China FTA: Not Right, Not Yet

On the surface, the China/Australia Free Trade Agreement (FTA) might seem like a holy grail for Australian producers trying to find an avenue into China.

Overall, however, the FTA has the most immediate impact on Australian commodities such as dairy, beef, wine, seafood and processed foods. It is a bureaucratic enabler that will take several years to a decade for impact to be felt. For example, it’s going to take up to 11 years to eliminate dairy tariffs alone. That’s a long time to wait for a rapidly changing market like China.

For small- and medium-size enterprises, especially those specialising in food and beverage, this means the trickle down of FTA agreements may take an even longer time to realise. In fact, the agreement is sparse on details about how it can specifically help SMEs win or where the opportunity is for food and beverage manufacturers. Instead of focusing so much on the FTA, SMEs could be better poised to take advantage of China’s growing middle class through two distinct avenues already in place.

Avenue #1: China's Easing Operational Landscape

One of the most important things to consider is that the operational landscape in China is getting easier to work within and navigate, even compared to a couple of years ago. Just take a look at the impact companies like Alibaba are having on warehousing and logistics.

It’s now possible to send something from Shanghai to Tibet in a day, drop ship globally in a week or less and conduct business online in seconds. In short, you no longer need to have major in-house resources like the major multinationals to “make it” in China.

Engaging partners and talent – Once the bane of anybody looking to do business in China, local partner and talent quality is improving daily. While there are still thousands of potential suppliers, legal systems for the protection of foreign business are much stronger than only 5 years ago.

Today, the World Bank ranks China 15th globally in terms of contract enforcement. Compare that to Mexico at 81 and India at 182.

Talent is also easier to come by. Foreign-educated Chinese are returning to the mainland in large waves. These returnees (‘hui gui’) have strong overseas experience, with foreign language skills to match.

Tapping into these partners and the available talent pool is now easier as well, especially with the widespread use of social media and the Internet.

I recently toured an Australian client around Shanghai and introduced them to WeChat. This mobile phone app has largely replaced traditional phone calls and other social mediums, including Facebook and Weibo, as a means of real-time communication and networking. They were amazed with how easy, and extensive, the app was to use and have now adopted as a means of connecting better with what’s going on in China. Now back in Australia they can communicate with us and their other China-based suppliers for free.

Engaging Chinese consumers – The Internet has revolutionised the way Chinese consume and how brands interact with these consumers. In many respects it has democratised opportunities between larger organisations and SMEs. Still, brands have to stay fresh and new, not simply relying on their historical ties to the market.

According to Victoria Wicker, Category Planning Manager for Ole Supermarkets in China, “…the winning recipe is a combination of strong concept, added to a real story to tell to the consumer, and very visual and attractive packaging.” Larger companies, including Coca Cola, are struggling in the market because they cannot innovate fast enough to match changing consumer demands. Smaller firms have a “…very strong advantage because it means they adapt, or localise, and this acts as a real quality trigger in the consumer’s mind.”

With the rise of social networking apps like WeChat and Weibo, brand owners and consumers can directly communicate. Wicker notes that consumers “…love posting pictures of [products] on social media, using them as…lifestyle accessories.” WeChat has also even recently launched a payment system where users can buy products directly on the app. Adaptability and nimbleness is becoming critical to succeed in China.

The greatest impact of the internet is being felt in China through the country’s massive E-commerce market. Single’s Day, China’s version of Cyber Monday, sales figures for 2014 topped US$9 billion. U.S.-based Costco Foods raked in US$3.5 million, shocking management and “…totally transform[ing] [their] annual business plan.”

Websites are also experimenting with innovative ways to ease entry into China. Kuaijingtong, a government-sponsored e-commerce site, allows for online sales and shipment without undergoing Chinese customs. E-commerce giant Alibaba has recently penned a deal with Australia Post to ease customs processes, shipment and delivery between both countries. A mini-FTA of its own, this deal makes trade between Chinese and Australian SMEs an easy reality.

