Voluntary Report - public distribution

**Date:** 11/27/2006

**GAIN Report Number:** CH6115

CH6115

**China, Peoples Republic of**

**Frozen Potato Products**

**Annual**

**2006**

**Approved by:**

![](media/image1.wmf)Maurice House

U.S. Embassy

**Prepared by:**

Kevin Latner, LaVerne Brabant, Jiang Junyang, and Angie Han

**Report Highlights:**

Table potato production and consumption is down, but processed potato
products enjoy excellent market expansion opportunities, driven by
western-style and fast food outlet expansion and increased consumption
of snacks and other prepared foods. Media reports of the health risks
associated with fried potato products hurt MY 05/06 FFF and potato based
snack food consumption. Consumption is forecast to rebound 10 percent to
86,000 tons in MY06/07, however. Despite 68 million metric tons of
potato production, potatoes for processing are in short supply.

Includes PSD Changes: Yes

Includes Trade Matrix: Yes

Annual Report

Beijing \[CH1\]

\[CH\]

Table of Contents

[**Executive Summary 3**](#executive-summary)

[Production 3](#production)

[Fresh Potato Production Stable in MY06/07
3](#fresh-potato-production-stable-in-my0607)

[Six Percent of Domestically Produced Fresh Potatoes Processed
3](#__RefHeading___Toc153954771)

[Potato Chip Production Relies on Local Chipping Potato Production
4](#potato-chip-production-relies-on-local-chipping-potato-production)

[Quality Potato Shortages Peel Away Frozen French Fry Production
Capacity
4](#quality-potato-shortages-peel-away-frozen-french-fry-production-capacity)

[Fresh Potato Production Support Minimal
5](#fresh-potato-production-support-minimal)

[Food Service Sector Drive French Fry and Dehy Potato Consumption
5](#food-service-sector-drive-french-fry-and-dehy-potato-consumption)

[FFF Consumption will Expand Despite Health Scare
5](#fff-consumption-will-expand-despite-health-scare)

[Consumer Awareness Piqued by Media Stories
6](#consumer-awareness-piqued-by-media-stories)

[Trade 6](#trade)

[Numerous Phytosanitary Issues Limit U.S. Fresh Potato Opportunities
6](#numerous-phytosanitary-issues-limit-u.s.-fresh-potato-opportunities)

[China's Fresh Potato Exports Take Sprout
6](#chinas-fresh-potato-exports-take-sprout)

[Potato Chips Imports Stable... 7](#potato-chips-imports-stable)

[Starch and Dehydrated Potato Imports Continue to Expand
7](#starch-and-dehydrated-potato-imports-continue-to-expand)

[Short Crop Leaves FFF Exporters Unable to Meet Demand
8](#short-crop-leaves-fff-exporters-unable-to-meet-demand)

[Limited Cold Chain Distribution Cools FFF Import Competitiveness
8](#limited-cold-chain-distribution-cools-fff-import-competitiveness)

[Alaska Seed Potato Introduction to China
8](#alaska-seed-potato-introduction-to-china)

[Marketing 9](#marketing)

[Table Potatoes the "Inferior" Vegetable
9](#table-potatoes-the-inferior-vegetable)

[Starch and Dehy 9](#starch-and-dehy)

[Snack foods...the Booming Demand for Potato Chips
10](#snack-foodsthe-booming-demand-for-potato-chips)

[Distribution channel for potato chips (chart)
11](#distribution-channel-for-potato-chips-chart)

[The Ubiquitous Fried Potato 11](#the-ubiquitous-fried-potato)

[The distribution channels for frozen potatoes (chart)
11](#__RefHeading___Toc153954792)

[Product Acceptance and Market Development
12](#product-acceptance-and-market-development)

[Intellectual Property Rights: Protecting your Brand
12](#intellectual-property-rights-protecting-your-brand)

[Marketing Contacts 12](#marketing-contacts)

[Statistics Tables 13](#statistics-tables)

[Table 1. Fresh Potatoes PS&D Table
13](#table-1.-fresh-potatoes-psd-table)

[Table 2. Frozen Potato Products PS&D Table
13](#table-2.-frozen-potato-products-psd-table)

[Table 3. Frozen Potato Products Imports (Volume)
14](#table-3.-frozen-potato-products-imports-volume)

# Executive Summary

Table potato production and consumption is down, but processed potato
products enjoy excellent market expansion opportunities, driven by
western-style and fast food outlet expansion and increased consumption
of snacks and other prepared foods. As consumer incomes continue to
increase and lifestyles change, potato chip and dehydrated potato flake
consumption is estimated to grow by about 15-20% annually in cities.
While there is a sustained increase in the demand for processed potato
products, domestic supply is insufficient to meet this rising demand.
Imports have increased despite production shortages in Australia, Canada
and the U.S., and prices are up.

