China’s seafood industry faces a profitability crisis

Published on
October 2, 2017

Behind recent diplomatic niceties and well-scripted ceremonies, there’s plenty of angst and worry in countries like Indonesia, Malaysia, and Nigeria about the embrace of China’s geopolitical strategies like “One Belt, One Road.”

Fisheries officials and executives gathering in Hong Kong for the annual Seafood Expo Asia trade fair recently were keen to talk privately about how dumping of Chinese seafood below cost remains a problem. The blueprint for increased trade on China’s terms, they say, is aiding the movement of low-priced Chinese processed seafood products, which undercuts prices in other countries and renders local value-adding industries unviable.

They ask, if you took away the obvious direct and indirect subsidies, could Chinese seafood exports compete? Land, water, electricity, and loans are available to larger processors at very favorable rates. 

In addition, these companies are now set to enjoy a much larger subsidy. Chinese exporters are currently in line for a giant implicit subsidy in the multi-trillion yuan “One Belt, One Road” (OBOR) – a recent Chinese policy encouraging the construction of a network of transport routes out of China to facilitate exports. This blueprint of Beijing has been embraced by poorer countries grasping for the infrastructure that it promises. But many of these countries are also finding that greater connectivity to China comes at a high price for local producers. 

More Chinese products are appearing on local shelves as better roads and railways connect Chinese exporters into central Asia and Iran. A port in Pakistan refurbished under the OBOR has opened up a new route for overland supply of raw materials to China from the Arabian Sea. These infrastructure projects reach southwards as far as Sri Lanka and westwards to the Middle East, Africa, and Eastern Europe.

Officially, China currently has more than 10,000 seafood processing plants. Anecdotal evidence suggests the figure is accurate, but that high numbers means market saturation. Half these processors compete solely on price and make tight profit margins through export rebates and subsidised costs. The overcapacity of the sector leads to exports effectively being sold at a loss, and the same is true in various other exports, though Chinese steel has gotten the most attention in the international press. 

Chinese tilapia has scored major market openings in the Middle East and West Africa – many of whose own waters are overfished by Chinese and Western vessels. Increasingly, Chinese tilapia is winning in these markets because it costs less to farm and process the fish in Fujian or Guangdong and ship it than it does to move product around Africa.

The hype and euphoria around the OBOR export opportunities masks a harsher reality. Many Chinese seafood firms are in a precarious financial state. Many operate not according to commercial or market-based decisions, but rather decisions made in line with local political needs –positive local employment and export figures, which are essential career data to an ambitious Communist Party official. Of course, there are many successful and well-run firms but they’re being held back by other less-efficient operators who distort competition by undercutting rivals on price (and, too often, quality).  

There are no more easy gains remaining in Chinese productivity, as the country’s flow of migrant workers has slowed to a trickle. But rather than focus on innovation and productivity, many firms have instead ploughed money (often borrowed) into real estate and other areas such as tourism, which are seen as delivering faster, larger profits. If and when China’s real estate prices fall –and many predict an inevitable bubble bursting – then the leveraged real estate plays of these seafood companies will come asunder with massive consequences in debt.

A market-based rationalization of China’s seafood sector is now on hold. Cheered with the prospect of OBOR market access, companies will keep producing on wafer-thin margins, while neglecting to invest in research and development, transitioning to higher-value species or products, or downsizing their workforces.

The tactics compound the sin. “One Belt, One Road” will ultimately prolong the life of companies in sectors that suffer from overcapacity, including seafood processing, thus squeezing opportunity for competitors elsewhere.  This will be of worry to many other producer nations – who will, however, be loath to complain if they’re getting a piece of infrastructure through OBOR. 

Contributing Editor reporting from Beijing, China

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