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October 2, 2008

Japanese firms stress food safety to gain Chinese sales

For the saddest of reasons, food safety issues are front of mind for anyone looking at the Chinese food market. Japanese companies have been active investors in China for some time, and see their high standards of food safety as a key marketing asset, one only likely to be accentuated by recent events. Michael Fitzpatrick and HsiaoYing Lin in Tokyo, and Ben Cooper report.

For the saddest of reasons, food safety issues are front of mind for anyone looking at the Chinese food market. Japanese companies have been active investors in China for some time, and see their high standards of food safety as a key marketing asset, one only likely to be accentuated by recent events. Michael Fitzpatrick and HsiaoYing Lin in Tokyo, and Ben Cooper report.

The melamine in milk scandal in China has once again focused attention on food safety standards in the country. While companies must be extremely sensitive about being seen to derive commercial gain from the misfortune of others, if promoting high standards of food safety is part of a brand’s marketing proposition then it stands to reason at times like these the message will carry considerably more weight.

This would appear to be the case for Japanese food companies operating in China. High standards of food safety can and are being used to persuade those consumers who can afford it to trade up to significantly more expensive international products.

As a spokesperson for Japanese sauces and condiments specialist Kikkoman puts it: “The price of Kikkoman soy sauce is on average much more expensive than local production, but with fears growing over the quality of local brewed soy sauce now is the time to expand rapidly in China.”

Another industry insider puts it more succinctly, though not surprisingly prefers not to be named. “To be cynical, I think China’s difficulty is Japan’s opportunity,” the regional expert says.

For some time, Japanese food firms have had a particularly active eye on China, where rising incomes and worries over domestic food safety have combined to create new demand for Japanese food products in spite of the price premium.

Japanese companies are aggressively looking to expand internationally because of stagnating sales in Japan. The food industry can no longer rely on what is a shrinking domestic market; survival depends on expanding overseas. “It has become essential for food companies to rev up operations outside Japan if we are to grow further,” says Kunio Egashira, chairman of Ajinomoto Co., Japan’s top seasoning maker.

China’s rapidly expanding economy and geographical proximity has made it an obvious choice for overseas investment for Japanese companies from many sectors, including food. Two notable examples from the food industry are Kikkoman Corp. and Yakult Honsha Co.

Both of these companies are facing shrinking demand at home and are boosting output in China, looking to capitalise on rising disposable income and the growing numbers of middle class consumers. These consumers are not only gaining more spending power but they are also growing increasingly worried about the quality of China’s domestically made food, something which will only have been exacerbated over the past couple of weeks.

In search for new opportunities, Kikkoman became one of the first Japanese food companies to advance overseas and is now aggressively targeting China. Enticed by the burgeoning middle class in China’s coastal zones who, according to the company, “appreciate the Kikkoman brand more than local products”, Kikkoman entered China’s market in 2002 and currently makes soy sauce in Shanghai and other places in eastern China. Already established in the south and east, the company says the time is ripe to expand all over the country.

The seasonings and condiments specialist will set up a joint venture with Shijiazhuang Zhenji Brewing Group in Hebei Province this autumn to manufacture soy sauce and other seasonings. Starting from January Kikkoman will use lines installed at some of the partner’s factories in northern China, aiming for production of 110,000kl of soy sauce, vinegar and other products by 2015.

“Some close partnerships involve capital relations, while looser ones do not. To enhance our corporate value, we make both independent efforts as well as seek alliances. Various types of alliances are simply an outshoot of such efforts. The challenges in China are on price. We are up to six times more expensive but we don’t want to compromise quality. This means building up a slow but steady following in China. But we will grow as the Chinese economy takes off,” says the Kikkoman spokesperson. Kikkoman will also step up its wholesale business elsewhere, planning to open a third base in China. It already has facilities in Hong Kong and Beijing.

Yakult, meanwhile, plans to set up a wholly owned subsidiary in Tianjin by next summer, and begin production of its Yakult probiotic fermented milk drink at the start of 2011.

This will be the company’s third production base in China for the drink. It plans to make the beverage at an initial rate of 300,000 units a day, ultimately ramping up daily production to 1.44m units.

China’s increasingly health-conscious consumers drank 660,000 bottles of Yakult a day in fiscal 2007, up 57% from the previous fiscal year. The price premium is once again a challenge, but middle class consumers tend to be those most likely to be seeking out better-for-you products, and they are the Chinese consumers who have the wherewithal to afford imported products.

“The market is saturated at home so naturally we are looking abroad to grow,” says a Yakult spokesperson. “China in particular is a promising market for us with its fast economic development and high population of people whose health awareness is rising rapidly and lifestyles are changing dramatically.”

Yakult acknowledges there are risks involved in entering China and setting up partnerships with Chinese firms who often have a very different business culture. “But Japan has quite a long record of doing business with our neighbour and I think ties are closer than you find with western and Chinese companies,” the spokesperson continues. “We understand one another, more or less. Where some foreign businesses find it difficult dealing here we are proud to say none of our subsidiaries or joint-managed companies have failed. So far all our businesses have succeeded in expanding smoothly and regularly.”

Moreover, the company believes many more Japanese food firms will be venturing into China as its economy grows and Japan enters a severe decline in population.

That projection comes in spite of recent legislative and fiscal changes in China that could inhibit foreign direct investment (FDI). In January, China enacted two key pieces of legislation, a new corporation tax law that effectively removes tax breaks for foreign companies, and a new labour law designed to improve working conditions.

The new laws are part of a drive by President Hu Jintao to reduce China’s dependence on foreign investment and strengthen its international competitiveness. The laws are expected to alter the balance of power between foreign firms and Chinese companies, and have certainly given foreign investors food for thought.

Indeed, an article in the Nikkei Report earlier this year suggested that a less accommodating political stance towards FDI had already had an impact, with last year’s figures showing that FDI from Japan and Europe had fallen by more than 20% year-on-year, with investment from the US declining by slightly over 10%.

Nevertheless, Yakult appears relatively bullish about the opportunities in China, and sees food safety, along with quality, as one of the most important factors which set foreign-branded goods apart from domestic products.

“Quality and food safety: these are our USPs,” says the Yakult spokesperson. “We are seriously looking after our China factories using the same strict checking level as we do in Japan to carry out complete high-quality and sanitary management in order to offer safeguarded products.”

In times like these, stressing food safety standards would appear a sound strategy for companies looking to introduce luxury food items to an understandably jittery population, even if prices are still way beyond the reach of the average Chinese consumer.

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