Media reports of the health risks associated with fried potato products
hurt marketing year (MY)05/06 frozen French fry (FFF) and potato based
snack food consumption. As a result, MY05/06 FFF consumption is
estimated down 6 percent. Consumption is forecast to rebound 10 percent
to 86,000 tons in MY06/07, however. Menu promotions and educational
campaigns marketing the potato as a healthy food and part of a balanced
diet will help rebuild consumer acceptance of frozen potato products. A
key component of the marketing message is science and objectivity in
media reporting on food safety related issues.

# Production 

Potatoes are the fourth largest and most important staple crop in China
after wheat, rice and corn. However, most fresh potatoes produced are of
inferior quality and unusable in potato chip and FFF processing. This is
due primarily to being crowded off of fertile lands by other cash crops,
antiquated management practices, varietal shortcomings and other quality
control measures. Inner Mongolia, Gansu, Yunnan, Guizhou, Sichuan and
Heilongjiang are the top potato producers, collectively accounting for
more than 60 percent of China's total potato production.

## Fresh Potato Production Stable in MY06/07

Droughts in Inner Mongolia and Gansu provinces during both the planting
and growing seasons negatively affected 2006 yields. Consequently,
China's MY06/07 fresh potato production is forecast to reach 68 million
tons, down 4 percent from 71 million tons in MY05/06. The MY06/07 potato
production area is forecast to grow slightly in MY05/06 to 4.9 million
ha while production forecast to be down slightly as farmers shift
production to lower productivity land.

## Six Percent of Domestically Produced Fresh Potatoes Processed

Processed potatoes consume about six percent of total potato production,
with potato starch, potato chips, FFF and dehydrated potatoes being the
most prominent users. Starch milling accounts for five percent of total
potato production while potato chips, dehydrated potatoes and frozen
French fries collectively account for about one percent of total potato
production.

Industry sources estimate that about 50 percent of fresh potatoes are
consumed as a staple food. This is especially relevant in Northern and
Western China, where the comparatively cold climates are less suitable
for grain production, and potatoes are widely produced. Chinese potato
dishes, generally steamed or baked, are a cheap and popular part of
regional cuisine.

The remainder of fresh potato production is used as animal feed, as
seed, or lost to waste. Loss due to spoiling during storage and
transportation is estimated to amount to 14 percent of total potato
production, according to industry sources.

  ------------- -------------- ------------------ ----------- ------------
  **Potato Use                                                
  in Food and                                                 
  Processing                                                  
  Sector (%)**                                                

  Food staple   Processed for  Processed for FFF, Feed and    Losses
  and Vegetable Starch         Chips and Dehys    Seed        

  50 %          5%             1%                 30%         14%
  ------------- -------------- ------------------ ----------- ------------

Sources: Post survey on industry sources

To meet the processing sector's growing demand, seed researchers and
farmers are experimenting with different potato varieties. The two most
highly valued qualities of processing potatoes are high starch content
(for starch milling) and low sugar content (for FFF and chip
production).

## Potato Chip Production Relies on Local Chipping Potato Production 

China's 2005/06 fried potato chip production is estimated at 45,000
tons, requiring an equivalent of 180,000 tons of potatoes for chipping.
Industry sources estimate that there are approximately 25 potato chip
producers in operation in 2006. Several of these also produce pressed
(fabricated) potato chip products. To ensure chipping potatoes meet
quality standards, most processors usually contract with individual
farms and offer seeds and technical assistance to producers. In order to
guarantee year-round potato supply, some large potato chip (and FFF)
producers have set up regional production bases in both Northern and
Southern China. Additionally, these producers have also invested in
storage facilities. In recent years, major chip processors have
increasingly funded seed research programs in production regions to
improve crop quality. Minor potato chip producers, in contrast, are
generally incapable of providing technical assistance or investing in
storage facilities, satisfying their needs through supply contracts and
direct purchasing at local markets.

**Starch and Dehydrated Used in Both Traditional and Western Foods**

Potato starch production in MY06/06 is estimated at 450,000 tons,
requiring the equivalent of 3.6 million tons of fresh potato. Industry
sources estimate that potato starch production will grow 10-15% annually
driven by rapid growth in food processing and industrial sectors like
textiles and paper milling.

