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Required Report - public distribution

**Date:** 4/4/2006

**GAIN Report Number:** CH6602

CH4605

**China, Peoples Republic of**

**Food Processing Ingredients Sector**

**Food Processing**

**2006**

**Approved by:**

Keith Schneller

**Prepared by:**

Daniel Taylor, revised and updated by Matt Van Osdol

**Report Highlights:**

The food processing industry in China continues to grow rapidly. In 2004
revenue for the industry was over USD\$157.7 billion. Strong economic
growth and rapid urbanization have contributed to higher disposable
incomes and increased demands from Chinese consumers for high quality
processed foods at home and in restaurants. China is also becoming a
profitable base for export oriented food processing. Although China's
food processing industry is growing rapidly, it is still relatively
underdeveloped. It should continue to see consistent growth in the
double-digit range for the foreseeable future, with increased demand for
certain high quality American ingredients.

Includes PSD Changes: No

Includes Trade Matrix: No

Annual Report

Guangzhou \[CH3\]

\[CH\]

# Table of Contents

# 

+------------------------------------+---------------------+-----------+
| Section II: Executive Summary      |                     | Page 3 of |
|                                    |                     | 33        |
+====================================+=====================+===========+
|                                    |                     |           |
+------------------------------------+---------------------+-----------+
| Section II: Market Summary         |                     | Page 5 of |
|                                    |                     | 33        |
+------------------------------------+---------------------+-----------+
|                                    |                     |           |
+------------------------------------+---------------------+-----------+
| > A. Sector Size                   |                     | Page 5 of |
|                                    |                     | 33        |
+------------------------------------+---------------------+-----------+
| #                                  |                     | # Pag     |
|  B. Sector Geographic Distribution |                     | e 6 of 33 |
+------------------------------------+---------------------+-----------+
| > C. Sector Growth                 |                     | Page 7 of |
|                                    |                     | 33        |
+------------------------------------+---------------------+-----------+
| > D. Consumer Trends and Sales     |                     | Page 9 of |
| > Patterns                         |                     | 33        |
+------------------------------------+---------------------+-----------+
| > E. Challenges and Opportunities  |                     | Page 16   |
|                                    |                     | of 33     |
+------------------------------------+---------------------+-----------+
|                                    |                     |           |
+------------------------------------+---------------------+-----------+
| Section III: Road Map for Market   |                     | Page 19   |
| Entry                              |                     | of 33     |
+------------------------------------+---------------------+-----------+
|                                    |                     |           |
+------------------------------------+---------------------+-----------+
| > A. Entry Strategy                |                     | Page 19   |
|                                    |                     | 0f 33     |
+------------------------------------+---------------------+-----------+
| > B. Distribution                  |                     | Page 19   |
|                                    |                     | of 33     |
+------------------------------------+---------------------+-----------+
| > C. Company Profiles              |                     | Page 22   |
|                                    |                     | of 33     |
+------------------------------------+---------------------+-----------+
|                                    |                     |           |
+------------------------------------+---------------------+-----------+
| Section IV: Competition            |                     | Page 26   |
|                                    |                     | of 33     |
+------------------------------------+---------------------+-----------+
|                                    |                     |           |
+------------------------------------+---------------------+-----------+
| > A. Domestic Competition          |                     | Page 26   |
|                                    |                     | of 33     |
+------------------------------------+---------------------+-----------+
| > B. Non-US Competition            |                     | Page 27   |
|                                    |                     | of 33     |
+------------------------------------+---------------------+-----------+
|                                    |                     |           |
+------------------------------------+---------------------+-----------+
| #                                  | #                   | # Page    |
|  Section V: Best Product Prospects |                     |  30 of 33 |
+------------------------------------+---------------------+-----------+
|                                    |                     |           |
+------------------------------------+---------------------+-----------+
| # Sec                              | #                   | # Page    |
| tion VI: Growing opportunities for |                     |  31 of 33 |
|  Chinese holiday food ingredients  |                     |           |
|                                    |                     |           |
| #                                  |                     |           |
+------------------------------------+---------------------+-----------+
| #                                  | #                   | #         |
+------------------------------------+---------------------+-----------+
| # Se                               | #                   | # Page    |
| ction VI: Post Contact Information |                     |  33 of 33 |
+------------------------------------+---------------------+-----------+

##  Section I: Executive Summary

China's population is over 1.3 billion and growing by nearly 10 million
people, or 0.57 percent, annually. Its per capita GDP is approximately
\$1,280 USD and its economy has sustained an annual growth rate of a
staggering 9 percent. China is currently the sixth largest economy in
the world and is predicted to surpass Britain and France as the world's
fourth largest in 2006. In 2004 the value of all exports was \$593
billion USD and the value of imports was \$561 billion USD. Its major
agricultural products include rice, wheat, potatoes, sorghum, peanuts,
tea, millet, barley, cotton, oilseed, pork, and fish.

China is one of the world's largest consumers of food. For example,
China consumes 51 percent of the world's pork, 33 percent of rice, 19
percent of ice cream, 19 percent of poultry and 12 percent of beef. In
raw figures China consumes 8.5 million tons of meat per year, 40 million
tons of vegetables and over 12.5 million tons of fruit. According to
2004 official statistics food constituted over 37 percent of the average
urban household's annual consumption expenditure.

Only about 30 percent of food in China is processed, compared to about
80 percent in western nations. While most consumers still prefer to
purchase fresh foods, the market for processed foods is growing in China
especially in urban areas where higher concentrations of wealth and
busier lifestyles have led many to seek out more convenient alternatives
to cooking with fresh ingredients. China's current sales of packaged
foods constitute nearly 4.0 percent of the world market and is estimated
that in 2009 it will rise to more than 5 percent with a value of over
\$71.9 billion USD. Demands for healthier choices, convenience, and
trends turning the younger population's tastes toward western styles of
food are opening the door to high quality imported ingredients. Recent
food poisoning incidents have also increased consumer concern over food
quality and safety and many are now looking towards food products that
are packaged with big-name brands that they feel they can trust. In many
urban areas, 40 percent of food is processed which shows promising
growth with room for further increases. Furthermore, China's inexpensive
labor makes it a profitable center for export-oriented production.

The food processing industry in China is based around the east coast
urban regions of Shanghai, Guangzhou and Beijing. In 2004, according to
official statistics, there were 20,526 food-processing ventures in China
each with annual sales revenue in excess of \$5 million RMB
(approximately \$600,000 USD). The total sales revenue for the industry
was \$157.73 billion USD. Here it is important to remember that numbers
and statistics in China should be used as guidelines as many statistics,
both official and unofficial can be misleading or inaccurate. While the
Chinese government only keeps track of enterprises with sales in excess
of 5 million RMB per year, there are thousands of small outfits in
operation as the industry is still very fragmented. In fact, it is not
uncommon to find newspaper articles reporting that China has over
900,000 food processing ventures on the mainland, from mom-and-pop
storefronts to multinational corporations. The fragmented nature of the
industry is bolstered by research that shows that many of the largest
ventures have less than a 5 percent market share in their respective
sub-sectors.

Official statistics report that the industry grew 16 percent in
2001-2002 and 23 percent in 2002-2003. This continued growth is
furthermore highlighted by the fact that from 1999 to 2004 sales of
packaged foods rose 45%. These numbers are staggering but many industry
insiders feel that it is safer to assume double-digit growth in excess
of 10 percent. The president of the China Food Industry Association was
recently quoted as expecting 10 percent-12 percent annual growth for the
food processing sector. While this outlook is less than the official
numbers of 16 percent and 23 percent it still shows strong growth with
excellent potential. In fact, some estimates believe that the output of
the food industry by the year 2010 may double from that of the year
2000, when it was valued at about 800 billion RMB (\$102.7 billion USD).

Retail sales of processed food as well as the restaurant and catering
industries have also shown impressive growth in the double-digit range
over the last few years. Packaged foods, especially baked goods, dairy
products, oils and fats, baby food and ice cream have all demonstrated
exceptional growth in recent years. Multinational fast-food chains such
as KFC and McDonald\'s continue to establish their presence in China
with already over 1,500 and 600 restaurants respectively as they look to
the Chinese market as their main source of growth. Institutional
catering is also on the rise as the number of factory workers skyrockets
and companies outsource feeding their employees.

In the upcoming years the industry will focus on the development of corn
and wheat goods, dairy products, food additives and seasoning
essentials. Demands for imported poultry, cereals, fish, nuts, soybeans
are expected to continue while US exporters may find new markets in
baking ingredients and fruit flavorings. Good prospects include:
almonds, pistachios, prunes, raisins, oranges, hazelnuts, macadamia
nuts, cherries, poultry, pork, potato flour, frozen potato products,
corn, juices and concentrates, seafood\--lobsters, scallops, salmon,
pollock \--infant formula, baking ingredients (dried fruits and nuts,
whey powder, flours), fruit flavorings (blueberry), stabilizers and
table grapes. In regards to beef and BSE, the Hong Kong market is now
open and industry insiders and government officials expect China to
fully open its markets within the first half of 2006.

**Section II: Market Summary**

-   The food processing industry had combined sales of \$157 billion USD
    in 2004.

-   The industry is mainly based in Shanghai, Guangdong and Shandong
    provinces.

-   Industry is very fragmented with many small-scale operations but
    there is slow growth of larger firms as consolidation begins.

-   Double-digit growth is a safe assumption based on current industrial
    and retail statistics.

-   The primary processing sector has demonstrated the highest
    consistent growth in both sales revenue and number of players.

-   Expect strongest growth rate in baby food, oils and fats, dairy,
    baked goods, and dried foods.

-   Expect strong growth in all sub-sectors.

**A. Sector Size**

Figure 1. The Food Processing Industry in China, 2004

  -------------------- --------------- ---------- ---------------- --------
                       Enterprises\*              Sales            
                                                  Revenue\*\*      

                       Number of Firms \% Share   billion RMB      \% Share

  Food Processing      12,244          60         781,097          60

  Manufacture of Foods 4,950           24         268,896          21

  Manufacture of       3,332           16         243,461          19
  Beverages                                                        

                                                                   

  Total                20,526          100        1,293,454        100
  -------------------- --------------- ---------- ---------------- --------

\* Statistics are only available for firms with annual sales revenue in
excess of 5 million RMB.

\*\* 1 US. Dollar is equal to approximately 8.25 RMB

Source: China Statistical Yearbook, 2005

Official statistics separate industrial food production into three
categories in China: food processing, food manufacturing and beverage
manufacturing. The food-processing sector includes primary activities
such as rice milling, flour milling, oil refining, sugar refining,
slaughtering, salt processing, feed processing, and aquatic product
processing. The food-manufacturing sector is composed of packaged food,
pastries and confections, dairy products, canned foods, fermented
products, and condiments. The beverage sector involves the making of
alcoholic beverages (i.e. distilled spirits, beer and wine), soft drinks
and tea.

In 2004 there were a total of 20,526 registered food production
enterprises with annual combined sales revenue of just over \$157
billion USD. By far the majority of these enterprises are involved in
primary food-processing, comprising more than half of the industry while
food manufacturing and beverage manufacturing account for approximately
20 percent each. (Again, one must keep in mind that statistics are only
kept for operations that have annual revenue of more than 5 million RMB
per year. China does not publish statistics for industrial enterprises,
state-owned or private with sales below the 5 million RMB mark.)

The industry is still very fragmented. While there may be a few giants
and mergers and acquisitions continue, the bulk of food processing is
done by medium-sized outfits. For example Statistics from China's Dairy
Industry Association show that there are over 1,500 dairy processors in
China and that 90 to 95 percent are small and medium-sized enterprises.
In retail sales of packaged food Hsin International Group is the
industry's largest player and only has four percent of the overall
market share. This is most likely because the industry is still very
young. Furthermore, with disparate incomes between urban and rural
residents, regional variations in taste and, most importantly, limited
infrastructure it will take some time for the industry to consolidate
and capitalize on economies of scale.

