Asian Industries--a Pioneer in China
Just 20 years ago, most
Chinese ate chicken once or twice a year, perhaps at New Year's or on
other special occasions. Since that time, standards of living have
risen sharply--especially at the dinner table--and per capita poultry
consumption has increased more than fivefold. Significant increases
have also taken place in the consumption of pork, the main source of
meat protein, up from 25.1 pounds per capita in 1980 to 75.7 pounds
today.*
Even so, China's
total per-capita consumption of pork, poultry, and beef (108 lbs.)
remains well behind that of the U.S. (275 lbs.) ... and in a country of
1.3 billion people, this means significant opportunities for
agricultural producers.
As one
of the first Western companies to operate in China, CGC has long
recognized this potential. In the mid 1970's, it supplied wheat and
soybean meal to the Chinese state grain agency, CEREOIL-COFCO. Then, in
1979, the company was invited to open the country's first foreign-owned
feed mill. Joining with Charoen Pokphand, it formed Conti Chia Tai
International (CCTI), a major feed producer that became one of the most
successful joint ventures in CGC history.
CCTI
essentially created the modern feed industry in China, notes Asian
Industries General Manager Mike Hoer, and its importance has often been
overlooked.
"Up to
this time, farmers were just feeding a few chickens in their backyards.
Then CCTI came in with modern feed and suddenly these farmers were
raising chickens in seven rather than fifteen weeks--and they were able
to raise tons of them, all healthy and ready to go to market!
CCTI changed everything by being the first to supply high-quality feed,
day-old chicks, and modern technical service."
Following this success, Conti made investments in a range of other
businesses throughout China. Some of these, such as the Keystone
poultry operation (a supplier for McDonald's), the Shanghai Golden
Conti LPG venture, and Conti Wanda poultry, were subsequently sold or
merged into other businesses.
Others,
including ContiFeed Additives and the Wuhan and Tianmen feed mills,
have been developed over time, and now form key parts of Asian
Industries.
In
recent years, AI has also developed a poultry importing business in
cooperation with Wayne Farms, become a founding partner in the Internet
site FoodChina.com, and invested in the integrated poultry processing
company Great Wall Northeast Asia.
Of
course, like most Western companies, ContiGroup has also made its share
of missteps in China, especially in attempting to reproduce
American-style operations without taking local conditions into account.
ContiGroup COO Vart Adjemian notes, in particular, that with the
exception of CCTI, the company began with facilities that were
"overbuilt for China" and that relied too heavily on expensive imported
material. It also lost sight of the overhead and cost structure.
At the
same time, the company did not have sufficient knowledge of local
production matters. "If you look at our hog farm, we began without
really understanding the genetics, diseases, and feed requirements in
China," notes International Industries VP Nick Rosa, "--a whole range
of issues that are crucial in this kind of operation."
Today,
things have changed. Asian Industries has both substantially greater
knowledge of local conditions and a more pragmatic approach to doing
business. Over the last few years, Mike Hoer and his team have also
significantly improved AI results. Following a three-part strategy,
they decided to focus on improving current businesses rather than on
developing new projects. They then took steps to restructure the
finances and reduce debt in the existing businesses, as well as to
reduce expenses and reorganize people.
With
these changes in place, they began to fine-tune in such areas as
pricing and production. "We had to focus on what made us profitable,"
says Mike, "and once we began to improve management and financing, we
were very quickly making money in these businesses."
"We've
clearly learned from our experiences," says Vart, who cites the Tanggu
feed mill--a recent addition to Contifeed Additives--as an example of a
"smarter," more efficient operation. "In this case, we leased an
existing plant instead of building a new one, and we're using used
equipment from Chinese manufacturers because that's what our
competitors are using. The goal is to be low cost, and we can't get
there with a Cadillac when the competition is driving a Volkswagen."
 |
| Outside the village of Yu Xin, Hubei province. |
Looking ahead,
Vart says that the major priority for Asian Industries will be to
increase market share in the higher-margin premix business, perhaps in
cooperation with other companies. This effort will also require moving
CCTI from compound feed production, its traditional focus, to premixes
and specialty products.
In
addition, Vart would like to further develop the relationship with
poultry processor Great Wall Northeast Asia. "This is different from
most of AI in that we're not in control," he notes, "but it's not a
passive investment. We have a seat on the board and are in regular
contact with their management. We need to be flexible and not think
that we have to own 90 or 100% of every business in China."
By any
measure, China will continue to have an important role in CGC's growth.
On the one hand, it's becoming a major market for U.S. meat exports at
a time when domestic U.S. consumption has largely leveled off. On the
other hand, it's a large, rapidly developing producer in its own right.
In this sense, the company's feed and premix businesses could serve as
a platform for expansion into other sectors of agriculture, much as the
acquisition of Allied Mills, 50 years ago, paved the way for the
development of CGC's U.S. livestock operations.
"In
China, we're cultivating a customer," says Nick Rosa, "and we're also
cultivating a strategy for the expansion of our business. This is a
market where our experience and our local management gives us a real
advantage, and a place where we can play a significant role as
agriculture develops."
* USDA Foreign Agricultural Service/Economic Research Service