McCain's passion for China
Published Saturday February 6th, 2010
Growth: French fry producer is after a lion's share of the Asian country's fast food market. The challenge lies in changing the palate - and the culture - of a nation
The average Canadian eats 30 pounds of french fries per year.
In China, per capita consumption is less than 3½ ounces.
McCain Foods Ltd. is trying to turn the figures for Asia's largest country around.
And there is hope for McCain, whose biggest fast-food restaurant chain clients, KFC Corp. and McDonald's Corp. (NYSE:MCD), are seeing exponential growth in China - a country of 1.3 billion people.
Right now, top dog KFC is opening one new store in China about every 18 hours.
Considerable growth for McCain in China could be as simple as each Chinese person making one additional trip to their favourite fast-food joint each year - and ordering a side of fries.
"Even an extra portion of french fries," says Kai Bockmann, McCain's managing director for Asia. "They could just go to McDonald's or KFC and order one extra portion of French fries. We would be pretty happy."
Bockmann, the company's Singapore-based director, is in Harbin meeting with Shanghai-based managing director for China, Ruifang Jia, and vice-president of corporate development and emerging markets, Terry Bird - who flew in from Toronto for a quarterly tour of Asia.
Just over 20 years ago, McCain felt the Chinese market wasn't strong enough to warrant setting up a french fry factory.
KFC and McDonald's were just breaking into China in the late 1980s and neither were posting figures that would entice McCain to move in as an on-the-ground supplier.
In the mid-'90s, though, business started to pick up and McCain began selling into China seriously.
By 2005, it had built its own potato processing plant to help meet demand.
Now, the company says it is the largest producer and supplier of both domestically produced and imported frozen potato and appetizer products in China.
Bird says that less than two decades from now, Asia alone is set to match the scale of McCain's entire global operation.
"Last year, we did $6.5 billion in the world with 20,000 employees at 60 factories," he says.
"We see Asia, the potential for Asia, being as big as our whole company in 10 to 15 years' time."
The heart of the company's China operations is here in Harbin, the capital city of the country's most northeastern province, Heilongjiang.
Heilongjiang has long served as China's gateway to Russia and Europe.
Harbin, a city of nearly 10 million people and about 1,200 kilometres from the nation's capital Beijing, is now wrapping up its 26th annual month-long international ice and snow sculpture festival that draws artists from across the globe.
Shopkeepers are breaking out the red lantern decorations that signal the coming of Chinese New Year, which this year falls on Feb. 14.
The brisk winter wind makes a chilly day registering -15C feel much colder.
In front of McCain Foods Ltd.'s potato processing plant outside of town, the company's flag flaps alongside that of China - crimson with five gold stars in the upper left corner - and Canada's maple leaf banner.
Inside the largely automated plant, whole potatoes are being peeled, chopped, blanched, seasoned and packaged into bags of french fries ready for consumption in China and throughout Asia.
Chinese workers check the sliced potatoes at various stages of processing for blemishes and pack sealed bags of fries coming off the line into brown boxes sporting McCain labels.
Ahead of the new year, Bird, Bockmann and Jia are charting a course for the firm's 2010 China operations.
Bird is pushing the facility, which employs about 145 people, to churn out 50,000 tonnes of french fries this year.
That's more than the roughly 35,000 tonnes McCain believes its Beijing-based competitor J.R. Simplot Co. is putting to market annually in China.
Though the Harbin facility is only entering its fifth year of production, McCain has been in China since two senior executives were sent over in 1988 to assess the country's potential
"They came to this part of the world and it was the first of November and back in those days the guys almost froze to death because it was still very much a controlled state - not that today it isn't - but back then the government only turned the heat on, on Nov. 15," Bird says.
McCain was drawn to China when KFC and McDonald's were just tapping into the market.
"Our former chairman and owner Harrison McCain had always been keen on emerging markets and he was a visionary and always wanted to grow and expand the business," Bird says.
McCain started with 30 employees after brothers Wallace and Harrison McCain opened their first potato processing plant in Florenceville in 1957 is active today around the world.
Now, about 88 per cent of McCain's operations are outside of Canada.
But Bird says that to the executives scoping out China two decades ago, it was quickly evident the country was not yet ready for McCain to move in.
"I think it was 1994 to '95 that we became interested again. China was starting to emerge as an economy and we started to toy around in the agriculture," Bird says.
In 1996, McCain hired Ren Wang, who left his government post in China as a plant pathologist to scour the country to find the best land for growing potatoes.
While Wang was scouting out agricultural opportunities, McCain opened a Shanghai sales office in 1997 to introduce the company's french fries into China.
