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Dr. FuYuning
May 2010
Cold Chain Logistics In China
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2
Executive summary
Rising middle class in China will demand more and safer food
The changing regulatory environment is driving up food safety standards andcompliance
Distributing food in China safely and efficiently is a formidable challenge
CMAC will offer an attractive value proposition to MNC manufacturers
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3
Urbanization in China has significantly increased
disposable income levels of the middle class
295437 622
1,335
713
1999
1,258
820
1989
1,127
832Rural
Urban
2009
295.4
198.5
127.2
42.0
7.60.5
20091985 2025
17.5%
1995 2005 2015
Increase in Chinese urbanization(Population millions)
Growth of Chinese middle class(Millions of urban households)
Source: National Bureau of Statistics of China; China statistics abstract; Chinese Academy of Social Science; The Great Electronic Wars 9/0 6
+42%
-13%
+48%
-1%
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4
As food safety becomes a greater concern, the urban
population tends to buy more from supermarkets
(1) Weighted average of all the health concerns held by food and beverage buyers(2) Including all the consumers that are concerned about safety and are willing to pay a premiumSource: Insights China; Annual survey report on China consumers; Statistics of Food Safety Survey that is Zhejiang Provincial Government conducted
online in March –May 2009
% respondents whoare concerned about
food and beveragesafety
9%
No concern
91%
8
No premium
<5%
5-10%
10-20%
>20%
44
30
15
3
How much premiumwould consumers like
to pay to eliminatehealth concern(1)
(2)
Location preference for urbanpeople to buy food
Others 4.7%
Convenience store
1.5%
Roadside market
1.6%
Wholesale market 2.1%
Farm product market
8.8%
Supermarket 81.3%
Concern about food and beverage safety
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5
As food safety becomes a greater concern, the urban
population tends to buy more from supermarkets
Concern about food and beverage safety is increasing
– Among the various expectations that consumers have in their food products, safety is themost intrinsic and essential quality. 90% of Chinese consumers are concerned aboutsafety in food and beverage products.
– Of the 90% who are concerned about food safety, half are willing to pay a premium forsafer food (30% of the consumers said that they are willing to pay up to 5% premium)
Internet survey result of “Where do you believe you can buy safer food (single choice)”
– Supermarket is a primary choice for urban people who wish to buy safe food
– Concerns about food safety focus on hygienic processing environment, fake products usedas genuine articles, inferior products used as qualified articles, additives being illegallyadded, residue of pesticide/veterinary drugs, false or exaggerated marketing, orexpired/spoiled foods
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6
A three-tier farm produce market system for rural areasA three-tier farm produce market system for rural areas
Food type in rural areasFood type in rural areas Food sourcing channel in rural areasFood sourcing channel in rural areas
In the rural areas, consumers have developed a weak
sense for food safety
Other unpacked food products
>15%
>15%
Packed food products
<70%
Urban food wholesale markets
40%
Mobile food selling vehicle
60%
Rural consumersFood businessoperators
Regulators
Source: National Bureau of Statistics of China; Sina news
Unpacked confectionary, delicatessen, driedfruit
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Executive summary
Rising middle class in China will demand more and safer food
The changing regulatory environment is driving up food safety standardsand compliance
Distributing food in China safely and efficiently is a formidable challenge
CMAC will offer an attractive value proposition to MNC manufacturers
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The Chinese government has issued new standards and
regulations on food safety
Food safety supervision over whole supply chain
Special attention to cold chain transportation
Clarification of food safety responsibility
Food Safety Law of the People's Republic of China
These new food safety standards and enforcement of these standards will
drive out non-compliant players in the supply chain
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Current food safety supervisory
structure
Current food safety supervisory
