CONFIDENTIAL

FOR INTERNAL USE WITHIN CLIENT COMPANY ONLY

OPPORTUNITIES IN THE

FOOD INDUSTRY

MARKET INFORMATION

Business Sweden, China

June 2016

KEY TRENDS

AGRICULTURE

One of the largest producers in the world

in several categories

Strive for self-sufficiency in several crops

and foods

Increasingly import dependent

Strong investment activity

INDUSTRY AND MARKET

Food market and imports keep growing

despite economic slow-down

Foreign companies dominating in terms of

brand recognition and technology

Quality and safety standards in industry

are lagging behind

CONSUMERS

Growing middle-class driving growth

Food safety still high public concern

High trust in foreign brands

General health and quality trends

Post -85, -95, -00s and their families

are becoming important factors for food

companies

BUSINESS SWEDEN 2

THE CHINESE FOOD INDUSTRY SHOWS PROSPECTS FOR

CONTINUOUS GROWTH AND DEVELOPMENT

FOOD CONSUMPTION OUTPERFORMS GDP GROWTH IMPORTS NEEDED TO MEET DOMESTIC DEMAND

BUSINESS SWEDEN 3

THE WORLD’S LARGEST FOOD MARKET CONTINUES TO

GROW, DESPITE GENERAL ECONOMIC SLOWDOWN

SOURCE: NATIONAL BUREAU OF STATISTICS, 2015, BUSINESS MONITOR, EU SME CENTER

4,5

5,1

5,6

6,0

6,5

7,1

0

5

10

15

0

1

2

3

4

5

6

7

8

201

2

201

3

201

4

201

5f

201

6f

201

7f

Food Consumption GDP growth

CAGR +9,1

% CNY BN

China has become the world’s largest

food importer

The world’s largest middle-class

demands quality and has a strong

bias towards foreign brands

FOOD SAFETY

CONCERNS

MIDDLE CLASS

GROWTH

Chinese consumers are becoming

more health aware

Numerous food scandals have

severely damaged trust for domestic

food production

A LARGE CONTINENT, NOT A SINGLE MARKET

Many provinces have the equivalent GDP

levels of industrialized countries

Each province is like its own market with

unique prerequisites

Costal provinces, Tier-1 and high Tier-2

cities have strong purchasing power

Markets are more mature and becoming

highly competitive

Market grows and middle-class expansion

continues further west

BUSINESS SWEDEN 4

BUYERS OF IMPORTED FOOD ARE TRADITIONALLY

FOUND IN THE RICHER COASTAL REGIONS

SOURCE: THE ECONOMIST INTELLIGENCE UNIT, 2015, NATIONAL BUREAU OF STATISTICS OF CHINA, CBBC

PROVINCES SIZE BY GDP COMPARISON

1000 to 1,500

0 to 250

250 to 500

750 to 1000

500 to 750

GDP PPP, 2014 (USD billion**)

Over 1,500

*GDP PER PROVINCE IS BASED ON 2014 DATA, COUNTRY GDP DATA IN PPP

TERMS IS BASED ON 2014 DATA RELEASED 2014 BY IMF

**1 INTERNATIONAL DOLLAR $ NOMINALLY CONVERTS TO 6.40 CNY

ACCORDING TO THE AVERAGE 2014 EXCHANGE RATE, AND TO 3.7603 BY

PURCHASING POWER PARITY (ALTHOUGH PRICES VARY FROM REGION TO

REGION WITHIN CHINA)

Colombia Anhui

Jiangxi

Sweden

Lithuania

Morocco

Nepal

Cyprus

Ecuador

Vietnam

Chile

Pakistan

Malaysia

Australia

South Korea

Spain

Venzuela

Thailand

Libya

Belgium Norway

Netherlands

Iraq

Romania

Egypt

South Africa Israel

Hong

Kong Switzerland

UAE

Taiwan

Philippines

Italy

Botswana

THE MIDDLE-

CLASS

CONSUMER

BUSINESS SWEDEN 5

CHINA IS TODAY THE HOME OF THE WORLD’S LARGEST

MIDDLE CLASS, WHICH CONTINUES TO GROW

SOURCE: MCKINSEY, 2015 THE ATLANTIC, 2015, CREDIT SUISSE, 2015

CHARACTERISTICS OF THE MIDDLE-CLASS

31% Live in tier 1 cities Shanghai, Beijing,

Guangzhou and Shenzhen

79% Have a college education

or higher

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016f 2017f 2018f 2019f 2020f

