THIS REPORT CONTAINS ASSESSMENTS OF COMMODITY AND TRADE ISSUES MADE

BY USDA STAFF AND NOT NECESSARILY STATEMENTS OF OFFICIAL U.S.

GOVERNMENT POLICY

Required Report - public distribution

Date: 4/1/2019
GAIN Report Number: GAIN0079

China - Peoples Republic of

Food Processing Ingredients

Industry Matures as it Caters To Demand for Natural,

Healthier, and More Convenient Processed Foods

Approved By:
Mark Ford
Prepared By:
FAS China Staff

Report Highlights:
China’s food processing industry is maturing, and growth is moderating. Consumers have becoming
increasingly interested in eating more natural and healthier foods, while valuing convenience and
attractive packaging. Food processing still accounts for 60 percent of the sector, however the fastest
growth is now in the beverage sector, where the trend for natural, healthy, and convenient ready-to-
drink smoothies, yogurts, and juices represents China’s transition from “eating full” to “eating
well.” Exporters are encouraged to consider China not as a singular market, but a country with
regional differences and culinary traditions affecting how their product will be received. U.S. fruit
ingredients (processed, and some fresh), dairy, pork, and some specialty grains and legumes have
the best food processing sales potential.

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Food Processing Fact Sheet: Processing Channels (USD billion) 20171
Food Industry Output $1,470
China Food Exports2 $62.6
Food Imports $54.3
Executive Summary Inventory $20.1
China’s food processing industry grew by 6.3
percent in 2017, however growth is expected to Quick Takeaways for Exporters
slow in 2018 and beyond due to industry - New market entrants should consider
consolidation, a decelerating economy, and attending trade shows, especially Food
global economic uncertainty. The industry has Ingredients China (FIC), held each March.
split its focus by continuing to provide - In 2018, China reorganized its customs and
traditional processed foods to mostly rural and regulatory agencies - The FAIRS Narrative
older consumers, while innovating exciting and Certificate reports outline how this
snacks and beverages using higher quality reorganization might affect exporters.
ingredients for younger affluent urban - The beverage manufacturing and food
consumers. manufacturing sectors are growing the
quickest – as they cater to mostly younger,
Industry Overview urban, affluent consumers with higher-end
“healthy and fresh” processed foods.

Strengths/Weaknesses/Opportunities/Threats
(SWOT) Analysis
Strengths Weaknesses
U.S. food ingredients Increased tariffs on
are regarded as high U.S. products affect
quality, consistent, and competitiveness with
safe. other exporting
countries.
Higher quality
Beverage manufacturing profit increased 17.5 ingredients are
percent, while food manufacturing grew at a increasingly sought
more modest 6.7 percent, reflecting urban after by consumers.
middle class consumer interest in higher quality Opportunities Threats
snacks and beverages. Younger generations A slowing economy,
are more accustomed and more price
Production, Imports, and Exports to eating processed sensitivity.
China’s food processing industry is largely foods.
dependent upon sourcing domestic food Increasingly complex
Streamlined imports certification, testing,
ingredients for domestic consumption. A
directly to food and
relatively small industry segment relies on processors and retail facility/production
imported food ingredients. Food exports account chains (e.g., private registration
for only 4 percent of industry output. labeled products) requirements for
imports.

1
Source: China Statistical Yearbook 2018.
2
Includes food and live animal products

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SECTION I: MARKET SUMMARY

China’s food processing industry continued to grow in 2017. Revenue climbed to $1.47 trillion,
an increase of 6.3 percent compared with the previous year. Profit reached $118 billion, an
increase of 6.3 percent compared to 20163. Despite the modest growth in 2017, the food
processing industry continues to slow down due to industry maturation, consolidation, and lower
fixed asset investments.

In 2018, industry investment and growth was expected to further moderate, given a combination
of macroeconomic factors, including global economic uncertainty, U.S.-China trade friction, and
economic indicators suggesting a broad economic slowdown in China. Food processing industry
publications have debated the effects that slower macroeconomic growth would have on Chinese
consumers and the food processing industry. There is no clear consensus on how a slowdown
(or even if one is occurring) will affect domestic consumption. In March 2019, the Chinese
government lowered its gross domestic production growth target to “6 to 6.5 percent,” a decrease
from its 2018 target of “around 6.5 percent.” Many industry insiders have argued that there is
ample evidence of food consumption downgrading, such as reports that instant noodle
consumption surged in 2018, after years of flat sales.