Even with this massive potential, PriceWaterhouse Coopers estimates that only 9 percent of Australian businesses are currently operating in Asia, with 65 percent of business having no intention of changing their stance towards Asia over the next 3 years. The Australian Trade Commission qualifies these numbers further in estimating there are only 50 Australian brands effectively running online stores in China. Clearly, there is a lot of room left for the 1,000 plus businesses with a connection to the Chinese market.

Avenue #2: Informed Value-Added Food Products

Simply setting up an E-commerce site without further thought is not enough to spell success. Product adaptation and focused promotional efforts trump simple product placement. Food and beverage companies have finally embraced this need to localise when entering China.

Ten years ago, the market for western products in China was such that any new addition would create a massive buzz among consumers. Today the market is so saturated with western, and comparable Chinese, products that making waves takes local consumer insight, strategy and adjustment. I like to call it making informed value-added products.

Time and time again, companies entering China make the fatal mistake of assuming Chinese consumers will simply buy their product because it is western. They plug and play instead of adapt. Often, this doesn’t work out as planned. Tesco and Carrefour are both in talks to sell their businesses to Chinese partners after many years in the market. Companies like Barbie, Home Depot and Best Buy have failed in the market completely.

Sure, statistically speaking you might have a percentage of the population purchase your goods. Even if your product only reaches 5 percent of China’s 300 million middle-class consumers, that’s 15 million people or about three-quarters of the Australian population. This may work initially, but making informed value-added changes to a product and its messaging increase its likelihood of long-term success. These changes aren’t always revolutionary, but they do always take into account the intersection between macro-trends and local insights.

In 2011 the Quaker (oatmeal) brand ranked third in China’s breakfast cereal market, with revenue rising 50 percent from the previous year. Though the brand had been in China for 20 years, its true success happened only after a relaunch “…incorporating ingredients that are known to have therapeutic function.”

Through its research center in Shanghai, Quaker set out to bring traditional Chinese medicine to the breakfast table. The result was a diversified offering of cereals, including oatmeal with functional ingredients like red dates for a healthy Qi, wolfberry and white fungus for the lungs and lotus root starch to match mouth feel preferences of Chinese consumers.

Torsten Stocker, head of Asian Consumer Goods at consulting firm Monitor Group, said, “Quaker has done a good job in extending the appeal of its existing range…it has a brand image associated with health.” He adds “…consumers like the fact that it has adapted to local palates and habits.”

Ferrero Rocher is another great example of adapting to the Chinese market and succeeding. A major China importer remarked, “…the key thing I expect from a brand is flexibility…Ferrero, without modifying their identity as a foreign delicacy, showed an excellent understanding of Chinese consumers.” Instead of replicating large packages of chocolates, a strategy the company uses in western markets, Ferrero in China made small packets perfect for festivals and weddings. “Such success would not have been possible without a real investment locally.”

Australia’s largest dairy foods company, Murray Goulburn, has also found success in China after adapting to local tastes.

Recently Devondale long-life milk was re-launched as the company sought to gain market share by addressing the Chinese need for safe, reliable foods. The brand’s packaging now includes bilingual translations, clear messaging about country of origin and the farm’s cooperative story, as well as family and gift packs.

Managing director Gary Helou talked about the new packaging, saying it is “…tailored to the local Chinese market based on extensive local customer insights.” The move seems sensible given Devondale exports accounted for 51 percent of revenue last year, with more than AUS$200 million coming from China and Hong Kong.

On the FTA itself, Helou feels it will “…improve the competitive positioning of Australian dairy foods into China, but dairy farmers must have ownership of the supply chain…otherwise value will be lost to others.”

Above: Devondale's long-life milk re-launch

Overall, the FTA certainly marks a time of increased cooperation between Chinese and Australian businesses. While it’s exciting to know that two of Asia’s largest markets are collaborating, it’s also important to remember the ink on the agreement has yet to dry.

The FTA is not the only motivator on the block. The current operational landscape, including access to partners and consumers, and use of informed value-added production can all help facilitate access, today, to what will soon be the world’s largest economy.

Andrew Kuiler (andrew@thesilkinitiative.com) is a native Australian and founder of Shanghai-based consultancy The Silk Initiative.
The Silk Initiative’s Olivier Stauff and Geng Huang also contributed to this story.

www.thesilkinitiative.com