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January 26, 2022updated 09 Feb 2022 9:39am

China’s Covid policy worsens supply-chain crunch for food makers

Ahead of Lunar New Year, Just Food’s Wang Fangqing talks to food manufacturers in China about the supply-chain challenges they are facing.

By Wang Fangqing

China’s policy of pursuing zero Covid-19 cases has caused significant supply chain challenges across all the country’s industries and markets.

In the food industry, companies importing ingredients or frozen foods have had to tackle the toughest issues.

Take the city of Tianjin (population: 13.8 million) as an example. Tianjin, two hours’ drive south of Beijing, is partly under lockdown due to an outbreak of the Omicron variant in mid-January, sparking a suspension of all operations processing imports at the city’s port, airport and railway station.

Road transportation into and out of the city is still allowed, but with limited capacity. French logistics company Bansard, now part of the US logistic group Seko, has suggested its clients in China re-direct air cargo destined for Tianjin to Beijing for pick-up.

A similar situation has also been seen in Beilun, China’s major port in Ningbo, a city close to Shanghai, in the south-eastern Zhejiang province. The port area was under lockdown from 1 to 17 January due to a local outbreak of the Delta variant. While port operations on imports have now resumed, Bansard has warned there could be congestion and delays.

Facing such challenges, perishable food companies like New Zealand dairy giant Fonterra, which counts China as a major export market, have been trying everything they can to avoid losses while maintaining a healthy inventory level locally to ensure supply.

“We are working closely with authorities in China Customs, our logistics partners and other related parties to improve our supply-chain resilience,” Kitty Zou, logistics director for Fonterra in China, tells Just Food.

The company sells cheese, cream and butter under the brand Anchor to China, all of which are shipped from New Zealand through sea freight using refrigerated containers.

Zou acknowledges the challenges involved in facilitating these shipments. Among them, a significant headache is the mandated additional Chinese procedures for product disinfection. “Every container needs to be disinfected, and you can imagine how much time it would take,” Zou says.

Her comments are echoed by Deen Hu, sales director at A&N Food, a Shanghai-based trading company selling imported frozen meat and seafood, such as beef, lamb and shrimp, to clients in China, including snacks manufacturers and sports schools training athletes.

“It took about ten days to get the containers from the Customs before the pandemic. Now you are lucky if you can get them in a month,” he says. Since the start of the pandemic in 2020, every container arriving at Shanghai port must be disinfected before even reaching China Customs controlled areas, Hu explains. “Because there are so many containers waiting to be disinfected, your containers have to wait in line and waiting alone could take many days.”

While companies selling imported room-temperature foods, such as snacks, feel less anxiety than those selling frozen foods, they are still facing difficulties.
“We need to pay extra attention to planning,” says Ethan Zhou, CEO of Landbase, a Shanghai-based company selling Swiss-made sugar-free chocolate in China. Zhou insists the company’s inventory level is good enough for the Lunar New Year holiday starting on 1 February and for Valentine’s Day 13 days later, a peak period for chocolate sales. “We are aware of the logistics issues so we try to plan well and plan months ahead. It’s not easy, but we don’t have any other options,” he says.

Amos Sweets, a Shenzhen-based confectionery manufacturer selling gummy candies domestically and abroad, works with partners such as the Japanese sweets maker Kanro to distribute their candies in China. CEO Amos Ma says the company has had to ease export sales to cope with the pressure on logistics.

“We make early import plans to minimize the impact, and we have slowed down the export to avoid traffic congestion and competing on containers. I believe we did everything we could.” Ma insists the company does not intend to make major changes to its manufacturing plans because he thought the current supply chain mess was “temporary.”

However, Tony Domingo, head of supply chain for Nestlé’s business in China, has a more cautious outlook. “The existing, globally-influenced, intercontinental logistics challenges will persist for the foreseeable future,” he says, underlining the world’s largest food maker has developed plans to ensure product supply in China.

Companies were hesitant to talk about the possibility of price hikes due to sensitivity but, recently, there have been statements from various food companies serving China about price increases.

Among them are the major frozen food maker Sanquan Food, which, on 1 December, raised prices for nearly all of its products including frozen buns, dumplings and seafood, citing reasons including higher ingredient, energy and logistics costs. Similar factors also prompted major dairy company Mengniu to raise prices on chilled dairy products on 16 December. Want Group, a Taiwanese-owned, Shanghai-based major snack and soft drink manufacturer, raised prices on 1 January.

Worldwide, the shortage of containers and logistics workers have already contributed to a spike in distribution costs but China’s tough Covid policy has arguably exacerbated the problems for manufacturers doing business in the country. “The current policy adds significant additional costs on companies. Prices are bound to increase if not sharply,” A&N’s Hu warns.

Hu says disinfection alone could cost about CNY18,000 (US$2,838) per container, while companies also have to pay for various expenses including disinfection agents, disinfection workers, their protection gear and frequent Covid-19 tests.

These practices are detailed in China’s guidelines for ship container disinfection methods for imported foods, which were updated in November. For example, alcohol-based liquid hand sanitiser and sanitising wet tissue must be in place on ships during transportation; documents that will be handed over to different workers must be put in one-time-use bags; and regular disinfection is necessary for surfaces that could carry the virus, including mobile devices, door handles and handwheels. These practices have all contributed to rising costs.

Local governments in China also often impose extra measures to avoid outbreaks. In early 2021, the Shanghai city government launched an app called Hu Leng Lian (meaning Shanghai cold chain) targeting imported frozen food shipped to the city. Importers and logistics companies are required to register with the app to upload documents for traceability.

One of the documents requires detailed information including the name of each worker who works on a container, workers’ Covid testing results and their vaccine records.

Hu says the measures are likely to hit small businesses much harder than large companies. “Small companies don’t have the budget and resources to cover these additional costs,” he says, suggesting they abandon handling their own imports and instead source ingredients and products from larger companies for sale and processing in China. “It would be better for them to buy from big companies,” he argues, referring to state-owned import companies such as COFCO Group and Bright Food, which are able, through large orders, to negotiate with foreign suppliers.

Large orders also make things look a little brighter for major food retailers such as Alibaba’s grocery store Hema and the Shanghai-based, NYSE-listed Dingdong.
“These platforms make plans maybe once or twice a year and get the best price with large quantity. They have the advantage on cost control. Small companies don’t have the luxury,” Hu adds. Hema and Dingdong did not respond to requests for interviews.

For now, however, especially smaller food import companies will continue to struggle. “We don’t know when our snacks will be released from the Customs. We just hope when they are out they are still before the expiration date,” a salesperson nicknamed ‘Orange’ at a snack store called Yaoyao Wangwang on the C2C platform Taobao says.

The shop sells popular Japan-made snacks, including Kit Kat chocolate bars, Morinaga chewy candy and Calbee potato chips. Some Japan-made snacks, such as the sake-flavoured Kit Kat, have been out of stock for a while. “With the rising costs in logistics, we will have to raise prices for our next batch of imported snacks,” Orange says.

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