Nevertheless, China continues its transition from “eating full” to “eating well.” China’s fixed
assets investment growth rate, an indicator measuring food manufacturing capacity growth,
dropped from 37.5 percent in 2011 to 1.2 percent in 2017. This is a proxy measure for new food
processing investments, suggesting that processors have the necessary equipment, facilities, and
technology in place, and that growth will now come from food processing innovation and
consumption upgrading, not processing capacity expansion.

The shift to “eating well” is especially true for affluent middle class consumers, who are
choosing snacks, condiments, beverages, and other processed foods perceived to be healthier
than traditional options. The food processing and retail sectors must balance mostly rural and
older consumer demand for traditional snacks, instant noodles, and beverages, and the more
affluent urban younger consumers demand for new products, imported indredients, and healthier
snacks and beverages.

Table 1. Advantages and Challenges for U.S. Food Processing Ingredients

Advantages Challenges
Fast paced and increasingly urbanized A slowing economy coupled with increased
lifestyles are driving consumers to eat more tariffs on U.S. imports, make U.S. food
processed foods. ingredients comparatively expensive.
Younger generations are more accustomed to Much of the food processing sector is still
eating processed foods. dominated by antiquated state owned
enterprises.

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China Statistical Year Book 2019.

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U.S. food ingredients are commonly regarded U.S. products must increasingly abide by
as high quality, consistent, and safe. complex certification, testing, and
facility/production registration requirements.
New technologies, such as automation and Consumers appear to be becoming more price
packaging, are rapidly improving. sensitive, and ingredient suppliers are hesitant
to pass price increases on to consumers.

SECTION II: ROAD MAP FOR MARKET ENTRY

Entry strategy
New food ingredient exporters should begin their inquiry by reading two important annual
USDA FAS reports. The China Exporter Guide will help exporters better understand how their
food ingredient products fit into the larger China market, and will provide readers with key
market access information, market entry strategies, import procedures, and consumer demand
trends. The Food and Agricultural Import Regulations and Standards (FAIRS) Narrative report
for China provides comprehensive information on product specific important regulations and
standards, and also includes information related to product testing, packaging, and production
facility registration requirements. The FAIRS Certificate report provides a brief but complete
outline of the import certificates and other documents needed to import U.S. products into China.
It is also vitally important to bear in mind that while China is one country, is still very diverse in
regards to geographical regions, dietary preferences, urban-rural consumer class dynamics, local
government incentives, cold chain/logistics capabilities, and many other factors. Exporters are
encouraged to first target one city/region in which to introduce their products to
distributors/importers before considering an all-China export plan.

To enter the market, U.S. exporters have several options:

 Attend trade shows in China to gain market information, gauge interest in your
product(s), observe competitors, and meet potential Chinese partners. Depending on the
product, we recommend several high-quality exhibitions. Food Ingredients China (FIC)
is perhaps the best targeted show for food ingredient exporters. Other shows include Food
& Hotel China (FHC), the China Fisheries & Seafood Expo, SIAL China, the China
International Meat Industry Expo, Bakery China Show, and China Food & Drinks Expo
(also known as Tang Jiu Hui). Exporters should also consider attending major Hong
Kong based trade shows, all of which attract Chinese importers and distributors, such as
Asia Fruit Logistica and HOFEX.
 Participate in State Regional Trade Group (SRTG) activities, such as trade missions to
China. Trade missions typically include site tours of processing facilities, one-on-one
meetings with importers, exhibiting under a unified USA pavilion at trade shows, and
attending exporter training and education events.
 Work with state departments of agriculture and/or state trade promotion offices, and
participate in trade missions and activities similar to those organized by SRTGs.