The food-processing sector is a major consumer of potato starch. An
example of this is vermicelli, whose popularity as an ingredient in
Chinese "hot pot" dishes has led to increased starch demand. Dehydrated
potato production in MY05/06 is estimated at 15,000 tons in MY06/06.
Most is used in the manufacturing of compressed chips. A smaller portion
is used in Western-style mashed potatoes. Due to increasing consumer
acceptance of potato-based snack foods and Western fast food, dehydrated
potato production is projected to expand by at least 15-20 percent
annually.

## Quality Potato Shortages Peel Away Frozen French Fry Production Capacity

Potatoes dedicated to the production of frozen French fries in MY05/06
are estimated at 70,000 tons. Processing requirements reduce this to
35,000 tons of FFF. Currently, four production lines are in operation
and are located in Beijing, HeilongJiang, Shanxi, Gansu and Yunnan.
Industry estimates are that FFF production capacity exceeds 100,000 tons
annually. Aggregate production is less than 35 percent of capacity due
to an inadequate supply of quality processing potatoes. None of the four
primary production lines, the newest of which opened in 2005 in
Heilongjiang, are running at capacity and industry sources report that
the lack of quality potatoes limited the processing season at some
plants to three or four months. Assuming potato quality can meet FFF
production requirements, the production forecast for MY06/07 is up
almost 30 percent from the previous year to 45,000 tons.

Potatoes in potato chip and FFF processing have specific requirements,
including variety, starch/sugar content, size and shape. Such
quality-specific potatoes require tailored growing conditions and
appropriate irrigation and fertilizer. The result is that potato chip
and FFF-grade potatoes compete with grains and other cash crops for
fertile land.

Large international producers of processed potato products have
established potato plantations in both Northern and Southern China which
include storage facilities to ensure a reliable and high-quality potato
supply. Minor chip producers generally lack the expertise required to
properly store crops.

# Fresh Potato Production Support Minimal

Potato producers receive no government support. In areas dominated by
grain production, however, the government discourages potato production
by encouraging farmers to increase grain output through production
support. In such regions, including Central and Southern China, potato
acreage is forecast to decrease from MY05/06. Potato expansion is
projected to occur primarily in Inner Mongolia, Gansu and Guizhou
provinces, due to better profitability compared with competing crops.
This trend will continue as research institutes in Mongolia, Gansu and
Guizhou develop and introduce higher yielding virus-free potatoes.

# Food Service Sector Drive French Fry and Dehy Potato Consumption

China's food service sector has enjoyed double-digit growth for 15
years, a trend expected to continue as income rises. From 2004 to 2005,
China's food service sector revenue rose 18 percent to \$111.1 billion
(RMB888.7 billion). Estimates for 2006 surpass \$125 billion (RMB1000
billion). Fast food, especially Western-style fast food, is one of the
fastest growing sectors, led by Kentucky Fried Chicken (KFC) and
McDonalds. By February 2006, KFC had opened over 1500 restaurants in
China compared to 1,200 restaurants at the end of 2004 and will open
300-400 in 2006. McDonald's had about 600 restaurants in China by
February 2006 and moved its Chinese headquarters from Hong Kong to
Shanghai at the beginning of 2005 to better develop its business in
mainland China.

While FFF are available at certain retail outlets, at-home consumption
of FFF will be negligible.

Depending on the marketing efforts, at-home dehy potato consumption
could increase significantly, but from a very small base.

## FFF Consumption will Expand Despite Health Scare

China's domestic FFF consumption is estimated at 78,000 tons in MY05/06.
Western style food outlets are the largest FFF consumers in China,
accounting for 75 percent of total consumption. The remainder is
marketed through HRI outlets and retail stores (20 percent and 5
percent, respectively). MY05/06 FFF consumption is estimated to decline
by 6 percent from MY04/05, mainly the result of health concerns
following reports linking acrylamide to eating fried food. MY06/07 FFF
consumption is forecast to rebound 10 percent to 86,000 tons. Market
participants are optimistic the trend will continue as per-capita FFF
and potato chip consumption is low in China. Growing incomes and the
increased availability of processed and snack potato products should
bolster long-term demand growth despite the short-term supply situation.

# Consumer Awareness Piqued by Media Stories

The media has played a vital role in raising Chinese consumer awareness
of the importance of healthy eating and maintaining a healthy lifestyle.
In March 2005, Chinese media cited FAO/WHO reports that starch-based
foods, such as potato chips and French fries, can contain acrylamide, a
carcinogen, when cooked at high temperatures. In response, on April 13,
2005, China's Ministry of Heath (MOH) suggested that Chinese consumers
avoid eating excessive amounts of fried food. In addition, MOH provided
consumers with a list of high acrylamide content foods; fried potato
products ranked first (followed by fried cereal food, baked cereal food,
instant coffee, barley tea and corn tea). Total FFF consumption dropped,
compounded by some fast food outlets replacing French fries with
alternate menu choices.

