Starting a business in Asia can be boom or bust. However, there are certain actions companies can put in place in order to get into the biggest consumer market in the world. Mike Wheeler explains.
Asia is home to almost 58 per cent of the world’s population. It is a continent that has a rich culture and history of food and beverages – from the spices of the Indian sub-continent through to the fried delicacies of Vietnam, and the heavily seafood-based Japanese diet. It is also a region that has a growing middle class that has a distrust of locally produced food and beverages. In other words, it offers a lot of opportunities for Australian manufacturers willing to set up a processing plant in the arena.
For a company doing any type of business in Asia, getting it right is important. However, when it comes to food there are a multitude of inputs that have to be taken into consideration. And with good reason.
In 2008, two Chinese citizens were executed, another had a suspended death sentence imposed while others were given lengthy prison terms after infant formula adulterated with melamine was found to be responsible for the deaths of six babies. More than 54,000 infants were hospitalised and there was an overall victim count of about 300,000. The damage to the reputation of the manufacturer was incalculable.
The lure of Asia as a destination to export produce, or build a food or beverage processing factory, cannot be underestimated. China alone had its middle class grow from negligible in 2002 to almost 430 million people by 2018. It is set to be as much as 740 million by the mid-2020s. A recent McKinsey report stated that in the year 2000, up to four per cent of China’s urban population was middle class. By 2012, that figure had reached 68 per cent. Then, if you take the growing popularity of Vietnam as a tourist destination, Cambodia opening up, Indonesia’s huge population, Thailand – which considers itself the kitchen of the world – being intrinsic to the growth of the region, and then throw the Middle East and the Indian sub-continent into the mix – well, who wouldn’t want to get their foot in the door?
But doing business in Asia could prove to be difficult for Australian businesses if approached carelessly. There are business challenges, building standards vary, while bureaucracy-heavy local, state and national governments (depending on where you are) may have restrictive policies. Then there are the potential language barriers.
Regardless, it is lucrative. And, if approached correctly, there are ways food processors and manufacturers can have successful business dealings in the region. Speaking to people who work in the region, a couple of things stick out that need to be taken into consideration – planning and research. They may seem obvious, but too often companies are caught short because they fall into a variety of traps.
A recent joint report from KPMG, the University of Melbourne, AustCham and the Australia China Business Council highlighted some of the concerns Australian enterprises had when doing business in China, which is still the fastest growing market in the region.
The survey pointed out that 16 per cent of the respondents were in the Food and Agribusiness industries. Interestingly, 94 per cent of respondents said their level of investment would either stay the same, moderately increase or significantly increase. Ninety-eight per cent said the increased activity was due to these companies preparing for future growth opportunities or planned operating expenditure.
One person involved in the report was Doug Ferguson, KPMG Australia’s partner in charge of the Asian and international markets. He has some definite ideas on how those in the food and beverage industry should put their initial foot forward when doing business in Asia.
“The main pitfalls are that many companies don’t do enough planning or research to understand the consumer requirements, regulations and competitive landscape in the specific target region,” he said. “Other common mistakes are picking the wrong local partner, or putting the wrong representative in charge of their operation on the ground.”
Another company that has had a lot to do with the Asian market, especially those countries outside of China, is project delivery specialist Wiley. The company’s chief future officer, Brett Wiskar, backs up Ferguson’s assertion, stating that sometimes people are too eager to bring with them their Western way of doing things. That just won’t do in Asia, he said.
“You will find that ideas that fly in Australia, New Zealand, Canada, the States and South Africa are not going to happen in Asia,” he said. “Not only is Asia dramatically different from the West, but it is also dramatically different within the continent, too.
“Something you learn about Japan is totally useless if you apply it to Thailand. As a result, there are many diverse markets, and many different approaches to the product. For example, it is easy for westerners to make broad, sweeping statements about the amount of protein that might get used in an evening meal, but realistically that is going to change on a market-by-market basis within the continent.
“Your marketing has to be savvy, but you also have to understand, that the Asian-buying public has to believe that your product comes through a supply chain that they can validate.
“If you’re manufacturing ‘cold’ produce in Australia and New Zealand, how do you get it through a cold-chain compliant supply chain to the retail environment in Asia where you don’t actually have control of the supply chain? Things like this – that we take for granted in a western context – cannot to be taken for granted when going into that market. Companies going into Asia have to do a lot of research, planning, onsite visits and a lot more validation of their retailers and supply chain if they want to get their products to market.”
