Voluntary Report - public distribution

**Date:** 12/29/2005

**GAIN Report Number:** CH5617

CH5617

**China, Peoples Republic of**

**Market Development Reports**

**Cold Storage in South China: Keeping US Chilled Exports Competitive in
the Chinese Market**

**2005**

**Approved by:**

![](media/image1.wmf)Keith Schneller

U.S. Consulate General

**Prepared by:**

Daniel Taylor

**Report Highlights:**

Although China represents a potentially vast market for US agricultural
exports, lack of a cold storage infrastructure severely limits market
penetration of temperature sensitive products. China's cold chain
capacity is only 20 to 30 percent of current demand and spoilage losses
range form 16 to 33 percent. The resultant price increase and decline in
quality erodes long-term product acceptance and the competitive
advantage of US products. China's cold chain is improving though
domestic and foreign investment that will help US agricultural exporters
tap into a lucrative and growing market.

Includes PSD Changes: No

Includes Trade Matrix: No

Unscheduled Report

Guangzhou \[CH3\]

\[CH\]

# Table of Contents

# 

+----------------------------------------------+----------+-----------+
| Section I: Overview                          |          | Page 3 of |
|                                              |          | 14        |
+==============================================+==========+===========+
|                                              |          |           |
+----------------------------------------------+----------+-----------+
| Section II: Cold Trade Between USA and China |          | Page 4 of |
|                                              |          | 14        |
+----------------------------------------------+----------+-----------+
|                                              |          |           |
+----------------------------------------------+----------+-----------+
| Section III: The Cold Chain in China         |          | Page 6 of |
|                                              |          | 14        |
+----------------------------------------------+----------+-----------+
| > Capacity and Standards                     |          | Page 7 of |
|                                              |          | 14        |
+----------------------------------------------+----------+-----------+
| > The Bottom Line                            |          | Page 8 of |
|                                              |          | 14        |
+----------------------------------------------+----------+-----------+
|                                              |          |           |
+----------------------------------------------+----------+-----------+
| > Section IV: Problems Along the Chain       |          | Page 8 of |
|                                              |          | 14        |
+----------------------------------------------+----------+-----------+
| > Port of Entry                              |          | Page 8 of |
|                                              |          | 14        |
+----------------------------------------------+----------+-----------+
| > Transportation                             |          | Page 8 of |
|                                              |          | 14        |
+----------------------------------------------+----------+-----------+
| > Cold Storage and Distribution Facilities   |          | Page 9 of |
|                                              |          | 14        |
+----------------------------------------------+----------+-----------+
| > Processing Plants                          |          | Page 9 of |
|                                              |          | 14        |
+----------------------------------------------+----------+-----------+
| > Wetmarkets and Supermarkets                |          | Page 9 of |
|                                              |          | 14        |
+----------------------------------------------+----------+-----------+
| > Information Technology                     |          | Page 9 of |
|                                              |          | 14        |
+----------------------------------------------+----------+-----------+
|                                              |          |           |
+----------------------------------------------+----------+-----------+
| Section V: Exporting Goods to China          |          | Page 10   |
|                                              |          | of 14     |
+----------------------------------------------+----------+-----------+
| > Importers                                  | #        | # Page    |
|                                              |          |  10 of 14 |
+----------------------------------------------+----------+-----------+
| > Distributors                               | #        | # Page    |
|                                              |          |  11 of 14 |
+----------------------------------------------+----------+-----------+
| > Retail Outlook                             | #        | # Page    |
|                                              |          |  12 of 14 |
+----------------------------------------------+----------+-----------+
| #                                            | #        | #         |
+----------------------------------------------+----------+-----------+
| # Section VI: Solutions and Trends           | #        | # Page    |
|                                              |          |  12 of 14 |
+----------------------------------------------+----------+-----------+
| > Increased investment in CS equipment       | #        | # Page    |
|                                              |          |  12 of 14 |
+----------------------------------------------+----------+-----------+
| > Supermarkets Replacing Wetmarkets          | #        | # Page    |
|                                              |          |  12 of 14 |
+----------------------------------------------+----------+-----------+
| > Direct Sales Increasing                    | #        | # Page    |
|                                              |          |  13 of 14 |
+----------------------------------------------+----------+-----------+
| > Big Chains And Central Distribution        | #        | # Page    |
|                                              |          |  13 of 14 |
+----------------------------------------------+----------+-----------+
| > Development of Trucking Fleets             | #        | # Page    |
|                                              |          |  13 of 14 |
+----------------------------------------------+----------+-----------+
| > Shift towards private standards            | #        | # Page    |
|                                              |          |  13 of 14 |
+----------------------------------------------+----------+-----------+
| > Competition                                | #        | # Page    |
|                                              |          |  13 of 14 |
+----------------------------------------------+----------+-----------+
| > FAS Programs and Opportunities             | #        | # Page    |
|                                              |          |  13 of 14 |
+----------------------------------------------+----------+-----------+
|                                              | #        | #         |
+----------------------------------------------+----------+-----------+
| # Secti                                      | #        | # Page    |
| on VII: Post Contact and Further Information |          |  14 of 14 |
+----------------------------------------------+----------+-----------+