Separately, a 2006 primetime TV advertisement promoting non-fried
instant noodles as a healthy alternative to the traditional fried
instant noodle also negatively affected potato chip popular perception
and sales. The advertisement reflects growing consumer sentiment that
fried foods, and especially French fries, are unhealthy and the cause of
a significant portion of childhood obesity. As a result, leading potato
chip manufacturers are now developing non-fried potato-based snacks.

As health concerns increasingly factor into U.S. potato product\'s
target consumers, building an effective response will be a key overall
marketing message. Getting the message that potato products are an
important part of a balanced diet and a component of a healthy lifestyle
will require targeting marketing channels through seminars, media
events, media missions and educational material for intermediate
consumers and end users.

# Trade

## Numerous Phytosanitary Issues Limit U.S. Fresh Potato Opportunities

Except for Alaska seed potatoes (discussed below), U.S. potatoes face
numerous phytosanitary import barriers. The U.S. has requested China
perform a pest risk assessment. While technical discussions continue
between U.S. and Chinese regulators, numerous obstacles remain and there
is no target date for overcoming them and developing an import protocol.
During recent discussions, however, the government of China suggested
pursuing a risk assessment for potatoes for processing indicated the
greater opportunity to mitigate risks on potatoes for processing make it
easier and less time consuming to develop an import protocol.

## China's Fresh Potato Exports Take Sprout

China's fresh potato exports for table consumption have been growing
rapidly in recent years as the Chinese government works to establish
closer trade ties with its neighbors. In MY05/06, China's fresh potato
exports rose 60% from the previous year to 329,000 metric tons. The
strong export growth is attributed to the following factors: a
comparatively low production cost, seed improvement, and freight rate
advantages to nearby markets. Trade sources report that Chinese fresh
potato exports to neighboring Asian countries is forecast to expand
rapidly, albeit from a small base.

  ------------- --------------- ------------- ----------- ----------- ----------- -----------
  China Fresh                                                                     
  Potato                                                                          
  Exports by                                                                      
  Destination                                                                     
  2001-2006 (in                                                                   
  1,000 metric                                                                    
  tons)                                                                           

                **HS (0701)**   **Sep 01-Aug  **Sept      **Sept      **Sept      **Sept
                                02**          02-Aug 03** 03-Aug 04** 04-Aug 05** 05-Aug 06**

                **World**       109           140         180         206         329

  1             **Malaysia**    43            53          73          77          102

  2             **Russia**      5             10          17          39          72

  3             **Vietnam**     7             26          37          39          69

  4             **Mongolia**    27            28          27          29          44

  5             **Singapore**   15            14          10          10          13

  6             **Hong Kong**   0             2           2           2           12

  7             **Thailand**    1             2           8           4           6

                **Others**      10            5           6           6           11
  ------------- --------------- ------------- ----------- ----------- ----------- -----------

## Potato Chips Imports Stable...

Chinese Customs data does not specifically cover potato chip imports,
Post analysis suggests that despite domestic demand, imports are not
expected to increase significantly, even as consumers become less price
conscious about their snack food purchasing decisions. Imported potato
chips represent about 15 percent of the potato chip market, most of
which are pressed potato chips. An estimated 60,000 tons of potato chips
(including the compressed varieties) were sold in China in MY06/06. Of
this, compressed varieties accounted for 30 percent of the chip market,
about 50 percent of which were imported. Trade sources estimate that
imported potato chips (including compressed varieties) account for less
than 5 percent of the processed potato market in China.

## Starch and Dehydrated Potato Imports Continue to Expand

Potato starch and modified starch products' wide range of applications
in food processing, pharmaceutical, textile and paper milling industries
helped China's potato starch imports double in MY05/06. This trend is
forecast to continue in coming years as a result of continued growth in
the food processing and industrial sectors and domestic supply
limitations. The import of dehydrated potatoes, an important ingredient
in Western food, particularly mashed potatoes, is also expected to rise
in coming years.

