Noon International: Food Trading Import Export

“Dining with the Dragon”
By Lily Noon
President, Noon International

When you meet someone in China, the traditional greeting – nichi bao la translates literally to “Have you eaten yet?”  Food is at the center of everything and Chinese spare no expense when purchasing gourmet delicacies, whether it is to impress friends or business associates.  Business simply can’t be done until you have shared a meal. It is estimated that Chinese spend 50% of their discretionary income on food. What better place in the world for us to build and expand our respective businesses in the frozen food sector than in China!  Despite the recent events regarding food safety issues, which I will address later, China for Noon International is the still the new frontier and land of opportunity.

I would like to thank the organizers of this event for inviting me to speak about China, sharing with you some of our experiences and excitement of the last 30 years and six secrets that we feel are vital for success in the China market.

A NEW CHINA EMERGES

It’s just amazing isn’t it to visit China today?  I mean no disrespect, but I can’t help but wonder what Mao Zedong would think if he was alive today?  If you’ve been to a tier one city in China like Beijing or Shanghai recently I don’t need to describe the scene for you – trendy, hip young people with cell phones can be seen everywhere enjoying
Haagen- Dazs ice cream or a Starbucks vanilla latte.  The masses dressed in pale grey or navy blue Mao suits have all but vanished, replaced by slim and beautiful Asian women dressed in designer jeans and the grey skies that are typical throughout most of China have gotten greyer. Air pollution caused primarily by unwashed coal burning is blamed for hundreds of thousands of deaths annually and cancer is now the leading cause of death in China.  It is estimated that nearly 500 million people have no available safe drinking water today.

On Wang Fu Jing road in Beijing you will see people buying chicken dinners at KFC or a pizza from Pizza Hut and the lines are long during summer months at McDonalds for a soft vanilla cone for only 2 renminbi. Yum, owner of KFC and PIZZA Hut brands, has shifted expansion concentration from the USA to China and plans to open 14,000 new KFC locations and 2000 Pizza Hut in the coming years. KFC has been in China since 1987.  Did you know that KFC is rated the # 1 consumer brand and Pizza Hut the #1 casual dining restaurant in China today?

Despite the recent modernization of China, deep cultural roots exist and these will never change. Mid-autumn festival is just over – a time for celebrating with delicious lotus moon cakes and other delicacies.  February 07, 2008 begins the YEAR OF THE RAT! Chinese New Year. The factories that many of us buy from will be closed for several weeks and the workers will return to their hometowns and their families – some for the first time in a year. Special foods will be purchased and enjoyed and luck enhancing rituals will take place.

Secret # 1 – please respect people at all levels of society and also respect the traditional values that have shaped this great country over the past 4000 years. 

Secret Number #2 – You must visit the KFC at Tiananmen Square at least one time in your life preferably on a Saturday afternoon or at the height of the tourist season.

A NEW URBAN MIDDLE CLASS EMERGES
It wasn’t until Mao’s death in 1976 that this new nation began to emerge as Deng Xiaoping set China on a new course with radical changes in economic and political policies.  With this era of unspoken freedom came an explosion of industry and business in the coastal cities and the creation of the new urban Chinese consumer. Millions moved from farms in the country to the cities in search of better wages and work yet despite this migration, 70% of the Chinese still live in rural areas.

Recent surveys show that what these new consumers want from a supermarket is # 1 convenience and secondly spaciousness and comfort in the store with price actually ranking 6th.  They want more selection, more hygiene and yes more frozen foods.

When I recently visited a Carrefour store in Shanghai I was pleased to see not only  dry goods and prepared foods including meats and seafood, but their freezers  stocked with a high percentage of convenient and locally produced frozen foods such as dim sum, dumplings, wontons, shu mai and rice balls. Now I can’t say honestly that I knew what they all were but for sure such items are particularly suitable to the Chinese taste buds and are also accepted by different age groups and income levels because the prices are reasonable and the product is convenient.

But variety is lacking in other frozen areas compared to European and U.S. markets although items such as frozen French fried potatoes, Dutch and Belgian frozen potato specialty items, ready to cook meals and vegetable blends are gaining popularity.  Plenty of opportunity exists here but frozen products and here is our third secret:

Secret # 3 - products must be created and designed to meet the requirements of the Chinese palate.  The challenge and goal of frozen food manufacturers and marketers is to reduce the difference in taste between traditional fresh and frozen foods s and emphasize advantages such as convenience and reduction in preparation time.