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  Connect with non-profit food and agricultural trade associations (i.e., FAS Cooperators),
who receive USDA funds each year to provide exporter assistance, sponsor trade
missions, and help producers identify new market opportunities. Many Cooperators have
representatives in China who can provide introductions to importers, food processors, and
distributors.
 Communicate directly with Chinese food and agricultural industry associations. New
market entrants are advised against using this option first, since Chinese industry
associations strongly rely on well-established professional connections when providing
information or introductions. However, exporters who have these connections, or those
employing Chinese staff, may be able to directly leverage contacts in these associations
to meet importers, distributors, and food processors.
 Contact USDA FAS Agricultural Trade Offices (ATO) in China (Beijing, Shanghai,
Guangzhou, Chengdu and Shenyang), for information and trade facilitation assistance.
These ATOs are strategically located in the five main commercial regions, and they can
provide tailored information about their respective regions. Exporters are may learn more
about ATO services by visiting www.usdachina.com.

Import Procedures
Generally, U.S. agricultural products enter China following the standard export-import model of
using private customs agents to clear products at the ports, and distributors to move products to
end-users. Formal import procedures as outlined by the General Administration of Customs of
China (GACC) and other relevant food and agricultural regulatory authorities can differ from
how private customs agents clear products through ports of entry. In the past decade, China has
sought to improve public confidence in its ability to provide safe food to consumers, and thus has
rather quickly passed numerous regulations, standards, certifications, and permits pertaining to
food and agricultural imports. These regulations can be vague and unclear to exporters, and even
to many Chinese port authorities. Even though port authorities are now under more central
GACC control than in previous years, local port authorities may interpret import regulations
differently. The FAIRS Narrative and Certificate reports outline official procedures, however
exporters are encouraged to discuss specific questions with experienced importers who can
provide on-the-ground advice.

Distribution Channels and Market Structure

China is generally divided into five regions:
 South China, which includes the cities of Guangzhou, Shenzhen, Xiamen, Fuzhou, and
Nanning
 East China, which includes Shanghai, Ningbo, Hangzhou, Hefei, Nanjing, and Wuhan
 North China, which includes Beijing, Tianjin, Hohhot, Jinan, Qingdao, Lanzhou, and
Zhengzhou
 Northeast China, which includes Dalian, Harbin, and Shenyang
 Southwest China, which includes Chengdu, Chongqing, Kunming, Guiyang, and Lhasa

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The main imported food ingredient distribution channels begin within the three major population
centers and port cities of East China, South China, and North China. These three regions include
at least one large first-tier city, port of entry facilities along the coast, and distribution channels,
which generally lead westward into smaller second- and third-tier cities. While these three
regions represent the traditional market entry channels for imported food ingredients, cities in
Southwest China have some of the highest economic growth rates in the country, and the
Northeast has a strong manufacturing and grain production base, which may be of interest to
some food ingredient exporters.

The traditional trade pattern is for U.S. exporters to sell directly to Chinese trading or
distribution companies (Figure 1, in blue). These trading companies typically have the scale, and
the capital, to purchase large quantities of products and resell them to food processors and other
third-party food manufacturers. Because of the immense size of China’s market, these large
trading companies in first-tier cities usually resell products to increasingly smaller regional food
ingredient distributors, who then sell directly to local food processing facilities.

As China’s economy continues to grow and modernize, there has been some disruption to this
model. With better technology, market consolidation, in-house trading companies, and consumer
demand for fresh and authentic imports, many Chinese food companies, restaurant and hotel
chains, grocery stores, and e-commerce companies are seeking to reduce the role of the trading
company (i.e., “middleman”) in favor of a direct import model linking exporters with end-users
(Figure 1, in green). This trend is already being seen in consumer oriented products, such as live
seafood, wine, and fresh fruit, however large retail (including e-commerce) companies are
increasing interested in directly sourcing food ingredients from exporters for their private label
processed food offerings.

U.S. exporters may consider establishing sales offices, or contracting local sales staff, to market
their products directly to large processors, manufacturers, and e-commerce platforms (Figure 1,
in red). The advantage of this is that the U.S. exporters could enjoy higher profit margins by
selling products directly to end users and exert tighter control over the end market. Chinese
buyers could also pay less money for the same products than from upstream local distributors.
This pattern normally demands more upfront monetary and time investments.