The firm practises a beachhead strategy, Bird says: It first develops a sales team to build a business base with fast food chains - McDonald's, KFC, Burger King and the like. And then McCain follows up with food-service customers such as hotel chains, and retail clients, including grocery stores - expanding once its processing facility is in place.
Wang, now the company's Harbin-based agriculture manager, spent years on agronomy trials throughout China before the company decided in 2001 to locate this processing plant in the northeastern city, surrounded by land on which Chinese farmers have been growing potatoes for centuries.
The company likes to have four solid successive potato-growing seasons before building a processing facility to ensure quality and quantity of supply.
"After four years of pretty good trials, we decided to build a factory and even then, I would think we moved a touch too fast and it cost us a fair amount of money at the front end when we built the factory because with our potatoes, we weren't prepared," Bird says.
"But we had to get into this market."
Bird says that looking at the history of french fries moving into different countries around the world, the trend has tended to follow the entrance of Western pop culture.
In urban centres such as Beijing, Shenzhen and Shanghai, fast food joints now abound as the Chinese, especially those in their 20s and younger embrace foreign flavours.
Increasingly, though, foreign restaurant chains are moving into smaller communities as the bigger cities become saturated, according to Guan Rong, the general secretary of the Shanghai Import Food Enterprise Association.
Rong expects McDonald's and KFC will see sales growth of 20 per cent annually in the coming years in all of China, except in Shanghai, where he deems the fast food market mature.
His non-profit organization - which represents 70 food importers, agents, retailers and wholesalers - has some members that saw growth of 10 to 20 per cent last year despite the economic recession.
"More and more people accept the fast food idea and Western foods," Rong says in an interview in his downtown Shanghai office.
Known affectionately as Kentucky among some locals, KFC has remained No. 1 in the market - perhaps because it was the first on the scene, or maybe because the fast food chain has succeeded in adapting its menu to suit local tastes.
"Fry producers like ourselves have been able to ride on the coattails of KFC and McDonald's in this market as they've grown exponentially," says Bockmann, McCain's Asia managing director.
But the two chains did not start doing well in China until they altered their offerings, he says.
According to McCain market research, 69 per cent of Chinese people eat breakfast outside the home.
KFC has cashed in on that custom by offering traditional Chinese breakfast choices such as congee, a porridge-like food made with rice.
And while its original recipe chicken is available, KFC does best selling chicken coated in spicier batters, Bockmann says.
"They really had a tough go for at least 10 years," he says of KFC and McDonald's. "Things really started to finally take off at both chains in the early '90s. That's when they started to resonate with consumers in China.
"They were able to offer products that really fit the local taste profiles. In the past, they would come in and peddle the same North American products."
KFC, based in Louisville, Ky., has a menu strategy for international markets not unlike McCain's operational motto introduced by its co-founder Harrison McCain: "Drink the local wine."
Bird insists that much of the company's success globally has come from abiding by this rule.
"What that basically means is when we come in, we drink the local wine. We don't go in with the assumptions that we know more than the people we're going to see, but that we can learn as much from them," he says.
In India, where McCain opened a potato processing facility in 2006, the company produces ethnic frozen potato products and alters its french fries by infusing local spices into the seasonings, creating masala fries.
McCain plans to devise new fry recipes for China eventually, as well.
But drinking the local wine goes deeper, Bockmann explains.
In Harbin, only a few foreigners - less than a handful of Canadians and one Australian - have remained on hand to help the facility along, but those are poised to be all but weeded out in the long run.
Facility managers are largely hired from within the local community at each of McCain's international operations and then sent abroad for about two years to be "inculcated" with the McCain culture, Bockmann says.
The company has even created an interactive web portal for its international workers, accessible in several languages, which allows an employee to sign in and learn about french fries - how they are prepared, consumed and how best to market the potato product, among other lessons.
Harbin plant manager Steve Ash says that taking advantage of the low labour costs in China has helped the Harbin facility's bottom line.
"Labour is cheap here; it's about one per cent of costs," Ash says.
Hiring local workers can present its challenges, though.
"It's very frustrating for me, not being able to speak with people on the factory floor," says Ash, who is originally from Florenceville, explaining that he relies on capable bilingual managers who speak Mandarin to ease communication.
A Canadian company operating in China is not without its feats on other fronts.
McCain has faced a business and political culture unique in the world.
But the biggest concern has been accessing quality potatoes.
Since two pounds of potatoes are required to make one pound of french fries, it is essential the company increases growing capability near its Harbin plant to avoid high transportation costs.
McCain is today forced to source some of its spuds from up to 1,200 kilometres away, in Inner Mongolia.
