China has emerged in the last few years as the single largest processor of apples in the world, and taken the international market place by the scruff of the neck. And it looks set to continue this domination in the future. The success of the Chinese sector has been built on the back of the huge apple crop that now exists there, which at some 20 million tonnes per year dwarfs all other producers, and makes the Chinese apple sector around five times the size of the US industry and 10 times bigger than the largest EU-based producers such as France and Italy.

In terms of processing volumes, China already processes around half a million tonnes more than the US, and considerably more than the other established international players in the market such as Poland, Germany and Argentina. World imports are still increasing, with the German and US markets being the most significant of these. In global terms the UK is still relatively small compared to Germany and the US. With the sector still emerging in China, probable ongoing improvement in the quality and condition of the crop, and investment in the processing infrastructure assisted by international investment from both public and private sectors, the future growth of the Chinese industry looks assured over the next 10 years (Figure 1).

Although global demand continues to increase, there is some evidence that at a macro level demand is beginning to slow, and only modest growth is predicted in the main EU markets over the next few years. Set against this backdrop, China has already emerged as a major player in its own right, and has put huge pressure on the Polish industry, which traditionally dominated the international commodity trade. Domestic consumption of apple juice in the Chinese market is still very low compared to other international markets, and this means that there is no shortage of supply for the export business (Figure 2).

There are still some problems with transport logistics, as much of the Chinese exports exit the region through the entrepôts of Hong Kong and Singapore, using shipping facilities bought on spot markets, but the sheer volume of product available for export, and at such highly competitive prices, means that the Chinese offer is a hard one to resist. Labour rates and procurement costs are still incredibly low in China, and allied to better access to international markets via WTO accession, this means that Chinese exporters have been able to compete fiercely in key international markets. The trade dispute with the US over dumping at very low prices is still likely to rumble on for a while yet before it is fully resolved.

However the sector is not without its problems, and already there appears to be over capacity in the Chinese market. A rationalisation of the processing sector seems inevitable, as there are problems with the highly seasonal nature of production, the variable internal infrastructure in terms of roads and storage facilities, the disorganised nature of procurement in many areas, and access to capital. In some ways, China has been something of a victim of its own success, in that having entered the international market so strongly in the last five years in particular, Chinese exporters have forced down the basic price levels and left markets depressed in what is already a classic commodity market. Better marketing and business control is something that the Chinese sector will have to get to grips with in the short to medium term if it is to continue to move forward (Figure 3).

To date there are about 70 processing factories in China, with the biggest of these having a capacity of some 50,000t a year. Factories tend to be very focused on the export market, with as much as 95 per cent of production being destined for the international market place. Main export markets for the Chinese crop are the US, Netherlands, Japan and Germany, with the UK market again being relatively small, but the volume being supplemented by the re-export business from Holland. Further development of the Chinese sector will be boosted by international investment from key players such as Danone, Yakult, Heinz, Unilever, and PepsiCo, and from the UK, Bulmers and Tesco in the retail sector.

The other emerging suppliers in the processing sector such as Brazil, Turkey and, to some extent Middle Eastern based suppliers such as Iran, are all still very much small scale players in international context compared to the Chinese. Again, at a macro level, the level of new plantings specifically for processing varieties around the world is very limited, and this only increases the pressure on the economics of existing orchards, which in many cases is becoming increasingly questionable.

In these circumstances the Chinese sector will be forced down one of two routes:

• more specialised, with relatively large capacities for processing, making use of state of the art imported equipment, and highly focused on the production of apple juice concentrates for the international market

• the more opportunist producer and processor, who can be characterised by having much smaller capacities, using domestically sourced equipment and switching in and out of production for the domestic or international market as circumstances dictate.

And for the really successful processor in China a number of key factors will emerge as particularly important if they are to survive, including:

• efficiency of factory operation, which in effect means running at levels of 70 per cent utilisation throughout the year

• maintaining competitive cost of procurement and production

• proximity to the crop

• investment in better food safety standards

• investment in enhanced traceability of products

• innovating not only the product but also the service behind it

• better marketing expertise, as technical competence becomes a given

Not least, as the nature of the EU food and drink market begins to change over the next three to five years and beyond, so Chinese exporters will also have to change. Market niches in areas such as fruit smoothies, NFC based products, baby foods, organics and functional food and drink products will continue to develop, and to exploit these alongside the more traditional concentrate juice markets, a new level of understanding will be required rather than over reliance on classic commodity trading skills (Figure 4).

Price will still of course be a critical factor, but the focus will eventually turn from servicing agents, brokers and importers to developing much closer three-way relationships with the actual end user. In this situation, skills sets such as consumer insight, marketing (not trading), integrity of supply and action, and the development of dedicated supply chain relationships will all be far more important for the Chinese sector.

Having a huge crop and a highly competitive price has taken the Chinese sector so far to date; the next big challenge ñ demanding innovation, servicing dedicated customers in key international markets, and developing global sourcing and specialist ranges ñ is another step on. These are all areas in which the future opportunity for the Chinese industry has to be realised.

John Giles is a Divisional Director with Promar International, a leading agri food consulting and business development firm operating right across the value chain. Based in the UK, Promar has offices in the US, Mexico, Japan and New Zealand, and has carried out a considerable amount of work in the processed fruit and vegetable sector, including work in the UK, Continental Europe, Eastern Europe and the FSU, Middle East, Latin America and Asia. John Giles can be contacted at the following email address: jgiles@promar-international.com

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