At home in California, the market for Asian foods has exploded in the last 10 years. Twenty years ago at retail level we imported  peapods  under private label in a 10 oz.carton, with a product of origin statement reading  “ MADE IN TAIWAN “and that’s about as Asian as it got unless you went into the canned aisles.  Today Asian Foods are one of the top three ethnic cuisines along with Italian and Hispanic.  Interestingly the major criteria for success at retail and food service level in the USA is not much different from what customers want in China and that is authenticity – the use of traditional recipes and ingredients.  In our supermarkets today you might find Red Curry with Shrimp under the Asian Rhythm brand or Kahiki’s Szechwan Peppercorn Beef.  Amy’s Asian Noodle Stir Fry is made with Organic Rice Noodles, Vegetables and Tofu – its non-dairy, cholesterol free, gluten free, wheat free and has no added MSG.  Steam in bag, cook in box, components, all geared to convenience and quality but the overriding characteristic is definitely authenticity. 

Here’s our 4th secret for any market – keep your products authentic.

Back in China you have only to look quickly at a few of the players in the domestic Chinese retail market to grasp the growth rate and expansion over the past decade. Carrefour, the French retail giant has opened 101 supermarkets in China since 1995. According to Carrefour President, Jose Luis Duran more than 100 million customers shopped at the 101 Carrefour supermarkets in China last year bringing a sales volume of 23.8 billion Yuan.  The success has been attributed to its localization strategy and Chinese nationals make up 80% of the managers in these 101 supermarkets. 

Wal-Mart, who until recently had only a 3.1 percent share of the market will double it’s presence in China by spending 1 billion dollars to acquire Trust-Mart a Taiwanese chain of more than 100 box stores in 34 cities.  Wal-Mart plans to grow with China’s middle class just as it did in the U.S. and Wal-Mart management finds the Chinese mentality more open to its style than consumers in Europe or Japan.

Here’s a recent excerpt from Newsweek Magazine that emphasizes Wal-Mart’s adaptation to local needs:
Quote  “In the grocery section of a big-box store in north Beijing, shoppers struggle to catch a bargain.  And a fish.  “We’d still rather pick it our ourselves says law student Guo Jiao as she and a friend repeatedly plunge fishing nets into a tank full of slippery grass carp.  Other shoppers with nets mob serve-yourself tanks swimming with crabs, clams and eels.  Nearby, Yang Fuming has already landed his fish and carefully watches the clerk gut it. Once his fresh catch is eviscerated, Yang takes the bloody bag of still-convulsing carp and drops it into his shopping cart beside a pair of duvets he is buying to cover his sofas.  “I come here every day or two for the fresh stuff” says the retired physicist. They’ve got everything you need.”   Such is life in the Great Wal-Mart of China.”

You’ve probably guessed Secret # 5 – to succeed today in China’s retail market you must go local.  Initially Wal-Mart offended customers by trying to sell them dead fish or meat packaged in Styrofoam and cellophane.  Once they installed the fish tanks described above, their sales soared dramatically.

For many retailers, China represents the new frontier and a gateway to the largest emerging consumer market in the world.  China’s economy continues to grow at breakneck speeds, and with retail sales expanding at 15% annually, you can’t help but find China’s market potential tantalizing and irresistible.  You’ll find players like Metro AG, Park N Shop, RT Mart, Tesco, and Wu Mart to name just a few.

MOVING INLAND
If the Tier 1 cities seem a bit crowded and you suffer from claustrophobia you might be wise to check out what’s going on inside China today.  Tier 2 and 3 cities provide huge market potential that is being tapped by the savvy marketers for all kinds of commodity goods, including frozen foods. More than 100 cities in China have a population of one million people or more and the government encourages expansion into these areas.  Looking to the future, as this industry continues its rapid growth and development we will see new chain store relationships and networks expanding into many 2 & 3 tier cities with great success.

