Tuesday, November 22, 2011

Chinese Feed Mogul on Benefits of WTO

Liu Yonghao, the chairman of New Hope Group--China's largest feed company--was interviewed by 21st Century about how his company has benefited from China's WTO accession 10 years ago. Liu said New Hope was one of the biggest beneficiaries, citing WTO for providing his company with a stable channel for importing raw materials.

New Hope's home base in Sichuan, the largest hog-producing province. Liu says the biggest challenge in producing feed is sourcing raw materials. In the early days, feed mills had to set up importing channels in Shenzhen to procure amino acids and vitamins that were not available domestically. When the government monopolized grain they had to collect ration tickets and devise other arrangements with farmers to get grain they could process into feed. 

He recalls traveling all over the country during the 1980s trying to convince grain warehouses and oil-crushing mills to sell him corn and soymeal. As a Sichuan native, he spent much of his time in the northeastern provinces buying grain. During Chinese New Year holiday, the hotels closed down but he was still trying to find grain to buy. At that time it was hard to get grain, the prices fluctuated and were not in line with international prices.

Before WTO accession, plant-based protein was imported but was scarce. After WTO accession, imports of soybeans boomed. Last year, China's soybean imports were over 50 mmt. Liu says his company uses 3-to-4 million metric tons (mmt) of soybeans to make 15 mmt of feed. Imported soybeans are crushed to make vegetable oil and soy meal for feed--most of the value of those beans is for feed.

Turning to the topic of foreign investment, Liu recalls that multinational companies like CP, Willmar, and Purina were dominant in the China market during the early years after "reform and opening." Now New Hope is one of the leading feed companies, selling 15 mmt annually.

Liu observes that China is the world's largest meat, egg, and dairy country. Since entering WTO, the manufacturing sector has grown rapidly, urbanization has increased, many small-scale "back yard" farmers have quit farming to work elsewhere, and consumption of meat, eggs, and milk rose. Liu said his company became a world-class company by the fourth year after WTO accession.

Liu says his company is growing by integrating from feed milling into the entire industry chain: breeding, livestock production, slaughter and processing. New Hope has set up a livestock technical services company, a loan guarantee company, and farmer cooperatives. The company sees itself as an intermediary with the "government above," "farmers below," a domestic "dragon head" company and a multinational company overseas.

The 21st Century interviewer asked Liu about his company's earlier plan to import feed and export meat products after WTO accession. Liu responded that China doesn't have enough meat products and does export any. Instead New Hope company is investing overseas. Liu asks rhetorically, "Foreign companies have invested in China, so why can't we invest overseas?"

New Hope looked into investing in mature markets like the U.S., Europe, Japan and South Korea, but felt they didn't have any advantage there since big multinationals dominate these markets. New Hope is now focusing on Southeast Asian countries like Vietnam, Cambodia and the Philippines. CP, the Thai company, is the leading feed miller in these countries, but New Hope has experience going up against them in China. New Hope operates a dozen mills in Southeast Asia: five in Vietnam, four in the Philippines, one in Cambodia, two in Indonesia.

The company's main overseas market is Vietnam. CP and Willmar have mills there, but Liu describes the feed industry in Vietnam as very weak.

In Vietnam, Liu says, they have to offer steep discounts to get livestock producers to buy their feed. The Vietnamese tell them all other Chinese products like motorcycles and apparel are sold at a fraction of the price of Japanese, American or European products, so they New Hope has to sell its feed at half-price in Vietnam.

Liu says Chinese exports and the quality of exported goods has improved since WTO accession. In Vietnam, the discount on Chinese goods is narrowing. It used to be 50%, but Chinese goods now sell for 70%-80% of the price of other goods.

The company hopes that after using their feed several years customers will gain confidence in their quality. Liu says New Hope is now one of the top three feed products in Vietnam. He says their after-tax earnings in Vietnam were 100 million yuan last year.

New Hope has plans to expand in Sri Lanka, Egypt and South Africa. They have ten plants under construction overseas. New Hope recently set up an overseas investment company in Singapore and plans to double foreign investment every year.

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