China’s ‘dragon head’ seafood giants will drive next generation M&A
Anyone who sees China’s aquaculture sector as fragmented should look to a remarkable figure: China’s government claims 80 percent of Chinese aquaculture output is in fact in the hands of the large-scale companies commonly referred to as “dragon head enterprises” in Chinese. That level of concentration exceeds the equivalent figures for livestock (70 percent) and crops (60 percent) and suggests plenty of ability by a select core of companies to influence seafood output in the area.
Those figures come from a little known government agency, the Office for the Vertical Integration of Agriculture, set up in the mid-1990s to oversee China’s efforts to integrate its agricultural sector. Over RMB 12 billion (USD 1.9 billion, EUR 1.4 billion) in subsidies was given to dragon head firms between 2000 and 2005 and while data hasn’t been published it’s likely that figure increased significantly in the years since then as China has been trying even harder to rationalize the sector in response to alleviate food safety scares but also to improve the security and logistics of its food supply.
Over two thirds of the “urban food basket” (a Chinese urban system of quantifying local agricultural output and food consumption) is accounted for by the dragon heads, according to China’s ministry of agriculture, which wants to increase that proportion. Dragon heads are firms with close ties to regional governments where they’re based —they’re also recipients of grants and policy support and many are or have been at least partly state owned. These are the so-called “dragon head” enterprises that China looks to as the modernizers of the nation’s food sector. Chinese firms like Baiyang and Tongwei (both aquatic feed, tilapia culture and processors) and pelagic specialist Shanghai Fisheries are examples of dragon heads in the seafood sector. The term also applies to shrimp shipper Guolian and shellfish specialist Zhangzidao.
As they grow, the dragon heads are buying firms overseas to get their hands on resources and know-how. The Chinese are buying international brands to secure supply but also to secure branding, distribution and marketing nous to ensure China has globally competitive players to satisfy the domestic and international markets.
Some of the most frequent-flying members of China’s government are the bureaucrats who oversee the agriculture and food processing sectors. Overseas purchases by Chinese food firms are part of a national strategy in the effort to modernize and rationalize a sector that has been blighted by food safety scares. The deals are being done by the dragon heads, encouraged by government to buy up competitors at home and peers overseas.
Dairy and pork processors have been the most high profile deals of the dragon heads: Shanghai-based Bright Foods’ purchase of the leading Israeli food processor Tnuva Food Industries (it earlier bought food brands and farms in U.K. and Australia) has been well reported while China’s agri conglomerate China National Cereals, Oils and Foodstuffs Corporation (COFCO) has continued to pick up assets. It owns European vineyards and lately took a stake in the huge Singapore-listed Noble Group Ltd.’s agricultural trading unit, only a week after capturing a majority stake in Dutch grain trader Nidera BV.
In seafood and fisheries there have been plenty of low-key deals on the extraction side, but there inevitably comes a time when China’s processors go hunting for brands, in the manner that China’s pork processor Shuanghui bought U.S. peer Smithfield to get access to a valuable brand that would allow the firm to charge a premium in the Chinese retail market (while also acquiring know-how in marketing and packaging — and a higher valuation for the Chinese firm in its subsequent stock listing).
The fisheries sector has also followed a similar pattern towards state-supported conglomerates being groomed as national champions able to compete internationally — in much the way the Shuanghui-Smithfield deal was done. Unlike pork and grain, seafood remains an export-oriented industry in China. But this will change as domestic consumption increases, in the same way that domestic consumption has changed China from a net exporter to a net importer of pork and corn in the past decade.
Asian models for China’s seafood dragon heads include Thai Union, with its Chicken of the Sea brand in the United States — along with Pacific Andes/China Fishery with its ability to secure large producers of fishmeal in Latin America. Both of the latter benefit from an established track record and access to capital, whereas Chinese firms are limited by China’s more restrictive financial system and dysfunctional stock market. But Chinese dragon heads also benefit from access to policy lenders like the China Development Bank, mandated by Beijing to support Chinese overseas deals — on favorable terms to the borrower.
Globally investors have proven enthusiastic about seafood investments, given expected increases in future seafood consumption paralleled with tightening supply. Integrated production-processing-distribution is seen as an optimal model globally, and also in China where Baiyang has sought to build its tilapia breeding, feed and processing capacities while Zhangzidao has sought to be a top distributor as well as producer-processor.
China needs to secure supply given the expected increase in seafood consumption here: the average Korean and Japanese eats 61.5kg and 55.3kg of seafood per year while the Chinese figure of 35kg will catch up in coming decades. Likewise, China’s share of global fish feed trade has gone from 30 percent to 45 percent in a decade and that figure will rise given feed accounts for half the production cost of premium priority species like shrimp.
Will China seek to go up the value chain by processors buying some of their international customers or distributors? Or will it continue the current focus of seeking to build markets in developing countries like Nigeria, Brazil and the Middle East? That goal, and another one — building domestic sales — would all be facilitated by acquiring a well-known international brand that would deliver prestige and an ability to increase prices. Expect to see the dragon heads making acquisitive moves in the coming years.