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    Greater China
     Jul 12, 2005
EU fights for share of China's cheese market
By Duncan Freeman

BRUSSELS - China's cheese consumption is booming, but the EU, the most important producer and trader of cheese in the world, occupies only a small part of the market. Despite Europe having the apparent advantage of its large cheese industry, the export market to China so far has been dominated by competitors who have managed to better exploit growing market segments, most notably in fast food.

As the Chinese market for cheese has developed in recent years, consumption, domestic production and imports have all grown. According to the UN Food and Agriculture Organization (FAO), in 2003 China produced 225,000 tons of cheese, while imports were 23,000 tons. In 1999 China's domestic output was 186,000 tons, and imports 16,000 tons. Although a growing producer and consumer, China still ranks far below the major producers such as the EU, the US, New Zealand and Australia. On a per capita basis, consumption in China is very small. The FAO figures show that annual per capita supply in China was 0.2 kg in 2003, compared to 24.5 kg in France and 20.2 kg in Germany, which have among the highest levels of consumption in the world. Even in Japan, which produced 123,000 tons, imported 202,000 tons, and is the largest consumer of cheese in East Asia, per capita supply was much higher than China at 2.5 kg a year.

China is a growing market, but can the EU, the largest producer of cheese worldwide, take advantage of the opportunity it offers? EU statistics show that its cheese exports to China are growing. Total EU cheese exports to China grew from 144 tons in 2000 to 937 tons in 2004. This is an impressive growth rate, but compared to total imports the absolute amount is small. Despite efforts to promote European cheese in China by various exporters, government agencies and even the EU, the market is actually dominated by competitors such as New Zealand and Australia. In 2003 New Zealand accounted for 58% of China's cheese imports, and Australia 30%. Germany, the top EU exporter to China, accounted for less than 3% of the market.

To some extent, the fact that Europe exports little to China is a reflection of the structure of the world cheese trade. Although the EU, with output of 5.6 million tons in 2004, is the largest producer of cheese, most of this is consumed and traded within its borders. Only 490,000 tons was exported in 2004. The US is the second largest producer, at 4 million tons in 2004, but it only exported 52,000 tons of this, and is actually a net importer of cheese. New Zealand produced only 285,000 tons in 2004, but exported an astounding 280,000 tons of this (over 98% of the total). Australia produced 360,000 tons, and exported 184,000 tons. Although their output is relatively small, New Zealand and Australia, which have fundamental cost advantages due to low pastureland prices, play a disproportionately large role in the world cheese trade.

The growth of cheese consumption is only a small part of a boom in the dairy industry in China. Surprisingly, China is now one of the largest producers of milk in the world. After slow growth throughout much of the 1990s, milk output in China suddenly rocketed from 7.8 million tons in 2000 to 17.5 million tons in 2003, making it the seventh largest producer in the world. Despite this growth, per capita consumption of milk in the country remains far below that of developed Western nations. In addition, there are enormous disparities in consumption of dairy products: according to Chinese statistics, consumption is over 10 times higher in cities than in the countryside, and urban consumption of dairy products has been growing at about 25% a year recently, much higher than in rural areas.

Even in major urban areas, there are variations in consumption of dairy products. According to one recent survey by Iowa State University, a very high percentage (90.4%) of households in Beijing, Shanghai, and Guangzhou report purchases of milk. Yogurt is the second-ranked dairy product, with an average of 58.9% of households reporting purchases, but consumption is much higher in Beijing than in Shanghai and Guangzhou. Ice cream is widely consumed (53.8% of households) in all three cities, although the level was significantly lower in Shanghai. Cheese, however, trails far behind (only 6.7% of surveyed households reported purchases) even in these urban areas.

The dairy industry, including cheese, has required construction from scratch of production, processing, storage and distribution facilities. Even within households, the use of refrigerators is almost essential for the storage and consumption of dairy products. In many cities these factors are increasingly in place, and dairy products are relatively common. But cheese has proved to be different from other dairy products which have penetrated urban households. Despite the availability of cheese in some retail outlets like Carrefour, by far the most common way to consume cheese in China, even among the small minority that does eat it, is through fast food outlets in the form of pizzas, burgers and sandwiches.

For the immediate future, exporting, rather than production in China, is likely to remain the preferred means for European companies to enter the market. Significantly, the dairy industry has not been a great success for European or other foreign investors; several, including Friesland, Parmalat and Kraft, have withdrawn from investments in China recently. Booming domestic production has brought fierce competition and price cutting, making business conditions very difficult for all producers, not just foreign investors. According to Chinese reports, a high proportion of domestic producers in the dairy industry are now losing money.
The success of pizzas and cheeseburgers shows that the taste barrier, often cited as the main reason for the reluctance of Chinese to eat cheese, can be overcome to some extent. The difficulty will be to find a way to integrate cheese more fully into the Chinese diet through the creation of a cheese culture. Other Western food products such as coffee, wine and even milk have been relatively widely adopted, and are now considered acceptable additions to Chinese eating and drinking habits, especially in cities. However, it is difficult to see how cheese fits into the scheme of Chinese culinary art. For cheese to come out from its hiding place behind pizzas, hamburgers and sandwiches will be a difficult challenge.

Therein lies something of a contradiction for many European cheese producers. While they may pride themselves on the superior taste, quality and enormous variety of their products (France claims to be the land of a thousand cheeses), the main growth in the Chinese cheese market will not be for this type of product. In fact, Europeans do make the standardized product, but so far they have not managed to compete with other producers in the Chinese market, where price as well as quality is a key factor. In 2004 processed cheese exports from the EU were 368 tons, just over one third of the total. Only 12 tons of blue-veined cheese were exported by the EU to China.

According to Tony Emms, of the Singapore-based food industry consulting firm Stanton, Emms and Sia, although New Zealand and Australia do have advantages in the China cheese market, it should be possible for European producers to develop market segments for products such as brie, camembert and feta, for instance in the European-style bakeries that are beginning to spread in some cities. Neverthless, Emms believes that such markets will only develop slowly, as they have done elsewhere in Asia. The China market will take long-term effort and careful planning by European producers, with the added difficulty that foreign companies will face the threat of competition from domestic producers as the market develops.

The fast food market is likely to continue to provide the greatest volume growth for cheese. The experience of Hong Kong has already shown the enormous growth potential for pizza in the Chinese dining culture, and mainland cities can be expected to follow a similar path. With thousands of pizza restaurants; over 600 McDonald's outlets already, with plans to open 100 new ones a year before the Beijing Olympics; and Burger King just entering the market, there will certainly be growing demand for pizza toppings and cheese slices for burgers.

Duncan Freeman is a writer and consultant based in Brussels. He can be contacted at duncanfreeman@skynet.be.

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