FAS SPONSORED LOGISTICAL STUDY JUNE 2007

In June of this year I had the privilege of being part of a fact finding task force sponsored by the U.S. Foreign Agricultural Service to investigate the logistical infrastructure in China today with particular emphasis on the movement of agricultural goods to and from the inland cities.  Working with the Federation of Logistics and Purchasing headquartered in Beijing we toured a variety of production and logistical facilities in the inland cities of Chongqing, Wuhan, and Beijing gathering market intelligence to begin assessment of potential obstacles and opportunities for California’s agricultural exporters.   It is clear that much work still remains to be done, especially in the area of cold chain management and the recent issues with food safety make this even more critical. So, for all of the rapid economic growth that we have seen, China’s logistics system is still quite antiquated and there is enormous potential for more 3PL’s and foreign investment in Chinese logistics activities.

SOURCING FROM CHINA
There has been great improvement in the Chinese frozen since privatization opened things up and much is due to foreign influence and investment especially from Taiwan and Japan.  In 1989, many Taiwanese moved their factories to China bringing knowledge and expertise to the growing, processing and freezing of frozen Chinese vegetables.  This was desperately needed both from the PRC side and for the Taiwanese to survive the devaluation of the NT dollar.  This shortened the learning curve and gave confidence to North American and European importers who had been dealing with the Taiwanese for some time. 

In the early days just getting to the plant was an adventure and I am sure many of you can relate to that statement along with the meals we shared which often included dog, squirrel and even rat soup.  They quartered the rats and removed the head and tails but you certainly knew what you were eating. 

During one of our first visits to a plant in Rugao in Jiangsu province, the blanching was done by hand with hundreds of people on the line moving the plastic baskets of peapods and in a sense creating a human conveyor belt. At the end of the cooling process, they would place each individual basket into a spinning machine and the centrifugal force would eliminate all the excess water.  We came with hairnets and masks in hand as these were unknown to them at the time. But plants have certainly changed since those early days.

WUHAN LIFE FOODS IDEAL CO. LTD
This past June I had the privilege to personally attend the opening of of an old friend’s new China plant -   Wuhan Life Foods Ideal Co. Ltd., a Sino-Japan joint venture in conjunction with Xiamen Ideal Foods Co. Ltd. and the municipal government of Wuhan, China.  The expected capacity of this frozen vegetable processing facility is 60,000 tons and the main items being produced are frozen soybeans, mushrooms and asparagus with primary emphasis on the export markets of Japan, Europe and the USA. I’m happy to announce that Noon International is the exclusive US sales arm for this plant!  This state of the art facility is impressive from seedling operations to specific design of the automatic spray irrigation, the green soybean harvesting equipment (from France) and fertilization controls. The use of advanced pesticide residue detectors and gas chromatography as well as modern microbe detection are all employed from the field throughout the production process.  As we enjoyed samples of finished product all we could say was – WOW - a world class frozen food facility dead center in the middle of China.  Who could have imagined this just 20 years ago?

FOOD SAFETY CRISIS IN CHINA
This brings me to the subject of the food safety crisis in China.  Did you know that the
word “crisis”, wei ji, written in Chinese characters, literally translates to mean danger and opportunity?  Yes there are dangers for sure but on the other side there are opportunities hidden within the crisis.

At first, even with the issues of melamine in wheat gluten that killed thousands of pets, the toothpaste problems, and cough medicine I thought we might get by. Then, in mid-July, the FDA blocked the import of certain frozen seafood products into the U.S. because of “chemical concerns” and Mattel recalled millions of toys worldwide that had been made in China. The quick execution of Zheng Xiaoyu who was head of the SFDA (State Food and Drug Administration) in July this year showed just how determined Beijing is to make this go away.  But we knew we were facing major changes of significant proportion in the food industry -changes that would affect all of our businesses in some way or another.

China faces a huge credibility problem now because we live in the age of transparency and the speed of the internet only magnify issues. The MADE IN CHINA problem has taken on a life of its own.

Briefly, the main issues that continue to drive food safety problems in China include:

• High pesticide residues 

• Heavy Metal pollution in soils and water

• Small food production facilities  with fragmented supply sources 

• The huge gap between the local governments who are responsible for regional food safety and the central government in Beijing.

Here’s what we feel you can expect in the coming months if you are not already experiencing some of these problems today as importers of product from China:

• We can expect significant cost increases from Chinese producers as tighter specs, quality processes and inspections are put into place.   In China, PRC officials can and will conduct on site inspections of manufacturing facilities and sales offices suspending activities on the spot if violations are found.

• For any export violations including rejections, the CIQ will close a plant down if they cannot fix the problem.  If it is a pesticide or heavy metal problem in the soil, the
  growing area will be restricted and some re licensing may be allowed depending
  on the plant’s performance and corrective action.