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Figure 1. Imported Food Ingredient Distribution Channels
U.S. Exporters and Producers

Traders, large distributors,

wholesalers Local Import
Sales Agents
Reps

Regional distributors

Food Processors/Retailers/E-commerce Companies

Note: Width of arrows denotes approximate volume of trade.

Major Sectors in the Food Processing Industry

The food industry is categorized into three main sectors, which include food processing, food
manufacturing, and beverage manufacturing. Within each sector, the major segments as shown
in Table 2.

Table 2. Food Processing Industry Sector and Segments

Sector Segment
rice milling, flour milling, oil refining, sugar refining, slaughtering, salt
Food processing
processing, aquatic products, etc.
packaged (snack) foods, pastries and confections, dairy products,
Food manufacturing canned foods, fermented products, frozen foods, condiments, flavorings,
etc.
Beverage alcoholic beverages, soft drinks and tea, fruit juices and purees, dairy
manufacturing ingredients, etc.

In 2017, the beverage manufacturing sector expanded considerably more than the food
processing and manufacturing sectors, although the beverage sector accounts for 17 percent of
the industry’s revenue (Table 3). Profit growth in beverage manufacturing is more than double
the other sectors, which can be explained by the favorable margins involved in producing higher
quality dairy, coffee, fruit/vegetable juice, and “healthy lifestyle” drinks marketed to affluent
urban consumers. Food processing profit growth lagged behind the food manufacturing and
beverage sectors, however it still accounts for 60 percent of the industry’s revenue.

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Table 3. Summary of Food Processing Industry Growth in 2017
Industrial added
Revenue ($100 Number of Profit growth
Food Sector value growth
million ) businesses* (%)**
(%)**
Food processing 8,860 24,661 6.5 4.5
Food manufacturing 3,275 8,862 6.4 6.7
beverage
2,529 6,714 8.1 17.5
manufacturing
*: Statistics are only available for firms with annual sales revenue in excess of RMB 20 million (USD$1 =
RMB6.76) **: Growth rate is made on year-on-year basis. Sources: China Statistical Yearbook 2018; China Food
Industry Association’s internal Food Industry Summary report; China Food Industry Association’s Food industry
Development Status in the First half of 2018 internal report.

Sector Trends
China continues to transition from a society that values “eating full” to one that emphasizes
“eating well,” especially among the growing urban middle class. This transition has, and it is
expected to continue to have, profound effects on the three major food processing sectors. More
traditional industry segments, especially those within the food processing and manufacturing
sectors, are expected to consolidate, and growth may also slow relative to fresh and minimally
processed foods (Table 4). The retail (to include e-commerce) and HRI sectors are expanding
their ready-to-eat options, to include “fresh and heathy,” and diet-minded foods for urban
affluent consumers.

Table 4. Profit Growth of Food Sectors Jan to May, 2018

Sector Growth Rate
Formula milk 111%
Fruit and vegetable beverages 79%
Carbonated beverages 54%
Sugar processing -45%
Alcohol -55%
Other dairy products -60%
Source: China Food Industry Association’s Food industry Development Status in the First half of 2018 internal
report.

SECTION III. COMPETITION

Since 2018, trade friction between the United States and China affected the competiveness of
many U.S. products. Furthermore, several key food ingredient exporting countries (e.g.,
Australia and New Zealand) have signed free trade agreements with China, further eroding U.S.
competitiveness. Despite increased competition and higher tariffs, many U.S. food processing
ingredients remain in demand, although opportunities may not be immediately apparent. For
example with respect to dairy ingredients, the United States exports skim milk protein, and high
and low protein whey concentrates. China tariffs on U.S. skim milk protein is approximately 30
percent and low protein whey concentrate is assessed duties of at least 25 percent. The

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competitiveness of these two U.S. products decreased considerably, since traders can now source
comparable products from New Zealand, Australia, Poland, and Russia. However traders report
that U.S. high protein whey concentrate, which are assessed duties of five to 10 percent, is still
very much in demand by food processors. Fresh and dried fruit for processing is another case.
While U.S. fresh fruit exports have decreased due to higher tariffs, some products that processors
are unable to source elsewhere are still competitive, for example frozen/dried blueberries, dried
cranberries, and tart cherries.