#  Section I: Overview

With a population of 1.3 billion that is growing by 10 million people
per year, China represents a potentially vast market for US agricultural
exporters. The current per capita GDP is approximately \$1,100 USD and
the economy has had a yearly average growth rate of 9 percent. 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. The food sector
accounted for over 25 percent of total consumer expenditure in 2004.

Table 1: China Food Expenditure

+------------------------+-------+------+------+---+---------+----------+
|                        |       |      |      |   | **%     |          |
|                        |       |      |      |   | C       |          |
|                        |       |      |      |   | hange** |          |
+------------------------+-------+------+------+---+---------+----------+
|                        | **2   | **20 | **20 |   | *       | **2003** |
|                        | 001** | 02** | 03** |   | *2002** |          |
+------------------------+-------+------+------+---+---------+----------+
| Urban                  |       |      |      |   |         |          |
+------------------------+-------+------+------+---+---------+----------+
| > Disposable Income    | 6,8   | 7,70 | 8,47 |   | 12.2    | 9.9      |
|                        | 59.60 | 2.80 | 2.20 |   |         |          |
+------------------------+-------+------+------+---+---------+----------+
| > Food Expenditure     | 2,0   | 2,27 | 2,41 |   | 12.8    | 6.3      |
|                        | 14.00 | 1.80 | 6.90 |   |         |          |
+------------------------+-------+------+------+---+---------+----------+
|                        |       |      |      |   |         |          |
+------------------------+-------+------+------+---+---------+----------+
| Rural                  |       |      |      |   |         |          |
+------------------------+-------+------+------+---+---------+----------+
| > Disposable Income    | 2,3   | 2,47 | 2,62 |   | 4.6     | 5.9      |
|                        | 66.40 | 5.60 | 2.20 |   |         |          |
+------------------------+-------+------+------+---+---------+----------+
| > Food Expenditure     | 8     | 87   | 88   |   | 1.5     | 1.6      |
|                        | 30.70 | 2.40 | 6.00 |   |         |          |
+------------------------+-------+------+------+---+---------+----------+

Source: China Statistical Yearbook 2002, 2003, 2004.

As the table above shows, Chinese people are making more money and
spending more money on food. This is particularly true in the urban
areas in the south and along the eastern coast. Urban residents spend
more money eating out and on expensive high quality foods and processed
foods than their rural counterparts. Aside from having more money to
spend on food, urban residents also have access to a wider variety of
goods as China\'s infrastructure is currently unable to supply rural
areas with expensive processed or imported goods at reasonable prices.
Most rural residents still purchase fresh food on a daily basis and make
all meals from scratch. Changes in the eating habits of urban residents
are having a direct impact on China\'s cold chain---there has been a
general increase in demand in most food sectors, especially fruit, meat
and dairy products; a growing demand for quality food products; and a
growing demand for convenience.

The increasingly busy lifestyles of urban Chinese in particular have led
to an increased demand for convenience foods, such as frozen ready
meals. An increasing number of people are finding it difficult to go
shopping for food each day, and so more people are now buying foods for
use another day, leading to an increased acceptance of frozen food use.
Rising average annual incomes has also led to an increased ownership of
refrigerators and freezers, which, combined with increased exposure to
western and international cuisines and a greater array of goods in the
supermarket are all combining to increase sales of frozen foods in
China. Supermarket sales are now growing by 30 to 40 percent per year.