• You will experience significant time delays – as Chinese exporters wait for CIQ approval.

• Expect new procedures in the USA on import inspections – you will be responsible, when asked to provide a detailed life cycle trace back on your product.

• You must ensure that product you import from China meets all safety standards of your particular country. From a legal point of view, you are now also the manufacturer.

We believe many small to medium size importers and distributors will vanish from this business due to threats of potential recall and lawsuits.  Some Chinese facilities will be absorbed into larger entities or will disappear entirely.

Edward Noon, of Noon International attended the China International Food Safety Conference in Beijing on Sept 12/13 2007. If you would like to receive more information on what we’ re doing and what was covered at that conference please let me know and we will gladly send you more information.  Or you can find a lot of info by visiting our website and reading the blogs.

Here are but a few of the basic recommendations:

• Know Your Suppliers intimately.

• Personal inspections even if you buy through an intermediary party.

• Timely & thorough plant reviews of HAACP programs and GMP and insure that the plant is living the documents.  Live in the plant if necessary during production. 

• Educate the management and factory personnel of your chosen production facility on the rules and regulatory requirements of the country of import.

• Be sure when you furnish product specifications that they are understood.  Include Food Safety issues as part of your contractual arrangements.

• Don’t create programs but create a FOOD SAFETY CULTURE

• Educate, test, educate, test.

LOOKING FORWARD WITH OPTIMISM
In conclusion, here is the biggest question mark of all – will China’s best friend,
the American consumer, who has benefited over the past decade from new and
innovative products and cheap pricing now choose a new international playmate?

How will new trade regulations be implemented and driven by these quality
issues?  History has shown that protectionist policies are not beneficial
in the long run – but can the US politicians resist, especially with an election
year approaching?

Retailers demanding cheap pricing for food products using top quality materials will be surprised to find fewer and fewer Chinese factories that are able to comply at the price levels they require. How can they? As inflation continues to drive costs higher in China, suppliers have no choice but to cut corners to meet retailer’s price demands or charge higher prices.  

Nancy M.Childs, a professor of food marketing at St. Joseph University in Philadelphia said it best recently -   “As long as we are pushing for the lowest price all the time,
driving our supply chain, you get more efficient, she said.  But at a certain point there is no more efficiency and you sacrifice quality.”

From our perspective we believe it’s up to us, the businesses involved in the China trade to restore trust in Chinese products. We must convey to consumers driving the market that new standards are being set and we must be actively involved in creating and maintaining the new standards.  Some may decide to abandon China – we heard just last week that Trader Joes will no longer sell retail vegetables with the MADE IN CHINA country of origin statement, however they will still allow certain Chinese ingredients to be used as components in final products.  At Noon, we think this was a knee jerk reaction.

Both the U.S. and CHINA have benefited from over a decade of remarkable profits and growth and the Chinese are not about to let this crisis stop them. Today, China’s foreign trade reserves are one trillion dollars plus and expected to rise by another 200-300 billion in 2007 fueled by strong exports and inflow of foreign investment and I read just
yesterday that Chrysler plans to enter China’s small car market very soon. The economy expanded 10.7 % in 2006, the fastest pace in eleven years.  At this moment the National Party Congress is meeting in China, making decisions and policies that will shape the country’s future – you can be sure Food Safety is on President Hu Jintao’s list along with the overheated economy, the growing gap between rich and poor, environmental problems and rising inflation.

The acceptance of China into the international arena was sealed when Beijing won the right to host the 2008 Olympics.  This is a big deal and a source of pride for China.  Did you know that China will use GPS (Global Positioning Satellites) as part of their program to ensure food safety at the Olympics? They have developed a high tech system just for the Olympics that will monitor food production, processing facilities and food hygiene during the games to make sure that the 10,500 athletes residing in the Olympic village are safely fed – and all food will have to carry the “Olympic Food Safety Logistics Code”.

At Noon we believe the government of China will take advantage of this current situation to improve China’s food safety status for exports and changes will be driven internally by the new middle class as well.  Many Japanese, Europeans and American have built and are building more sophisticated frozen plants in China introducing, teaching and insisting on high quality standards.  One cannot help but remember what MADE IN JAPAN meant just 50 years ago.   Rest assured it will be no different in China – except it will happen with much greater speed.  I was happy to read this week that China and the U.S. are near a deal on safe food and the FDA expect an agreement by December on improving the safety of food exports.

