Based on my personal opinion, currently, there are four important dilemmas which the top 30 feed companies in China face.
(Localization or Internationalization)
An important trend in recent years is the increased internationalization of global markets. Foreign enterprises, such as CP Group from Thailand, have achieved great success by exploiting the Chinese market. Chinese feed enterprises, such as New Hope Group, have expanded overseas with the prospect of claiming many achievements in foreign countries like Vietnam. These facts signify the importance of the saying that “business knows no borders.” Throughout the course of development, to be successful, enterprises could pursue neither a closed-door nor isolationist policy.
The successful growth and development of China is accompanied by the broad expansion of capital, technology, and markets; these accomplishments greatly encourage Chinese feed enterprises to pursue internationalization. However, the opposing viewpoint insists on localization, based on the notion that China is the market with the highest growth potential in the world today. Proponents of this viewpoint believe there is no need to achieve internationalization simpy for the sake of internationalization; that is, there is no need to strive after something unattainable, meanwhile forgoing substantial opportunities immediately at hand. Moreover, the scale of Chinese feed enterprises and the will of shareholders and management teams may not yet have reached the level required to successfully expand abroad. As is often the case, operating and developing businesses far away from the core, can lead to failure as encapsulated by the old Western proverb, “the farther away from hometown, the closer to failure.”
In weighing the pros and cons of localization versus internationalization, it is difficult to conclude which course is preferable. From my point of view, the primary strategy of Chinese feed enterprises should be to establish dominance in the domestic market, and then move to neighboring, but less-developed countries such as Vietnam, Laos, Cambodia, Burma, North Korea, and Kazakhstan. Indeed, in spite of larger market sizes, it would be much harder to invest in neighboring but well-developed countries such as India, Russia, South Korea, Japan, and Australia.
(Focus or Diversification)
Even though many of the world’s successful enterprises, such as Nokia, have pursued a highly focused strategy in a specific sector or industry, other large enterprises, such as GE, have attained even greater success by pursuing a highly-diversified strategy. Currently, China is in a transition point, moving from a developing, volatile, and informal market to a more mature market with rules, regulations, and transparency. For instance, East Hope Group initially was a feed business, but it soon grew into one of China’s major private aluminum enterprises. Additionally, in its early stages, New Hope Group invested in banking and real estate, instead of focusing its resources on the feed business. Recently, New Hope Group has a robust capital base due to its investment holdings and equity participation in several agriculture companies, which have helped the company to diversify and thereby lower the amount of risk to which it is exposed.
Today, the relationship between government and companies has largely been liberalized. The accumulation and distribution of wealth, social benefits, and resources and the pursuit of diversification are based on the decisions and strength of individual enterprises. The most successful approach might be found by examining cases regarding the development of specific businesses and industries, but these examples may not be applicable to China. Highly specialized companies such as Microsoft, IBM, and Intel, which began in the U.S., have become global leaders in the IT industry. On the other hand, some conglomerates in Japan and South Korea may have negatively impacted the overall development of the countries because many deals were made with the respective governments, often behind closed doors.
The problems created by focus and diversification should be decided by each individual enterprise, based upon rational choices about maximizing wealth creation, maximizing economic impact, or becoming a leader within a particular industry or sector. I prefer to be an expert in a given field.
(Specialization or Integration)
The traditional manner of the feed industry is to specialize in feed production and to increase complexity, enhance technology, and improve quality. This traditional manner has encountered challenges of the broiler industry, as exemplified by the comments, “mere broiler feed producer.” The trend is toward integrated production, by assembling the different branches of the process: breeding, hatching, feed supply, epidemic prevention and control, feeding, slaughtering, and meat processing. This trend will likely also affect pork, layer and ruminant industries. The trend has been the case in America; for example, Smithfield Foods is representative of Trus Model. Large scale production and operations obviously affect the market price and should lead to economies of scale. However, in recent years, Smithfield Foods presented signficant losses in its annual financial report. This data suggests imperfection with the Trus Model.
In fact, this trend toward integration can be particulary challenging, especially if the industry as a whole is consolidating. The challanges lies in converting innovation and execution expertise in a highly-specialized domain, into a broader expertise in integrating other companies into a coherent structure, and operating each component successfully and synergistically. In a sense, compared with North American companies, European ones tend to be even more specialized. Many family farms are under the restriction of quota allocations and limited scales of operation, and formal contracts with specialized feed companies and specialized slaughterhouses. To protect the production and soundness of the market, the government has implemented direct control of the process of production. Government does this through the process known as risk-sharing: it controls each branch of production and a large amount of farms to have risk characteristics that people are comfortable with, thereby reducing crises.
I still consider the model practiced in the EU to be preferable. The EU model is accomplished by maintaining crucial controls over operation of the specializated livestock chain. In addition, well-functioning commercial markets and the principle of good faith are essential to a healthy economy.
(Private or Public)
A firm may raise funds in financial markets by issuing equity, such as common stock or shares, which represent claims on the net income (income after expenses and taxes) and assets of a business. China has had active capital markets for many years, and therefore there are many publicly-listed feed companies. Companies listed in China have tended to have extraordinarily high P/E ratios, creating sudden wealth and large gaps between listed and unlisted companies. It is possible that some weaker firms may actually be most eager to sell securities to unwary investors, and the resulting adverse selection problem may keep stock prices in bubble territory. Furthermore, because of the market structure and lack of shareholder rights today, once an investor has bought a security, thereby providing money to a firm, the recipient firm may be incentivited engage in riskier activities or to commit outright fraud.
But Chinese firms and shareholders should be clear about the following concept: Going public is just an instrument of the company to finance future development, but it is not the final purpose of operations. In contrast, both BMW and Cargill are private holding companies and well-known in the world for many generations. There are stringent reporting requirements for public companies. Their bookkeeping must follow certain strict principles, their books are subject to periodic inspection, and they must make certain information available to the public. These necessary duties increase the cost of operations. Unfortunately, in order to go public, many firms in China create false financial statements and fabricate profit and loss accounts; but such firms will only end in bankruptcy, to the detriment of shareholders, customers, employees, and society. With capital markets supporting such overvalued stock prices, it is unlikely that rational decision-making will be achieved or incentivized in the near-term. But, it is necessary to be honor and pragmatist.
In addition to the challenges mentioned above, a major concern within the industry is the substandard and deteriorating FSQS (food safety and quality service). Many problems in the food industry have been discovered, such as melamine, which have caused the feed industry to be held at fault by the public. Such debacles, have resulted in increased supervision and regulation of the industry and restrictions imposed on many companies. Going forward, regulation and red tape continue to worsen and impose greater burdens on companies. The livestock industry is now under huge pressure, strangled companies and reduced . Moreover, the world is underoing a dramatic increase in human activity, severe damage to the environment, ecological disasters, and the likelihood of animal-derived epidemics. Considering all of the above components, the feed and livestock industries are under negative status and have recently become even higher-risk businesses.