  --------- ------------- -------------- ------------ -------------- ------------
  China                                                              
  Potato                                                             
  Starch                                                             
  Imports                                                            
  in metic                                                           
  tons (HS                                                           
  code                                                               
  110803)                                                            

            **Country**   **Sep 02-Aug   **Sep 03-Aug **Sep 04-Aug   **Sep 05-Aug
                          03**           04**         05**           06**

  0         \--World\--   25,732         21,874       43,126         95,839

  1         Netherlands   9,339          4,267        16,790         37,862

  2         Germany       7,739          2,787        10,637         29,395

  3         Denmark       4,061          7,908        6,551          10,762

  4         France        1,800          4,692        2,938          8,538

  5         Poland        1,943          1,318        3,504          7,064

  6         Sweden        15             0            1,777          1,187

  7         Korea, North  250            308          651            676

  8         Japan         271            341          251            285

  9         Thailand      5              39           16             44

  10        United States 4              25           0              19

            Others        306            189          12             6
  --------- ------------- -------------- ------------ -------------- ------------

  ---------------- ----------------- -------------- -------------- ------------ ------------
  **China                                                                       
  Dehydrated                                                                    
  Potato Imports                                                                
  in metric tons**                                                              
  (HS Code                                                                      
  110510.110520)                                                                

                   **Country**       **Sep 02-Aug   **Sep 03-Aug   **Sep 04-Aug **Sep 05-Aug
                                     03**           04**           05**         06**

  0                **\--World\--**   1,597          1,830          2,121        3,813

  1                **Germany**       808            1,449          1,594        1,282

  2                **United States** 296            240            185          951

  3                **France**        0              0              0            600

  4                **Poland**        0              0              0            270

  5                **Denmark**       64             0              18           252

  6                **Netherlands**   360            51             270          210

  7                **Belgium**       0              0              0            170

  8                **Spain**         31             20             29           29

  9                **Canada**        26             0              0            22

                   **Others**        11             70             25           29
  ---------------- ----------------- -------------- -------------- ------------ ------------

## Short Crop Leaves FFF Exporters Unable to Meet Demand 

FFF imports accounted for about 70 percent of total frozen potato
product consumption in 05/06 (H.S. Code: 20041000), estimated at 54,782
tons. While FFF consumption is forecast to increase in MY06/07, China's
MY06/07 FFF imports are forecast to remain unchanged from the previous
year. This is due to a short 2006 potato crop in major FFF exporting
countries, including the Australia, Canada, and the U.S.

According to China Customs data, the United States is China\'s dominant
FFF supplier, accounting for 61 percent of China's total MY05/06 frozen
potato imports. Competition, however, is intensifying between the U.S.
and lower-priced product from Canada, the Benelux countries, and New
Zealand. Canada\'s aggressive sales techniques and low transportation
costs increased Canada's share of the FFF market to 29 percent (16,146
tons) in MY05/06, up from 21 percent (13,131 tons) in MY04/05. Most of
the gain came at U.S. expense. The U.S. share of China's FFF imports in
MY05/06 decreased to 61 percent (33,662 tons) from 67 percent (41,452
tons) in MY04/05.

If new Chinese plants can be supplied sufficient quantities of quality
raw potatoes to meet their designed output capacity, some companies hope
to expand their market share in China or export to other Asian markets,
like Japan and South Korea. While expanded production will depend on the
limited ability to expand processed potato production, China's MY05/06
FFF exports increased 30 percent from MY04/05 to 11,552 tons, of which
11,350 tons went to Japan. China's MY06/07 FFF exports are forecast to
increase 12 percent due to significant Japanese demand.

## Limited Cold Chain Distribution Cools FFF Import Competitiveness

FFF distribution costs from China's ports to its vast and poorly
serviced interior, requiring either refrigerated railcars or trucks,
drives up the cost of imported FFF in interior cities. Precisely because
of this freight disadvantage, FFF imports are most competitive in
affluent and populous coastal cities. The reach of fresh potatoes,
dehydrated potato products, and potato chips is less constrained due to
their minimal shipping requirements.

## 

## Alaska Seed Potato Introduction to China

With the exception of Alaskan seed potatoes, China does not allow fresh
potato imports in order to prevent the introduction of disease and pests
into China.

China approved Alaskan seed potato imports in 2003. The first shipment,
which arrived in 2005, was suspended due to reports of finding diseases
while in quarantine. Seed potatoes from Alaska were re-introduced to
China in early 2006 and are now being tested for planting in Yunnan
province. According to researchers, no quarantined diseases were found
in any of these potatoes. There are also similar tests and collaboration
programs with seed potato research in major production regions,
including Inner Mongolia and Heilongjiang. As farming methods evolve and
seed research progresses, potato yields and quality will continue to
improve, to the benefit of FFF and chip processors.