**B. Sector Geographic**

![](media/image2.png){width="5.6875in" height="3.926388888888889in"}

**Distribution**

Figure 2. Regional Distribution of Food Industry (Regions covered by ATO
offices)

+----------------------------+--------------------+-------------------+
|                            | Number of          | Sales Revenue     |
|                            | Enterprises        |                   |
|                            |                    | (billion RMB)     |
+----------------------------+--------------------+-------------------+
|                            |                    |                   |
+----------------------------+--------------------+-------------------+
| **National Industry        | 19,022             | 1,013.67          |
| Total**                    |                    |                   |
+----------------------------+--------------------+-------------------+
|                            |                    |                   |
+----------------------------+--------------------+-------------------+
| **ATO Beijing Region       | 1200               | 92.35             |
| Total**                    |                    |                   |
+----------------------------+--------------------+-------------------+
|                            |                    |                   |
+----------------------------+--------------------+-------------------+
| Beijing                    | 394                | 30.85             |
+----------------------------+--------------------+-------------------+
| Tianjin                    | 370                | 25.79             |
+----------------------------+--------------------+-------------------+
| Qingdao                    | 124                | 9.38              |
+----------------------------+--------------------+-------------------+
| Jilin                      | 392                | 26.33             |
+----------------------------+--------------------+-------------------+
|                            |                    |                   |
+----------------------------+--------------------+-------------------+
| **ATO Guangzhou Region     | 2,113              | 113.55            |
| Total**                    |                    |                   |
+----------------------------+--------------------+-------------------+
|                            |                    |                   |
+----------------------------+--------------------+-------------------+
| Fujian                     | 465                | 16.34             |
+----------------------------+--------------------+-------------------+
| Hainan                     | 209                | 11.4              |
+----------------------------+--------------------+-------------------+
| Guangdong                  | 1,282              | 82.22             |
+----------------------------+--------------------+-------------------+
| Guangxi                    | 157                | 3.59              |
+----------------------------+--------------------+-------------------+
|                            |                    |                   |
+----------------------------+--------------------+-------------------+
| **ATO Shanghai Region      | 3,134              | 170.15            |
| Total**                    |                    |                   |
+----------------------------+--------------------+-------------------+
|                            |                    |                   |
+----------------------------+--------------------+-------------------+
| Shanghai                   | 641                | 35.46             |
+----------------------------+--------------------+-------------------+
| Jiangsu                    | 1,353              | 78.48             |
+----------------------------+--------------------+-------------------+
| Zhejiang                   | 1,140              | 56.21             |
+----------------------------+--------------------+-------------------+

China's food processing industry is concentrated in the three coastal
regions of Shanghai, Guangdong Province and Shandong Province. These
areas have access to seaports, domestic logistics and imported
technology. Furthermore, east coast consumers have benefited the most
from economic development and are the wealthiest consumers, comprising
the largest market for processed and imported food.

Guangdong is the second largest food-processing center in China with a
total of 1,282 enterprises and is a major center for seafood processing.
It is also, according to industry insiders, the center for distribution
of imported ingredients and processed goods. While many imported goods
enter directly through Guangdong\'s capital of Guangzhou, the city also
handles a large amount of goods that are shipped via Hong Kong.
Guangdong also has a large restaurant/catering business as Guangdong
consumers spend more per capita in both real terms and as a percentage
of income on dining out than anywhere else in China. Guangzhou is known
for its diverse cuisine as exemplified by a common saying that the
Cantonese will eat anything with four legs except the table. Owing to
this, many processors and importers feel that Guangzhou is a good place
to test out foreign foods as they will likely find early acceptance here
allowing a foothold in the Chinese market.

Income, population and growth have all made the Yangtze River delta a
major center for the food processing industry, and an important market
for U.S. food ingredients. In 2003 the food processing industry for the
region, including both food and beverage manufacturers, included some
3,134 enterprises with a total sales value of \$170 billion RMB (\$20.5
billion USD). Although Shanghai's industry remains large (at \$4.3
billion), many food processors have moved to lower-cost areas in
neighboring Jiangsu and Zhejiang provinces, and the food processing
industries in these areas are now larger than Shanghai. Jiangsu is the
largest of the three, with a 2003 sales value of \$9.5 billion in an
industry that employs over 214,000 people. The key cities for Jiangsu's
food manufacturing industry include Zhanjiagang, Kunshan and Suzhou.
Provincial statistics indicate that profit margins are tight,
particularly for food processing (margins for beverage manufacturers a
considerably higher). As a result, manufacturers in the Shanghai region
are looking for ways to improve or otherwise distinguish their products
from the competition. Many are turning to imported ingredients.

**C. Sector Growth**

Figure 3. The Food Industry in China, Growth 2001-2004 (RMB Billions)

  ------------------ ---------- ---------- ---------- ---------- ------------- ---------------
                     **2001**   **2002**   **2003**   **2004**   **% Change**  

                                                                 2003-2004     2001-2004

  Industry Total                                                               

  Number of Firms    18,251     18,315     19,022     20,526     8% \_ \_      12%\_\_\_\_\_

  Sales Revenue      706.97     821.62     1013.67    1293.39    22%\_\_\_\_   46%\_\_\_\_\_

                                                                               

  Food Processing                                                              

  Number of Firms    10,381     10,413     11,192     12,244     9%\_\_\_\_    16%\_\_\_\_\_

  Sales Revenue      382.35     451.59     585.11     781.09     26%\_\_\_\_   52%\_\_\_\_\_

                                                                               

  Food Manufacturing                                                           

  Number of Firms    4,563      4,615      4,636      4,950      7%­­\_\_\_\_    8%\_\_\_\_\_

  Sales Revenue      151.90     182.76     216.83     243.46     11%\_\_\_\_   38%\_\_\_\_\_

                                                                               

  Beverage                                                                     
  Manufacturing                                                                

  Number of Firms    3,307      3,287      3,194      3,332      5%\_\_\_\_    1%\_\_\_\_\_

  Sales Revenue      172.72     187.27     211.72     268.89     22% \_        36% \_
  ------------------ ---------- ---------- ---------- ---------- ------------- ---------------

Source: China Statistical Yearbook, 2002, 2003, 2004, 2005

The food industry in China has experienced robust growth in recent
years, which is of little surprise given that the country\'s population
increases by approximately 10 million people per year. It is safe to
assume double-digit growth will continue in the near future as the
percentage of processed food in Chinese diets continues to increase.
Currently only about 30 percent of food in China is processed, compared
to about 80 percent in more developed countries. Clearly there is more
room for growth.

As the table above demonstrates, while the increase in the number of
enterprises has slowed, especially in the beverage sector, sales revenue
continues to grow. This is due to the fact that while mergers and
competition have either swallowed companies or put others out of
business, the market continues to grow. (Again, keep in mind that this
may only be true of larger scale operations as there are still thousands
of small-scale operations in China) While official statistics show
2003-2004 growth in sales revenue at 22% percent and 2001-2004 growth at
46 percent it is prudent to assume slower, yet still stable growth. Most
industry insiders project a continued growth in the food processing
industry of between 10 percent and 12 percent. Again, when dealing with
China, assume stable growth but take all statistics with a word of
caution.

With an apparent 52% percent growth in sales for 2001-2004 the
processing sector is clearly the best performer as its growth exceeds
those of both the manufacturing and beverage industries. Although the
figures may be inflated, the disparity between the sub-sectors seems
justified given the fact that the food processing industry in China is
young and that initial growth should be in the primary sector of the
industry.

Figure 4. Retail Value of Processed Foods 2000-2004 (RMB millions)

  --------------------------- ------------ ------------ ------------ ------------ ------------
                              **2000**     **2001**     **2002**     **2003**     **2004**

                                                                                  

  Packaged food               345,183.50   372,713.60   403,053.70   436,625.80   473,223.90

    Confectionery             28,393.50    30,721.60    33,405.90    36,219.20    38,596.10

    Bakery products           49,057.00    53,713.70    58,776.20    63,667.70    69,030.20

    Ice cream                 19,401.70    20,939.20    22,474.00    23,909.40    26,223.50

    Dairy products            23,885.80    28,038.60    32,468.90    37,243.10    41,939.30

    Sweet and savory snacks   12,507.50    13,485.50    14,432.50    15,434.00    16,561.50

    Ready meals               1,943.90     2,082.00     2,240.20     2,420.50     2,622.70

    Soup                      68.9         71.3         74           77.5         81.1

    Pasta                     22.2         22.9         23.9         24.9         25.9

    Noodles                   31,381.40    34,363.70    37,417.9     41,107.80    45,230.70

    Canned/preserved food     42,678.80    43,978.80    45,448.90    46,909.20    48,602.70

    Frozen processed food     23,836.30    25,434.70    27,275.10    28,993.60    30,835.00

    Dried processed food      32,073.20    35,120.40    38,245.20    42,003.10    46,201.90

    Chilled processed food    8,916.90     9,392.10     9,956.70     10,503.60    11,134.20

  Meat and Fish (frozen,      59,233.10    61,942.50    65,048.90    68,067.80    71,448.50
  chilled, canned)                                                                

    Oils and fats             11,213.30    13,095.90    15,654.40    20,103.80    24,874.20

    Sauces, dressings and     57,103.70    59,351.90    62,033.00    64,645.50    67,668.30
  condiments                                                                      

    Spreads                   2,699.40     2,901.30     3,126.90     3,362.90     3,596.60
  --------------------------- ------------ ------------ ------------ ------------ ------------

Source: Euromonitor

Figure 5. Growth Rate in Product Type 2000-2004

  --------------------------- ------------- ------------- ------------- -------------
                              **2000-01**   **2001-02**   **2002-03**   **2003-04**

                                                                        

  Packaged food               7.9           8.1           8.3           8.4

    Confectionery             8.2           8.7           8.4           6.6

    Bakery products           9.5           9.4           8.3           8.4

    Ice cream                 7.9           7.3           6.4           9.7

    Dairy products            17.4          15.8          14.7          12.6

    Sweet and savory snacks   7.8           7             6.9           7.3

    Ready meals               7.1           7.6           8.1           8.4

    Soup                      3.5           3.8           4.7           4.7

    Pasta                     3.6           4.1           4.1           4.4

    Noodles                   9.5           8.9           9.9           10

    Canned/preserved food     3             3.3           3.2           3.6

    Frozen processed food     6.7           7.2           6.3           6.4

    Dried processed food      9.5           8.9           9.8           10

    Chilled processed food    5.3           6             5.5           6

  Meat and Fish (frozen,      4.6           5             4.7           5
  chilled, canned)                                                      

    Oils and fats             16.8          19.5          28.4          23.7

    Sauces, dressings and     3.9           4.5           4.2           4.7
  condiments                                                            

    Baby food                 12.8          10.5          11.3          15.1

    Spreads                   7.5           7.8           7.5           6.9
  --------------------------- ------------- ------------- ------------- -------------

Source: Euromonitor

The total retail value of packaged food has showed consistent 8 percent
growth since 2000. Baby food, oils and fats, dairy, ice cream, and dried
foods all show higher than average growth, although the average rate of
8 percent is very strong. Using the growth rate of the retail value of
processed foods should provide a reasonable estimate of the growth rate
for the entire industry. In fact, many industry insiders feel that the
above listed growth rates are accurate for the industry as a whole.
However, with more and more companies using China as a platform for
export oriented processing, these numbers may increase.

## D. Consumer Trends and Sales Patterns

-   Overall expenditure on food shows consistent growth.

-   There is a large urban and rural divide. Urban centers will still be
    the largest market for processed food until rural incomes increase
    and market penetration and distribution logistics improve.

-   Urban areas show the most growth and the highest growth in expensive
    value-added items.

-   Urban areas show strong growth in milk, yogurt, milk powder, baby
    food products, oils and fats, meat and poultry, and seafood.

-   Consumption patterns are highly regional.

-   While unprocessed grain consumption decreases, baked goods and
    processed cereals increases.

-   Fish, poultry, baked goods, milk and yogurt show parallel increases
    with income.

-   Watch for increasing trends in convenience, health foods, low fat,
    fortified foods.

-   Safety and imitations are still concerns.

-   The organic market is fledgling but being promoted by the government
    and is bolstered by health and safety concerns.

-   More and more food is purchased in supermarkets and hypermarkets

-   The retail food service industry increases as more people eat out,
    especially in urban areas.

Figure 6. The Urban-Rural Divide: Per Capita Income and Food Expenditure
in China (RMB)

+-----------------+------+------+------+------+-----------+----------+
|                 |      |      |      |      | **%       |          |
|                 |      |      |      |      | Change**  |          |
+-----------------+------+------+------+------+-----------+----------+
|                 | **20 | **20 | **20 | **20 | **20      | **200    |
|                 | 01** | 02** | 03** | 04** | 03-2004** | 1-2004** |
+-----------------+------+------+------+------+-----------+----------+
| Urban           |      |      |      |      |           |          |
+-----------------+------+------+------+------+-----------+----------+
| > Disposable    | 6    | 7    | 8    | 9    | 11%       | 28%      |
| > Income        | ,859 | ,702 | ,472 | ,422 |           |          |
+-----------------+------+------+------+------+-----------+----------+
| > Food          | 2    | 2    | 2    | 2    | 11%       | 26%      |
| > Expenditure   | ,014 | ,271 | ,416 | ,709 |           |          |
+-----------------+------+------+------+------+-----------+----------+
|                 |      |      |      |      |           |          |
+-----------------+------+------+------+------+-----------+----------+
| Rural           |      |      |      |      |           |          |
+-----------------+------+------+------+------+-----------+----------+
| > Disposable    | 2    | 2    | 2    | 2    | 11%       | 20%      |
| > Income        | ,366 | ,475 | ,622 | ,936 |           |          |
+-----------------+------+------+------+------+-----------+----------+
| > Food          | 830  | 872  | 886  | 1    | 15%       | 20%      |
| > Expenditure   |      |      |      | ,031 |           |          |
+-----------------+------+------+------+------+-----------+----------+

Source: China Statistical Yearbook 2002, 2003, 2004, 2005

According to the tables above, per capita expenditure on food in urban
areas increased by about 11 percent between 2003 and 2004 while in rural
areas the increase was an even greater 15 percent. There was a parallel
increase of 11 percent in amounts of disposable income between rural and
urban households. What is important to recognize here though is that
while growth in food expenditure is strong in both urban and rural
areas, rural disposable income and food expenditure is less than
one-third of the urban counterpart. It is also worth mentioning that due
to price factors and availability most of the food consumed in rural
areas is fresh rather than processed. Therefore the strength of the
processed food market and the drivers for tastes and products still
reside in urban areas.

