How to break into the Chinese Food & Beverage Market

By Richard Hoffmann, ECOVIS Beijing

With China having an annual GDP growth rate at around 8 % over the last few years it is no surprise, that the Chinese food market has also seen a rapid growth. In fact China has become the world’s biggest food and grocery retail market in 2011, surpassing the United States. The projected food market volume for 2015 is 1,042 billion Euro. China is a net food importer, and it was accountable for 6.2 % of the world’s food imports in 2012, making it the third largest importer of food only behind the EU, the United States.

Given this numbers, it is understandable, that more and more companies want to take advantage of this growing market. There are different ways to enter the Chinese market and to distribute the imported products to the retail channel. Due to the fact that the nationwide network of trucks, highways and cold storage warehouses do not extend out to all regions equally, the situation within China remains very complex and changes frequently. Especially in the rural provinces, it can be very difficult to deliver products from the producer or importer to the storage shelf. One of the key factors to be successful is to find a trusted partner and establish a network in China. It can be difficult, especially for small and medium sized companies, to verify whether or not the intentions of Chinese companies are sincere. Ecovis Beijing can help you to carry out due diligence checks of potential business partners.

Market Entry

Cooperation With Local Importers

The import procedure must be handled by a licensed importer, however most distributers and traders don’t hold such a license. The Chinese Ministry of Commerce operates a searchable platform of importers called “World Importers Net” (http://win.mofcom.gov.cn/en/), although it’s not a complete list it is a good way to get in touch with potential Chinese importers. Importers organize the import procedure and are in charge of submitting the documents, the examination of goods, producing or checking the labels, storage and transport, customs clearance, payment of taxes and fees and the foreign exchange control. However most importers are only specialized in importing large amounts of goods and don’t take care of the distribution. Therefore further distributers or market agents are needed.

Direct Import Through FIE

The most direct way for a company to break into the Chinese market is to import and distribute their products themselves. This requires a company to set up a Foreign Invested Enterprise (FIE) in mainland China and obtain the necessary Licenses and Registration from the Commerce Bureau or the Ministry of Commerce’s Department of Foreign Trade. If distribution channels are clear this is good way for small and medium sized to enter the Chinese market. Though it does include financial investment and personel working in China, chances are that a well-planned market entry strategy will pay off and result in new business.

Local Production

After a certain amount of time of activity in the Chinese market, many companies think about localizing their production in order to reduce costs and become more competitive. The benefits of local production are lower manufacturing and shipping costs, faster response times, no or little warehouse rental fees, exemption from paying import-taxes and the option to easily adjust the product to fit local market conditions.

Even though local production offers a lot of benefits, it presents the risk of losing basic intellectual property. Therefore companies should take precautionary measures such as educating their employees in intellectual property protection, having sound physical protection and destruction methods for documents, plans and samples. Furthermore risk assessments and due diligence checks on business partners and the usage of clear and well-drafted contracts must be assured. Producing locally also presents the challenge of retaining high-quality standards that consumers expect from a foreign product. Especially foreign beer companies have decided in the last few years to open up local production facilities to reduce costs, in order to compete with the domestic players in the price-sensitive beer sector.

Importation/Distribution Channels

Distribution

Cooperation With Local Agents

The responsibility of agents is to develop potential markets and clients. They organize the sale of the products and receive a performance based commission. As the product remains the property of the producer, he can still determine if he wants to do the deal or not. Agents have a good knowledge of the market and specific groups of customers and therefore can be very beneficial for producers and exporters.

Cooperation With Local Distributors

Some Distributers also have an import license and import their products directly from the producers to cut out the intermediary and save costs. To trade with imported products, distributers need a business license for the respective product category (e.g. meat or alcohol).  Distributers, contrary to agents, buy the products and sell them with a profit margin. A lot of the players in the market also offer after-sale-services such as marketing or target group analysis. For establishing new or niche products in the market, a producer should work together with smaller distributors, as they tend to focus on specific products and know how to market them. Big distributing companies are more interested in importing and trading large amounts of goods and their effort for introducing new or niche products is restrained.

Local Representation

Setting up a representative office in China, gives a foreign producer the opportunity to better understand the market, allows them to react faster to changes and enables better control of the marketing of the products. It can also be beneficial, when it comes to finding potential business partners such as importers, distributers or agents. However, it should be noted, that the business scope of a representative office is limited to non-business activities including market investigation, exhibition of products and marketing activities. All of these activities must be connected to the business scope of the Headquarter. The amount of foreign employees is limited to four. There must be one appointed Chief Representative within the company.

The different options shouldn’t be seen as completely separated. Every Option implies different tax and legal regulations. Reducing taxes and assuring legally compliant and protective contracts require professional advice.

For further information please contact us.

	Richard Hoffmann is a Partner at ECOVIS Beijing China. Richard obtained an honor’s degree in law and worked in Germany, America and China for various prestigious law firms prior to joining ECOVIS. He has published more than fifty articles in international magazines, frequently speaks at high profile events in China and abroad and is often invited as a legal expert by international TV. Contact: richard.hoffmann@ecovis.com
Ecovis Beijing is the trusted tax and legal advisor of several embassies and official institutions in China. It specializes in mid-sized international companies and focused on tax & legal advisory, accounting and auditing. If you’re interested in finding out more about tax and legal, don’t hesitate to sign up to our Newsletter or give us a call  +86 10-65616609 (ext 811/806)   or contact us directly via Beijing@ecovis.com