structure• Food, like healthcare products
and pharmaceuticals directlyimpact human health
• Developed countries placesupervision of food and drugunder one organization
• Drug Supervision Administrationcan transfer lessons learned fromthe pharmaceutical supply andvalue chain to the food industry
One unified supervision for food & drugs
Food Safety will now fall under China’s Ministry of Health
State Food and DrugAdministration
China’s Ministry of Health
• All players in the supply chain,including purchasing, transportation,storage, and sales will be monitored
• Methodologies and lessons learnedfrom supervising the pharmaceuticalindustry will be applied to the food
industry
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USA EU
• Covers allfood
• Offer very
specificstandards andregulatoryprocedures
• Constitutevery tightregulations on
food safetyprotection
• Full-controltheory ‘fromfarm to table’
• HACCPsystems,requiringtraceability in
all food andfoodingredients
Gap of Chinese Food Safety Laws &
Regulations
• Lack of systematic and coordinated legalsystem
• Provisions of laws and regulations aretoo general, lacking of maneuverability
• Lack of self-improvement &complementary mechanism, laggingbehind in adapting new legal provisions
to new situations
• Lack of uniformity in food safety controlsystem
• Lack of food safety control legislation inrural areas
Food safety laws in USA and Europe Union
China still lags behind developed western countries
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This places pressure on all players in the food industry to pursue operationalexcellence in food production, transportation, storage and sales
SalmonSalmon
Ice
Cream
Ice
Cream
Yogurt Yogurt
Deep-
frozen
Dumpling
Deep-
frozen
Dumpling
With the increased attentionfrom public opinion and
policies, manufacturers and
distributors can no longer just watch their own qualitystandards –
they must pay
attention to those of their partners
Many
scandals
on food
safety
issues
However, when problems arise, all players in the supply
chain are liable for prosecution
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Executive summary
Rising middle class in China will demand more and safer food
The changing regulatory environment is driving up food safety standards andcompliance
Distributing food in China safely and efficiently is a formidable challenge
CMAC will offer an attractive value proposition to MNC manufacturers
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75% of the market will be in 2nd and 3rd tier cities
1st Tier Regions
2nd, 3rd Tier Cities
1st Tier Cities
Efficient reach requires a national distribution network
There are 50 cities with over 1 million population
Source: China Ministry of Construction
Guangzhou /Shenzhen
Beijing
Tianjin
ShanghaiXian
Qingdao
Chengdu
Urumqi
Lanzhou
Dalian
Harbin
Changchun
Shenyang
Xining
Nanning
Fuzhou
Hangzhou
TaiyuanBaotou
Kunming
Nanjing
Chongqing Nanchang
Guiyang
Changsha
Jinan
Zhengzhou
Lhasa
Xiamen
Wuhan
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Food business operators typically employ three typicallytypes of cold chain distribution models
More and more players have been considering outsourcing their cold chainlogistics, to focus instead on sharpening their core competence
Cold Chain ModelCold Chain Model FeatureFeature Typical Player Typical Player
• Internally operate• Guarantee food safety• Huge volumes of cold chain
logistics costs
Internal OperationInternal Operation• The logistics business unit, which
is subsidiary to Yum Group,
• Much safer• Not common3rd-Party ColdChain Logistics
3rd-Party Cold
Chain Logistics• Kangxin Logistics• ShuangHui Logistics,COFCO• Sinotrans Yuhe Cold Chain
Logistics, Jinjiang Cold Logistics,Shandong Rongqing Logistics
• Havi Logistics
• Difficult to monitor the deliveryquality of the outsourcedlogistics;
• Or depth and breadth of marketcoverage is severely restricted
Pick-up /DeliveryPick-up /Delivery• Very common in China
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Executive summary
Rising middle class in China will demand more and safer food
The changing regulatory environment is driving up food safety standards andcompliance
Distributing food in China safely and efficiently is a formidable challenge
Value proposition of CMAC to MNC manufacturers
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Problems can easily occur within each interface of food
distribution process
Source
Linehaul
transporta-
tion
Plant or intermediate
(regional)
warehouse
Linehaul or multi-stoptransporta-
tion
Marketfacing
warehousing