Figure 7. Urban Household Per Capita Annual Purchases of Major
Commodities (kg)

  ----------------------------- ---------- ---------- ---------- ----------
                                **2001**   **2002**   **2003**   **2004**

  Grain                         79.69      78.48      79.52      78.18

  Fresh Vegetables              115.86     116.52     118.34     122.32

  Edible Vegetable Oil          8.08       8.52       9.2        9.29

  Pork                          15.95      20.28      20.43      19.19

  Beef and Mutton               3.17       3          3.31       3.66

  Poultry                       5.3        9.24       9.2        6.37

  Fresh Eggs                    10.41      10.56      11.19      10.35

  Aquatic Products              10.33      13.2       13.35      12.48

  Milk                          11.9       15.72      18.62      18.83

  Fresh Melons and Fruits       59.9       56.52      57.79      56.45

  Nuts and Kernels              3.37       2.76       2.7        2.94

  Liquor                        9.68       9.12       9.39       8.94

  Cake                          3.26       3.84       4.18       4.33

  Milk Powder                   0.5        0.6        0.56       0.51

  Yogurt                        1.36       1.8        2.53       2.85
  ----------------------------- ---------- ---------- ---------- ----------

Source: China Statistical Yearbook

Figure 8. Rural Household Per Capita Annual Purchases of Major
Commodities (kg)

+----------------------------+---------+---------+---------+---------+
|                            | *       | *       | *       | *       |
|                            | *2001** | *2002** | *2003** | *2004** |
+----------------------------+---------+---------+---------+---------+
| Grain (Unprocessed)        | 250.23  | 236.50  | 222.44  | 250.23  |
+----------------------------+---------+---------+---------+---------+
| > Wheat                    | 80.27   | 76.31   | 73.23   | 80.27   |
+----------------------------+---------+---------+---------+---------+
| > Rice                     | 126.82  | 123.11  | 119.31  | 126.82  |
+----------------------------+---------+---------+---------+---------+
| Soybeans and Related       | 5.49    | 5.76    | 5.28    | 5.49    |
| Products                   |         |         |         |         |
+----------------------------+---------+---------+---------+---------+
| > Soybean                  | 2.53    | 2.20    | 2.05    | 2.53    |
+----------------------------+---------+---------+---------+---------+
| Fresh Vegetable            | 111.98  | 110.55  | 107.40  | 106.74  |
+----------------------------+---------+---------+---------+---------+
| Edible Oil                 | 7.06    | 7.53    | 6.27    | 7.06    |
+----------------------------+---------+---------+---------+---------+
| Meats, Poultry and Related | 18.30   | 18.60   | 19.68   | 18.30   |
| Products                   |         |         |         |         |
+----------------------------+---------+---------+---------+---------+
| > Pork                     | 13.28   | 13.70   | 13.78   | 13.28   |
+----------------------------+---------+---------+---------+---------+
| > Beef                     | 0.52    | 0.52    | 0.50    | 0.52    |
+----------------------------+---------+---------+---------+---------+
| > Mutton                   | 0.61    | 0.65    | 0.76    | 0.61    |
+----------------------------+---------+---------+---------+---------+
| > Poultry                  | 2.81    | 2.91    | 3.20    | 2.81    |
+----------------------------+---------+---------+---------+---------+
| Eggs and Related Products  | 4.77    | 4.66    | 4.81    | 4.77    |
+----------------------------+---------+---------+---------+---------+
| Milk and Related Products  | 1.06    | 1.19    | 1.71    | 1.06    |
+----------------------------+---------+---------+---------+---------+
| Aquatic Product            | 3.92    | 4.36    | 4.65    | 3.92    |
+----------------------------+---------+---------+---------+---------+
| Sugar                      | 1.28    | 1.64    | 1.24    | 1.28    |
+----------------------------+---------+---------+---------+---------+
| Fruits and Related         | 18.31   | 18.77   | 17.54   | 7.02    |
| Products                   |         |         |         |         |
+----------------------------+---------+---------+---------+---------+
| Nuts and Related Product   | 0.74    | 0.78    | 0.72    | 0.74    |
+----------------------------+---------+---------+---------+---------+

Source: China Statistical Yearbook

As the tables above show there have been substantial increases in
poultry, milk, yogurt, cake and pork consumption amongst urban
residents. Urban residents are also eating less grain and nuts. However,
this data is most likely for raw forms of food and does not indicate
consumption of processed grains or packaged/processed nuts, the
consumption of which has been increasing. While not all of the foods
listed in these tables are processed, the data, along with the market
value in figures 4 and 5, indicate strong preferences for certain types
of food that will affect the food processing industry.

Growth in overall food consumption in rural areas remains limited with
emphasis on meats, dairy and fish products while other foods such as
edible oils actually declined. There is very little data for processed
food consumption in rural areas, which is indicative, of how little is
consumed.

It is worth noting that over 90 percent of urban households have
refrigerators today while only around 18 percent of rural households
have them. Furthermore, less than 7 percent of urban households have
freezers. Therefore, the urban market is ready for foods that require
refrigeration while it will most likely be several years before they can
be sold in rural markets. While the frozen food market has consistently
increased it probably indicates that most frozen food is eaten soon
after it is purchased. Frozen food is not particularly popular with
consumers in the south of China but is still widely used in the food
service industry there. Furthermore the number of households with access
to refrigerators is increasing annually, 10 percent between 2001 and
2003. Although no official statistics exist, microwaves are rapidly
becoming a more common appliance in urban households. For example retail
surveys in Shanghai show that over 450,000 microwave ovens were sold in
retail outlets across the city in 2002. Furthermore this represents a 37
percent increase over 2001.

Figure 9. Urban Per Capita Annual Food Consumption by Income Bracket
(kg)

  ---------------------- ---------------- ---------------- ---------------
  **Income Bracket**     **Average**      **High**         **Highest**

  Cake                   4.18             5.58             5.74

  Milk                   18.62            26.82            28.29

  Yogurt                 2.53             3.92             4.33

  Fresh Fruit and Melons 56.57            70.84            75.08

  Shrimp                 1.33             2.15             2.72

  Fish                   9.79             12.43            14.05

  Poultry                9.2              11.54            12.77
  ---------------------- ---------------- ---------------- ---------------

Source: China Statistical Yearbook

The table above shows that certain prized foods are consumed in larger
amounts as wealth increases.

Figure 10. Urban Income and Food Expenses in High Income Regions (RMB
per capita)\*

  -------------------------------------------------------------------------------------------------------------------
                  **National   **Shanghai**   **Beijing**   **Zhejiang**   **Guangdong**   **Tianjin**   **Fujian**
                  Average**                                                                              
  --------------- ------------ -------------- ------------- -------------- --------------- ------------- ------------
                                                                                                         

  Total Income    9061.22      16380.25       14959.30      14295.38       13451.13        10971.57      10816.32

  Disposable      8472.20      14867.49       13882.62      13179.53       12380.43        10312.91      9999.54
  Income                                                                                                 

  Living          6510.94      11040.34       11123.84      9712.89        9636.27         7867.53       7356.26
  Expenditure                                                                                            

  Food            2416.92      4102.65        3522.69       3558.41        3583.72         2963.85       3104.80

                                                                                                         

  Grain           194.15       195.77         224.11        182.99         **230.24**      217.41        248.98

  Starches and    17.08        23.26          **26.12**     12.62          11.45           **24.71**     17.22
  Tubers                                                                                                 

  Beans/Bean      31.40        **56.63**      38.15         45.10          25.89           28.05         37.48
  Products                                                                                               

  Oil and Fats    78.46        84.27          81.63         63.42          **86.17**       79.46         83.28

  Meat and        473.19       618.80         575.01        474.87         **846.22**      479.36        662.66
  Poultry                                                                                                

  Eggs            60.97        65.73          71.80         47.89          44.85           **93.27**     71.91

  Aquatic         170.31       **534.09**     160.94        547.10         359.79          271.92        **581.56**
  Products                                                                                               

  Vegetables      236.44       **336.30**     266.62        311.38         287.91          249.97        271.53

  Condiments      35.22        49.59          **67.06**     36.33          36.21           56.18         44.37

  Sugar           26.51        **54.21**      44.56         28.42          36.32           24.24         21.91

  Beverages       120.11       212.17         **246.46**    173.46         106.87          170.61        131.54

  Dried/Fresh     174.89       294.26         **313.01**    255.48         225.50          241.72        207.43
  Fruits                                                                                                 

  Nuts and        26.14        49.93          **64.42**     39.21          28.20           55.12         24.71
  Kernels                                                                                                

  Cake            53.46        118.82         **125.94**    62.58          73.05           84.08         49.23

  Dairy Products  124.70       241.82         **255.99**    139.17         124.01          139.08        153.00

  Dining Out      438.24       896.85         829.68        827.63         **924.09**      612.07        346.64
  -------------------------------------------------------------------------------------------------------------------

\* Bold figures indicate notably high amounts

Source: China Statistical Yearbook

**Regional consumption of packaged foods**

Regional variations must be accounted for in the food processing
industry. While China may have 1.3 billion people, there is a great
urban/rural divide and further variations among urban consumers.
Exporters should be aware of where in China their products will have the
most impact and educate themselves about the Chinese market. One of the
biggest complaints from Chinese importers and distributors of food
ingredients is that American exporters often know very little about the
Chinese market. In the past, it was very convenient for US companies to
ship to brokers in Hong Kong and allow the brokers to worry about
distribution and market acceptance. If US companies want to be
successful in today's China market, they need to spend time in China
visiting with their importers/distributors to better understand the
needs of the market and to take advantage of the great opportunities
that lie in this market in the future.

While Guangdong province may rank 4^th^ among the wealthiest areas it
spends far more on meat and poultry and dining out than its wealthier
counterparts. In fact, demand for meat in Guangdong far outstrips
supply\--it can only supply 60 percent of its meat demands---making it a
coveted market for meat processing enterprises. Guangdong brings in
about four million tons of pork each year from surrounding provinces due
to increasing demand and restrictions on land and water use within the
province.

Take as further examples seafood consumption in Fujian or egg
consumption in Tianjin, which is much higher than in other more wealthy
areas. Fujian\'s seafood consumption is roughly triple that of Beijing
even though its disposable income is only 70 percent of its wealthier
counterpart. In short, agricultural exporters must be aware of
significant regional variations and not consider China as a single,
large market.

Figure 11: Retail Sales of Packaged Food by Region: Value 1999-2004 (RMB
billion)

+-----------------------------------------------------------------------+
| 1999 2000 2001 2002 2003 2004                                         |
|                                                                       |
| Region                                                                |
|                                                                       |
| East China 80,656.3 86,966.9 93,969.2 101,765.1 110,503.8 120,020.5   |
|                                                                       |
| Central China 48,683.9 51,868.6 55,618.9 59,875.3 64,290.8 69,118.2   |
|                                                                       |
| North and Northeast China 56,424.7 61,648.3 67,308.2 73,481.9         |
| 80,312.9 87,611.0                                                     |
|                                                                       |
| Northwest China 15,480.8 16,710.8 17,829.9 18,988.2 20,207.7 21,758.8 |
|                                                                       |
| South China 54,225.5 58,412.6 62,880.8 67,755.0 73,283.7 79,311.8     |
|                                                                       |
| Southwest China 31,694.3 34,404.2 37,462.4 40,874.4 44,530.7 48,718.2 |
|                                                                       |
| **TOTAL** 287,165.5 310,011.5 335,069.5 362,740.0 393,129.5 426,538.4 |
+-----------------------------------------------------------------------+

Source: Euromonitor International estimates

In general China's market for consumption of packaged foods can be
divided into 6 major regions: East, Central, North and Northeast,
Northwest, South, and Southwest.