While all eyes are on China now, we urge you not to forget that Food Safety is a global issue - it is not just a China problem but a global concern – exacerbated by the enormous expansion of trade throughout the world.  We must not continue to make China the scapegoat for the world. No country is safe or exempt, be it seafood from China, fresh spinach in California, or mad cow in the U.K.  We ALL have the same goal and want
the same thing – safe food now and for the future generations.

Perhaps you are wondering what our 6th secret to success is ?
It’s Guanxi – relationships – and maybe a better way to explain good guanxi is “good chemistry” that comes from respecting and trusting each other over time. In closing, I’d like to read you an email we received last week from an old supplier -
Quote:
“Dear Lao Dege (Elder Brother)
Received the letter from you and I felt so excited and happy but because of
the seven day’s holiday for National Day of China I was late to write back to
you – please give me your pardon.
We are good friends for a long time; I’m much obliged to you. It’s you who have brought me a great of happy during my life, who have gave me a lot of help for my job and factory.  I sense you are with me all the time that push me to work better in return for your help. I often proudly mentioned that I have a good friend in America to my
countrymen.”

Secret # 6 – No matter what anyone says it is not just price – guanxi is still the most important overriding factor. That’s why you have a meal first before doing any business and the next time someone in China greets you and says NICHIBAO LA  - Have you eaten yet? You’ll know exactly what that really mean.

END NOTES/RESOURCES

• Retrieved from : As China Roars, Pollution reaches Deadly Extremes, 26 August 2007 Joseph Kahn & Jim Yardley

• Retrieved from: CHINA CSR.com Yum! Brands Exhibits Potential Growth Internationally Krause Fund Research Fall 2006

• Asian Monitor China & North East Asia Vol14  Issue 9 Sept 2007

• Retrieved from: The China Daily:   Supermarkets in China , September 2007

• Retrieved from: The Standard  CRE to Boost Spending to 10b Sept 2007

• Retrieved from: The Wall Street Journal July 2007 China Faces a New Worry:  Heavy Metals in Food  Nicholas Zamiska & Jane Spencer

• Retrieved from:  CHINA.ORG.CN Carrefour Has 101 Supermarkets in China September 07, 2007

• Retrieved from: International Herald Tribune, Wal-Mart said to be acquiring chain in China  Oct 2006 David Barboza & Michael Barbaro

• Retrieved from: Newsweek: The Great Wal-Mart of China  October 06  Keith Naughton

• Retrieved from: China People’s Daily Frozen Food Industry Booms in Central China

• Retrieved from: San Francisco Shipper:  California Ag Task Force to Evaluate China’s  Transport Structure

• Retrieved from China Business Review June 2007  The Year of the PIGGY Bank  Vanessa Rossi

• Retrieved from: Trans Pacific Maritime: China’s antiquated inland network creates opportunities for overseas 3 PLs Peter Leach Sept 07

• Retrieved from:  The Journal of Commerce Online Customs Update:  FDA and Food Imports  August 01, 2007  Susan Kohn Ross

• Retrieved from: GOV.CN Full Text: China’s food quality and safety August 17, 2007 

• The China Business Review August 2007 Cleantech  Boom or Bust  William Brent

• Retireved from: International Herald Tribune  China Blasts Foreign Media for Exaggerating Food Safety Woes   AP July 2007

• Retrieved from: The Journal of Commerce Online  US Shifting more inspection burden on importers Sept 11, 2007 Bill MOngelluzzo

• Retrieved from:  MSNBC  China will use GPS to ensure Olympic Food August 06, 2007

• CRS REPORT FOR CONGRESS Food & Agricultural Imports from China July 17, 2007  Geoffrey Becker

• Retrieved from: The New York Times China Not Sole Source of Dubious Food  July 2007  Andrew Martin, Griff Palmer

• Retrieved from: China Environment Forum A China Environmental Health Research Brief  June 2007  Yang Yang, Jennifer Turner

• Refrigerated & Frozen Foods, August 2007  Wok This Way

• The China Business Review  Dec 06  Managing Business Risk  Jay Hoenig

• CHINA INTERNATIONAL BUSINESS The Budding Luxury Market June 2007

• The China Business Review October 2007 The Sales and Distribution Revolution  David Michael