Cold Chain Logistics In China

Dr. FuYuning

May 2010
Executive summary

 Rising middle class in China will demand more and safer food

 The changing regulatory environment is driving up food safety standards and

compliance

 Distributing food in China safely and efficiently is a formidable challenge

 CMAC will offer an attractive value proposition to MNC manufacturers

2
Urbanization in China has significantly increased
disposable income levels of the middle class

Increase in Chinese urbanization Growth of Chinese middle class

(Population millions) (Millions of urban households)
1,335
1,258 295.4
1,127
437 +42% 622
Urban 295 +48%
17.5%
198.5

127.2

Rural 832 -1% 820 -13% 713

42.0

0.5 7.6

1989 1999 2009 1985 1995 2005 2009 2015 2025

Source: National Bureau of Statistics of China; China statistics abstract; Chinese Academy of Social Science; The Great Electronic Wars 9/06
3
As food safety becomes a greater concern, the urban
population tends to buy more from supermarkets

% respondents who How much premium Location preference for urban

are concerned about would consumers like people to buy food
food and beverage to pay to eliminate
safety health concern(1) Supermarket 81.3%

3 >20% Farm product

No concern 8 8.8%
10-20% market
9% 15 5-10% Wholesale
2.1%
market
30 <5%
Concern about food and beverage safety Roadside
1.6%
(2) market
Convenience
91% 1.5%
44 No premium store

Others 4.7%

(1) Weighted average of all the health concerns held by food and beverage buyers
(2) Including all the consumers that are concerned about safety and are willing to pay a premium
Source: Insights China; Annual survey report on China consumers; Statistics of Food Safety Survey that is Zhejiang Provincial Government conducted
online in March –May 2009
4
As food safety becomes a greater concern, the urban
population tends to buy more from supermarkets

 Concern about food and beverage safety is increasing

– Among the various expectations that consumers have in their food products, safety is the
most intrinsic and essential quality. 90% of Chinese consumers are concerned about
safety in food and beverage products.
– Of the 90% who are concerned about food safety, half are willing to pay a premium for
safer food (30% of the consumers said that they are willing to pay up to 5% premium)

 Internet survey result of “Where do you believe you can buy safer food (single choice)”
– Supermarket is a primary choice for urban people who wish to buy safe food
– Concerns about food safety focus on hygienic processing environment, fake products used
as genuine articles, inferior products used as qualified articles, additives being illegally
added, residue of pesticide/veterinary drugs, false or exaggerated marketing, or
expired/spoiled foods

5
In the rural areas, consumers have developed a weak
sense for food safety

Food business Regulators Rural consumers

operators

A three-tier farm produce market system for rural areas

Food
Food type
type in
in rural
rural areas
areas Food
Food sourcing
sourcing channel
channel in
in rural
rural areas
areas

Other unpacked food products

Urban food wholesale markets

>15%
Unpacked 40%
confectionary, >15%
delicatessen, dried 60%
fruit <70%
Mobile food selling vehicle
Packed food products

Source: National Bureau of Statistics of China; Sina news

6
Executive summary

 Rising middle class in China will demand more and safer food

 The changing regulatory environment is driving up food safety standards

and compliance

 Distributing food in China safely and efficiently is a formidable challenge

 CMAC will offer an attractive value proposition to MNC manufacturers

7
The Chinese government has issued new standards and
regulations on food safety

Food Safety Law of the People's Republic of China

 Food safety supervision over whole supply chain

 Special attention to cold chain transportation

 Clarification of food safety responsibility

These new food safety standards and enforcement of these standards will
drive out non-compliant players in the supply chain

8
Food Safety will now fall under China’s Ministry of Health

One unified supervision for Current

food & drugs
• Food, like healthcare products
and pharmaceuticals directly
impact human health
• Developed countries place
supervision of food and drug
under one organization
• Drug Supervision Administration
can transfer lessons learned from
the pharmaceutical supply and
value chain to the food industry
Current food
food safety
safety supervisory
supervisory
structure
structure
China’s Ministry of Health
State Food and Drug
Administration
• All players in the supply chain,
including purchasing, transportation,
storage, and sales will be monitored
• Methodologies and lessons learned
from supervising the pharmaceutical
industry will be applied to the food
industry

9
China still lags behind developed western countries

Food safety laws in USA and Europe Union

USA EU Gap of Chinese Food Safety Laws &
Regulations
• Covers all • Full-control
food theory ‘from • Lack of systematic and coordinated legal
system
farm to table’
• Offer very • Provisions of laws and regulations are
specific • HACCP too general, lacking of maneuverability
standards and systems,
• Lack of self-improvement &
regulatory requiring complementary mechanism, lagging
procedures traceability in behind in adapting new legal provisions
all food and to new situations
• Constitute
food • Lack of uniformity in food safety control
very tight
ingredients system
regulations on
food safety • Lack of food safety control legislation in
protection rural areas