East China is clearly the largest regional market for packaged foods in
China. In terms of value this region will account for 28 percent of all
packaged food sold in China. Shanghai is one of China's leading
commercial centers and home to its largest port. With a population of 20
million and a 2004 GDP estimated at \$93 billion, the city is at the
center of a massive web of development. Shanghai is an aggressively
cosmopolitan city, which derives much of its strong sense of identity
from a bleeding-edge knowledge of international brands and fashions.
This region leads the market for most high-end packaged foods including
confectionary, ice cream, dairy products, and other western-style foods
such as pasta, packaged bread and Western sauces. This region also has a
well established distribution infrastructure and a large number of
supermarkets and hypermarkets making transportation and accessibility
less of a problem than in other regions. Because of this and the general
high level of income, education and openness to western food styles,
this region is also an excellent launch area for many new products.

The North and Northeast packaged food markets are also well developed,
accounting for nearly 20 percent of total value sales in the country. In
general, people in northern China prefer a meatier and starch heavy
diet. Combined with somewhat less complicated foods than consumers are
used to in the South, northern food and North China constitutes a
sizable and tangible market for international food processing businesses
in China. Large cities such as Beijing, Harbin and Shenyang provide a
strong base for demand. The consumption of noodles, mostly made from
wheat flour, is particularly high in this region. Key characteristics of
the processed food industry in North China are as follows:

1\. Logistical bottlenecks: Especially in Northeast China, the
agricultural production supply chain suffers from inefficiency. This is
also a reason the processed food industry is less developed in the
region.

2\. Highly stratified and distribution facility development is not fully
in place. For the same reason Carrefour and other big retail players
consider establishing their own regional distribution centers in cities
of North East China such as Shenyang in 2006. The rationale is to grow
trade in local markets before competitors can move in to these segments.

3\. Severe weather conditions leaves a shorter window of opportunity to
actively market to consumers and businesses. On the other hand, fewer
competitors translate into more opportunities to establish markets. This
means an offset of transportation and other costs to establish a solid
foothold in regional markets. Two recent examples are Anheuser Busch\'s
purchase of Harbin Beer in Northeast China\'s Heilongjiang Province and
New Zealand\'s Fonterra teaming up with Sanlu Milk Powder of Hebei
Province. Both local partners are influential brands that can give the
joint venture an advantage on expanding existing market shares. It is
anticipated that the food processing sector in Northeast China will
repeat the development pattern of those in the Pearl and Yangtze River
Deltas several years ago, but with an accelerated pace, since North
China is the focus of strategic development for the Country in the
11^th^ five year plan, and stakeholders all have in mind a race against
their southern peers.

4\. A review of Shandong Province is somewhat representative of the
North China food processing sector. In 2005 Shandong had 13 enterprises
listed in the top 100 food processors ranking it the first in terms of
number of businesses among other provinces. However, compared with peers
in Shanghai or Jiangsu Province, they all had lower profit rates,
economies of scale, etc. Also, Shandong has more primary food processing
rather than manufacturing businesses which means products with lower
added value and greater vulnerability with regard to meeting
competition, especially when there are price increases in raw materials.
Currently, in the value-added food processing sector, Japanese and
Korean businesses are more present in Shandong and North East China.

The southwest market is the fastest growing with a 9 percent in sales
increase in 2004. This fast paced growth is largely due to urbanization
of cities like Kunming, Chengdu, and Chongqing. Tourism in these areas
has also lead to the consumption of more packaged foods. Sichuan cooking
is famous in these regions so it is not surprising that this region has
the highest growth rate for sauces, dressings, and condiments and that
demand for oil and fats rose 25 percent 2004.

South China is a market whose proximity to Hong Kong and large mainland
cities like Guangzhou and Shenzhen is reflected in its high disposable
incomes and customer knowledge about new products. In 2004 this region
was the largest for oils and fats and the second largest for
canned/preserved and chilled foods. Fastest growth is expected for sales
of bakery products, dairy products and baby food.

The Northwest is a relatively underdeveloped market with few large
cities and poor distribution channels as is reflected in the fact that
it accounts for a mere 5 percent of total packaged food sales.

**Sales Patterns**

-   Presence of traditional wet markets is decreasing.

-   Presence of hypermarkets and supermarkets is increasing.

-   The food retail service industry continues to grow rapidly.

-   Above factors mean a higher presence of processed foods.

-   46 percent of retail processed food is sold in hypermarkets and
    supermarkets.

##### Figure 12: Food Retailer Sales by Type of Outlet 1999-2003 (RMB billion)

  ------------------ ----------- ---------- ---------- ---------- ----------
                     **1999**    **2000**   **2001**   **2002**   **2003**

                                                                  

  Hypermarkets       96.3        118.5      142.3      170.5      200.8

  Convenience stores 61.4        67.4       73.5       82.6       92.1

  Supermarkets       623.5       664.0      721.0      810.5      875.4

  Other grocery      1,028.8     1,120.3    1,263.0    1,347.4    1,450.3
  retailers                                                       

                                                                  

  Total              1,810.0     1,970.2    2,199.8    2,411.0    2,618.6
  ------------------ ----------- ---------- ---------- ---------- ----------

Source: Euromonitor

Supermarkets and hypermarkets are increasing in number and in their
share of food sales. Between 2003 and 2004, the number of supermarkets
increased by almost 17%. Furthermore, convenience stores such as
7-Eleven are gaining in numbers as well. Traditional wet markets are
losing market share, as more and more consumers are concerned about
hygiene and food safety while government tax structures are making it
more and more difficult for wet markets to operate. These developments
bode well for the food processing industry as currently 46 percent of
retail processed food is sold in hypermarkets and supermarkets and more
than 10 percent in convenience stores. The rest is split between
independent grocery stores and other outlets. Targeting middle-class
consumers who are increasingly short on time, hypermarkets offer a wide
variety of processed products, ranging from fish fillets to ready-made
meals.

#####  {#section-8 .unnumbered}

##### Figure 13. Consumer Expenditure on Food in Retail Foodservice 1999-2004 (RMB Billion)

  ------------- ------------ ------------ ------------ ------------ -----------
  **Year**      **2000**     **2001**     **2002**     **2003**     **2004**

  Expenditure   130.3        137.9        139.7        148.4        160.7
  ------------- ------------ ------------ ------------ ------------ -----------

Source: Euromonitor Consumer Food Service in China Report 2005

Eating out is very popular among Chinese consumers and has become a
regular occurrence for most in recent years due to the strength of the
economy. Most Chinese meals are still prepared at home, but this figure
is in decline. The growth in the number of working women and dual-income
households, particularly dual-income households without children, has
led to an overall improvement in the disposable incomes of Chinese
consumers. In larger cities, the fast pace of life leads many to eat out
more often. For example, according to a report by the Chinese research
institution Sinomonitor International, over 90% of Beijing's young
white-collars aged 18-35 eat out frequently. Also, during the workweek,
54% of working people eat out more than four times per week. These
trends have resulted in considerable growth for restaurants, cafés, and
fast food and home delivery businesses across the country. With
increased purchasing power and more exposure to western lifestyles,
Chinese consumers' tastes have become more and more varied. They are
spending more on eating out, demanding a wider variety of food options,
and expecting high-quality food.

The growth of a high end food industry is particularly evident in
Shanghai. Shanghai had a total of 30,800 registered restaurants in 2004,
slightly less than in 2003. Revenues, however, jumped by almost 20% to
reach 7.5 billion RMB (\$937 million). The declining number of entities
relative to income reflects continued consolidation in the industry as
chain stores and professional food service operations continue to
displace small enterprises. It is also important to keep in mind that a)
this number lumps restaurants and catering together, and b) the number
almost certainly grossly understates the size of the industry, as many
small or informal restaurants go unregistered.

Traditionally, the catering industy has been viewed as a poor venue for
imported products, due to its focus on box lunches produced at a cost of
less than \$1 per unit. This is starting to change, however, as consumer
concerns about food safety have led many Shanghainese to distrust
traditional box lunch manufacturers. In response, several high-end
restaurants in commercial districts have started producing box lunches,
and several retailers (including Lawson's convenience stores) have begun
offering Japanese-style box lunches. Significantly more expensive than
traditional box lunches, the main appeal is combination of high quality
with convenience. This has created a potential opportunity for U.S.
products, and several companies have held discussions with Lawson's with
an eye to including their products in box lunches.

Shanghai is home to one of China's most vibrant and innovative
restaurant scenes. Although separate statistics on the restaurant
industry are not available, the city has seen tremendous development.
Shanghai now hosts a cohort of world-class restaurants, including
Jean-Georges, Sens et Bund and Laris, catering to the city's growing
business elite. Pizza restaurants are becoming increasingly popular,
becoming an important driver for demand for cheese.

One of the most important trends in Shanghai's restaurant industry is
the rapid emergence of high-end Chinese restaurant chains, such as
Shanghai Uncle, Xiaonanguo, and Lulu. Shanghainese typically prefer to
entertain guests in restaurants rather than at home, and gain a great
deal of 'face' by taking guests to a high-end restaurant. This is
especially true for business dinners, which place a premium on
over-the-top displays of generosity. At the same time, they prefer to go
to a place that is seen to have reliable quality: foreign cuisines are
interesting, but unfamiliar and unsuitable for some occasions. These
high-end chain restaurants specialize in providing a reliably excellent
dining experience with high-end ingredients and consistent preparation,
at a price. They innovate in recipes, but only within certain limits.
These restaurants' demand for consistent high quality, willingness to
pay higher prices and very high volume (Xiaonanguo has twenty very large
restaurants), makes these an excellent venue for imported ingredients.
All already serve imported wines, and most already import a number of
other ingredients. Shanghai Uncle has an exclusive arrangement with
Gallo Wines, and Lulu featured fresh Washington state cherries as part
of a promotion last fall.

Shanghai also has a large community of western restaurants, serving a
mixed clientele of western expatriates, Taiwanese and local Chinese who
have either lived abroad or are just interested in trying something new.
Unofficial estimates put the number of western restaurants at 1,600,
serving 20 different cuisines, to an expatriate community estimated at
350,000. Western restaurants are important both as customers for high
end products such as wine, and as a means of introducing new products to
the market. Some western restaurants have expanded to the point that
they generate significant volume on their own: Moon River Diner (U.S.
owned and operated), for example, now has three outlets in Shanghai.
Specialty restaurants and ethnic restaurants are becoming increasingly
common, creating niche markets for very high-end products. Organic food
is also becoming an emerging trend, with at least two high-end organic
restaurants opening in the past year. Demand is so strong that one local
retailer has established strictly controlled greenhouse vegetable farms
in the suburbs to cater to the needs of these restaurants.

Demand for knowledge about the preparation and handling of western food
is at a premium, and the city suffers from a chronic shortage of
well-trained western chefs. One estimate put the number of fully
qualified chief chefs (for western food) at 100, most of them working in
the star-rated hotels. This constitutes an excellent opportunity for
exporters and distributors willing to commit the time to introduce and
explain their products. In conjunction with the local chef associations,
ATO/Shanghai regularly organizes chef seminars throughout East China
that are invariably packed. These events provide USDA cooperator groups
such as the Alaska Seafood Marketing Institute, the U.S. Meat Export
Federation, the USA Poultry and Egg Export Council, Sunkist Growers, and
the California Table Grape Commission, the opportunity to not just
introduce new or unusual products, but to explain the proper preparation
techniques and potential innovative uses of their products.

Hotels

Shanghai's hotel sector is already extremely well developed, but is
expanding rapidly under pressure from overwhelming demand. Five and four
star hotels are routinely fully booked, and during peak seasons there
may be no rooms available at this level in the city. At the end of 2004
Shanghai had 359 star-rated hotels, of which 61 were rated four stars or
higher---an increase of 21 over the previous year, 11 of which were four
or five star hotels. Expansion is likely to continue or accelerate:
Marriott has specifically targeted the Yangtze River Delta for
development, while Holiday Inn plans to build hotels in every city in
China with an airport in the next few years, including 7 new hotels in
Shanghai. Business revenues for Shanghai's hotel industry amounted to
over \$1.7 billion in 2004, and average room rates for 5-star hotels
reached roughly \$150/night, according to local government statistics.

+-------------+------------+--------------+--------------+------------+
| Shanghai    |            |              |              |            |
| Hotel       |            |              |              |            |
| Industry    |            |              |              |            |
| Statistics  |            |              |              |            |
|             |            |              |              |            |
| 2003-2004   |            |              |              |            |
+-------------+------------+--------------+--------------+------------+
| Year        | Total      | Five Star    | Four Star    | Others     |
+-------------+------------+--------------+--------------+------------+
| 2004        | 359        | 24           | 37           | 279        |
+-------------+------------+--------------+--------------+------------+
| 2003        | 338        | 20           | 30           | 288        |
+-------------+------------+--------------+--------------+------------+
| Source:     |            |              |              |            |
| Shanghai    |            |              |              |            |
| Statistical |            |              |              |            |
| Yearbook,   |            |              |              |            |
| 2004 and    |            |              |              |            |
| 2005        |            |              |              |            |
+-------------+------------+--------------+--------------+------------+

Restaurants and four and five star hotels continue to form the cutting
edge of cuisine in Shanghai, despite growing competition from
world-class standalone restaurants like Laris. This makes the hotel
industry an ideal entry point for now-to-market and high-end imported
food ingredients. As noted earlier, top hotel restaurants have the best
qualified chefs for foreign cuisine, and they are generally more
familiar with imported products. Whereas other restaurants are willing
to be convinced of the virtues of new products, ATO's experience
indicates that these top restaurants aggressively seek them out. They
are also more familiar with menu promotions, and their high profile in
the restaurant community means that other restaurants tend to follow
their lead.

