New report: China’s seafood processing sector in decline

Published on
April 11, 2019

A recently published report has pointed out numerous problems with China’s seafood processing sector, highlighted by labor shortages, low technical capacity, rising costs, and not enough spending on research and development. 

China’s seafood processors are living on borrowed time, according to the report, which was published by the China Industrial Research Network, an economic research agency. The sector looks strong owing to its scale, but is actually weak, “as the main advantage is low-cost labor” and this advantage will eventually evaporate. Too much processing material is shipped in by foreign firms, the report concludes.

“Higher incomes in China will mean low-cost, low-tech goods production will be eliminated in China and replaced by other countries with less-developed economies,” the report said. “If you still insist on operating in the current mode, you will only end up with failure.”

This prognosis won’t come as a surprise to anyone watching China’s economy. Last year was the first that the country’s labor force contracted in size since China started its economic reforms in 1979. Wages are rising for China’s labor force and the country’s demographics point to a fast-aging society. 

In recent years, government support – primarily through tax rebates – has helped Chinese seafood processors stay afloat. But as the attention of China’s local governments shift from job creation to labor shortages, they may not prioritize keeping seafood processing facilities open. Seafood plants may face the same fate as other industries in China, which the government deemed were too dirty and shoved out under the guise of curbing pollution. 

The solutions recommended by the China Industrial Research Network look straightforward for the minority of Chinese processing firms with the financial means to carry them out: investment in technology and expansion of domestic market sales. The first move is needed to cut labor costs and the second is required to expand the domestic consumer market and reduce dependence on foreign markets, according to the report.

Rather than competing on price, as most of the firms in the sector have been doing up until now, Chinese processing firms need to increase “deep processing” to add value to its products, according to the report’s recommendations. However, that requires investment and the report questions around how “deep processing” fits into a Chinese market that puts a premium on fresh product.

For companies that do have funds to make it happen, there is a template for success in what the previously export-focused shrimp firm Guolian Aquatic has done with its processed “Long Ba” range of Vietnamese catfish and locally-farmed bass (Chinese perch). The company has pivoted to selling those products in the domestic market, feeding into growing demand from hot pot restaurant chains and other types of mass-market concepts requiring low-cost fish inputs. 

Following the report’s formula for success, Guolian has been developing “deep processed” products for the Chinese food and beverage sector at its large R&D center in Shanghai, and has invested in several new processing facilities for packaged breaded shrimp and fish products as it seeks to anchor its future growth to the domestic Chinese economy. An explosion of dining and grocery franchises in China’s regional cities means there’s a demand for products like those Guolian has been researching and developing. 

However, most of the seafood processing operations in China don’t have the necessary financial backing to commit to such large reforms. And as for the supply issues pointed out by the China Industrial Research Network report, the document claims Chinese processors are far too dependent on reprocessing work for foreign clients who supply the seafood.

Without change, the report predicts a likely clearing out of excess capacity as the cost of labor continues to get pricier and as the export-focused Chinese contract processing sector wanes as it is supplanted by the growing domestic market.

Data for 2018 suggests that shift may already be underway. China’s seafood processing business remained largely flat at 24.04 percent of overall exports for the first half of 2018. While volume decreased 3.13 percent year-on-year to 577,000 metric tons, total value rose 4.68 percent to USD 29.72 billion (EUR 26.4 billion). Of that figure, contract processing accounted for 100,500 metric tons, down 3.29 percent in volume but up 5.92 percent in value terms year-on-year to USD 692 million (EUR 613.7 million). As for seafood bought and imported by Chinese processors for re-export, the figure fell 3.10 percent in volume and rose 4.31 percent in value.

China’s ambition for more control and higher-value processing of its imported seafood would require most of the product being processed for the domestic market, and that market remains largely focused on species that fit the needs of China’s booming food and beverage sector (growing at an average 10 percent per year over the past five years). Vietnamese catfish, for instance, works well in hot pots. Squid from Argentina is processed into dry snack packets sold in every bus and train station around China. Shrimp is also a versatile product in high demand in China. 

But it’s not clear how China can replace its low-margin contract processing trade, which has been focused on processing whitefish and shrimp for large Western clients. Most processors chasing this business don’t have the resources to emulate Guolian, whose R&D center isn’t focusing on new products for the Western market, but on adapting convenience products to Chinese palates. 

Even less clear is how the well-documented expansion of China’s distant-water fleet impacts the fate of the processing sector. As one example, the city of Fuzhou claims to have 13 companies operating 432 distant water vessels around the world, collectively accounting for a 250,560-metric-ton catch worth CNY 2.17 billion (USD 323.1 million, EUR 286.6 million) in 2018. Cities like Fuzhou aspire to developing an industry cluster around their distant-water fleets, with seafood docked and processed. That idea is pegged around the hope that more value be kept at home, with Chinese companies owning the product rather than contract processing someone else’s fish. 

But the growth market is domestic. Hence the distant-water fleet’s catch and any new processing plants set up to service it will be looking to supply species and products to suit the Chinese palate. If Chinese processing companies fail to make this transition, the sector faces a dim future, the report concluded.

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