10
However, when problems arise, all players in the supply
chain are liable for prosecution

Yogurt

With the increased attention

Deep- Many from public opinion and
frozen policies, manufacturers and
Dumpling scandals
distributors can no longer
on food just watch their own quality
standards – they must pay
Ice safety attention to those of their
Cream partners
issues

Salmon

This places pressure on all players in the food industry to pursue operational
excellence in food production, transportation, storage and sales
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Executive summary

 Rising middle class in China will demand more and safer food

 The changing regulatory environment is driving up food safety standards and

compliance

 Distributing food in China safely and efficiently is a formidable challenge

 CMAC will offer an attractive value proposition to MNC manufacturers

12
75% of the market will be in 2nd and 3rd tier cities

There are 50 cities with over 1 million population

Harbin

Changchun

Urumqi Shenyang
Beijing
Dalian
Baotou
Taiyuan Tianjin
Qingdao
Xining Jinan
Lanzhou
Xian Zhengzhou
Shanghai
Nanjing
Hangzhou
Wuhan
Chengdu
Lhasa Chongqing Nanchang
Changsha Fuzhou
Guiyang Xiamen
1st Tier Cities
Kunming
1st Tier Regions Nanning
Guangzhou /
nd rd
2 , 3 Tier Cities Shenzhen

Efficient reach requires a national distribution network

Source: China Ministry of Construction
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Food business operators typically employ three typically
types of cold chain distribution models

Cold
Cold Chain
Chain Model
Model Feature
Feature Typical
Typical Player
Player
• Internally operate • The logistics business unit, which
Internal Operation • Guarantee food safety is subsidiary to Yum Group,
• Huge volumes of cold chain
logistics costs
• Difficult to monitor the delivery • Very common in China
Pick-up /Delivery quality of the outsourced
logistics;
• Or depth and breadth of market
coverage is severely restricted
• Much safer • Kangxin Logistics
3rd-Party Cold
Chain Logistics • Not common • ShuangHui Logistics,COFCO
• Sinotrans Yuhe Cold Chain
Logistics, Jinjiang Cold Logistics,
Shandong Rongqing Logistics
• Havi Logistics
More and more players have been considering outsourcing their cold chain
logistics, to focus instead on sharpening their core competence
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Executive summary

 Rising middle class in China will demand more and safer food

 The changing regulatory environment is driving up food safety standards and

compliance

 Distributing food in China safely and efficiently is a formidable challenge

 Value proposition of CMAC to MNC manufacturers

15
Problems can easily occur within each interface of food
distribution process
Plant or Linehaul or
Linehaul intermediate multi-stop Market
transporta- (regional) transporta- facing Local Retail
Source tion warehouse tion warehousing delivery operations

Import Retail stores

Manufacturer,
Distributor, or 3 Restaurants
PL Warehouse
Manufacturing Institutional and
Plant Hospitality
Manufacturer,
Distributor,
Grower 3 PL or Retailer-
Warehouse
Retail stores

Food safety process is broken 1st Tier

Wholesaler
Restaurants
• Fragmented supply chain 2nd Tier
Wholesaler
• Lack of standards Institutional,
Hospitality and
3rd Tier other
• Inadequate audit and enforcement Wholesaler Consumption
Points

• Reliance on trust and visual

inspection
Source: CIES food safety operator survey
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Successful management of food distribution logistics
systems ultimately requires “end-to-end” management

Objectives Technical Issues Operational issues

•• Maintain
Maintain quality
quality and
and safety
safety •• Temperature
Temperature abuseabuse isis the
the •• Significantly
Significantly more
more complex
complex
from farm to consumer
from farm to consumer single most important
single most important •• More
More expensive
expensive (facilities,
(facilities,
purchase
purchase or or consumption
consumption issue
issue in
in cold
cold chain
chain equipment)
equipment)
•• Ensure logistics
logistics in
in China
China today
today
Ensure temperature
temperature andand •• Multiple
Multiple participants
participants and
and
sanitation
sanitation integrity
integrity •• Temperature
Temperature abuseabuse hand-offs
hand-offs
throughout
throughout logistics
logistics typically
typically happens
happens at at the
the
process
process interfaces,
interfaces, where
where “hand-
“hand- •• More
More attention
attention and
and
offs”
offs” occur
occur discipline
discipline required
required
•• Provide
Provide certifiable
certifiable product
product
at
at retail
retail •• The
The integration
integration challenge
challenge •• Requires
Requires seamless
seamless
is
is substantial:
substantial: multiple
multiple integration
integration throughout
throughout the
the
•• Increase
Increase customer
customer process
process
satisfaction
satisfaction participants,
participants, functions and
functions and
hand-offs
hand-offs

Therefore retailers must influence the entire food supply chain as much
as possible

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Capabilities of logistics vendors must be analyzed before a
vendor can be selected

Vendors that have cold chain logistics as their core business

Criteria for selecting

outsourcing vendors Strong Abilities
In International
Logistics
•• International
International logistics
logistics abilities
abilities