US agricultural products are perceived as higher in quality than
domestically produced items. US agricultural exports to China continue
to rise to meet this demand for quality in several sectors such as
dairy, fruit, seafood, poultry and pork products. (Beef exports should
also be strong once the BSC\--Mad Cow's Disease\--ban on imported US
beef is lifted) While rising income has led to an increased demand for
quality the Chinese market is still very price sensitive and the bottom
line is still the dominant factor in purchasing decisions. China\'s lack
of cold storage and transport has a serious impact on US agricultural
exports. Improper handling of cold products leads to a lower quality
final delivery. Furthermore, loss along the way from point of entry to
final delivery leads to higher prices to make up for losses. Increased
price and lower quality is a double-edged sword that erodes the
competitiveness of US products while wasting millions of dollars that
could be spent on market development funds. Furthermore, the current
problems with China\'s cold chain make it extremely difficult for US
products to penetrate the rural market as the cost of shipping is simply
too high. If the quality of U.S. products is compromised at the importer
or consumer level, it can erode long-term general product acceptance and
U.S. exports will lose their competitive advantage.

**Section II: Cold Trade Between USA and China**

When considering agricultural trade between USA and China it is
important to take Hong Kong into consideration. This is especially
important with agricultural goods such as meats, fruits, and vegetables
where a high proportion are generally shipped into southern China and
trucked north. While seeming to decline in popularity the "gray channel"
route of transshipments via Hong Kong is still a preferred choice for
some importers. Using the gray channel, goods are first shipped to Hong
Kong where they are offloaded and shipped to the border with mainland
China for entry. Many importers rely on "transportation" companies to
take care of the import license, provide transportation from Hong Kong
to the mainland, and to pay all fees including VAT and customs duties.
These companies usually charge a flat fee for their services. This also
means that the US exporters will not have a direct relationship with the
mainland importer. This is not a recommended long-term approach to entry
into the China market.

In order to get a better idea of the value of temperature sensitive
products shipped to China, one must also look at the data for Hong Kong
as the total value of goods that reaches China is generally considered
to be higher than that reported between China and the United States
alone. Of even greater importance is the issue of inventory tracking.
The current cold chain lacks computerized inventory systems making it
very difficult to keep track of how long cold products are in storage or
transit for. Given that food may be smuggled between Hong Kong and China
or even intentionally mislabeled, transshipments through Hong Kong can
make tracking difficult or impossible and greatly increase the risk of
improper handling. Assuming that China\'s cold chain continues to
improve, US agricultural exporters would be wise to ensure that they
ship products intended for China directly to China.

> Table 2: Value of US Cold Exports to China and Hong Kong, 2002-2003
> (US Dollars)

  ----------------------------------------------------------------------------------------------------------
  **Product**     **Country**      **CY 2002**       **CY 2003**       **CY 2004**           **%Change
                                                                                             2003/2004**
  --------------- ------------- -- ----------------- ----------------- ----------------- --- ---------------
                                                                                             

  **Dairy\***     China            24,191,196        27,589,480        37,221,764            34.91%

                  Hong Kong        7,055,256         5,862,841         6,409,354             9.32%

                                                                                             

  **Seafood**     China            109,249,245       169,242,948       243,669,219           43.98%

                  Hong Kong        24,606,035        25,962,981        29,663,214            14.25%

                                                                                             

  **Meat**        China            82,086,120        140,441,227       64,733,580            -53.91%

                  Hong Kong        339,984,949       308,606,004       156,351,707           -49.34%

                                                                                             

                                                                                             

  **Vegetable**   China            5,245,955         8,935,228         8,137,919             -8.92%

                  Hong Kong        14,531,755        10,090,613        8,936,498             -11.44%

                                                                                             

  **Fruit**       China            45,899,665        49,359,167        70,815,039            43.47%

                  Hong Kong        223,127,670       220,237,812       183,797,182           -16.55%

                                                                                             

  **Total**       **China**        **266,672,181**   **395,568,050**   **424,577,521**       **7.33%**

                  **Hong Kong**    **609,305,665**   **570,760,251**   **385,157,955**       **-32.52%**
  ----------------------------------------------------------------------------------------------------------

\* Does not include dried dairy products.

> Source: US Customs Export Data
>
> As the table above shows, exports of key cold items to China was
> valued at nearly USD \$425 million in 2004. Strong gains are being
> made in dairy, fruit and seafood products. Further gains should be
> made in meat products pending resolution of the BSE issue. However, as
> the table below will show, the value of cold exports to China is
> actually is higher.