Despite the growth of high end restaurants in large cities like
Shanghai, the most popular type of catering outlets in China are still
small, cheap, full-service restaurants. These usually provide a range of
local dishes, often seasonal in nature, although economic development is
reducing seasonal variations in availability of produce. However, the
expanding middle class is developing a taste for fast food and quick
service restaurants---many office workers buy breakfast snacks on the
way to work and eat out for lunch, often more than 3 times a week. Fast
food restaurants are rapidly gaining in popularity, especially amongst
younger consumers. US-based Yum! Brands Inc, which owns KFC, Pizza Hut
and Taco Bell, is the market leader, with 2004 revenue of 9.4 billion
RMB (\$ 1.1 billion USD) and over 1,200 open in 280 Chinese cities.
McDonald\'s also has over 600 outlets in China. However, fast-food
chains must compete with local restaurants that have competitive prices.
A typical Chinese take-away lunch box with rice, meat and vegetables
costs about \$1 USD.

The surge in the popularity of eating out along with the influx of
foreign food has had a substantial impact on retail sales of processed
food. Consumers often to go supermarkets in search of new foods they
have tried in restaurants. The growing number of cafés selling gourmet
sandwiches has contributed to an increase in supermarket sales of
specialty breads and cheeses. Furthermore, manufacturers have responded
to the popularity of ethnic food by creating ready-made sauces and meals
and many supermarkets now have specific sections for imported Western,
Japanese, Korean and other Asian foods.

**E. Challenges and Opportunities**

Figure 14: Market Challenges and Opportunities

  -----------------------------------------------------------------------
  **Opportunity**                     **Challenge**
  ----------------------------------- -----------------------------------
  World's largest food market; food   Fragmented market; 65- 70% of
  sector growth in the double digits. people are scattered in the
  China's economy large enough to     countryside. Poor logistics and
  survive setbacks that hurt others.  infrastructure hamper producers,
                                      processors, distributors.

  Food is an essential part of        The Chinese have very strong taste
  Chinese culture and social life.    preferences. While they are willing
                                      to experiment, they are less
                                      willing to incorporate foreign
                                      tastes into their daily life
                                      without product information.

  China is incomprehensibly large.    Regional differences in culture and
  Though many consumers still lack    taste can be quite stark.
  the income to purchase imports,     Promotions with limited budgets
  millions join the middle class      must target specific groups.
  every year.                         

  Chinese consumers spend nearly half Chinese consumers are
  of their disposable income on food  price-sensitive: imported products
  and beverages. Higher living        have difficulty competing with
  standards, health education drive   domestic substitutes on price.
  consumers to demand better quality, 
  more variety in new diets.          

  Changes in urban living styles      Basic agricultural production is
  favor consumption of more processed not well integrated with commercial
  food.                               food processing sector.

  Undeveloped agriculture means       Competition among foreign firms in
  processors may need to import even  China is heavy.
  basic ingredients to develop their  
  food businesses.                    

  Imported goods are generally        Imports are regarded as luxury
  regarded as high in quality. Many   goods: the vast majority of
  U.S. brands, such as Budweiser,     consumers do not believe they can
  Coca- Cola, M&Ms, Snickers,         afford them.
  Campbell's, Heinz, Wrigley's, and   
  Pringles are widely recognized in   
  China.                              

  China is new to food processing,    Intellectual property issues.
  open to foreign processes and       Successful products are quickly
  technologies.                       counterfeited and innovative
                                      processes may be stolen.

  Foreign-invested companies on       Local producers catch up quickly;
  leading edge of industry, more      market life of new product may be
  likely to use imported ingredients. short.

  Low wage structure makes China a    Most Chinese firms are looking for
  good base for value-added           investment, marketing, packaging,
  processing.                         and management support.

  New markets for imported products   Transportation and logistics for
  are appearing in fast-growing       these cities remains difficult, and
  cities throughout China.            many lack the presence of a
                                      qualified distributor for imports.

  Overseas fast-food chains are       Foreign fast-food chains source
  extremely popular, and provide      most of their products locally. Few
  exposure for foreign foods.         of these chains import directly
  Overseas retail chains are growing  from overseas, working instead
  quickly, and carry more imported    through distributors. Many retail
  products than domestic              chains charge high listing fees to
  counterparts.                       promote new products.

  Overseas retail chains and          Although interested in quality for
  convenience chains are increasingly their house labels, these chains
  interested in establishing house    are tough negotiators, and will
  brands. This is creating            leave suppliers with little room
  opportunities for bulk shipment of  for profit.
  quality foods.                      

  Food safety concerns favor imported Registering food labels on imported
  products, especially for health     products is a lengthy bureaucratic
  food products including fresh fruit process. Counterfeiting has a
  and baby food.                      negative impact on perceived
                                      quality and safety of foreign
                                      brands.

  Under WTO, China's duties on        Increased access for imports has
  imported foods have fallen, and     resulted in greater competition
  more products are shipped directly  from other exporting countries for
  to China, instead of through Hong   products like beef, seafood and
  Kong. WTO entry leads to lower      pistachios. Non-tariff barriers
  tariffs and import barriers, market such as SPS rules and local
  and legal reform, and increased     protectionism will not disappear
  access for distributors.            quickly despite WTO. Import
                                      procedures can be costly,
                                      obstructive, and inconvenient.

  The Chinese market often moves      If a product is successful, it is
  en-masse. If a product becomes      likely to be counterfeited or
  trendy, sales can skyrocket         imitated.
  overnight.                          
  -----------------------------------------------------------------------

**Section III: Road Map for Market Entry**

-   Economic reform and market liberalization, removal of price controls
    and foreign exchange controls, and movement toward removal of import
    licensing have enhanced the possibilities for exports to China.

-   Regional inconsistency is still a problem.

-   Although import rules are changing most still use an agent.

-   Relationships and knowledge of Chinese business practices are
    essential

-   Logistics are modernizing but still need a lot of improvement.

-   Cold storage still limited.

-   Shrink still a problem, especially for fresh ingredients.

**A. Entry Strategy**

China\'s food processing market is extremely diverse and fragmented
which makes it nearly impossible to suggest one model for getting US
products into the market. However there are certain factors that all
exporters should consider such as the great importance of relationships
and market knowledge.

China has an ancient business culture that, like its American
counterpart, values efficiency and profit. However, there are
considerable differences that exporters must take into account. Personal
relationships are extremely important as is respect for hierarchy. Do
not be surprised if the more economic option is usurped by a
long-standing relationship. It is essential to understand the Chinese
concept of face and orientation towards groups and not individuals. The
emphasis Chinese place on food extends into business practices as well.
Dinners and lunches are an essential and informal way to cement
relationships. On the ground work and regular visits to China are
essential.

As mentioned above, the food market in China is incredibly diverse and
varies between urban and rural and from region to region. One should not
think of China as a single market of 1.3 billion people but rather as
several markets that are loosely connected. It is essential to conduct
targeted research on a specific consumer groups and ensure that there
will be a market for processed food that needs your exports. Try and
figure out how your product can be used in, or add innovation to,
typical Chinese food products. Only once a successful business model is
established, should it then be attempted in different markets. It is
said that US exporters often make the mistake of seeing China as one
large market and attempting to spread their product over too large an
area without a focus on local promotion and market development. In fact,
one of the biggest complaints from Chinese distributors about American
exporters is their lack of knowledge about the Chinese market and
expectations from local importers and distributors.

When looking for a distributor try to find one that not only has
established wholesale and retail outlets but one that has relationships
in your target market. Its one thing to accept orders for your product,
its another thing to make sure your product is penetrating the market
and ensuring future growth. Look for distributors that have technicians
on staff and experience working with other exporters. Make sure you
visit their facilities and warehouses especially if you are shipping
through the cold chain and beware of any company claiming they can ship
throughout China. You are better off dealing with individual
distributors in different regions. Be prepared to offer technical
assistance and support. Also, be sure you and your importer or
distributor have a clear understanding of who will pay certain fees as
many times the brand owner is expected to pay fees, which in other
countries an importer or distributor might otherwise cover.

All exporters should take full advantage of ATO assistance and producer
associations as they have on-the-ground experience and relationships
with both Chinese and American agricultural interests. Furthermore it is
highly recommended that exporters visit the various agricultural and
food industry trade-shows that are held throughout China. Contact one of
the three ATO offices in China for more information about the most
successful trade shows.

**B. Distribution**

The system for importing agricultural products into China is improving
but still remains a rather confusing mix of transport modes and
authorities. Once an informal system dominated by Hong Kong and Chinese
entrepreneurs, the distribution channel has become more open and more
formal where Western ideas, capital and management have greater
influence. As more foreign retailers set up operations in China,
international standards of logistics have been introduced into the
country. For example, fast food chains like McDonald's and KFC have set
up cold chain systems that service nearly 200 outlets throughout China.

Further change and improvement is still needed to cope with increasing
imports. For example, distribution accounts for up to 30 percent of a
product's cost in China, while the figure is as low as 10 percent in the
United States. Cold storage is still limited and shrink remains a
problem for distributors. While the system is more transparent and
tariffs on imported goods are dropping there still remain many
roadblocks to smooth and easy importing of foreign agricultural
products. In fact, over 70 percent of importers still use an import
agent to help navigate the Chinese bureaucracy.

Importers have historically been limited to a small number of
state-owned companies that do not make purchasing decisions but rather
have official import rights, handle customs and logistics documentation,
facilitate government inspection and certification processes and remit
payment for the imported products. Purchase decisions are generally made
by distributors who do not have import licenses but often handle import
logistics, themselves or through a contracted agent, and have an
established network of retail customers. However, this is scheduled to
change as China, as of April 6^th^ 2004, revamped the import-export
license system. By the end of 2005, any company will be allowed to start
an import-export activity in China, with no need to get an official
license whatsoever. Bear in mind that this change in regulation may
sound good in theory but it will no doubt take at least a few years for
the change in legislation to have an effect on the practice of
importing.

For purposes of food ingredients distribution, China is generally
divided into three regions: North China (China north and east of the
Yellow River, including Beijing, Tianjin and Manchuria); Huadong, which
includes the coast from Shandong to Fujian provinces, the city of
Shanghai, and Jiangsu, Zhejiang and Anhui provinces; and South China,
mostly Guangdong province. Distribution, retail and food markets in the
west of China are still largely undeveloped and virtually inaccessible
to processors and importers.

Figure 15: Major Chinese Ports (with annual volume over 100 million
tons)

  ------------- ----------- ----------- ----------- ----------- -----------
                                        (10, 000                
                                        tons)                   

  **Seaport**   **2000**    **2001**    **2002**    **2003**    **2004**

                                                                

  Shanghai      20,440      22,099      26,384      31,621      37,896

  Ningbo        11,547      12,852      15,398      18,543      22,586

  Guangzhou     11,128      12,823      15,324      17,187      21,520

  Tianjin       9,566       11,369      12,906      16,182      20,619

  Qingdao       8,636       10,398      12,213      14,090      16,256

  Dalian        9,084       10,047      10,851      12,602      14,516

  Qinhuangdao   9,743       11,302      11,167      12,562      15,037

                                                                

  Total         80,144      90,890      104,243     122,787     148,430
  ------------- ----------- ----------- ----------- ----------- -----------

Source: China Statistical Yearbook, 2004

Methods of distribution into China:

Wholesalers

Wholesalers are self-financed, specialized business organizations or
people who have their own sales and distribution network. They are
capable of purchasing large quantities of goods directly from the
manufacturers/exporters or from an importing company. The imported goods
are sold through wholesalers to the local enterprises with a relatively
quick transfer of assets. The wholesalers assume the risk of sale once
the foreign products are delivered to a Chinese agent. To a large
extent, the wholesalers control the demand and the pricing of the goods.

Commission Basis

The manufacturers/exporters entrust the goods with a business
organization or person and agree to settle payment after the goods are
sold. As the business organizations or persons incur minimal risk (no
capital cost) in selling the products, many of them are willing to
sell/distribute the products for a share of the profit or a contractual
payment. The manufacturers/exporters do not have to invest in a sales
infrastructure but their investment is tied down for the duration of the
commissioned sale. A high level of trust is required of the parties
involved in this method of distribution. It is not appropriate for new
business partners.

