Cold chain logistics – the transportation of refrigerated or frozen materials – is something of a novelty in an underdeveloped Chinese distribution network. "Up until very recently China simply didn’t know how to do cold chain well," said Stuart Ross, head of industrial property in China for Jones Lang Lasalle (JLL).
However, a growing demand for prepackaged perishable foods and temperature-sensitive biotech has encouraged some of the nation’s leading commercial real estate and industrial development firms to throw billions of dollars into what they perceive to be a potential cash cow.
Feed the consumer
Given China’s vast and fast-growing consumer food market, there is considerable investment potential in developing food supply chains. From 2000 to 2007, per capita annual living expenditure of urban households grew at a compound annual rate of 11.6%, with food purchases comprising 36.6% of that growth.
"China’s consumer food market has experienced vigorous growth in the past decade, and with it, traditional eating habits have changed," said Ross. "As incomes rise, Chinese consumers are eating more animal protein, dairy products and convenience foods like frozen dinners and ice cream."
All of these products require cold chain to ensure safe delivery. And while it is difficult to forecast how consumer tastes will change with time, a 70% rise in the annual consumption of refrigerated goods between 2002 and 2008 suggests an enduring demand for cold chain deliveries. Meanwhile, Chinese consumers continue to become more aware of food safety issues. In a "Top of Mind" survey conducted by the International Committee of Food Retail Chains, respondents ranked food safety second only to the economy in terms of importance.
At present, it is estimated that of the trucks used to carry perishable food in China, only 10% are equipped with refrigeration or freezers, compared with about 90% in most developed countries. As a result, only 15% of all products that require refrigeration for safe transport receive proper handling, causing over 30% of China’s annual fruit and vegetable output to spoil en route to market.
According to a study by consultancy AT Kearney, reductions in the wastage rate as well as increasing usage of refrigerated vehicles could boost consumer confidence, generating US$160 billion in cost savings and market growth. The study further reveals that the country’s current delivery capabilities will be overwhelmingly insufficient to meet the expected US$650 billion in food spending by China’s middle class in 2017.
However, despite a growing need for dependable cold chain, China still lacks the clear supply chain standards, transparency and vigilant oversight required to encourage investment in costly infrastructure.
"Historically, the regulation of food distribution was low on the list of government priorities," said J.K. Tan, head of industrial properties for Colliers International. "Even though much of the legislation was in place, little attention was paid to actually enforcing it – and as a result food spoiled."
If the implementation of food safety standards wasn’t a top priority before 2008, the political and economic damage the melamine-tainted milk scandal wrought engendered a change of heart. In May 2009, Beijing announced a reduction in the minimum purchase price of industrial land for food processing, a decision bound to encourage investment not only in agriculture and animal husbandry, but also cold chain.
Some analysts hope the government will introduce complementary regulatory reforms meant to assuage the fears of those who might otherwise choose to invest in safer markets. But, as Tan explained, it may take a while for such an announcement to have any affect, if ever. "When the government announces new legislation like this, there is usually a good six months before there is any traction."
He suggests that neither consumers nor investors should hold their breath.
Unlike comestibles which can tolerate modest fluctuations in temperature, biotechnologies are extremely sensitive. For biotech, a fraction of a degree can mean the difference between safe handling and spoilage. The shipment of vaccines and biological specimens is therefore subject to tighter regulation.
"When a shipment of food is compromised, it is easily discarded for a small loss," said Tan. But when a biotech product is mishandled, millions of dollars are lost and lives can be put at risk.
As a result, logistics specialists and commercial investors have scrambled to meet the demand created by laboratories and hospitals throughout China.
One company with a particularly large stake in the biotech cold chain, World Courier, has extended its network to 36 major Chinese cities. It currently offers cold chain transport services for everything from capuchin carcasses to investigational drugs in every clinical trial location approved by the Chinese State Food and Drug Administration.
"China is poised to become the fourth-largest pharmaceutical market by 2012," said Henning Voss, director for World Courier in north Asia.
However, unlike the food chain, the drive to create a reliable biotech cold chain has already achieved success, said Tan of Colliers. "Cold chain enjoyed a wave of biotech investment years ago because strict regulation demanded it," he said. In the process, most of the the easy investment opportunities were snapped up.
Today, many analysts believe that the window of opportunity to invest in cold chain infrastructure along the main biotech corridors is quickly closing. Future investments would need to be made to develop supply chains in riskier, less developed regions with biotech potential, such as Yunnan province. However, the improvement of cold food supply chains to such regions may facilitate additional upgrade investments in biotech chains.
Regardless, there is still plenty of work to be done. If cold chain is to undergo the kind of transformation that will bring it up to speed with developed nations, more effort is needed. In addition to the lack of oversight monitoring food transport, the logistics market is still characterized by fragmented supply chains, inadequate facilities and underdeveloped infrastructure – particularly in the western provinces.
But for those brave enough to bet on ambitious reform and continued growth, cold chain could yet prove quite lucrative.