Table 3: Value of China Cold Imports from USA and Hong Kong (US Dollars)

  --------------------------------------------------------------------------------------------------------------
  **Product**      **Country**      **CY 2002**       **CY 2003**       **CY 2004**               **%Change
                                                                                                  2003/2004**
  ---------------- ------------- -- ----------------- ----------------- ----------------- ------- --------------
                                                                                                  

  **Dairy\***      USA              25,984,620        30,657,011        41,074,773                33.98%

                   Hong Kong        655,004           36,453            0                         -100.00%

                                                                                                  

  **Seafood**      USA              104,164,260       132,030,869       242,547,976               83.71%

                   Hong Kong        919,116           526,545           847,473                   60.95%

                                                                                                  

  **Meat**         USA              509,570,301       578,394,309       170,586,730               -70.51%

                   Hong Kong        0                 277,232,969       140,733,112               -49.24%

                                                                                                  

  **Vegetables**   USA              6,206,358         12,117,737        12,847,043                6.02%

                   Hong Kong        3,804             695               216                       -68.92%

                                                                                                  

  **Fruit**        USA              37,307,076        68,324,299        86,460,757                26.54%

                   Hong Kong        2,104             42,230            67,851                    60.67%

                                                                                                  

  **Total**        **USA**          **683,232,615**   **821,524,225**   **553,517,279**   ** **   **-32.62%**

  ** **            **Hong Kong**    **1,580,028**     **277,838,892**   **141,648,652**   ** **   **-49.02%**
  --------------------------------------------------------------------------------------------------------------

> \* Does not include dried dairy products.
>
> Source: China Customs Import Data
>
> US export data shows nearly USD 425 million worth of cold products
> exported to China in 2004 while Chinese import data puts the value at
> over USD \$550 million. US export Data from table 2 valued cold dairy
> exports to China at just over USD \$37 million in 2004, while China\'s
> import data shows that over USD \$41 million worth of cold dairy
> products came from the United States. The discrepancy could be
> accounted for by the more than USD \$6 million worth of cold dairy
> products shipped to Hong Kong, a certain portion of which probably
> ended up in China. Take also for example the data for meat products
> where there is a discrepancy of over USD \$105 million. Some of this
> could be accounted for by the over USD \$156 million worth of meat
> shipped to Hong Kong. While it is difficult to ascertain the true
> value of US agricultural products sold in China, it is safe to say
> that the United States exports over USD \$500 million worth of
> temperature sensitive products to China each year and that this number
> is likely to increase.

Not only are there direct exports of temperature sensitive products but
also US agricultural products that do not require cold storage may be
destined for use in processed foods such as ready-made meals that
require refrigeration. The inability of the cold chain to handle these
types of foods will have a direct impact on US exports of food
ingredients products.

> Table 4: Hong Kong Import and Export of Cold Goods: USA and China

  ---------------- ------------- -- ------------------- ----------------- ----------------- ------- --------------
  **Product**      **Country**      **CY 2002**         **CY 2003**       **CY 2004**               **%Change
                                                                                                    2003/2004**

                                                                                                    

  **Dairy**        From USA         9,090,383           6,480,387         7,380,933                 13.90%

                   To China         86,128,625          43,018,932        50,510,103                17.41%

                                                                                                    

  **Seafood**      From USA         28,637,527          37,777,015        37,170,851                -1.60%

                   To China         81,964,901          75,369,752        62,608,472                -16.93%

                                                                                                    

  **Meat**         From USA         443,864,083         417,405,581       194,095,084               -53.50%

                   To China         648,221,945         681,969,569       295,053,935               -56.74%

                                                                                                    

  **Vegetables**   From USA         26,419,364          17,732,527        19,953,994                12.53%

                   To China         2,288,229           1,602,430         1,748,403                 9.11%

                                                                                                    

  **Fruit**        From USA         236,429,641         240,193,957       222,470,865               -7.38%

                   To China         279,287,160         184,232,391       191,182,278               3.77%

                                                                                                    

  **Total**        **From USA**     **744,440,998**     **719,589,467**   **481,071,727**   ** **   **-33.15%**

  ** **            **To China**     **1,097,890,860**   **986,193,074**   **601,103,191**   ** **   **-39.05%**
  ---------------- ------------- -- ------------------- ----------------- ----------------- ------- --------------