MIDDLE-CLASS AS SHARE OF TOTAL POPULATION

no1 The world’s largest

middle class since 2015

80% Are aged between 18-45

years

FOOD SAFETY IS A MAJOR PUBLIC CONCERN… … PUSHING PREFERENCE FOR IMPORTED FOOD

BUSINESS SWEDEN 6

FOOD SAFETY ISSUES MAKE CONSCIOUS CONSUMERS

TURN AWAY FROM DOMESTIC BRANDS

SOURCE: PEW RESEARCH CENTER 2015 GLOBAL ATTITUDES SURVEY

Trust foreign brands

Willing to pay premium for

the best product

Food from foreign brands is considered safe and nutritious

Imported food is regarded as a premium product, generally

distributed at a higher price

With increasing affordability among the growing middle-class, the

demand for imported food is growing

62%

52%

DOMESTIC COMPANIES CAN NOT MEET DEMAND NEITHER IN TERMS OF SUPPLY OR PREFERENCES

0 20 40 60 80 100

Unemployment

Education

Health care

Food safety

Inequality

Air pollution

Corrupt officials

Very big problem Moderate problem

CONSUMER PREFERENCES

71%

DEMOGRAPHICS (% OF WORKING POPULATION)

BUSINESS SWEDEN 7

ONLY MIDDLE CLASS AND AFFLUENT CONSUMERS CAN

AFFORD PRICE PREMIUMS FOR IMPORTED PRODUCTS

SOURCE: GOLDMAN SACHS, CHINESE NATIONAL BUREAU OF STATISTICS

BUSINESS SWEDEN ANALYSIS

PR

ICE

QUALITY

Domestic

brand

Imported

high-end

Domestic

premium

Locally

produced

HIGH

HIGH LOW

19,0%

30,6%

50,2%

0,2% Wealthy

Middle-class

Migrant

workers

Rural

workers

Rural workers

Migrantworkers

Middle class

Wealthy

AVERAGE ANNUAL INCOME (USD)

PRICE STRUCTURE OF FOOD PRODUCTS

500 000

11 733

5 858

2 000

100% = 780 million

PRODUCTION CONSTRAINTS

Development of domestic production has been

neglected for past decades

Have not developed in line with other

industries

Hampered by inefficacies in production,

much more labour dependent than foreign

counterparts

Still highly fragmented, but under

transformation

Sustainability challenges from decades of poor

natural resource management put great

constraints on production capacity

FOOD SCANDALS A number of food scandals have damaged trust for

domestic food production and local brands

Milk melanin scandal

Decades-old rotting meat

Dumping of dead pigs

CONSUMER TRUST

The trust for domestic food production has

reduced significantly during recent years

Strong bias for imported brands

Imported brands means retailers can charge

a price premium

Leading domestic players are investing a lot

in developing their own premium

BUSINESS SWEDEN 8

REOCCURRING FOOD SCANDALS ARE SHAPING THE

FOOD INDUSTRY IN CHINA

OVERVIEW OF SELECTED NOTABLE DEALS AND INVESTMENTS 2013-2016

BUSINESS SWEDEN 9

INTERNATIONAL INVESTMENTS ARE USED AS

SHORTCUTS TO TECHNOLOGY AND BRAND UPGRADES

CHINESE OVERSEAS INVESTMENTS

Chinese companies are investing overseas for strong

brands, technology and intellectual know-how to bring

back to the Chinese market

FOREIGN DIRECT INVESTMENT

International companies investing for market

entry and expansion

BLOOMBERG, LEXOLOGY, JPOST, FOOD BUSINESS NEWS, WALLSTREET JOURNAL, BUSINESS WIRE,

FORBES, MORNING WISTLE, SVENSKA DAGBLADET, PULSE NEWS, 4-TRADERS

0,165

0,4

0,556

0,622

0,8

2,57

0 0,5 1 1,5 2 2,5 3

Heinz - Foodstar

Coca-Cola - Culiangwang

Fonterra - Beingmate

Inbev - Ginsber

Cheiljedang - Meihua

Inbev - "Greenfield"

