 2010 imposition of tariffs on U.S. poultry, the appearance of H7N9 HPAI in 2013, a scandal with a McDonald’s supplier selling expired meat in 2014, and the incidence of bird flu overseas beginning in 2015 are all negatively affecting the domestic industry.
HPAI continues to challenge China, Lyons said, because consistent outbreaks tarnish consumer confidence in the product at home and make international trade difficult. H5N1 was first identified in China in 1996 and spread to humans. H5N1 is a growing global challenge for poultry and human health. H7N9, a novel HPAI virus, first affected humans in China in 2013. The 2013 event cost China an estimated $6 billion, Lyons said, and may have permanently tarnished chicken for many consumers. China must import grandparent stock, so any limitations to trade caused by HPAI are serious for China.
Along with health issues, China faces high feed costs, flat performance in chicken consumption and falling exports of chicken meat due to the country’s industry no longer being as competitive on labor costs as they once were. Lyons said he spoke with the leader of Wens Group, the largest Chinese agricultural enterprise, who predicted the broiler industry will face flat, if not shrinking, demand, over production of broiler meat and too little efficiency in production.
Consolidation and adjustment in the Chinese poultry industry
Chinese businesses are ready to break down the fragmented industry and start consolidating the industry. Along with existing players looking to integrate, Lyons said companies without a background in agriculture are buying their way into the industry. One such company is Haier, the world’s largest appliance company after its $5.6 billion purchase of GE Appliance in 2016.
Haier, he said, wants 15 percent of China’s egg market. Right now, no single company accounts for more than .3 percent of the annual production of 300 billion eggs. The company will use its financial strength to achieve that goal.
Outside companies have an opportunity to use their capital to purchase necessary equipment, feed and additives, but knowledge of the industry is essential for success. Lyons said western agribusiness companies now have a chance to share their expertise with Chinese companies entering the industry. Alltech, Lyons said, is already working with Haier.
Companies are also changing to serve customers' changing demands and adapt to new environmental policies.
Like in the West, consumers are asking more questions about what they eat. As western chains announces pledge to reduce or remove antibiotics from production, Chinese consumers are demanding the same. To them, Lyons said, serving China a different product represents a double standard.
Integrated food companies are now opening their own grocery stores in an effort to deliver the higher-quality products the Chinese demand. Food companies want to differentiate themselves in the crowded market and win a larger portion of the market share with specialized products.
After years of accepting heavy pollution, Lyons said, China’s government and people are demanding better environmental practices from all industries. The pollution issue also touches another key challenge for China: its lack of water needed for meat production. In response, the Chinese government is moving farming operations away from water supplies and drafting legislation to improve general environmental stewardship.
Lyons predicts this is the beginning of a green revolution in China’s agriculture industry. Chinese companies will be willing to innovate and test out new technology in order to meet new environmental standards. New ideas will be adopted early in China, and well-capitalized companies will deploy the newest technology available.
3 key questions for the future
Lyons closed his remarks with three questions that will shape the future of the industry.
- Who will control scale and integration? As mentioned, existing food and farming companies and new players are looking to consolidate Chinese agriculture. Who will ultimately control the market remains unknown, but Lyons said it certainly will not be state-owned enterprises.
- Can the white broiler industry improve its image to drive consumption? The Chinese prefer traditional breeds over Western genetics, but does that mean there’s no future for the white broiler in China? If consumer perceptions change, it would be a huge opportunity to increase global white broiler consumption.
- How will water drive imports? China does not have enough water to support its animal agriculture industry. Lyons said if the country is importing meat, it is effectively importing the water used to grow the animal as well. This issue could be a driver of the future of the industry.
China as an economic power
Lyons said the era of “made in China” is ending as the nation becomes wealthier and its workers earn higher wages and pay higher prices. The country’s economy is shifting away from manufacturing and more of the country’s population is moving into the middle class. After decades of migration, more than 300 million of China’s 1.3 billion people live in cities. He said 188 Chinese cities are more populous than Chicago. China’s new middle class is urban, young, globally minded and financially empowered.
As a consequence of three decades of quick development, prices for everything are up in China. Higher costs for labor, raw materials, energy, transportation and increased regulation of industry are ending China’s time as the factory of the world. The export economy is ending and being replaced by a consumption-driven market. Chinese businesses are reacting by focusing on making products for domestic consumption.
Instead of being its factory, China is interested in being the world’s bank and a leader on global free trade. Lyons said China is using its wealth to run the Asian Infrastructure Investment Bank (AFIB), an alternative to the Washington-based World Bank Group. The AFIB is involved in funding projects in Africa and other developing markets around the world. The company is also stepping up as a leader on free trade on the global stage.