When it comes to food itself, especially meats, it is not so much that the diet is different, but the different cuts mean different things to different cultures. Wiskar gives chicken as a prime example.
“If you look at something like chicken breast, it can cost a small fortune in Australia, but chicken wings are a lot cheaper,” he said. “However, if you go to China, chicken wings are twice the price than that of chicken breast because they value the flavour of the chicken meat that is on the bone, despite the fact it is a small amount of meat. If you have a chicken and you are prepared to process it in Australia the price per kilo of chicken breast is high, but if you process it in China, it is the price of the chicken wings that drive the market – any meat off the bone does.”
Perhaps the best news for the food and beverage industry with regard to doing business in Asia comes from Ferguson, who said that not only is the market perceived as lucrative, it actually is. And those within the industry can only see the market growing bigger, and quickly.
“It is growing fast, and is driven by several issues,” said Ferguson. “First are food safety and quality. Then there are consumer demands and the China Australia Free Trade Agreement (ChAFTA). This is still in the early days, but it may prove to be the largest consumer-driven boom in the history of mankind for the food, beverage and agriculture sectors.”
Safety and quality cannot be underestimated, as indicated by the massive queues of Chinese nationals or their proxies in Australian retail outlets for local powdered milk. Wiskar said that while these issues are the drivers, it is the lack of trust in the Asian-produced products that has inflamed local demand.
“The milk powder situation goes back to a trust issue,” he said. “The Chinese have milk powder factories, but consumers know they don’t have the capacity to produce enough milk locally. And if some Chinese manufacturers do have milk in raw form, Asian consumers know the milk didn’t come from cows grazing in the Victorian highlands of Australia with clean air and clean grass and all those sorts of things.”
Which brings up another red flag for any Australian processor or manufacturer thinking of starting up a business on the continent – be careful how you market a product. He said that some foreign enterprises that kowtow to local marketing strategies might shoot themselves in the foot, especially when it comes to food and beverage products.
The Asian diaspora means that their communities are in different countries and they keep in touch with friends and relatives in their homeland – something that needs considering when deciding on what to do.
“We’ve had stories from China about people seeing an Australian ‘brand’,” said. Wiskar “Now, this brand might well have been set up by an Australian manufacturer because they did the research and determined the name of the brand was good, and the colouring and branding was good and all sorts of other things. But the people in China might have relatives in Melbourne and they will ask them if they have heard of the brand. However, because the company manufacturing the product doesn’t use the brand in Australia, the relatives say, ‘No’. This leads to the people in China assuming it is a counterfeit product that is not from Australia and therefore won’t buy it.”
Another outcome from the KMPG survey was that 50 per cent of those in the agribusiness sector thought the business environment in China was ‘somewhat difficult’. There are many reasons for this, said Ferguson. As well as different rules, standards, the language barrier and behaviours, businesses need to take in to account a whole range of other considerations.
“Production costs and especially labour costs are rising fast, while consumer prices for commodity-type foods are under pressure,” he said. “The ability to compete with other foreign companies, let alone local Chinese companies, requires a culture of making sure you are up to date with the latest innovations. Then you have to be quick to make decisions if a pilot scheme seems to be working. Finally, you might have to sustain losses for the first couple of years and then stay the course with constant improvement, while keeping costs lean and efficient.”
And what are both Wiskar and Ferguson’s last pieces of advice for those heading into the region?
“It is an expensive process to go into the Asian market,” said Wiskar. “But it is a lucrative market because it is so large. You wouldn’t want to spend a small fortune going into the market and not spend the extra money to do the research properly to make sure you are entering the market in the right way.”
“There are many positives when going into the Asian and Chinese markets,” said Ferguson. “You may find that trade leads to new capital investment interest in your company. Once the brand becomes recognised it can lead to an enormous multiplier effect on consumer demand, not only in China, but throughout the whole region. This may help those in the industry who are currently overly dependent on the Australian domestic retail cycle.
“I would also advise people to visit China or any other country they are trying to do business in on a regular basis. Also welcome visitors from the region to see your operations in Australia to educate and build relations. Make sure your person on the ground is capable of building trust and credibility with local staff, regulators and consumers.
“Finally, I would suggest that you are seen to be helping the countries’ governments – especially in the case of China – build and strengthen their own domestic food and logistics industries through education and training, as it is most valued and considered very important.”