Local
delivery
Retail
operations
ImportImport
ManufacturingPlant
ManufacturingPlant
Grower Grower
Manufacturer,Distributor, or 3PL Warehouse
Manufacturer,Distributor, or 3PL Warehouse
Manufacturer,Distributor,
3 PL or Retailer-
Warehouse
Manufacturer,Distributor,
3 PL or Retailer-
Warehouse
1st Tier Wholesaler
1st Tier Wholesaler
2nd Tier Wholesaler
2nd Tier Wholesaler
3rd Tier Wholesaler
3rd Tier Wholesaler
Retail storesRetail stores
RestaurantsRestaurants
Institutional,Hospitality and
other Consumption
Points
Institutional,Hospitality and
other Consumption
Points
Retail storesRetail stores
Institutional and
Hospitality
Institutional and
Hospitality
RestaurantsRestaurants
Food safety process is broken
• Fragmented supply chain• Lack of standards
• Inadequate audit and enforcement
• Reliance on trust and visualinspection
Source: CIES food safety operator survey
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Successful management of food distribution logistics
systems ultimately requires “end-to-end” management
Therefore retailers must influence the entire food supply chain as muchas possible
• Maintain quality and safetyfrom farm to consumerpurchase or consumption
• Ensure temperature andsanitation integritythroughout logisticsprocess
• Provide certifiable productat retail
• Increase customersatisfaction
• Maintain quality and safetyfrom farm to consumerpurchase or consumption
• Ensure temperature andsanitation integrity
throughout logisticsprocess
• Provide certifiable productat retail
• Increase customersatisfaction
• Temperature abuse is thesingle most importantissue in cold chainlogistics in China today
• Temperature abusetypically happens at theinterfaces, where “hand-offs” occur
• The integration challengeis substantial: multiple
participants, functions andhand-offs
• Temperature abuse is thesingle most importantissue in cold chainlogistics in China today
• Temperature abuse
typically happens at theinterfaces, where “hand-offs” occur
• The integration challengeis substantial: multiple
participants, functions andhand-offs
Technical IssuesTechnical IssuesObjectivesObjectives Operational issuesOperational issues
• Significantly more complex
• More expensive (facilities,equipment)
• Multiple participants and
hand-offs• More attention and
discipline required
• Requires seamlessintegration throughout the
process
• Significantly more complex
• More expensive (facilities,equipment)
• Multiple participants and
hand-offs• More attention and
discipline required
• Requires seamlessintegration throughout the
process
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Multi-national food producers entering into China should seek nationwide andall-along-cold-chain strategic cooperation with logistics vendors that are
leaders in the industry
StrongLocal Experiences
WeakLocal Experiences
Strong AbilitiesIn International
Logistics
Weak Abilities InInternational
Logistics
Vendors that have cold chain logistics as their core business
(1) Industry standards are defined by reference to best players in the industry, since their practices have undergone market test and thereby developedpracticability
Capabilities of logistics vendors must be analyzed before a
vendor can be selected
• International logistics abilities
• Local experience
• Logistics as core businesses
• International logistics abilities
• Local experience
• Logistics as core businesses
Criteria for selectingoutsourcing vendors
Criteria for selectingoutsourcing vendors
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CMAC is ready to be your strategic partner to set up an
efficient distribution network in China
CMG has a 51% stake in CMAC
• Strength in ports and logistics network along the coast and rivers, with goodunderstanding of local logistics market
• Meet cold chain logistics industry standards and are and familiar withgovernment policies
• Have close relationship with government
• Economies of scale result in low operating costs
AmeriCold, with 49% stake in CMAC, will inject its International
logistics
capabilities
• Has 30 million sqm cold storage• Able to service many large food producers and wholesalers
CMAC offers logistics service as its core businesses
• Comparing to some big China state-owned companies who mainly serve internalcold chain logistics needs, CMAC is a public cold chain logistics service providerwho prioritizes client needs
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Appendix: Introduction of CMAC
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Founded in 1872 ,China Merchants was the firstnational enterprise in China’s modern history and