Agriculture manager Ren Wang spends much of his time educating nearby farmers and trying to convince them to switch from easier crops such as corn and soy beans to growing potatoes, which can be a more lucrative business but promises to be more capital- and labour-intensive.
"This year they want to grow potatoes and next year they may want to grow peas or cucumbers," Wang laments in an interview inside the doorway of the Harbin seed-production lab where visitors can observe, through a window, rows of small glass jars labelled in Chinese symbols, which contain soil and small green shoots.
Workers at the facility take little plantlets grown from seeds that are imported from New Brunswick and split them into many other plantlets, which are then transplanted to grow in a greenhouse where they become part of the company's potato resource.
Wang was one of 11 scientists from China who was sponsored under a $1.4-million program launched in 1987 by the Canadian International Development Agency to spend four years in the Maritimes studying potato seed growth and agronomy, largely at the New Brunswick government's Plant Propagation Centre in Fredericton and on course in Truro, N.S.
Many would likely find it hard to believe that China grows the most potatoes in the world.
Potatoes - sliced, diced, shredded and otherwise transformed - are used in a host of Chinese dishes.
But the country's farmers are used to producing table stock or supermarket variety potatoes not of the consistent quality and size needed for french fries, Wang explains.
Each year he visits small communities to give workshops to growers, introducing them to new technology to loosen the soil, teaching them how to spray fungicide to control disease and offering lessons on how to improve the quality of potatoes in other ways.
When Wang and his team introduced one group to irrigation, the farmers thought he was nuts.
" 'Those crazy foreigners,' they thought," Wang says. "Then they said, 'Oh, they are making rain.' "
The climate and environment is also tricky.
Aphids - little insects that like to attack potato plants - have been a nuisance for McCain in China.
And one key french fry potato variety, Russet Burbank, will not store long enough in China, where the summer nights are too warm and moist.
Amy Guo, the Harbin production manager, says the three on-site storage facilities can together hold up to 70,000 tonnes of potatoes.
About 400 temporary workers unload potatoes for roughly six weeks at the end of each growing season - around 2.5 million 40-kilogram bags last year, alone.
Potatoes are stacked from floor to ceiling in the dark, cold warehouses.
They are removed as needed throughout the year and sent tumbling down a long metal track and into a truck that unloads them into the processing plant.
"Some varieties can last until March or April and some of them May or June. That's still our challenge," Guo says. "Raw materials are still our challenge."
And operating in China isn't easy, either.
While firms in North America might be used to moving independently, in China, the government is involved in key decisions.
McCain chose early on not to pursue a joint venture with a Chinese partner, though many global firms entering the country in recent years took that route under pressure from the government.
Bird says McCain spent a lot of time studying the social, business and economic conditions of the country before setting up and queried international firms in the country's financial centre, Shanghai, for advice.
"Most of them said if they had to do it over again they would have come in on their own and that swayed our company's decision," Bird says.
"We want to be here for 30, 40, 50 years. Many of the partners, I think, that companies like us joined up with were looking for short-term returns - make a lot of money quickly and sell the company."
Bird is quick to point out that the local government has largely been helpful and supportive of McCain.
He says that so far, the corruption that is notoriously rampant among some governments in China has not affected the company.
"The one thing I will say straight off the top is both here and in India, we've never paid a bribe, we've never been asked for a bribe. We've said straight up front that we wouldn't do it," he says.
Jia, the managing director based in Shanghai, says rich international firms are especially targeted by the demands of corrupt officials.
"On the government side, we got huge support form local government. But corruption is still wide in China with a lot of governments," Jia says.
"It's easy to run a foreign company in a foreign country, it's easy to run a Chinese company in China. But it's very difficult to run a foreign company in China because you have to have the integrity and you have to deliver the results, which is not easy."
Jia says the consumer market for french fries needs to mature yet, too - another challenge for McCain.
"The potential in China is growing but still it's something foreign. It takes a few generations of Chinese to really absorb it," he says.
"We wish everybody would have a pound of fries but it will take a while for China to get there."
Bird is confident the market will grow and he is bullish on China becoming an exporter for McCain to the rest of Asia.
"The gestation and the birthing period was not all that easy but we see China today as a good market," Bird says.
The executive makes the case that there is more trade between Asian countries, now, than there is to and from North America.
"Many of these countries now are starting to develop free trade agreements amongst one another," he says.
Bockmann's words of wisdom for any firm looking to set up in Asia, though, are a sober reminder that just because the market is big, it might not be easy to crack:
"Be prepared for the long haul."
Rebecca Penty is a business reporter with the Telegraph-Journal. She can be reached at penty.rebecca@telegraphjournal.com.
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