> \* Does not include dried dairy products.
>
> Source: Hong Kong Customs Data

**Section III: The Cold Chain in China**

In developed countries, food markets are characterized by a network of
cold storage warehouses, companies that consolidate food from farms,
processors, and other companies and then distribute them to regional and
local warehouses, which ultimately deliver foods to retailers and
consumers. In China, these crucial intermediary links have not kept pace
with consumer demand or productive capacity. Reforms have partially
dismantled state-run distribution monopolies, but these necessary
reforms left a fragmented system of small traders with limited
geographic scope. Producers and retailers have had to piece together
delivery network and customers receive small shipments from large
numbers of suppliers, with little consistency. Producers must deal
separately with cold storage warehouses and arrange for inter-city and
intra-city transport. China's agri-food sector critically depends on the
efficiency, commercial orientation, and responsiveness of China's
transportation system and intermediaries in the cold chain.

Until China's WTO accession, investment in trading, wholesaling, and
distribution has been dominated by state-held institutions and
off-limits to foreign investors, with a few exceptions. Markets were
carved up along both geographic and jurisdictional grounds, leaving them
fragmented and open to manipulation. As time passed, some foreign
enterprises were allowed to develop their own systems, but were
precluded from exploiting those developed by others. Private
entrepreneurs and non-incumbent domestic enterprises have encountered
similar obstacles. Still, there is evidence that, when incentives are
right, China has the ability to produce and transport high-value
perishable products that meet or exceed international standards. Joint
ventures with Japanese and Singapore investors, for example, have
produced high value fruit, vegetables, juice, poultry and pork products
for export to East and South-East Asia. But the incidence of such
successes is well below China's potential.

The list of problems in the cold chain is a long one. The system is
fragmented and under-funded requiring negotiation with several
intermediaries en route resulting in too much loading and unloading of
products. There is a lack of refrigeration in storage and in transit, a
lack of proper handling procedures at all stages and inadequate humidity
control. Communication and IT is still very limited in scope with paper
based transactions still the norm at many points. This severely hampers
inventory support and tracking. The problem occurs at farms, ports, cold
storage and handling facilities, transportation, and wholesale and
retail outlets. As temperature-controlled equipment is not always
available, food products, in some cases, are simply cooled with bagged
ice and covered with a blanket. China now produces such equipment, but
incentives in the value chain are not yet sufficient for them to be
widely used. Marketers of temperature-sensitive food products also have
concerns about excessive loading and unloading under less than ideal
conditions, excessive damage potential, and unreliable delivery times.
While the cold storage problem seems less severe at the point of entry
than at other points along the chain, the problem has widespread
ramifications and is not limited to any single link in the chain.

**Capacity and Standards**

It is estimated that China\'s cold storage capacity is only 20 to 30
percent of the current, and growing, cargo demand. While approximately
85 percent of temperature sensitive products are handled properly in the
US and EU countries, there is only about 20 percent compliance in China.
Spoilage losses for fresh fruit products appear to average around 16
percent from point of entry to final delivery. For temperature sensitive
products as a whole, spoilage estimates run from 20 percent to as high
as 33 percent.

For some commodities such as bulk-frozen beef, pork, and poultry the
system manages to get by. This is because frozen goods are easier to
handle, as these products can more easily endure temporary breakdowns in
the cold chain. Cartons of frozen meat are often off-loaded from
imported 40-foot containers and thrown onto the backs of trucks and vans
and delivered directly to wet markets where they are immediately sold to
restaurants and other consumers for immediate consumption. Chilled
meats, dairy products, fruits and vegetables, on the other hand, have
short shelf lives and will deteriorate rapidly without efficient
handling under controlled conditions

Regarding standards is it is safe to say that, regardless of any written
laws at the national or provincial level, standards effectively do not
exist. When questioned about any national standards for the cold chain,
industry insiders reply that there are none and that if they did exist
there is no capacity to enforce them. Recently, as will be discussed
below, large-scale supermarkets and hypermarkets have begun to enforce
their own standards with suppliers.

# The Bottom Line

The true dollar value impact of the cold chain on agricultural products
is difficult to pin down. Domestically, estimates claim that more than
20 percent of China's annual agricultural production of US\$300 billion
is lost due to poor refrigeration in transit. Furthermore, in 2004
estimates claim that China lost US\$8.63 billion in discarded fruit and
vegetables alone. Kepping 20 percent as an estimate then that means that
over USD \$110 million worth of temperature sensitive US exports are
lost each year in China. The cost of this is passed onto the consumer
further reducing the competitive edge of American products as consumers
may not be able to justify the high price of quality goods.