  ---------- ------------------------ -------- -------- -------- --------
  H.S. Code  Products                 Import            Import   
                                      duty              VAT      

                                      2005     2006     2005     2006

  07101000   Potatoes, frozen         13%      13%      13%      13%

  20041000   Potatoes, preserved o/t  13%      13%      17%      17%
             by vinegar or acetic                                
             acid, frozen                                        
  ---------- ------------------------ -------- -------- -------- --------

# Marketing

While demand for processed potato products is growing at between 10 to
30 percent, depending on the product, as consumption shifts away from
table potatoes, total potato consumption declines.

## Table Potatoes the "Inferior" Vegetable

The "main course" of any Chinese meal is either rice or noodles,
complemented by meat and vegetable side dishes. As incomes increase,
this traditional notion of rice or noodles as the centerpiece of Chinese
meals is changing. Even outside the context of Western food, in some
circumstances, like large banquets, Chinese consumers are beginning to
think of meat as the main course. Still, outside of Western cuisine,
potatoes will complement not replace rice or noodles.

As incomes rise in both rural and urban China, even in the north, where
there is a traditionally a higher consumption of starchy foods, table
potato consumption is down, reflecting the fact that it is an inferior
good -- that is, as incomes rise, consumption declines.

As a traditional part of the Chinese diet, table potatoes are not
marketed by domestic concerns and there are significant phytosanitary
market access issues for non-Chinese table potatoes.

## Starch and Dehy

Demand for industrial- and food-use potato starch and dehydrated
potatoes for processed potato products has expanded in response to
increased demand for processed products. While industrial starch is
mostly price driven, Demand for food starch and dehydrated products has
expanded in response to increased demand for snack foods and mashed
potatoes at food service outlets. While locally produced dehy potatoes
are reportedly of reasonable quality, domestic demand has not been able
to keep up with growth, estimated at 15-20 percent, and with production
down after poor crops in Australia, Canada and the U.S., U.S. exports of
dehy potatoes were up to China almost 500 percent and prices have been
high during the later half of the MY05/06 marketing year.

Targeting the affluent Shanghai market, where tastes are more "flexible"
and consumers more willing to diverge from traditional Chinese flavors,
ready to eat mashed potatoes in single serving sizes, called "Magic
Potato" are a new-to-market product that has sold quite well. After
initial market promotion in Shanghai, Magic Potatoes are now being
marketed in Northern China as well.

As with all new-to-market products, the three key components to an
effective marketing campaign are 1) adequate research to know your
target market, 2) well placed advertising and strategic public relations
and marketing efforts, and 3) a well developed distribution channel.

Potato chip\'s world-wide popularity are reflected in China, but Post
notes that anecdotal reports are that the brisk sales and consumer
acceptance gained by the Magic Potato suggest market opportunities for
healthy and nutritious, easy to eat products, like dehydrated potatoes.

## Snack foods...the Booming Demand for Potato Chips

Snack foods are a \"luxury good\" that have responded to China's
unprecedented economic expansion and the commensurate increase in the
demand for higher value products. Demand for snack foods are increasing
by 15-20 percent annually, driven by a shift away from traditional, and
less convenient, snack foods like fruit and unshelled nuts, to
processed, easy to eat foods.

Demographics and taste preferences influence the penetration of potato
chips in the snack market. First, The North China palette, where
potatoes are regularly consumed and food is traditionally made with more
salt and more oil, are particularly suited to marketing potato chips.
Second, young consumers, including the 20-somethings and only-children
still living at home are excellent target consumers. They are more
likely to adopt potato chips as a regular snack food and have a longer
consumption life. Chinese parents with only one-child are particularly
susceptible to product marketing, purchasing products that make their
child happy. Third, the most popular potato chips are those with flavors
that are engineered for the local palette.

Consistent with global trends, potato chips are one of the most popular
snack foods in China, even in the South where sweet snacks compete with
potato chips, and grazing, public snacking, and eating on the run are
less prevalent; last year's growth is estimated at 30-40 percent.
So-called Asian flavored chips, including shrimp and BBQ (which suits
the Chinese taste for spicy food, have sold increasingly well as the
novelty of more traditional Western flavors, plain or onion and sour
cream, have worn off.

In response to booming demand, domestic production of potato chips has
exploded. International brands, including Pringles which has been in the
market over 15 years and is dominant in the pressed chip market, Lays,
and the Philippine based Oishii dominate the market. In the last 2
years, however, smaller local competitors are increasingly eating into
the growth opportunities the larger players have enjoyed.