Third Party Logistics

A small group of foreign-managed companies have been established in
ports and free trade zones offering customs clearance, foreign exchange
conversion, bonded warehousing and shipment. This channel often requires
the supplier to establish a representative office to handle sales and
technical support. WTO reforms should enable third party logistics to
increase the scope and geographical reach of their work.

Gray Channel

The Gray Channel refers to shipments via Hong Kong through local import
agents with distribution connections on the mainland. This channel has
historically been cheaper than mainland channels as goods are often
shipped from Hong Kong outside of official channels or using various
methods to evade customs and VAT payments. US exporters should know that
this channel is illegal and is an option that is discouraged. Here, the
US supplier has little control over their product after it reaches Hong
Kong and technical support and supplies are not reliable. Furthermore,
non-US products may often be "mislabeled" by Hong Kong agents as being
US products.

Many importers report that importing through the same port at different
times of the day will result in different tariffs and procedures as the
staff has changed. For this reason some find Hong Kong a more consistent
port to import through.

While authorities are attempting to gain some control of the gray
channel, many estimate that 90 percent of goods destined for south China
still travel through Hong Kong. Lower tariffs reduced the cost advantage
of moving products through the Hong Kong "gray channel," and more
northerly ports like Shanghai and Qinhuangdao are beefing up
infrastructure in hopes of grabbing some of the business. Despite the
anticipation, importers and distributors are cautious about the changing
shape of the industry. For example, Beijing-based fruit distributors are
already importing 90 percent of their fruit directly, with only 10
percent coming via Guangdong through the gray channel. On the other hand
Shanghai distributors say they are still buying about 70 percent of
their fruit from wholesale markets in Guangzhou, which is the central
hub of the gray channel market for imported fruit. So while lower
tariffs may allow importers near port cities to displace gray channel
imports, it may take a while for newer ports to displace the power of
the gray channel in certain areas.

Direct Distribution

The manufacturers/exporters set up their sales outlet and sell their
products directly in China rather than through a local business
organization or person. The advantage is that the
manufacturers/exporters can meet the consumers face to face and learn
the market condition and trends. They can also reap the benefits of
their sales promptly. The drawback is the need to invest in developing a
sales network and the high cost of learning to operate in a foreign
market *This method should be made easier with China's revamping of the
import-export system.*

Exporters must complete the following documentation:

-   Bill of Lading

-   Label Certificate (required for all packaged food products)

-   Invoice

-   Packing list describing item, weight, and packing material

-   Certificate of Origin

-   Sanitary/Phytosanitary Certificates

Importers are responsible for the following documentation:

-   Import authorization document

-   Customs Declaration

-   Quarantine Certificates

-   Additional product specific documents

Figure 16. Distribution Flow Chart

![](media/image3.png){width="6.022222222222222in"
height="3.578472222222222in"}

# C. Company Profiles

Figure 17. Package Food Major Companies by Market Share and Retail Value
RMB (millions)

  ------------------------------- ---------- ----------- ---------- ----------- ---------- -----------
                                  **2001**               **2002**               **2003**   

                                  **%**      **Value**   **%**      **Value**   **%**      **Value**

                                                                                           

  Ting Hsin International Group   3.8        13,058.50   3.7        13,729.30   3.7        14,780.40

  Kuok Oils & Grains Pte Ltd      1.2        4,245.20    1.3        4,855.70    1.9        7,780.90

  Inner Mongolia Yili Industrial  1.1        3,831.00    1.5        5,547.50    1.8        7,147.00
  Group                                                                                    

  Shineway Group                  1.2        4,303.10    1.7        6,263.80    1.7        6,872.20

  Nestlé SA                       1.4        4,939.80    1.5        5,569.80    1.5        6,160.90

  Lee Kum Kee Co Ltd              1.3        4,647.40    1.4        5,114.90    1.5        5,909.60

  Bright Dairy & Food Co Ltd      \-         \-          \-         \-          1.4        5,478.90

  Foshan Haitian Flavouring &     1.4        4,920.50    1.3        4,837.70    1.3        5,341.10
  Food Ltd                                                                                 

  Jiangsu Yurun Food Industry     1.3        4,483.40    1.3        4,837.80    1.3        5,267.70
  Group                                                                                    

  Uni-President Enterprises Corp  1.2        4,068.20    1.1        4,216.10    1.2        4,644.40

  Hai Pa Wang International Food  1.1        3,826.60    1.1        3,986.80    1          4,207.60
  Group                                                                                    

  China National Cereals, Oils &  0.8        2,727.10    0.8        3,161.40    1          4,133.00
  Foodstuffs Imp & Exp Corp                                                                

  Hebei Hua Long Food Co Ltd      0.6        2,036.60    0.8        2,956.80    0.9        3,823.00

  Danone, Groupe                  0.9        2,951.20    0.9        3,456.90    0.9        3,794.20

  Inner Mongolia Mengniu Group    0.3        1,010.60    0.6        2,155.20    0.9        3,765.80

  Unilever Group                  0.8        2,706.20    0.9        3,290.50    0.9        3,583.50

  Shijiazhuang Sanlu Group        0.6        2,068.40    0.8        2,888.30    0.8        3,137.60

  Long Fong Group                 0.9        3,225.00    0.9        3,294.10    0.7        2,974.90

  McCormick & Co Inc              0.5        1,888.00    0.7        2,495.00    0.7        2,726.50
  ------------------------------- ---------- ----------- ---------- ----------- ---------- -----------

Source: Euromonitor Market Database

As the above table shows, the food processing industry in China is still
very fragmented, a fact confirmed by many in the industry. While the
retail sale of processed food in the United States is typically a
two-horse race between products such as Coca-Cola and Pepsi, this is
clearly not the case in China. The leading retail food processing
company only has a total market share of 3.7 percent while the rest in
the top twenty have between .7 and 1.9 percent. In fact, 40 percent of
the market is shared by over 80 companies, while a tiny portion of the
market is taken by artisanal labels with the bulk being in the hands of
many small-scale operations. Furthermore, as the table below
demonstrates, while there is some stratification in sub-sectors with
single entities having a greater share, fragmentation remains.

Figure 17. Processed Food Retail Sub-Sector Market Share (%)

  ---------------------------------------------------------------------------
                                             **2001**   **2002**   **2003**
  ------------------------------------------ ---------- ---------- ----------
  **Baby food**                                                    

    Nestlé SA                                17.2       18.5       18.3

    Bristol-Myers Squibb Co                  11.4       11.4       11.5

  **Bakery products**                                              

    Ting Hsin International Group            1.7        1.7        1.8

    Kraft Foods Inc                          0.8        1.5        1.5

  **Canned/preserved food**                                        

    Shineway Group                           8.5        11.2       11.9

    Jiangsu Yurun Food Industry Group        4.9        5.2        5.4

  **Chilled processed food**                                       

    Jiangsu Yurun Food Industry Group        25         25         26

    Shineway Group                           5.8        11.8       12.2

  **Confectionery**                                                

    Wrigley Jr Co, William                   6.1        6.4        6.5

    BVI Hsu-Fu-Chi Holdings Ltd              5          4.9        4.9

  **Dairy products**                                               

    Bright Dairy & Food Co Ltd               \-         \-         14.6

    Inner Mongolia Yili Industrial Group Co  7.1        9.9        11.2
  Ltd                                                              

  **Dried processed food**                                         

    Ting Hsin International Group            34.3       32.9       32.2

    Uni-President Enterprises Corp           10.9       10.3       10.4

  **Noodles**                                                      

    Ting Hsin International Group            35.1       33.7       32.9

    Uni-President Enterprises Corp           11.2       10.6       10.7

  **Oils and fats**                                                

    Kuok Oils & Grains Pte Ltd               32.4       31         38.7

    China National Cereals, Oils &           19.4       18.8       19.4
  Foodstuffs Imp & Exp Corp                                        

  **Pasta**                                                        

    Dongguan Humen Ri Long Food Factory      14         15         15.3

    Zhuhai Yat Hing Food Ltd                 10.5       10.5       10.7

  **Ready meals**                                                  

    Hangzhou Wahaha Group                    19.5       19.5       19.5

    Shanghai Maling Food Co Ltd              18         17.5       17.8

  **Sauces, dressings and condiments**                             

    Lee Kum Kee Co Ltd                       7.8        8.2        9.1

    Foshan Haitian Flavouring & Food Ltd     8.3        7.8        8.3

  **Sweet and Savory snacks**                                      

    Hefei Huatai Food Co Ltd                 6.5        8.1        8.1

    Guangdong Strong (Group) Co Ltd          7.3        7.4        7.3

  **Soup**                                                         

    Unilever Group                           29.9       33.1       36.4

    McCormick & Co Inc                       15         15         15.5

  **Spreads**                                                      

    QP Corp                                  8.4        8          7.8

    McCormick & Co Inc                       5.9        6.3        6.4
  ---------------------------------------------------------------------------

Source: Euromonitor Market Database

As the above table demonstrates, sub-sectors of the retail market remain
generally fragmented. Although the top two companies in each sector may
account for over 50 percent of the market there are usually more than 20
other enterprises in the sector with shares between .1 and 10 percent.
More often than not 20 to 70 percent of the market share goes to
companies too small to list. As the industry is further broken down in
smaller and smaller sub-sectors, clear leaders prevail in some cases but
not all. For example, while Kraft Foods may have the retail market lead
in biscuits it only has a 6.2 percent share and the top 13 companies
only have 24 percent of the market.

**D. Sector Trends**

Figure 18. Foreign Funded Food Industry, 2004

  --------------------------- ------- ------------ ------- ------------------------
                              ** **   **Number**   ** **   **Sales Revenue (billion
                                                           RMB)**

                                                           

  Food Processing                     1,776                221.1

  Manufacture of Foods                1,160                102.8

  Manufacture of Beverages            526                  81.0

                                                           

  Total                               3462                 404.9
  --------------------------- ------- ------------ ------- ------------------------

Source: China Statistical Yearbook 2005

According to official statistics there are currently 3462 foreign funded
ventures with total combined sales revenue of approximately 404.9
billion RMB (\$49.37 billion USD) This represents a growing amount of
foreign investment in China as the number of state-owned ventures
decreases. Foreign-funded ventures typically have more technology and
size than Chinese counterparts, process for the domestic market or
re-export and are more likely to use foreign ingredients to attain
higher quality and consistent input. Big players in the market include,
Danone, Cadbury, Cargill, Hormell, Purdue, Nestle, Kraft, Pilsbury,
Yum!, Chaeron, Campbell's, Kellogs, Smithfield, McCormick, and Heinz.
Foreign companies have high hopes for China, such as Heinz, which
expects 20 percent-30 percent of its ketchup supply to come from China
and is the market leader in baby cereal. American companies are not the
only one\'s getting into the market though. Asian companies from Japan
and Korea play a dominant role in foreign investment while EU investment
continues to increase. For example, Nippon Suisan Kaisha recently built
its largest plant in Qingdao to process for export to Japan.

Headaches

As the number of foreign-funded enterprises continues grow there have
been, and will continue to be, certain difficulties, especially for
production geared toward the domestic market. Many foreign companies are
not familiar with the Chinese market or sensitive enough to the
importance of price, even among the more affluent and growing middle
class. While more and more consumers are looking towards quality and
choice, most, probably more than 80 percent, view price as the most
important factor in purchasing processed foods, while less than 20
percent view quality as the primary factor. Given that foreign funded
companies tend to produce high quality products at higher prices it can
be difficult to break into the Chinese market. In 1993, for example,
multinational dairy corporations began to break into China\'s domestic
market. Nestle, Kraft, Danone and Parmalat all began to build their own
manufacturing and distribution channels. Soon, however, they met
repeated setbacks. Kraft withdrew from the Beijing dairy market in 2002.
Parmalat Nanjiing, founded in 2001, saw sales of its dairy products on
the decline less than two years later in Shanghai and Nanjing. Danone
started a partnership with the domestically owned Bright Dairy Co. in
1992 but by 2001 had only a 3.8 percent share in the joint-venture and
by 2002 had granted Bright the right to use its trademarks and designs
for free until September 2011. Danone only recently bounced back to
increase its stake in Bright Dairy to 7.7 percent.

Lessons Learned

Dairy companies had difficulties entering the Chinese market for several
reasons. First, multinationals had fewer domestic farms owing to
sensitivities over land ownership. Second, traditional dairy
distribution in China relies on a fragmented network reaching every
street and community of a city, and it is not easy for foreign brands to
penetrate even with substantial investments. Third, and perhaps most
importantly, multinationals knew little about Chinese consumption habits
and miscalculated the positioning of their products. Parmalat, for
example, focused only on high-end products selling its fruit-flavored
yogurt for 2 RMB per cup, double the price of similar local brands,
while their milk was sold only in supermarkets in packaged promotions.
Lessons have been learned and multinationals are getting over the
initial growing pains but there will always be unanticipated setbacks
for processors and agricultural exporters especially if they do not
conduct research and familiarize themselves with the Chinese industry
and market.