> **Section IV: Problems Along the Chain**

**Port of Entry**

China's cold chain is generally considered to be effective through
import but not through distribution. Most major ports have facilities to
connect refrigerated containers to electricity and some have cold
storage on site. However, many ports still lack dedicated cold storage
facilities. Even Nan Sha, a brand new port in southern Guangdong
province that opened in June, 2005 has no cold storage facilities on
site. However, it is anticipated that cold storage will be provided at a
new logistics facility nearby. Generally speaking, the problem begins
when a cold storage container leaves the port area.

**Transportation**

While there is refrigerated trucking available, the bulk of trade is in
insulated trucks and often in open trucks covered with blankets.
Furthermore, drivers of refrigerated trucks will often leave a port area
with the refrigeration unit turned on only to stop and turn it off after
leaving the port and restarting it just before delivery. Often, for
voyages of less than one day the refrigeration unit will not be turned
on at all. At the sub-distributor level, final delivery in cities is
still often made in vans with no refrigeration or with the air
conditioning turn on.

-   Refrigerated trucking is available but under-utilized

-   Insulated trucks and blankets are the norm

-   Refrigeration standards often not followed even when available

**Cold Storage and Distribution Facilities**

The Da Lou Tan cold storage facility in Guangzhou presents a good
example of what one might expect to find in China. The facility boasts
150,000 tons of cold storage across 5 facilities and is a national
pricing center for frozen imports where products are often bid for right
on the loading dock. Refrigerated trucks often arrive from nearby ports
without the refrigeration turned on. The products are either transferred
into the facility itself or directly to other trucks. While the facility
itself is cooled, the doors lack any seals and the loading docks are
external meaning that some food sits on the leading dock. Few, if any,
of the smaller trucks accepting products for onward delivery are
refrigerated. Most of the trucks are simply lined with styrofoam
insulation or have blankets placed over their cargo.

-   Facilities are often converted from other uses

-   Material handling systems are limited

-   Narrow docks lacking refrigeration and door-seals

**Processing Plants**

While many processing facilities are modern there are still many smaller
facilities that need to be upgraded and modernized. However, it is not
simply a question of upgrading the facilities as one of the biggest
areas for improvement lies in understanding and following the
refrigeration procedures and eliminating cross contamination.

-   Variety of ultra-modern and very old plants

-   Food safety standards need to be adopted

-   Cross-contamination a big problem

-   Lack of refrigeration

**Supermarkets and Wetmarkets**

Wetmarkets do not generally have any cold storage available. However,
rapid growth in the retail sector has created a variety of supermarket
and hypermarkets chains that are challenging wetmarkets, especially in
urban areas. Sanitation, quality, safety and shrink reduction, and
variety are becoming priorities for retailers and consumers alike.
However, many supermarkets still lack adequate cold storage areas and
inadequate inventory systems and logistics means that stores often
receive more than 100 small deliveries per day and overloading the
system. Furthermore, lack of understanding about cross contamination in
cold storage leads to further loss of products.

-   Rapid growth of more advanced supermarkets and hypermarkets

-   Lack of adequate storage and preparation areas primarily due to
    over-capacity

-   Produce quality tends to be high but opportunities exist for
    reducing shrink

-   Cross contamination must be reduced

-   Sanitation and safety standards still vary

**Information Technology**

The current cold chain lacks efficient computerized inventory systems.
While there are some computer systems in place, efficient integration
and application to the cold chain has yet to be realized. This makes it
very difficult to keep track of how long cold products are in transit
for and prevent over-capacity at cold storage facilities. Upgrading to
computerized systems will greatly improve the cold chain.

# Section V: Exporting Goods to China

# 

Given that inventory systems for cold products are often antiquated it
is difficult to say exactly what happens to an imported temperature
sensitive product once it leaves a port facility in China. However, a
recent study of fresh produce importers and distributors operating in
China gives some idea of what to expect along the cold chain**.**[^1]
The focus is not import procedures but on the transit routes and
shipment times for imported products entering China. For a detailed
description of procedures and guidelines for exporting agricultural
products to China please visit the USDA China web site at
http://www.usdachina.org.

