MARKET WATCH

MARKET WATCH

Milk Rivalry

Foreign brands are gaining a solid foothold in China’s milk powder market, mounting pressure on the local companies.

In the first half of 2011, China’s formula imports rose 32 percent from the previous year to reach nearly 300,000 tons, around 72 percent of last year’s total.

New Zealand’s Natural Dairy, for example, aims to open 3,000 retail stores in 24 provinces and municipalities across the nation this year. In another move, the U.S. giant Abbott Laboratories invested $230 million to build a new plant in Jiaxing, Zhejiang Province, to produce infant formula.

China is now the world’s largest dairy market. The U.S. Department of Agriculture said China’s whole milk powder consumption had reached 1.337 million tons in 2010.

“Before the scandal in 2008, Chinese brands controlled 60 percent of the market, while 40 percent went to foreign companies,” said Wang Dingmian, Chairman of Guangzhou Dairy Association. “But now they have switched positions.”

Zhang Weiying, Secretary General of Dairy Association of Heilongjiang Province, said at least one third of formula producers in the province are struggling with mounting inventories due to sluggish sales.

“It will take time for domestic businesses to recover their lost ground,” said Zhou Siran, a researcher with the Shenzhen-based think-tank CIConsulting. “The key is to improve product quality, rebuild consumer confidence and avoid vicious price wars.”

Iron Ore Campaign

China is trying desperately to break its dependence on iron ore imports.

Miners across the country are stepping up capacities to boost output. In the first half of 2011, output of raw iron ore surged 22 percent to more than 570 million tons, according to data from the National Bureau of Statistics.

The goal is to lift the output to 1.5 billion tons in 2015 to meet 40 percent of the country’s total needs, said Yang Jiasheng, Secretary General of Metallurgical Mines’Association of China.

From January to July, China imported 390 million tons of iron ore, up 7.9 percent year on year. The price averaged $162.76 a ton, jumping 37.8 percent. The acute cost inflation is hurting the profitability of China’s steel industry. The country’s 77 large and medium-sized steelmakers reported a profitto-sales ratio of 3.08 percent in the first seven months, compared with 6.11 percent of the average industrial enterprises.

“But increasing output cannot be a panacea for ails of the industry due to a lack of quality mines,” said Lu Yeshou. “It is still necessary to improve mining technologies and lower the costs of exploration.”

While Chinese domestic iron ore production has been stimulated in the last year by strong demand growth, high production costs and low quality reserves will drive up import demands, said a report by Wood Mackenie, a global energy and mining consulting firm.

Expanding Globally

As they establish themselves abroad, Chinese firms are stepping onto the world stage in greater numbers.

In August, the country’s outbound direct investment (ODI) in non-financial sectors soared 33.3 percent year on year to reach $6.57 billion, according to data from the Ministry of Commerce (MOFCOM). From January to August, the non-financial ODI totaled $34.2 billion, up 6.9 percent.

The data underscores China’s growing interest in overseas businesses despite the ongoing European debt crisis. In 2010, China surpassed Japan and the UK for the first time to become the fifth largest source of ODI in the world.

Wang Shengwen, Deputy Director of the Department of Outward Investment and Economic Cooperation of the MOFCOM, expected this year’s ODI to grow at a double-digit rate.

“In a bid to lift their economies, developed nations are taking greater efforts to develop emerging industries like renewable energies. Meanwhile, developing countries continue with a spending spree on infrastructure construction,” he said. “All those developments have provided investment op-portunities for Chinese enterprises.”

“Moreover, Chinese investors have become more experienced and sophisticated with expansions abroad,” he added.

Logistics Conundrum

China’s logistics industry is picking up momentum, though challenges remain.

In the first eight months of 2011, the sector’s output value totaled 1.97 trillion yuan ($307.8 billion), up 14.2 percent from a year ago, said the China Federation of Logistics & Purchasing (CFLP). The country’s expenditures on logistical services amounted to 5.05 trillion yuan ($788.3 billion), jumping 18.7 percent.

From warehouse management to home delivery, the logistics industry provides efficient connections between each link of the industrial supply chain. The sector accounted for 7 percent of China’s GDP in 2010 and 16 percent of the service industry.

“But the industry still reels from weak profitability due to cost inflation and a tightening monetary environment,” said the CFLP.

Profits of core businesses of key logistics companies grew 11.7 percent year on year in the first eight months, 16.6 percentage points lower than that of industrial enterprises with annual revenue of more than 20 million yuan ($3.125 million).

High toll road charges, rising labor costs and the congestion problem have forced up logistics expenses in the country. In the first half of this year, logistics costs were around 18 percent of China’s GDP, compared with 8-10 percent in developed nations.

But government efforts to invigorate the industry are already underway. In August, the country announced a series of measures, including tax waivers and favorable land policies for logistics firms. The government also vowed to reduce road tolls and encourage mergers and acquisitions to boost consolidation of the industry.

Challenging Outlook

China is losing its competitive edge as the world’s lowest-cost manufacturing base, said the international accounting firm KPMG, in a recent report.

Indonesia and Bangladesh are benefiting most as rising costs in China force firms to switch production. While China is still the major supplier for consumer electronics and furniture, apparel and footwear production has shifted to countries across Asia.

Indonesia posted a 42-percent jump in footwear exports to $2.1 billion in 2010 while Bangladesh’s textile exports rose 43 percent to more than $18 billion in the 12 months ending in July 2011.

The report was based on a survey of more than 12 major multinational companies including Ikea, B&Q-owner Kingfisher and Hong Kong’s Li & Fung, which sources goods for big-name clients including Wal-Mart.

Minimum wage levels in China are now four times greater than other places in south and southeast Asia. In addition, an aging population and labor shortages in some regions in China are also driving companies to source products from other countries in the region, said KPMG.

Still, China’s infrastructure, its complete supply chain, its speed to market and a growing presence in global shipping all mean China will continue to be a preferred source of goods supplies. Moreover, the country remains competitive for some goods due to its investment, infrastructure and workforce skills, allowing productivity gains to offset higher labor costs.

Online Payment

Australia-based budget airline Jetstar announced on September 22 that it has cooperated with Alipay, an online payment platform of China, to allow Alipay’s 600 million registered users to pay for airfares directly from their Alipay accounts.

Third-party payment channel Alipay is the preferred online payment option for Chinese consumers.

Jetstar is expanding its Chinese network to nine Chinese destinations, including a planned service linking Beijing, Singapore and Melbourne.

“Jetstar’s cooperation with Alipay will give our growing number of Chinese customers hassle free access to our all-day low fares,” said David Koczkar, Jetstar Chief Group Commercial Officer.

a deadly blow from a melamine-tainted baby formula scandal in 2008, which undermined consumer confidence for domestic dairy brands, and offered a chance for foreign firms to expand.