The international players developed their market through imported potato
chips, but except for Pringles, have migrated to a domestic production
model. Imported chips, if they are shipped in bags, have a tendency to
break in transit, have a shorter shelf life, and can be more expensive.

Market opportunities abound in a retail sector where growth of 15
percent is considered normal and distributors target 30-50 percent to
keep products on the shelf. New products and new flavors, tailored to
the regional and generational differences, including the small but
growing interest in "healthy foods," will drive consumption. Marketing
potato chips as an adjunct to lunch is virtually untapped.

As noted above, the three key components to an effective marketing
campaign are research, effective marketing, and distribution. Probably
the single most important constraint on the market development of potato
chips is the shortage of potatoes for chipping.

## Distribution channel for potato chips (chart)

## 

## The Ubiquitous Fried Potato

Frozen Potatoes are primarily used in the HRI sector, principally in
Western style facilities. As product innovations bring new shapes and
flavors to market, competing products are further expanding this growing
sector. Most expansion is in the Western style food sector. This sector
would benefit from marketing support communicating that potatoes are an
important part of a health lifestyle.

Frozen French fries have not been marketed significantly to the
traditional Chinese HRI sector. While standard cut French fries are not
on the Chinese menu, specialty cuts, slivers (for dudousi) and chunks
served with stewed beef (for tudou xiao niurou) are served in many
Chinese restaurants. In addition, there are opportunities for new menu
items, such as ganbian tudousi (spicy shredded potatoes), now ubiquitous
yet virtually unknown 5 years ago.

HRI continues to be the most direct channel for introducing products to
consumers. Although retail sales are growing as well it is a small and
difficult market as Chinese kitchens are not adapted to cooking French
fries.

[]{#__RefHeading___Toc153954792 .anchor}The distribution channels for
frozen potatoes (chart)

## Product Acceptance and Market Development 

French Fries and dehy potatoes, to a lesser extent, find a ready market
in the expanding Western style food service outlets, from French fries
and mashed potatoes in fast food outlets to frozen baked potatoes in
Western style steak houses. The greatest market potential, however, lay
in the use of potato products in traditional Chinese cooking.

A three-stage approach to market development includes insuring that
there is a distribution channel, developing menus incorporating the new
products, and commercializing the new product through consumer
education. Once there is a distribution channel, critical is educating
the hotel, restaurant and institutional food service providers about new
products and new uses of existing products, and providing marketing
support to promote the new products or new uses in their venues. Once
products have been accepted, consumer education on use in the home can
pull demand into the home.

The best marketing opportunities are best determined by effective market
research, but possible product introductions include substituting
individually quick frozen (IQF) potato shreds into traditional
\"tudousi,\" incorporating potato starch or dehydrated potatoes into
institutional food services facilities to improve flavor and nutrition,
and reduce costs. As consumers have less time for cooking, opportunities
exist to develop other ready-to-eat potato based products for the newly
affluent.

Developing markets for potatoes in traditional Chinese cooking will
require training chefs and food service establishments on how to develop
new products or how to incorporate new ingredients into traditional menu
items. In addition to effective training for the new users to insure
quality menu items, consumers must be rewarded for trying the new food
product (through product sales and introductory offers, and of course,
better flavor). Effective marketing at the consumer level requires the
key elements outlined in previous sections.

## Intellectual Property Rights: Protecting your Brand

While at the HRI sector, intellectual property rights is not currently a
major issue for imported and processed potato products, products at the
retail sector are. Products marketed at the retail level require the
full use of available trademark and patent protections, including
trademark, logo, and Internet domain registration. Registrations should
be completed with the Chinese Trademark Office in Beijing.

## Marketing Contacts

For marketing assistance for U.S. potato products contact:

U.S. Potato Board's

Mr. Daniel Chan

PR Consultants Ltd.

Room 436, Shanghai Center

1376 Nanjing Xi Lu,

Shanghai 200040

Tel: (86-21)62798668

Fax: (86-21)62798669

<Prc@prcon.com>

Or, for more information about marketing and new developments related to
potatoes in China, contact the following USDA Agricultural Trade
Offices:

  --------------------- ------------------------- -----------------------
  USDA ATO Beijing      USDA ATO Guangzhou        USDA ATO Shanghai

  Attn: Mr. LaVerne     Attn: Ms. Joani Dong      Attn: Mr. Wayne Batwin
  Brabant                                         

  Tel: 86-10-8529-6418  Tel: 86-20-8667-7553      Tel: 86-21-6279-8622

  Fax: 86-10-8529-6692  Fax: 86-20-8666-0703      Fax: 86-21-6279-8336

  Email:                Email:                    Email:
  ATOBeijing@usda.gov   ATOGuangzhou@usda.gov     ATOShanghai@usda.gov
  --------------------- ------------------------- -----------------------

# Statistics Tables 

Beginning Stocks of fresh potatoes in PS&D Table is zero, not consistent
with previous year because Post uses September replacing January as the
beginning of the Marketing Year.