Supply Chain improvement

As more foreign retailers set up operations in China, international
standards of logistics have been introduced into the country. Central
distribution centers are now a common feature of chained supermarkets.
In order to keep prices down, suppliers and manufacturers are often
required to deliver their goods to the central distribution center of
supermarket chains. The chains will subsequently undertake the
distribution to their own stores and will levy suppliers and
manufacturers a delivery fee of 3-5% on the cost of goods. Many
fast-food companies are following the same model of centralized
distribution centers. For some premium products such as wine and
spirits, the major supermarkets have begun importing them into the
country directly to save on the extra margin charged by importers.

WTO

China formally became a member of the WTO at the end of 2001. Upon
accession, China is committed to gradually lowering import tariff rates.
Tariffs on agricultural imports will be cut to an average of 17 percent
by 2004. Average tariffs will be even lower, at 14.5 percent, for US
priority products such as wine, cheese, beef, citrus, pork and poultry.
Non-tariff measures, such as most of the import licensing arrangements
and import quotas, will also be abolished in phases. China has also
committed to liberalizing and allowing greater foreign participation in
distribution, telecommunication, finance, and professional services.
However, local importers have said that as tariffs on certain
commodities drop, some Chinese customs officials have found other ways
of raising the cost of importing products, sometimes by increasing the
estimated value of products entering the country.

China's entry into the WTO has also changed the status of company's
obligation to have joint venture status. This has allowed foreign
companies to have more oversight and control of their operations in
China.

# Section IV: Competition

## 

**A. Domestic Competition**

-   Meat production is expanding but not rapidly enough to keep up with
    demand.

-   Cereal output is in decline and may continue to be displaced by
    high-value fruits and vegetables.

-   Despite skyrocketing production, supply of fruits is not likely to
    match domestic demand.

-   Milk production has skyrocketed but still lags behind demand.
    Technology is helping to improve domestic output with many feeling
    that China will be able to satisfy most of its demand through
    domestic production.

As a matter of national security, the government aims to cap bulk
agricultural imports at just 5 percent of all food consumed in China.
Given rising incomes, population growth, shrinking arable land and trade
liberalization, this target will be hard to meet. In fact, most insiders
feel it is an impossible goal without a complete restructuring of the
farming industry. In fact, for the first time in many years, China ran
an agricultural deficit in 2003. It is expected to maintain a deficit
for many years to come.

Figure 19: Domestic Agricultural Output, Yield of Farm Crops (10 000
tons)

+---------------+--------+--------+--------+-------+-------+-------+
|               | **     | **     | **     | **2   | **2   | **2   |
|               | 1999** | 2000** | 2001** | 002** | 003** | 004** |
+===============+========+========+========+=======+=======+=======+
|               |        |        |        |       |       |       |
+---------------+--------+--------+--------+-------+-------+-------+
| Grain         | 50     | 46     | 45     | 45,   | 43,   | 46,   |
|               | ,838.6 | ,217.5 | ,263.7 | 705.8 | 069.5 | 946.9 |
+---------------+--------+--------+--------+-------+-------+-------+
| > Cereal      | 45     | 40     | 39     | 39,   | 37,   | 41,   |
|               | ,304.1 | ,522.4 | ,648.2 | 798.7 | 428.7 | 157.2 |
+---------------+--------+--------+--------+-------+-------+-------+
| > Rice        | 19     | 18     | 17     | 17,   | 16,   | 17,   |
|               | ,848.7 | ,790.8 | ,758.0 | 453.9 | 065.6 | 908.8 |
+---------------+--------+--------+--------+-------+-------+-------+
| > Wheat       | 11     | 9      | 9      | 9,    | 8,    | 9,    |
|               | ,388.0 | ,963.6 | ,387.3 | 029.0 | 648.8 | 195.2 |
+---------------+--------+--------+--------+-------+-------+-------+
| > Corn        | 12     | 10     | 11     | 12,   | 1     | 13,   |
|               | ,808.6 | ,600.0 | ,408.8 | 130.8 | ,1583 | 028.7 |
+---------------+--------+--------+--------+-------+-------+-------+
|               |        |        |        |       |       |       |
+---------------+--------+--------+--------+-------+-------+-------+
| Oil-bearing   | 2      | 2      | 2      | 2,    | 2,    | 3,    |
| Crops         | ,601.2 | ,954.8 | ,864.9 | 897.2 | 811.0 | 065.9 |
+---------------+--------+--------+--------+-------+-------+-------+
| > Peanuts     | 1      | 1      | 1      | 1,    | 1,    | 1,    |
|               | ,263.9 | ,443.7 | ,441.6 | 481.8 | 342.0 | 434.2 |
+---------------+--------+--------+--------+-------+-------+-------+
| > Rapeseeds   | 1      | 1      | 1      | 1,    | 1,    | 1,    |
|               | ,013.2 | ,138.1 | ,133.1 | 055.2 | 142.0 | 318.2 |
+---------------+--------+--------+--------+-------+-------+-------+
| > Sesame      | 74.3   | 81.1   | 80.4   | 89.5  | 59.3  | 70.4  |
+---------------+--------+--------+--------+-------+-------+-------+
|               |        |        |        |       |       |       |
+---------------+--------+--------+--------+-------+-------+-------+
| Fruits        | 6      | 6      | 6      | 6,    | 14,   | 15,   |
|               | ,237.6 | ,225.1 | ,658.0 | 952.0 | 517.4 | 340.9 |
+---------------+--------+--------+--------+-------+-------+-------+
| Apples        | 2      | 2      | 2      | 1,    | 2,    | 2,    |
|               | ,080.2 | ,043.1 | ,001.5 | 924.1 | 110.2 | 367.5 |
+---------------+--------+--------+--------+-------+-------+-------+
| Grapes        | 270.8  | 328.2  | 368.0  | 447.9 | 517.6 | 567.5 |
+---------------+--------+--------+--------+-------+-------+-------+
| Citrus        | 1      | 878.3  | 1      | 1,    | 1,    | 1,    |
|               | ,078.7 |        | ,160.7 | 199.0 | 345.4 | 495.8 |
+---------------+--------+--------+--------+-------+-------+-------+
|               |        |        |        |       |       |       |
+---------------+--------+--------+--------+-------+-------+-------+
| Meat          | 5      | 6      | 6      | 6,    | 6,    | 7,    |
|               | ,820.7 | ,125.4 | ,333.9 | 586.5 | 932.9 | 244.8 |
+---------------+--------+--------+--------+-------+-------+-------+
| > Pork        | 3      | 4      | 4      | 4,    | 4,    | 4,    |
|               | ,890.7 | ,031.4 | ,184.5 | 326.6 | 518.6 | 701.6 |
+---------------+--------+--------+--------+-------+-------+-------+
| > Beef        | 505.4  | 532.8  | 548.8  | 584.6 | 630.4 | 675.9 |
+---------------+--------+--------+--------+-------+-------+-------+
| > Mutton      | 251.3  | 274.0  | 292.7  | 316.7 | 357.2 | 399.3 |
+---------------+--------+--------+--------+-------+-------+-------+
|               |        |        |        |       |       |       |
+---------------+--------+--------+--------+-------+-------+-------+
| Milk          | 806.9  | 919.1  | 1      | 1,    | 1,    | 2,    |
|               |        |        | ,122.9 | 400.4 | 848.6 | 368.4 |
+---------------+--------+--------+--------+-------+-------+-------+
| Poultry Eggs  | 2      | 2      | 2      | 2,    | 2,    | 2,    |
|               | ,134.7 | ,243.3 | ,336.7 | 462.7 | 606.7 | 723.7 |
+---------------+--------+--------+--------+-------+-------+-------+
|               |        |        |        |       |       |       |
+---------------+--------+--------+--------+-------+-------+-------+
| Total Aquatic | 4      | 4      | 4      | 4,    | 4,    | 4,    |
| Products      | ,122.4 | ,278.5 | ,381.3 | 564.5 | 704.6 | 901.8 |
+---------------+--------+--------+--------+-------+-------+-------+
| Seawater      | 2      | 2      | 2      | 2,    | 2,    | 2,    |
| Products      | ,471.9 | ,538.7 | ,571.7 | 646.3 | 685.8 | 767.8 |
+---------------+--------+--------+--------+-------+-------+-------+
| Freshwater    | 1      | 1      | 1,09.6 | 1,    | 2,    | 2,    |
| Products      | ,650.5 | ,739.7 |        | 918.2 | 018.8 | 134.0 |
+---------------+--------+--------+--------+-------+-------+-------+

Source: China Statistical Yearbook, 2005

With China's grain production no longer under heavy government control,
many Chinese farmers are switching to production of more profitable
high-value commodities, such as fruits and vegetables. Domestic grain
production is in decline while fruit production is skyrocketing.
However, the sudden surge in fruit output is not surprising given that
Chinese farmers are known to quickly change their crops in reaction to
market prices and demand. Production of oilseeds is also in decline and
the gradual rise in meat production is not likely to match demand.
Furthermore, China's domestic fishing industry has been severely
strained by over fishing in recent years while aquaculture production
continues to increase. China now produces over 70 percent of the world's
aquaculture products.

**B. Non-US Competition**

**Note: The following information is based on Chinese customs data
retrieved from the Global Trade Atlas System. Commodities are specified
by their HS code.**

**Beef (0202)**

-   Currently US and Canada are out of the market owing to BSE which has
    allowed Australia and New Zealand to capitalize on exports of beef
    and live cattle

-   New Zealand is currently exporting maximum capacity of live dairy
    cattle

-   BSE situation have caused beef imports to steadily decline and has
    been a boon to domestic beef industry

-   The beef market is expected to open in mid-2006

Total value of imports (USD): \$5,613,570

Currently, Australia supplies nearly all of China's imported beef, with
almost 98 percent of the market. Supply sources for imported beef in
2004 were a bit more diversified including Australia, New Zealand and
Brazil who have 60, 26 and 13 percent market shares respectively. Prior
to BSE, the United States had 71 percent of the market in imported beef.
For comparison, note that the value of imported meat in 2002 was \$
11,909,979 USD and that the value of imports from the United States was
more than \$8.6 million USD

# Pork (0203)

Total value of imports (USD): \$28,968,288

Total value of US imports (USD): \$4,809,778

-   Pork is the main meat consumed by Chinese, accounting for 66% of
    sales by volume in 2004

The current major suppliers of pork are the Canada, United States, and
Denmark who have 67, 16 and 14 percent market shares respectively.
Imports of pork have experienced an annual decline of roughly 50 percent
per year since 2003 when the total value of pork imports reached a high
at \$90,638,565. At that time the United States was held the largest
market share with 42 percent, while Canada and Denmark each held 25
percent.

**Poultry (0207)**

Total value of imports (USD): \$334,818,462

Total value of US imports (USD): \$178,575,820

The current major suppliers of poultry are the United States, Brazil,
and Argentina with 53, 38, and 6 percent market shares respectively.
Traditionally, the United States has been the largest importer of
poultry to China. However, due to concerns over Avian Influenza in 2003
market restrictions caused imports from the United States dropped nearly
86 percent, allowing Brazil and Argentina to gain larger market shares.
Between 2004 and 2005 the United States increased imports from 79,404 to
208,299 tons and was able to regain its larger market share.

**Cereals (10)**

Total value of imports (USD): \$1,394,913,529

Total value of US imports (USD): \$105,227,602

**Corn (1005)**

Total value of imports (USD): \$1,379,753

Total value of US imports (USD): \$352,918

**Wheat (1007)**

Total value of imports (USD): \$ 3,515,696

Total value of US imports (USD): \$ 495,857

The current major suppliers of cereals Australia, Canada, and France
with 34, 30, and percent market share respectively. It is important to
note though that between 2003 and 2004 the total value of cereal imports
from the United States went from \$39,220,267 to \$648,505,294, a 1,522
percent increase, giving them a market share of 29 percent. In 2005,
however, imports dropped 82 percent, leaving total US cereal imports
valued at \$105,227,602. Wheat imports are expected to grow in the
coming years to meet the needs of the burgeoning bakery sector and its
demand for high quality wheat flour.

**Dairy Products (04)**

Total value of imports (USD): \$462,431,145

Total value of US imports (USD): \$60,910,813

New Zealand is currently the largest supplier of diary products with 48
percent market share, dominating in both fresh and powdered milk and
cheeses. The United States is the second largest with 13 percent and
Australia and France follow with each around 11 percent market shares.
The United States market share has steadily increased since 2003, this
past year rising 47 percent. Also, China is currently introducing new
laws that will exclude any pasteurized milk from bearing the label
"fresh milk." This means that regular pasteurized milk will no longer be
as distinguished from UHT milk or milk made from milk powder. This will
give exporters of milk powder a potential advantage.