Table 5: Major Chinese Ports by Tonnage (10, 000 tons)

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

  Shanghai      18,641      20,440      22,099      26,384      31,621

  Ningbo        9,660       11,547      12,852      15,398      18,543

  Guangzhou     10,157      11,128      12,823      15,324      17,187

  Tianjin       7,298       9,566       11,369      12,906      16,182

  Qingdao       7,257       8,636       10,398      12,213      14,090

  Dalian        8,505       9,084       10,047      10,851      12,602

  Qinhuangdao   8,261       9,743       11,302      11,167      12,562

                                                                

  Total         69,799      80,144      90,890      104,243     122,7
  -------------------------------------------------------------------------

Source: China Statistical Yearbook, 2004

Although Guangzhou is not the busiest port in China, the Pearl River
Delta is one of the dominant import zones in China, which, combined with
Hong Kong, make it the usual starting place for cold products that
generally follow a south to north path within China. Fresh produce is
often shipped into Guangzhou and distributed through large wholesale
markets such as Jiang Nan Wholesale Fruit and Vegetable Market, while
meats often pass through the Da Lo Tan distribution facility. The
implication is that items sold in Guangzhou are fresher and cheaper than
items sold in northern cities such as Beijing or Shanghai. Imported
produce sold in Shanghai is on the road for an average of 17 days after
docking in Guangzhou. Furthermore, produce may double in price by the
time it reaches its destination owing to tariffs, transport cost, vat,
and markups. A box of apples that sells for USD \$20 ex-vessel in
Guangzhou will sell for USD \$40 in Shanghai. One way to keep the price
down is to skimp on refrigeration. However, more and more companies are
importing directly into northern ports including Shanghai, Dalian, and
Tianjin. For high value items such as fresh seafood, many in the
catering industry still have food flown into China.

Imported fresh produce usually suffers 16 percent shrink from importer,
distributor to retailer. Gaps in cold chain are largely to blame. To
compensate for shrink, the price is increase at each transfer point to
compensate for lost stock.

**Importers**

Importers generally consider cold storage to be the responsibility of
the wholesaler or distributor. However, when asked, many importers claim
that they have their own cold storage facilities and that products are
transported from port of entry to their facilities in refrigerated
trucks. As with all business in China, having good relationships is the
key to success and most industry insiders will tell you that the key to
successful cold chain is having the right relationships and being able
to book cold storage in advance.

The bulk of importers still sell to distributors/wholesalers while a
small yet increasing amount are beginning to sell direct to supermarkets
and hypermarkets.

-   Fresh produce remains in possession of importer on average of 4.4
    days.

-   Average 4.2 percent shrink.

-   Sales go to the following:

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-   79 percent wholesalers/distributors

-   15 percent hypermarkets

-   5 percent supermarkets

-   1 percent other

**Distributors**

Distributors generally have larger cold storage facilities, although
many rent additional space. Many distributors claim that they use
refrigerated trucks to transport produce to their own facilities but
admit that in cooler months they are not used as much. On the other
hand, many distributors admit that they do not transport produce to
their buyers in refrigerated trucks. Generally speaking, the bulk of
distributors sell to a secondary distributors but many are selling to
hypermarkets. In Guangdong, the percentage of distributors who sell to
hypermarkets is higher than in other areas.

Distributors average transit times from Guangzhou port to storage
facilities:

-   Guangdong 2 hours

-   Shanghai 30.5 hours

-   Beijing 44 hours

Distributors Average Possession Time:

-   Guangdong: 2.1 hours

-   Shanghai: 7.8 hours

-   Beijing: 9.3 hours

Distributors sell to:

-   secondary distributors: 49 percent

-   hypermarkets: 30 percent

-   supermarkets: 6 percent

> wetmarkets: 10 percent

-   foodservice outlet: 4 percent

-   others: 1 percent

**Retail Outlook**

Most retailers still get the bulk of their products from primary or
secondary distributors. However, as the number of supermarkets and
hypermarkets continues to increase this model may change as larger
retailers consolidate importing and distribution. Most retailers say
that the average delivery time from a supplier to their facility is just
under 2 hours and while the number who say they receive deliveries in
refrigerated trucks is growing, many claim that deliveries are still
made in non-refrigerated trucks.