## Table 1. Fresh Potatoes PS&D Table

  ------------------ ---------- ----------------- ---------- ----------------- ---------- -----------------
  **Country**        China,                                                               
                     Peoples                                                              
                     Republic                                                             
                     of                                                                   

  **Commodity**      Fresh                                                                (HA)(1000 MT)
                     Potatoes                                                             

                     2004       Revised           2005       Estimate          2006       Forecast

                     USDA       Post              USDA       Post              USDA       Post
                     Official   Estimate\[New\]   Official   Estimate\[New\]   Official   Estimate\[New\]
                     \[Old\]                      \[Old\]                      \[Old\]    

  **Market Year                 09/2004                      09/2005                      09/2006
  Begin**                                                                                 

  Area Planted       0          4596700           0          4880900           0          4900000

  Area Harvested     0          4596700           0          4880900           0          4900000

  Beginning Stocks   0          0                 0          0                 0          0

  Production,        0          72220             0          70865             0          68000
  Commercial                                                                              

  Imports            0          0                 0          0                 0          0

  TOTAL SUPPLY       0          72220             0          70865             0          68000

  Exports, Fresh     0          206               0          329               0          400

  Processing         0          18000             0          17800             0          17000

  Domestic Fresh     0          46792             0          45650             0          43800
  Market                                                                                  

  Feed Waste         0          7222              0          7086              0          6800

  TOTAL Dom.         0          72014             0          70536             0          67600
  Consumption                                                                             

  Ending Stocks      0          0                 0          0                 0          0

  TOTAL DISTRIBUTION 0          72220             0          70865             0          68000
  ------------------ ---------- ----------------- ---------- ----------------- ---------- -----------------

## Table 2. Frozen Potato Products PS&D Table

  ----------------- ----------- ----------------- ---------- ----------------- ---------- -----------------
  **Country**       China,                                                                
                    Peoples                                                               
                    Republic of                                                           

  **Commodity**     Potato                                                     (MT)(MT,   
                    Products,                                                  Net        
                    Frozen                                                     Weight)    

                    2004        Revised           2005       Estimate          2006       Forecast

                    USDA        Post              USDA       Post              USDA       Post
                    Official    Estimate\[New\]   Official   Estimate\[New\]   Official   Estimate\[New\]
                    \[Old\]                       \[Old\]                      \[Old\]    

  **Market Year                 09/2004                      09/2005                      09/2006
  Begin**                                                                                 

  Deliv. To         105000      90000             150000     105000            0          120000
  Processors                                                                              

  Beginning Stocks  0           0                 0          0                 0          0

  Production        35000       30000             50000      35000             0          45000

  Imports           70600       61782             84500      54782             0          54000

  TOTAL SUPPLY      105600      91782             134500     89782             0          99000

  Exports           8980        8866              12500      11552             0          13000

  Domestic          96620       82916             122000     78230             0          86000
  Consumption                                                                             

  Ending Stocks     0           0                 0          0                 0          0

  TOTAL             105600      91782             134500     89782             0          99000
  DISTRIBUTION                                                                            
  ----------------- ----------- ----------------- ---------- ----------------- ---------- -----------------

## Table 3. Frozen Potato Products Imports (Volume)

  ----------- ---------- ------------- ------------ ----------- -----------
  (Metric                                                       
  Tons)                                                         

  H.S. 200410                                                   

  Country     Apr-Jun    Jul-Sep 2005  Oct-Dec 2005 Jan-Mar     Apr-June
              2005                                  2006        2006

  World       15,172     11,036        10,416       14,637      19,727

  United      9,329      5,257         7,099        9,177       13,528
  States                                                        

  Canada      4,463      3,714         2,775        4,533       5,094

  New Zealand 423        633           153          448         661

  Belgium     798        1,060         248          301         285

  Egypt       67         108           0            129         96

  Japan       72         264           120          48          40

  Australia   0          0             0            1           22

  France      0          0             0            0           1

  Germany     0          0             0            0           0

  United      0          0             0            0           0
  Kingdom                                                       

  Others      21         0             22           0           0
  ----------- ---------- ------------- ------------ ----------- -----------