Investment potential in China's cold chain logistics

Australian companies with the expertise and resources needed to fill the gaps in China's inadequate cold chain logistics stand to benefit from a projected USD$160 billion in annual cost savings that a modernised system could deliver, according to a recent study by A.T. Kearney.

The study, China's Cold Chain Challenges, reveals that the country's broken food safety process will be overwhelmingly insufficient in meeting the expected USD$650 billion (USD$150 billion in 2007) in food spending by China's middle class in 2017. It also shows that ignoring China's problematic cold chain logistics poses a significant risk to food manufacturers, with consumers ready to dump brands involved in food safety incidents.

The survey conducted by AT Kearney canvassed the attitudes and behaviour of the Chinese middle class towards food safety in 2005 and 2007. It then analysed the country's embryonic cold chain supply system and provided 10-year projections of what the future holds.

Principal at A.T. Kearney, Antje Voelker, says the underlying issue is the rise of the Chinese middle classes — forecast to more than double in number from 200 million in 2007 to 518 million in ten years' time.

"The rapid growth and increasing wealth of the middle class in China is having flow-on effects in their food choices. The study shows a burgeoning preference by this group for safer food options, and a move away from traditional fresh food markets to modern, western-style supermarkets and hypermarkets which they believe provide safer food," Ms. Volker said.

Survey results show 95% of the middle classes now rank food safety as very important (compared with just 73% two years ago). However, there is a large gap between the expectations of consumers and the food retailers' ability to provide a high level of food safety.

The key reason is a lack of infrastructure. Comparative cold storage data between the US and China indicates a staggering difference: the US has 0.368 m3 of cold storage per middle-class capita while China has 0.045 m3. Similarly, there are just two refrigeration trucks per 10,000 middle-class capita, compared to nine in the US.

Ms. Voelker said, "75% of the future food market in China will be in 2nd and 3rd tier cities dotted around the country. More than 50 cities, each with populations of over 1 million, require a national distribution network to efficiently cater for this market. However, the existing food supply chain is fragmented, still in its infancy, and unable to cope with such demands. It significantly impedes the ability to deliver safe food to customers."

There are also issues beyond the increasing cold storage and refrigeration volumes.

"China lacks clear supply chain standards and any meaningful auditing and enforcement systems. It also has a dangerous reliance on trust and visual inspection. What's really required is third-party knowledge, expertise and advice in order to facilitate a seamless flow between the farmers, the raw materials suppliers, the processors or manufacturers and the retailers."

This provides significant opportunities for foreign companies with the resources and know-how to deliver a world-class cold chain logistics framework.

"Logistics providers have the opportunity of applying the latest technology in their field to building an ideal cold chain system and extending their reach into China. In fact, investors and operators stand to reap part of the USD$160 billion per year in projected cost savings," Ms Voelker said.

Food manufacturers and processors must also be part of the process, as the issue is integral to their risk management. The study shows that a food safety incident would have a large impact on the market: consumers would stop purchasing a brand's products (38%), cease to buy the brands altogether (32%) or raise complaints to authorities (21%).

"It is imperative that China's cold chain logistics is modernised, not just for the people of China, but also for all international market entrants who want to capitalise on this market. Otherwise, manufacturers and suppliers — both local and foreign — are exposed to potential risks and a serious backlash from consumers should a food safety incident arise," Ms Voelker said.

A.T. Kearney recommends the following key steps for improving China's food supply system.

• Common standards must be agreed on between the food industry and government, and the latter must take responsibility to ensure enforcement for all participants.
• A high-quality, end-to-end national supply chain must be developed in collaboration with third-party providers; with the advantage that there are only a few legacy structures to grapple with.
• Private sector infrastructure investment of about USD$100 billion is needed, for warehousing, refrigerated truck transport, IT systems and training.

"Safeguarding the country's cold chain logistics will preserve and grow a large market for food manufacturers from all over the world. And beyond that, it would mean billions of Chinese people will have access to safe and nutritious food well into the future," Ms Voelker said.