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Nestle and Danone Flee Shanghai
Summary:The two food giants are both shutting down their factories in Shanghai, where land is scarce and costs have risen, but is there a broader problem with their Chinese operations?


By Li Juan (
李娟)
Corporation, page 31
Issue No. 548, Dec 12, 2011
Translated by Zhu Na
Original Article:
[Chinese]

 
Danone has just closed its Shanghai yogurt plant, Nestle says it’s going to shut down its local ice cream factory and Pepsico has sold off 24 bottling plants in China – what’s forcing foreign food makers out?

Danone
The French food group says it wants to concentrate on developing its Bio dairy brand, where margins are high, but after the failure of its Chinese joint ventures, the company is operating alone, and its sales and marketing channels are far behind the competition.

In the Guangzhou yogurt market for example, Danone has a 12 percent share but has to ship in products from faraway factories in Shanghai or Beijing. It can take almost a week between the factory and the supermarket, which is half a yogurt’s typical shelf-life.


Nestle
Just two days after Danone ceased production in Shanghai, Nestle, its larger rival, confirmed that it would stop selling ice cream in eastern China and shut down its Shanghai factory. The company didn’t give a specific reason for the closure, but industry analyst Liang Mingxuan (梁铭宣) from CI Consulting said the Swiss firm was struggling to compete with local peers.

“In the past few years both Nestle’s ice cream business and Danone’s yogurt business have been squeezed by dairy giants Yili (伊利) and Mengnui (蒙牛),” he said.


The Chinese spent 31 billion yuan on ice cream in 2011, according to consultancy Euromonitor, but Nestle’s share of the market was around 3 percent, less than half of Unilever’s and far behind Yili and Mengniu, which have 17 percent and 15 percent respectively.


With Nestle’s market share flat, the company has struggled against to match its rivals’ economies of scale, a problem aggravated by the location of its factories – one up north in Tianjin and the other down south in Guangzhou.


Moving Out
It’s significant that, when they chose to make cutbacks in China, Nestle and Danone both singled out their Shanghai operations.

“There’s almost no suitable land”, said Gao Jianfeng (高剑锋) a management consultant with BOGO Consultants, who recently advised a foreign client looking for a location to build a factory near Shanghai.

“A lot of the land seems like wasteland, but, when you make enquires, you find that it all belongs to someone,” he added, noting that the owners of the leaseholds [Note – it is not possible for businesses to buy land in China; local governments only sell long-term leases] are often businesses from Zhejiang, Jiangsu and the Yangtze River Delta.    

Gao says that the lack of land is the biggest problem for businesses in the area and that those who are determined to operate there must either settle for one of the tiny plots available or pay for land from another business that has already owns the leasehold.

Another problem for businesses eyeing up Shanghai is the operating costs, with labor, logistics and raw materials coming at a premium over the Pearl River Delta, central and western regions.

“The lack of land makes it hard for Nestle and Danone to build new plants and expand their production capacity,” said Gao, adding that their predicament in Shanghai isn’t helped by the taxation system.

Many coastal cities, including Shanghai, had previously drawn foreign manufacturers with tax breaks, but changes to the taxation code have put an end to these incentives.

“Shanghai is focused on developing the service, high-tech and advanced manufacturing industries,” said Chen Yao, of the Chinese Academy of Social Sciences, who believes that the government’s fiscal policies will reflect these new priorities, marginalizing the city’s food factories and prompting the owners to shift inland.

“Shanghai is no longer suitable for traditional manufacturing,” said Gao, the management consultant.

But that point of view isn’t universally accepted, and market analyst Li Baojun (李保均), says that Shanghai factory owners have another option aside from moving inland. Li, whose company is called Society Insights & Decision (苏赛特), says that some firms are keeping their higher-cost operations in the east, but upgrading the products produced in those plants.

As an example, he cites Nestle, which may have shed its ice cream business in Shanghai, but has just bought 60 percent of Xiamen-based food company Yinlu (银鹭), and 60 percent of sweet maker Hsu Fu Chi (徐福记).

As well as their moves inland and/or upmarket, foreign food makers are paying much closer attention to their supply chains in the light of recent food scandals in China

“In the past, it was enough to have a lead in production and sales channels,” said one investor. “Now they’re also very concerned about whether a company has its own sourcing and production base […] and whether it has a system to trace any quality problems.”

 

This translation was edited by Will Bland.

 

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