There is a demand for temperature-controlled product in China. But before fresh food enters the supply chain, there is a pressing need to build a first class “cold chain”.
As its middle class expands and appetites grow, China will source more and more of its fresh food globally in the years ahead, and that offers immense commercial possibilities for producers around the world, as well as for importers and distributors. China’s food industry also wants to beef up its fresh food exports and national distribution, as it attempts to modernize and bolster safety procedures and growing methods.
However, there’s one major element that holds back perishable food-related commerce: China’s cold chain needs serious strengthening.
“The growth in consumption of perishable food in China will only continue if supply chains deliver on quality and safety,” wrote Paul Bosch, food and agribusiness research analyst at Rabobank, in a recent report. “To a large extent this depends on the proper cooling of products during storage handling and transport.”
This doesn’t just mean building new cold storage facilities and adding fleets of refrigerated trucks, although both are desperately needed. Cold storage operations are highly fragmented. Many existing cold storage facilities are substandard and improperly run; some deceive customers as to capabilities, including discreet temperature capabilities. Drivers often lack training in how to properly transport refrigerated goods and many times carry them in vehicles that have seen better days.
““There’s a lack of understanding how to operate what they do have,” said Bosch in an interview. “They don’t use assets the right way.”
Some food is handled more efficiently than others. Logistics providers in China have years of experience in frozen food such as seafood, for example. Local seafood producer and trader Zhangzidao Group, also known as Zoneco, began building up its own cold storage division several years back.
Ice Cream Factor
Ice cream and yogurt have become models of proper distribution as well. “It’s a very advanced and very efficient supply chain,” said Clement Lam, director and manager, Swire Pacific Cold Storage Ltd., which is mounting China’s most ambitious cold storage facilities building program. (See table on page 17).
Fresh produce is proving especially difficult to carry and store properly, Bosch said.
In China, most fresh food is consumed close to where it is produced. The country’s wet markets still provide consumers with the vast bulk of meat, seafood, fruits and vegetables.
Fresh food that is transported longer distances often falls prey to China’s complex distribution system, which is provincial-based. China’s wholesalers have resisted paying for efficient temperature controlled transport and storage.
“How wholesalers manage products is the main reason for substandard cold chain,” said Lam.
As Lam explained, under this system, producers and even importers lose control of their produce and the way it is handled once it leaves the farm, plant or port gate.
The impact of China’s weak cold chain is dramatic. Each year, millions of tons of food spoil in China because of transport-related deficiencies, wasting billions of dollars. Food-related diseases remain a major health hazard in China, striking tens of millions annually.
On the other hand, as they gain buying power, more and more Chinese consumers are demanding fresher and safer food. Dairy and meat consumption continues to grow and consumer tastes broaden. China, for example, is now the world’s biggest consumer of ice cream.
The wealthier consumer is helping to propel state-of-art supermarkets and, increasingly, online fresh food delivery, both reliant on efficient and modern cold storage.
More sophisticated tastes and an emphasis on safety and freshness also work to drive demand for imported food products, which, of course, rely on a well-oiled cold chain as well.
The government is getting into the act and that is critical, Lam and others believe. Under new food safety regulations, promulgated in October last year, product traceability is being strengthened. Food product companies become liable for their products and can be saddled with recalls.
These new regulations mean the role of distributors will likely change, Lam said. While wholesalers will continue to market products, the actual transport and storage will become the domain of the producers and importers.
Fruit & Produce Demand
“They are taking back some control,” said Lam.
There’s evidence some of this is already underway. In May, for example, JD.com, China’s second largest e-tailer, opened a Tianjin cold storage facility in a joint venture with Zhengming Logistics, a China-based 3PL. This follows a $70 million investment last year by JD in online retailer FruitDay, which offers fresh imported produce directly to more than 10 million consumers.
“Chinese consumers associate imported fruit and vegetables with safety and quality, as they do with imported milk,” wrote Gordon Orr, a senior advisor to the consultancy McKinsey China. “This creates a willingness to pay a premium.”
Because of the way Chinese customs categorizes products, it’s tough to accurately break out fresh fruits and vegetables imports. This much is known: It’s really, really small. Last year, China imported about $5 billion worth of fresh fruit and a few million dollars worth of fresh vegetables. Bananas and grapes represent the two single biggest items, although fresh cherries are coming on particularly strong. Recent bilateral trade agreements have opened up categories such as US apples as well. (Fresh dairy imports accounted for another $2 billion, while imported seafood totaled $6.5 billion. Imported fresh meat is now taking off and in May 2016 alone, totaled almost $4 billion, according to customs data.)
The potential for imported fresh produce in China is enormous. A study by China-based M.Z. Marketing Communications provided this comparison: China imported only twice the amount of fresh fruit in 2014 as did Hong Kong, although China’s population is almost 200 times larger than Hong Kong’s.
China hopes to boost fresh produce exports as well. For the 12 months ended May 2016, fruits exports totaled about $5.7 billion, which would represent about a 32% gain over calendar year 2014. Vegetables exports totaled $9.7 billion in 2015, an 18% gain over 2014. For the first five months of this year, Chinese vegetable exports totaled $6.6 billion.
Chinese exporters are pushing in particular among fruits, pears, apples and citrus, and among vegetables, garlic, mushrooms and onions. However, China must overcome a clinging reputation for low grade – and in some cases unsafe—produce. Especially for fruits, export markets have been largely limited to poorer countries in Southeast Asia and Russia and exporters acknowledge they need to push heightened quality to capture a bigger market.
A more efficient, competent and economical cold-storage infrastructure is key. But building one is no easy task.
China’s cold storage capacity at the end of last year stood at 93.6 million cubic meters, according to data presented during an industry conference by Lam. That’s an impressive 55% increase in just two years. It’s eight times the capacity in 2007, according to Rabobank. However, it still represents anywhere from one-third to one-fourth the cold storage capacity of developed countries.
What’s more, many of these facilities are substandard. One particular deficiency is the lack of multi-temperature rooms, said Bosch, where different items are stored in the same temperature. So, for example, fruits and vegetables are thrown into the same room or the facilities aren’t cold enough to handle some frozen food.
Handling is also an issue, as items are often moved around, jeopardizing the integrity of the cold chain.
Need for Wheels: Refrigerated Truck Fleet
Refrigerated trucks have even more ground to make up. While estimates vary, the country’s fleet of reefer trucks stands at most at 90,000, which is less than 20% of developed countries per capita fleet size. Refrigerated trucks in China carry a mere 5% of all fresh produce, 15% of all meat and 23% of all seafood, according to figures presented at last year’s Cool Logistics Asia conference. Even these numbers may be overstating how much food moves effectively through the cold chain.
Add to that some ports-related bottlenecks. For example, reefer plugs at Chinese ports total just over 50,000, according to a presentation at the conference by Tsunemichi Mukai, MOL Liner senior vice president. That’s barely enough to handle current demands, and far below international norms, although Lam said plugs are available when needed in the main ports of Shanghai, Tianjin, Guangzhou and Dalian.
All this portends huge development in the years ahead. A U.S. Department of Commerce study earlier this year predicted that China’s “cold chain capacity may increase by as much as 20 times current capacity over the next decade.”
Rabobank estimates that decade-long investment needs amounts to the $85 billion.
Investments are underway, and while Swire’s building program is the most impressive, it’s by no means alone. Japan’s Denso Corp., for example, in March announced a joint venture with Kingtec Technologies (Heyuan) Co. to develop and sell reefer trucks and related equipment in China.