Sunday, October 30, 2011
Feed Industry's Long Transition
Feed warehouse of Mr. Liu's company.
An interview with a feed industry executive titled "Feed Industry Re-shuffle" provides some interesting perspective on the evolution of China's animal feed industry. The interview follows up on a speech given to an aquaculture industry conference by Liu Hanyuan, the chairman of a fish feed company in September. (Actually, the website of Liu's company says it is a conglomerate composed of feed, fish, food, pharmaceutical, chemical and solar energy companies.)
The interview begins by discussing the growing role of state-owned companies in the feed industry. Mr. Liu provides some historical background. He traces the feed industry's mostly-private character back to the 1980s when Deng Xiaoping proclaimed that the feed industry would be open to everyone. After 30 years, the industry has transitioned from state-owned to companies with private or mixed ownership, "highly marketized and responsive." The entry of state-owned companies, Liu says, is related to the general environment of "state-in, private-out" (国进民退）, i.e. the recent trend of state-owned companies regaining a dominant position in many Chinese industries, pushing aside private companies.
Mr. Liu's assessment of the ascendancy of state-owned companies is that it's too early to say whether this is progress or a regression. He observes that the state-owned companies have advantages: "special policies," large scale, ability to "grab large volumes of grain raw materials," and access to "cash, import quota and approvals." These advantages may give them a shortcut to leading position in the industry.
Mr. Liu sees a period of consolidation and shake-out in the industry that will take a long time. He says it's happening slower than anticipated. Companies of each scale "have their own survival skills." He says that consumers naturally tend to gravitate toward larger stable companies with well-known brands accepted by consumers. Small companies are "under pressure," and those with "weak hardware" will be weeded out. Small and medium companies need to recognize their advantages to compensate for limited research, labor, and management resources.
Mr. Liu discusses the challenges feed companies face in changing their mode of operation. Instead of just manufacturing and selling products, companies will need to integrate into management of upstream raw materials and downstream production of fish and livestock products and provision of services to users of feed.
One of the big challenges facing the industry is the scattered layout of livestock and fish production. Providing technical services to producers in this environment is difficult.
Another challenge is the transition from unbranded generic consumer products to branded products. The interviewer observes that he recently found fish carrying Mr. Liu's company brand in a supermarket that were selling for twice the price of generic fish. Mr. Liu replies that consumers are still in the habit of killing their own chickens and fish so it's hard to sell differentiated products at a premium price. This is a major challenge for large companies.
Mr. Liu acknowledges that brand-creation will be a long process. One positive development he cites is the increased scrutiny of foods by grandparents and parents shopping for kids. These shoppers are more likely to spend more to buy branded products. Mr. Liu suggests that companies concentrate on expanding on this base of 10%-20% of consumers. He sees this emerging trend as an opportunity and anticipates that the industry's transformation will take 10, 20, even 30 years.