the legacy of the “Westernization Movement”
Li Hongzhang,Founder of China
Merchants
In 1979, China Merchants establishedChina’s first industrial zone opening tothe outside world – China Merchants
Shekou Industrial Zone
First Headquarter (Shanghai)
“Yidun”
First vessel
bought in 1872
CM’s branches inhistory
CMG introduction —
A hundred and thirty-seven year
voyage…
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Subordinated To The State-owned Assets Supervision And AdministrationCommission (SASAC) Of The State Council
• One of 10 Chosen SOE publicized as Model
State-owned Enterprise• Selected as “The Most Admired ChineseEnterprise” by Fortune
• Awarded Grade A enterprise by SASAC• Two-fold growth in key financials within a 3-
year period
• Awarded “Enterprise with OutstandingPerformance” by SASAC
• Awarded Grade A enterprise by SASAC
2008
2007
2004 -
2006
2009
• Ranked 7th most profitable amongst all SOE
… Mainland China
Enterprise based inHong Kong
•Headquartered in HKand started business inHong Kong in 1873, andis the oldest mainlandChina enterprise
operating in HK
CMG introduction —
Large state-owned enterprise
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Transportation & related infrastructure, property development & management,financial investment & asset management
Assets portfolio —
2009 Profit contributions —
2009
CMG introduction —
Core business sectors
Transportationinfrastructure
Ports
Logistics
Energy shipping
Toll roads
Others
Industrial zone
Propertydevelopment
Securities
Fund
Banking
Insurance
The largest public port operator in
China
The leading logistics vendor in China
With the largest deep-sea energy shipping fleet in the Greater China
China’s largest investor and
operator in toll roads
Propertydevelopment
Finance
34%44%
22%
Finance
TransportationInfrastructure
Property
50%
34%
16%
Finance
TransportationInfrastructure
Property
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• Total Assets amounting to USD40 billion and managing asset value of US$368 billion (end of 2009)• Net Profit of US$1.41billion (for 2009)
Total assets(US$ billion)
40
30
18
8
64
200219981994
+17%
200920082006
CMG introduction —
Financial strength
368
255
147
18168
19981994
+29%
2009200820062002
1.4
1.2
1.6
0.9
0.6
0.5
0.3
2005 20092006 2007 2008
+29%
20042003
Managed assets(US$ billion)
Net profit(US$ billion)
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QianhaiwanFree Trade Zone
MWT
CCT
SCT
CMAC
CMAC
CMG Cold Chain —
Cold chain business
CMAC is a joint venture, held 51% by China Merchants and 49% by AmeriCold, involved indeveloping cold chain logistics industry in China
CMAC owns cold storage space 24,500㎡ near West Port, one of the two designatedrefrigerated food inspection storage warehouses endorsed by the General Administration ofQuality Supervision, Inspection and Quarantine of the People’s Republic of China inShenzhen
Furthermore, CMAC has constructed a 12000㎡
cold storage warehouse at Qianhaiwan
Free Trade Zone. And by leveraging the favorable policies that are entitled by a free tradezone, CMAC also provides innovative services for import and export traders
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• CMAC will own/operate 8 DCs with
75,000 sqm of frozen and chilled space,and a fleet of over 100 temperaturecontrolled trucks by the end of 2010
• In synergy with the internal logisticsproviders owned by China Merchants
Group, CMAC can leverage the strengthof the consolidated resources in bothgeneral goods logistics and cold chainlogistics, thereby providing an integratedlogistics service that covers generalgoods logistics and cold chain logistics
• The dry-storage warehouses that CMGoperates occupy totally 1,000,000 squaremeters, of which self-owned warehousesoccupy near 300,000 square meters. Italso owns 500 vehicles
• CMAC will own/operate 8 DCs with
75,000 sqm of frozen and chilled space,and a fleet of over 100 temperaturecontrolled trucks by the end of 2010
• In synergy with the internal logisticsproviders owned by China Merchants
Group, CMAC can leverage the strengthof the consolidated resources in bothgeneral goods logistics and cold chainlogistics, thereby providing an integratedlogistics service that covers generalgoods logistics and cold chain logistics
• The dry-storage warehouses that CMGoperates occupy totally 1,000,000 squaremeters, of which self-owned warehousesoccupy near 300,000 square meters. Italso owns 500 vehicles
CMAC
Cold Chain Network
— 2010
And Beyond
CMG Cold Chain —
Development planning