**Seafood (03)**

-   Chinese typically prefer fresh seafood to frozen, which made up over
    63% of sales in 2004

-   Demand for frozen seafood should increase with the rise in numbers
    of personal refrigerators and freezers and cold chain distribution
    networks extend further into the country.

**Frozen Fish (303)**

Total value of imports (USD): \$ 2,199,983,963

Total value of US imports (USD): \$ 295,038,359

**Frozen Fish Fillets and Meat (304)**

Total value of imports (USD): \$43,548,446

Total value of US imports (USD): \$11,819,416

**Crustaceans (306)**

Total value of imports (USD): \$312,035,531

Total value of US imports (USD): \$11,521,992

Major suppliers of whole frozen fish are Russia and the United States.
Russia has 48 percent of the market while the United States holds just
over 13 percent. It is worth noting that the United States has made
small but steady gains in the market of about a 2 percent increase in
market share per year over the past 3 years while Russian imports have
been in decline. Other suppliers such as the Canada, Netherlands,
Norway, South Korea and Japan have between 2 and 7 percent each. For
frozen fish fillets and fish meat, the United States and Vietnam are the
market leaders with 27 and 19 percent shares. Both countries have taken
increasing market shares over the past few years along with steady
growth from Chile, while competition from New Zealand and Thailand has
been in decline. Canada is currently the most significant exporter of
crustaceans with 32 percent market share. The rest of the market is
highly fragmented with countries including Greenland, Russia, Japan, and
Australia holding only 5 to 7 percent. The United States currently holds
around 4 percent.

**Vegetables (07)**

Total value of imports (USD): \$ 523,768,505

Total value of US imports (USD): \$17,080,782

**Frozen Uncooked Vegetables (709)**

Total value of imports (USD): \$ 17,967,971

Total value of US imports (USD): \$13,899,057

**Frozen Potatoes Including French Fries (200410)**

Total value of imports (USD): \$41,494,555

Total value of US imports (USD): \$24,945,336

The vegetable market is generally dominated by Thailand with 65 percent
market share. Over the past three years Vietnam has seen a steady
decline, while Canada's market share has increased to 8 percent, a 200
percent increase from 2003. Currently the United States has only 3
percent of the overall market share. However, the United States supplies
the majority of frozen vegetables. The US supplies over 77 percent of
China's frozen vegetables and 60 percent of frozen potatoes. In the last
3 years Canada has become increasingly competitive raising its market
share from 6 percent in 2003 to over 28 percent in 2005 by value.

**Oilseeds (12)**

-   Oilseeds has been one of the most dynamic markets due to increased
    incomes and changes in consumer preferences in China recording over
    24% growth in value sales in 2004.

Total value of imports (USD): \$8,159,001,686

Total value of US imports (USD): \$3,199,387,722

China has become the world's largest importer of oilseed products. The
major suppliers of oilseeds to China are the United States, Brazil and
Argentina who each have 39, 29 and 26 percent of the market. Note that
over 99 percent of these imports are soybeans. It is also significant
that since 2003 the total value of China's oilseed imports, particularly
soybeans, has increased by more than 30 percent.

**Total Fruits and Nuts (08)**

Total value of imports (USD): \$656,290,440

Total value of US imports (USD): \$108,847,211

**Citrus (0805)**

Total value of imports (USD): \$44,628,594

Total value of US imports (USD): \$25,976,136

**Dried Fruit (0813)**

Total value of imports (USD): \$27,200,122

Total value of US imports (USD): \$619,145

**Nuts (0802)**

Total value of imports (USD): \$87,841,535

Total value of US imports (USD): \$19,040,219

In terms of volume, Philippines, Thailand, and Vietnam are the market
leaders. Each country has about 25 percent of the market while the
United States has 9 percent. In terms of value though, Thailand is the
leader with nearly 27 percent of the market and the United States has
the next highest share with over 17 percent, indicating that the United
States is exporting more high value fruit and nut products.

As mentioned above in the section on the gray channel, a large amount of
US fruit is still shipped via Hong Kong into the Pearl River Delta.
Chinese customs data show the value of 2004 US fruit imports as
\$99,367,747 and the value of imports from Hong Kong as \$ 2,364. On the
other hand, US customs data reports that the value of exports to Hong
Kong in 2004 was \$191,272,287. The data appear to indicate that a
substantial amount of US fruit is trans-shipped through Hong Kong and
unrecorded.

**Section V: Best Product Prospects**

In the upcoming years the industry will focus on the development of corn
and wheat goods, dairy products, food additives and seasoning
essentials.

-   Developing corn and wheat goods will suit US exporters particularly
    well.

-   Dairy products continue to grow in popularity among Chinese
    consumers, and improving cold storage capabilities and expansion of
    supermarket chains will ensure a steady demand.

-   China's consumers are demanding more and more fish and seafood. At
    the same time, domestic seafood production is limited by new limits
    on fishing.

-   China's entry into the World Trade Organization should provide
    further support for imports, with tariffs scheduled to fall to 14
    percent or less by the end of 2005 and most non-tariff measures to
    be eliminated completely by 2007.

-   Greater urban affluence altering consumer tastes for varied foods
    should assure rising demand for nuts and other imported products.

-   Sophisticated baked goods are becoming more popular and bakeries
    need high quality imported ingredients. More and more bakeries are
    also using innovative ingredients in traditional products such as
    moon cakes.

-   China's appetite for edible oil and meal continues to rise at
    impressive rates as the economy expands. Per capita edible oil
    consumption in the last two years has increased at an annual average
    rate of over 9 percent and with limited domestic soybean production
    has led to over 20mmt of soybean imports per year.

Good product prospects include: almonds, beef, cereals, cherries, corn,
crustaceans, fish products, frozen potato products, blueberries,
hazelnuts, infant formula, juices and concentrates, lobsters,
macadamias, mollusks, oranges, pistachios, pollock, pork, poultry,
prunes, raisins, salmon, scallops, soybeans, soy flour, thickeners,
table grapes, and wine.

Figure 20. Best Products Prospects: Value and Growth

  -------------------------------------------------------------------------
  **Item**                 **Total Value                  **5 Year Growth
                           of Imports                     Factor**
                           (USD)**                        
  ------------------------ -------------- --------------- -----------------
                           **1999**       **2004**        **(2004 as
                                                          multiple a of
                                                          1999)**

                                                          

  Almonds                  1,465,875      4,047,718       2.76

  Beef                     5,734,699      7,109,957       1.24

  Cereals                  497,047,510    2,218,542,636   4.46

  Cherries                 19,437         2,333,765       120.07

  Crustaceans              122,874,032    312,035,531     2.54

  Blueberries              323,824        1,163,013       3.59

  Fish - whole (chilled,   408,383,686    1,516,574,524   3.71
  frozen)                                                 

  Fish - fillets (chilled, 14,983,029     45,556,256      3.04
  frozen)                                                 

  Frozen Potato/French     3,491,266      51,484,593      14.75
  Fries                                                   

  Grapes                   23,577,944     67,546,114      2.86

  Hazelnuts                1,021,299      2,296,623       2.25

  Infant Formula           26,319,528     88,821,019      3.37

  Juices and Concentrates  13,394,370     61,001,369      4.55

  Lobsters (uncooked)      1,119          131,185         117.23

  Mollusks                 102,221,765    332,462,177     3.25

  Oranges                  9,460,914      36,994,455      3.91

  Pistachios               6,477,384      17,432,173      2.69

  Pollock ^1^              1,139,638      1,250,250       1.10

  Pork ^2^                 24,348,589     54,451,507      2.24

  Poultry ^3^              409,895,603    153,412,927     0.37

  Prunes ^4^               175,396        921,664         5.25

  Raisins                  410,408        14,666,366      35.74

  Salmon                   2,313,383      26,612,317      11.50

  Scallops                 3,908,402      8,022,977       2.05

  Soybeans                 890,303,816    6,956,653,547   7.81

  Soy Flour                1,319,983      1,758,052       1.33

  Thickeners               6,350,226      12,603,501      1.98

  Whey Powder              57,965,310     119,744,400     2.07

  Wine (containers less    6,695,561      25,246,505      3.77
  than 2L)                                                

  Wine (containers more    27,044,673     24,435,609      0.90
  than 2L)                                                
  -------------------------------------------------------------------------

1\. 2001 high was \$ 2,560,890

2\. 2001 high was \$ 81,365,413

3\. 2002 peak was \$ 461,774,542

4\. 2002 peak was \$ 2,573,138

Source: Chinese customs data

**Section VI: Growing opportunities for Chinese holiday food
ingredients**

![](media/image4.jpeg){width="2.0833333333333335in"
height="1.8020833333333333in"}\
Traditional golden-brown mooncakes.

Mooncakes are traditional treats eaten during the Chinese Mid-Autumn day
festival, otherwise known as Moon or Mooncake festival. This ancient
Chinese holiday has its roots in a legend about the "lady living on the
moon" and Chinese celebrate the holiday by moon gazing and making small,
but high calorie cakes about the size of one's fist called mooncakes.
Traditional mooncakes have an outside crust of flour, lard, oil and
sugar and various fillings such as egg yolks to symbolize the moon, red
and green bean past, and lotus seeds. However, with China's recent
growing affluence and consumers' exposure to more western tastes, the
variety of mooncakes has reached an entire new level, making them prime
opportunities for suppliers of various food ingredients including a wide
array of fruits, nuts, and different flavoring additives.

In recent years making traditional mooncakes at home has largely been
replaced by buying fancier, packaged mooncakes that come in a wide range
of new and exotic flavors. A few examples of these new, non-traditional
mooncake flavors are chocolate, green tea, ice-cream, and mooncakes with
fruit, nuts, and meat fillings. Foreign owned producers are often the
ones promoting these new flavors. In fact, even Starbucks and
Haagen-Dazs have taken advantage of these new demands by offering
coffee-flavored and ice-cream flavored mooncakes. Although these new
varieties of mooncakes do not come cheap, sometimes costing as much as
300 yuan or around US \$40, they have become very popular among
customers in affluent urban areas. Since it is common to give mooncakes
as gifts to friends, family, and employers during the holiday, this
willingness to spend is not surprising given the strong connection
between gift-giving and the Chinese concept of "face".

##### Figure 21. Retail Sales of Moon Cakes 2003-2004

Value sales, RMB million

2003 2004

Moon cakes 7,000 8,400

Source: Trade association (China Food Industry Association), Euromonitor
International estimates

Today, the sale of mooncakes is a quickly growing industry with value
sales of packaged of mooncakes in 2004 estimated at 8.4 billion RBM
(US\$ 1.04 billion) representing a 16.6 percent growth from the previous
year. Although only around 5,000 mooncake manufactures are officially
registered, many hotels and restaurants will produce and sell their own
mooncakes to take advantage of the high demand during peak season. The
sales season for mooncakes is very short. Even though promotion and
pre-sales events sometimes happen as early as June, the peak time for
sales of mooncakes only last about 10 days between September and
October. Mid-autumn festival falls on October 6^th^ for the year 2006.
During this time domestic competition is very high, with lots of
aggressive promotions as everyone tries to take advantage of the short
season. As of yet, there is not a widely recognized national brand, only
leading brands by region. Top brands in the East are Xing Hua Lou and
Guan Sheng Yuan. The North and Northeast region is led by Dao Xiang Cun
and Hao Li Lai, number one and two respectively. Guangzhou Jiujia and
Lian Xiang Lou are the top brands of Southern China.

An estimated 20 percent annual growth of mooncake sales and emphasis on
new and innovative flavors will continue the demand for high quality
ingredients from US producers. ATO Guangzhou is teaming up with the
National Highbush Blueberry Council and several other US producer
associations to organize a large USA pavilion at the Interbake Show in
Guangzhou from May 12-14, 2006. This is one of the largest food
ingredient shows in China where food processors place their ingredient
orders for the moon cake season which kicks off in the fall. Please
contact the Guangzhou office for further information.

# Section VII: Post Contact and Further Information

For further market information, please contact the appropriate ATO
office. FAS/China has ATOs in

Beijing, Shanghai and Guangzhou. E-mail and fax numbers are as follows:

ATO Beijing: ATOBeijing@usda.gov, (8610) 8529-9962

ATO Shanghai: ATOShanghai@usda.gov, (8621) 6279-8336

ATO Guangzhou: ATOGuangzhou@usda.gov, (8620) 8667-0773

For policy issues, please contact the Agricultural Affairs Office in the
US Embassy in Beijing at:

AAO Beijing: <AgBeijing@usda.gov>, (8610) 6532-2962

Further information is also available on the USDA China website at
[http://www.usdachina.org](http://www.usdachina.org/).