•• Local
Local experience
experience
Weak Abilities In
International
Logistics
•• Logistics
Logistics as
as core
core businesses
businesses

Weak Strong
Local Experiences Local Experiences

Multi-national food producers entering into China should seek nationwide and
all-along-cold-chain strategic cooperation with logistics vendors that are
leaders in the industry
(1) Industry standards are defined by reference to best players in the industry, since their practices have undergone market test and thereby developed
practicability
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CMAC is ready to be your strategic partner to set up an
efficient distribution network in China

 CMG has a 51% stake in CMAC

• Strength in ports and logistics network along the coast and rivers, with good
understanding of local logistics market
• Meet cold chain logistics industry standards and are and familiar with
government policies
• Have close relationship with government
• Economies of scale result in low operating costs

 AmeriCold, with 49% stake in CMAC, will inject its International logistics
capabilities
• Has 30 million sqm cold storage
• Able to service many large food producers and wholesalers

 CMAC offers logistics service as its core businesses

• Comparing to some big China state-owned companies who mainly serve internal
cold chain logistics needs, CMAC is a public cold chain logistics service provider
who prioritizes client needs
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Appendix: Introduction of CMAC
CMG introduction — A hundred and thirty-seven year
voyage…

Li Hongzhang,
Founder of China Founded in 1872 ,China Merchants was the first CM’s branches in
Merchants national enterprise in China’s modern history and history
the legacy of the “Westernization Movement”

First Headquarter “Yidun” First vessel In 1979, China Merchants established

(Shanghai) bought in 1872 China’s first industrial zone opening to
the outside world – China Merchants
Shekou Industrial Zone
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CMG introduction — Large state-owned enterprise

Subordinated To The State-owned Assets Supervision And Administration

Commission (SASAC) Of The State Council
• Ranked 7th most profitable amongst all SOE

2009

• One of 10 Chosen SOE publicized as Model … Mainland China

State-owned Enterprise Enterprise based in
2008 • Selected as “The Most Admired Chinese
Enterprise” by Fortune
Hong Kong
•Headquartered in HK
and started business in
Hong Kong in 1873, and
• Awarded “Enterprise with Outstanding is the oldest mainland
Performance” by SASAC China enterprise
2007 • Awarded Grade A enterprise by SASAC operating in HK

• Awarded Grade A enterprise by SASAC

• Two-fold growth in key financials within a 3-
2004 - 2006 year period

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CMG introduction — Core business sectors

Transportation & related infrastructure, property development & management,

financial investment & asset management
The largest public port operator in Industrial zone
Ports China
Property Property
Logistics The leading logistics vendor in development development
China
Banking
Transportation With the largest deep-sea energy
Energy shipping shipping
infrastructure fleet in the Greater China
Securities
Toll roads China’s largest investor and
operator in toll roads
Finance Fund
Others
Insurance

Assets portfolio — 2009 Profit contributions — 2009

Transportation Transportation
Infrastructure 34% Infrastructure 34%
44% Finance
50% Finance

22% 16%
Property
Property

23
CMG introduction — Financial strength

Total assets Managed assets Net profit

(US$ billion) (US$ billion) (US$ billion)

+29%

40 368 1.6
1.4
30 1.2
+17% +29% 255

0.9
18
147 0.6
0.5

6 8 0.3
4
8 16 18

1994 1998 2002 2006 2008 2009 1994 1998 2002 2006 2008 2009 2003 2004 2005 2006 2007 2008 2009

• Total Assets amounting to USD40 billion and managing asset value of

US$368 billion (end of 2009)
• Net Profit of US$1.41billion (for 2009)
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CMG Cold Chain — Cold chain business

 CMAC is a joint venture, held 51% by China Merchants and 49% by AmeriCold, involved in
developing cold chain logistics industry in China
 CMAC owns cold storage space 24,500㎡ near West Port, one of the two designated
refrigerated food inspection storage warehouses endorsed by the General Administration of
Quality Supervision, Inspection and Quarantine of the People’s Republic of China in
Shenzhen
 Furthermore, CMAC has constructed a 12000 ㎡ cold storage warehouse at Qianhaiwan
Free Trade Zone. And by leveraging the favorable policies that are entitled by a free trade
zone, CMAC also provides innovative services for import and export traders

CMAC
Qianhaiwan
Free Trade Zone

MWT

CMAC
CCT

SCT

25
CMG Cold Chain — Development planning

CMAC Cold Chain Network — 2010 And Beyond

• CMAC will own/operate 8 DCs with

75,000 sqm of frozen and chilled space,
and a fleet of over 100 temperature
controlled trucks by the end of 2010

• In synergy with the internal logistics

providers owned by China Merchants
Group, CMAC can leverage the strength
of the consolidated resources in both
general goods logistics and cold chain
logistics, thereby providing an integrated
logistics service that covers general
goods logistics and cold chain logistics

• The dry-storage warehouses that CMG

operates occupy totally 1,000,000 square
meters, of which self-owned warehouses
occupy near 300,000 square meters. It
also owns 500 vehicles

26