0,3

1

1,9

4

4,6

7

0 5 10 15 20 25

Shangdong Ruyi - Cubbie

Bright Food - Tnuva

Bright Food - Weetabix

COFCO - Noble Agri

Shanghui - Campofrio Food

Shunghui - Smithfield Foods

ChemChina - Syngenta AG 43

50

FDI 2013-2016, Bn USD OFDI 2012-2016, Bn USD

ALMOST 20% OF GLOBAL CHINESE M&A’S IN 2014 WERE IN THE FOOD OR AGRICULTURE SECTORS

THE YASHILI INFANT FORMULA CASE

BUSINESS SWEDEN 10

OVERSEAS PRODUCTION AND SALES STRATEGY AIMED

TO BUILD CONSUMER TRUST

SOURCE: NZ HERALD

OVERSEAS SALES AND PRODUCTION

CN Yashili moves to sell its infant formula in NZ

Production takes place in Yashili's plant in NZ, a

USD 220 mn investment

THE “COUNTRY OF ORGIN” EFFECT

Chinese parents tend to trust imported formula

brands more if

Also sold in country of

manufacture

Produced solely for

export >

NZ Retail price

24 NZD

CN Retail price

61 NZD <

CHINESE PRODUCERS STILL STRUGGLE TO REGAIN TRUST AFTER 2008 MILK SCANDAL

DOMESTIC CONSOLIDATION

The acquisition of intermediaries and suppliers

further up the chain of production demonstrates the

desire of firms to consolidate absolute control of the

entire process

Increased cost of compliance with new

regulations and general cost of production are

also pushing smaller players out of business

Trend is shifting towards fewer and larger players

LARGER PLAYERS GO FOR VERTICAL INTEGRATION

BUSINESS SWEDEN 11

LEADING COMPANIES ARE ALSO CONSOLIDATING FOR

INCREASED CONTROL AND SAFETY

SOURCE: BUSINESS SWEDEN ANALYSIS

INPUTS

PRODUCTION

PROCESSING

RETAIL

Illustrative

THE FOOD INDUSTRY IS SLOWLY SHIFTING TOWARDS FEWER AND LARGER PLAYERS

GOVERNMENT PUSH

STRATEGIC

ACQUISITIONS TO

BUILD GLOBAL

COMPETITIVENESS

THREE MAIN INVESTMENT MOTIVES

Companies are encouraged to extend their value chain

overseas and to strengthen positions in international

commodities trading

The ultimate goal is control both supply and pricing

BUSINESS SWEDEN 12

GOVERNMENT ENDORSED INVESTMENTS AIM TO

UPGRADE THE CHINESE FOOD INDUSTRY

BUSINESS SWEDEN, XINHUA NEWS SERVICE, 2014, FARMER'S DAILY, 2014

FOOD

SECURITY

SAFETY &

PRODUCTIVITY

PREMIUM

BRANDS

Domestic food companies acquire well-known Western

food brands and bring products back to the domestic

market

Grasp ready-to-grow & well-established brands within

short-term period

Food safety concerns motivate investors to acquire premium

agricultural assets, including dairy farms, animal husbandry

pastures and food processing plants and advanced

technologies

“Borrow foreign chickens to lay golden eggs in our yards”

1

2

3

CHINA’S SHARE OF WORLD FOOD PRODUCTION AGRICULTURE IS OF GREAT POLITICAL IMPORTANCE

BUSINESS SWEDEN 13

CHINA HAS ALSO REACHED A POSITION AS THE

LARGEST PRODUCER IN SEVERAL CATEGORIES

SOURCE: GIANNINI FOUNDATION OF AGRICULTURAL ECONOMICS, FAO

Agriculture has traditionally been the back bone of

China’s economy and development

Currently launching the largest reform since 1980s:

Tighten up regulations to improve food safety

Increase consolidation and shift towards more

large scale farming

Amend property legislations to improve

operation and property rights

Raise the technological level to increase

productivity and over-all standards

Strive for self-sufficiency in main crops

0 20 40 60 80

Milk

Soybean

Beef

Chicken

Corn

Wheat

Rice

Fruits&Veg

Eggs

Pork

Seafood

%

= World’s largest producer

CHALLENGES TO CHINA’S AGRICULTURAL SECTOR

China holds 20% of the world’s population

With a strong urbanization movement and

changing diets

CONSTRAINTS IN ARABLE LAND

BUSINESS SWEDEN 14

CHINA’S SUSTAINABILITY CHALLENGES PUT GREAT

CONSTRAINTS ON ITS AGRICULTURAL OUTPUT

SOURCE: FOOD SECURITY PORTAL, CHINA DAILY , THE WORLD BANK

10,6

10,8

11,0

11,2

11,4

11,6

11,8

12,0

12,2

12,4

12,6

1,22

1,24

1,26

1,28

1,30

1,32

1,34

1,36

1,38

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

Population Arable land

Billion % of total land

CHINA NEEDS TO FIND WAYS TO ACHIEVE INCREASED PRODUCTION AND QUALITY FROM DIMINISHING RESOURCES

POPULATION

LAND

WATER

China has only about 10% of world’s

arable land

40% is degraded

20% is polluted

China has 6% of global water resources

80% of groundwater in the major river

basins are unsafe for human contact

China’s largest lakes have big dead

zones caused by fertilizer run-off

VAST USE OF FERTILISER AND PESTICIDES LATE ACTIONS TO TACKLE ISSUES OF OVERUSE

BUSINESS SWEDEN 15

HEAVY BOOSTING OF HARVESTS IS JEOPARDISING

BOTH ARABLE LAND AND FOOD SAFETY

SOURCE: FAOSTAT, CHINA DAILY, CHINA NATIONAL BUREAU OF STATISTICS

0

50

100

150

200

250

300

350

0

2

4

6

8

10

12

14

16

18

20

199

2

199

4

199

6

199

8

2000

200

2

200

4

200

6

200

8

201

0

201

2

Pesticides Grain yields Nitrogen fertiliser

Mn tonnes 100k tonnes

China today consumes one third of world’s total

consumption of both nitrogen fertilisers and

pesticides

Fertilisers and pesticides have been strongly

advocated by the government to boost agricultural

production

Issues of overuse are now becoming evident and

actions are being taken

PESTICIDE AND FERTILISER USE KEEPS GROWING WHILE YIELDS HAVE PLATEAUED SINCE THE 1990S

1/3 Of total global use

Other 68%

WATER USE

0%

20%

40%

60%

80%

100%

Water use

TOP 4 FARM PROVINCES ARE IN THE DRIEST AREAS

5 SEPTEMBER, 2016 BUSINESS SWEDEN 16

THE AGRICULTURAL SECTOR IS CHINA’S SINGLE

LARGEST USER OF WATER

CHINA WATER RISK 2015

Agriculture

(61%)

Industry (24%)

Municipal

(13%)

100%=590 bn m3 100%= total agriculture output

Shandong 12%

Hebei 10%

Henan 6%

Jiangsu 4%

BUSINESS SWEDEN 16

34% OF SOWN LAND LOCATED IN WATER SCARCE AREAS

BUSINESS SWEDEN 17

DISCREPANCY BETWEEN CHINA’S ARABLE LAND AND

WATER RESOURCES CAUSES FURTHER STRAIN

SOURCE: CHINA WATER RISK (BASED ON CHINA STATISTICAL YEAR BOOK, AVERAGE BY PROVINCE 2003-2012, HSCB GLOBAL RESEARCH

<500 Extreme scarcity

500-1000 Scarcity

1000-1700 Stress

1700-2000 Borderline adequate

>2000 Adequate

Water resources per capita (m3)

Sown

Irrigated

Heilongjiang

Jilin

Liaoning

Shandong

Jiangsu

0.0 – 2.4

2.5 – 4.9

5.0 – 7.4

7.5 – 9.9

12.5 – 14.9

10.0 – 12.4

Beijing

Shanghai

Inner Mongolia

Guangdong Guangxi

Sichuan

Shaanxi

Henan

Hubei

Hunan

Xinjiang Hebei

Anhui

Gansu Area in mn hectares

FURTHER POLICIES REQUIRED FOR WATER ALLOCATION TO AGRICULTURE

BUSINESS SWEDEN 18

FOOD SAFETY AND SUSTAINABILITY ISSUES ARE

SHAPING THE INDUSTRY AND DRIVE DEMAND

AGRICULTURE

FOOD

INDUSTRY

Modernisation of agriculture

Severe production limitations

Consolidation for control

Building domestic premium

Investments in brands and safety

CONSUMERS

Increasing awareness

Willingness to pay

FOOD

SAFETY

AND

SUPPLY

SECTOR KEY TRENDS KEY ISSUES

KEY TAKE-AWAYS

CONTACT BUSINESS

SWEDEN IN CHINA FOR

MORE INFORMATION

Business Sweden

Shanghai Office

12F, Sail Tower, 266 Hankou Road, Huangpu District,

Shanghai 200001, P.R of China

T: +86 21 6218 9955

F: +86 21 6217 5152

shanghai@business-sweden.se

www.business-sweden.se

BUSINESS SWEDEN 19

Business Sweden

Beijing Office

Room 609, 6/F, CYTS Plaza, No 5, Dongzhimen Nandajie

Beijing 100007, P.R of China

T: +86 10 5815 6006

F: +86 10 5815 6223

china@business-sweden.se

www.business-sweden.se