Retailers get there produce from:

-   primary distributors: 66 percent

-   Second distributors or wholesalers: 23 percent

-   grower-exporter: 5 percent

-   other: 6 percent

**Section VI: Solutions and Trends**

After China enters the WTO, restrictions in the area of retail
distribution will be gradually removed. Foreign companies will be
allowed to participate in the forms of agency, distribution and chain
operation. It is predicted that innovative sales promotions and
discounts by foreign operators will attract considerable attention from
customers. Also, the more competitive environment in the major cities
will drive the multiple grocers to expand to smaller cities, the Western
regions and rural areas. Increased investment, competition and foreign
involvement should lead to a corresponding improvement in the cold
chain. Many large western-style hypermarket chains have already started
importing fresh food products on their own account including Carrefour,
Wal-Mart. Metro. McDonald's, Yum Foods KFC, and Pizza Hut have
contracted with cold storage companies and have established
sophisticated supply chains for their products.

**Increased investment in CS equipment**

Aside from knowledge of food safety standards, increased investment is
the single most important factor in improving the cold chain.
Fortunately, there are indications that investment in many points along
the cold chain is increasing rapidly. For example, the Zhuhai Maoda
Vehicle Co. in Guangdong is scheduled to begin yearly production of
50,000 refrigerated trucks in 2005 through a joint venture with Japan.
Dalian Sanyo Cold Chain Co is a joint venture set up by Sanyo Electric
and Dalian Bingshan Group that, specializes in developing and
manufacturing supermarket showcases, freezing and cooling storage
facilities and, refrigerated-warehouse blowers.

**Supermarkets Replacing Wetmarkets**

Supermarkets are spreading quickly and in some cases replacing wet
markets. In 2003 an explicit program was launched to convert wetmarkets
to supermarkets through an auction system. Although this trend is
largely limited to cities, up to 49 percent of consumers now buy fresh
vegetables at supermarkets that are more likely to have controlled
atmospheres than wetmarkets.

**Direct Sales Increasing**

New markets for direct sales to hypermarkets are opening up. In
Guangzhou and Shanghai especially, many importers are selling direct to
hypermarkets and some port facilities, such as Tianjin are upgrading
facilities to allow storage and direct transport to hypermarkets.
Distributors are increasingly selling to hypermarkets instead of
secondary distributors thus reducing the number of links in the chain
and the average transit time.

**Big Chains And Central Distribution**

Big supermarket chains and multinationals are centralizing their
logistics. Increasingly these companies have large centralized
warehouses and handle their own distribution to retail outlets. This
allows them to tighten their control over food safety standards and
inventory tracking. Typically, products that are easily stored such as
processed items are first centralized with fresh foods following later.
Metro has its own distribution centers and trucking fleet to supply as
far west as Chjongqing and Xi\'an. However, it is still prohibitively
expensive to ship certain items over great distance. A little bucket of
ice cream can cost 15 dollars in the west.

**Development of Trucking Fleets**

Problems with rail transport have caused many foreign and indigenous
ventures to develop their own trucking fleets. China\'s third-party
trucking industry is also growing rapidly -- in response to the
competitive market demands and China's integration into international
trade. Several large international shipping and logistics companies are
now making inroads into China\'s distribution system, in some cases
providing controlled temperature trucking services. But, for the most
part, such services are still in short supply and dominated by domestic
firms with jurisdictional monopolies

**Shift towards private standards**

Lacking government guidelines and regulations many firms, especially
larger retailers, have adopted private standards and testing procedures
which are used with preferred suppliers. In order to maintain a
preferred status distributors must adhere to the retailers standards.
Restaurants have also implemented their own inspection procedures that
motivate distributors to improve

**Competition**

Distribution of all agricultural products in China is changing rapidly
from an old informal systems dominated by Hong Kong and Chinese
entrepreneurs to a more open and formal systems open to western ideas,
capital and management. The distribution industry in China is now very
competitive and now that there are an increasing number of alternatives,
recipients are now more likely to reject deliveries they are
dissatisfied with.

# FAS Programs and Opportunities

The USDA and FAS are constantly seeking ways to improve the cold chain
in developing countries. Currently, USDA/FAS has implemented the Global
Cold Chain Improvement Project that is operating in many nations,
including China. For more information, contact the relevant ATO office
listed in section VII or consult the following article:

<http://www.fas.usda.gov/info/agexporter/2002/April/page04-05.pdf>

The US Meat Export Federation (USMEF) has also launched a cold chain
project in China. The USMEF-managed cold chain project is funded through
the USDA Foreign Agricultural Service Market Access Program Global Based
Initiative.

# 

# Section VII: Post Contact and Further Information

For further 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

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

[^1]: Produce Marketing Association, "China: Opportunities for Fresh
    Produce Suppliers" 2003