SECTION IV. BEST PRODUCT PROSPECTS

Products Present in the Market which have Good Sales Potential

Lentils and other Specialty Crops. Since gaining market access in 2016, U.S. lentils have
expanded from zero to 10,599 metric tons (MT) in three years, accounting for 80 percent of
China’s lentil imports. Lentils are a good example of products that China used to produce in
abundance, but due to increased feed and forage crop acreage, they are no longer produced to the
same degree in favor of imports.

Dairy Ingredients. Whey, skim milk powder, cheese, and other dairy ingredients are in high
demand, since China is not able to produce them in sufficient quantities and quality. U.S. high
protein whey concentrate, which is used to fortify beverages and yogurts, are especially in
demand due to lower assessed tariffs. The competitiveness of most other U.S. dairy ingredients is
currently restricted by high tariffs.

Fruit Ingredients. Frozen/dried fruits, such as blueberries, cranberries, and tart cherries have
great potential due to the specific attributes of U.S. varieties. While China can source fresh
blueberries from Chile and Peru, U.S. blueberries have a higher sugar content and softer skin
which are sought after by food processors, especially for use in beverages and yogurts.

Pork. African Swine Flu has taken a toll on China’s swine and pork production. To cover an
estimated domestic supply gap and ease consumer’s concerns, China is expected to increase pork
imports by up to 33 percent, or 2 million MT, in 2019. U.S. pork products face Chinese tariffs of
up to 62 percent. If tariffs are lowered, U.S. producers could significantly increase exports.

Products Not Present in Market but which have Good Sales Potential
Fruit Ingredients. Table 4 demonstrates the increasing profitability of the beverage sector in
China. As a result, fruit ingredients are increasingly sought after by beverage manufacturers for
coloring and flavoring. U.S. fruit ingredients, such as raspberry, peach, and blueberry do not
have market access for fresh products, however many fruit ingredients can be imported frozen,
powdered, or in their dried whole form.

Specialty Crops. Traditionally, China produced many specialty grain and legumes, but due to
structural changes favoring planting feed and forage crops, China’s strength in specialty crops
has reduced significantly. If U.S. products can be granted access, these niche crops, such as
garbanzo and millet, may find surprising demand by food processors unable to source better
quality imports elsewhere.

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Products Not Present Because They Face Significant Barriers
Poultry. Imported poultry products are in high demand, particularly products like chicken feet
that have little commercial value in the United States. U.S. imports are excluded by China’s
avian influenza import restrictions.

Non-GMO (Food-Grade) Soybeans. Although U.S. non-GMO (food grade) soybeans can be
imported, they are traded in limited amounts due to China’s zero tolerance policy for the
presence of biotech in a food-grade soybean shipment. Traders and processors are hesitant to
import U.S. non-GMO food-grade soybeans for fear that an entire shipment will be denied entry
if a trace amount of biotech soybeans are detected. Chinese domestic supply is far from being
sufficient. Expanding U.S. non-GMO food-grade soybeans is contingent upon China approving a
low level presence policy to address incidental contamination.

SECTION VI. KEY CONTACTS AND FURTHER INFORMATION

For more information about food and agricultural import regulations and standards, please
contact:

USDA FAS Office of Agricultural Affairs

U.S. Embassy in Beijing
Phone: (86-10) 8531-3600
Fax: (86-10) 8531-3636
[email protected]

For more information about this report and food ingredient marketing opportunities in North
China, please contact:

USDA FAS Agricultural Trade Office in Beijing

U.S. Embassy in Beijing
Phone: (86-10) 8531-3950
Fax: (86-10) 8531-3050
[email protected]
This office covers Beijing and Tianjin; Hebei, Henan, Shanxi, Shaanxi, Qinghai, and Gansu
Provinces; Xinjiang, Ningxia, and Inner Mongolia Autonomous Regions.

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