Economic Development Alliance for Business

Economic Development Alliance for Business

In cooperation with

Bay Area World Trade Center

International Market Analyses

Food Processing 2005

International Market Analyses

Food Processing 2005

Table of Contents:

I. Description of U.S. Market II. Top 5 Export Markets of U.S. Companies III. East Bay’s Top 10 Food Processing Companies


In cooperation with


Processed Foods Industry Outlook 2004

U.S. Industry & Trade Outlook®

Published by the International Trade Administration

2004 INDUSTRY OUTLOOK FOR PROCESSED FOODS

Food Manufacturing Industry Definition

The food manufacturing industry (NAICS 311) transforms livestock and agricultural products into products for intermediate or final consumption. Subsectors in this category include animal food manufacturing (NAICS 3111), grain and oilseed milling (NAICS 3112), sugar and confectionary product manufacturing (NAICS 3113), fruit and vegetable preserving and specialty food manufacturing (NAICS 3114), dairy product manufacturing (NAICS 3115), meat product manufacturing (NAICS 3116), seafood product preparation and packaging (NAICS 3117), bakeries and tortilla manufacturing (NAICS 3118), and other food manufacturing (NAICS 3119).

Establishments primarily engaged in manufacturing beverages and tobacco are classified separately in Subsector 312, Beverage and Tobacco Product Manufacturing and are not covered in this chapter.

U.S. Domestic Industry Overview

The food manufacturing industry is one of the United States’ largest manufacturing sectors, accounting for more than 10 percent of all manufacturing shipments. The processed food industry has experienced steady growth over the 1997-2003 period. In 2003, the value of food shipments was $461.6 billion, an increase of 9 percent from 1997 shipments of $421.7 billion (see chart).1 In 2003, the ten largest U.S. companies in this sector were Altria (Kraft Foods), ConAgra, PepsiCo, Archer Daniels Midland, Cargill, Coca-Cola, Mars, Anheuser-Busch, Tyson Foods, and Dean Foods.

Value of Processed Food Industry Shipments 1997-2003

400

410

420

430

440

450

460

470

1997 1998 1999 2000 2001 2002 2003

year

sh

ipm

en

ts (

in $

bil

lio

ns

)

Shipments

1 This chart reflects growth in current dollars, not real dollars and does not account for changes in inflation.

Demand for processed food products is less affected by economic upswings and downswings than other industries since food is a necessary purchase. Historically, the industry has had a high level of merger and acquisition activity and consolidation and reorganization have continued, although at a slower pace than in the past. The processed food industry has become increasingly global, as companies in the industry have expanded production and distribution into foreign markets.

Technological change has played an important role as production becomes increasingly automated and companies invest in new technology. Productivity gains from automation have increased output while leaving employment levels relatively stable. Investment in advertising and new product development is also significant.

Nature of the Industry

Processed foods are “value-added” products, referring to the fact that a raw commodity or commodities are transformed into a processed product through use of materials, labor, and technology. Any product that requires some degree of processing is referred to as a processed product, regardless of whether the amount of processing is minor, such as for canned fruit, or more complex, such as for snack foods.

Of the subsectors that make up the food manufacturing industry, the largest four: meat products; dairy products; fruit and vegetable preserving and specialty food; and other food, made up 65 percent of total industry shipment values of $451 billion in 2001. Other sectors included bakeries and tortilla manufacturing, which accounted for 11 percent, grain and oilseed milling (10 percent), sugar and confectionary (6 percent), animal food manufacturing (6 percent) and seafood products (2 percent).

Food Manufacturing Industry, Value of Shipments by Sector 2001

27%

15%

12%

11%

11%

10%

6%

6% 2%

Meat Product Mfg- $125billion

Dairy Product Mfg- $65billion

Fruit & Veg. Preserving &Specialty Food Mfg.- $52billion

Other food Mfg- $51 billion

Bakeries and Tortilla Mfg-$49 billion

Grain and Oilseed Milling-$46 billion

Sugar & ConfectionaryProduct Mfg- $25 billion

Animal Food Manufacturing-$26 billion

Seafood ProductPreparation and Mfg- $8billion

U.S. Census, Annual Survey of Manufacturers, 2001

Employment

Employment in the industry increased slightly from 1.50 million in 1990 to 1.51 million in 2003. Better technology and increasing automation allowed companies to increase production while holding employment steady. The meat industry employed the largest number of workers in 2003 employing 34 percent of total industry workers.

Industry Employment 2003 (thousands) %

Food Manufacturing 1518.7 100.0 Animal Slaughtering and Processing 515.4 33.9 Bakeries and Tortilla Mfg 292.5 19.2 Fruit & Veg Preserving and specialty 183.8 12.1 Other Food Products 152.8 10.0 Dairy Products 136.3 8.9 Sugar and Confectionary 83.8 5.5 Grain and Oilseed Milling 61.8 4.0 Animal Food 49.7 3.2 Seafood product prep and pkging 42.6 2.8

Source: Bureau of Labor Statistics

Geographically, the largest percentage of workers in the industry is concentrated in California, making up 11 percent of the food processing industry workforce in 2003. Texas, Illinois, and Pennsylvania employed significant percentages of the food processing workforce at 6 percent, 6 percent, and 5 percent respectively with the rest of the workforce fairly evenly distributed across the United States (see chart).

Source: U.S. Department of Labor, Bureau of Labor Statistics, 2003 State Employment for Food Manufacturing

Consolidation is Slowing

According to the Food Institute, there were 415 mergers and acquisitions in the food manufacturing industry in 2003, which reflects the fact that the industry continues to consolidate. The slow economy resulted in less activity than in past years, down from a high of 813 mergers in 1998. The Economic Research Service of the United State Department of Agriculture (USDA) notes that consolidation or mergers can be in a company’s interest in order to take advantage of more efficient manufacturing plants and close inefficient ones, or quickly expand a firm’s product lines by acquiring market share in a mature domestic market.

Consolidation among food retailers increased from 27 mergers and acquisitions in 2002 to 42 in 2003. Despite increased consolidation, prices have remained low due to discount retailers such as Costco and Wal-Mart that sell large volume food products. Also, more consumers are buying from restaurants and take out establishments, which compete with food retailers. According to USDA, in 2002, 46 percent of the food dollar was spent on

2003 Employment in Processed Food Industry by State

>10% total employment 5-10% total employment 1-5% total employment >0 but <1 % employment 0 employment

food away from home while spending for food at home was 54 percent. Competition between warehouse clubs, traditional retailers, and restaurants has kept the rise in food prices below inflation levels.

Food Prices

According to USDA, in 2002, families spent only 10 percent of their household disposable income on food; 6 percent on food consumed at home and 4 percent on food consumed away from home. The consumer price index (CPI) for food rose 2.2 percent in 2003. Due to sustained economic growth, consumer demand for food is expected to increase with rising disposable personal income. Consumer demand, marketing costs, and commodity prices can have an effect on food prices.

Consumer Trends

Demographic factors affect demand for processed food products in the U.S. market. The Hispanic population continues to grow rapidly and processed food companies are developing new products for this population. Convenience products and snack foods are also popular and cater to double income households and consumers who are generally short on time. Frozen foods are doing particularly well due to their convenient and quick preparation. Snack bars that are positioned as portable meals are in demand by consumers with little time for a sit down meal.

Other factors affecting demand for processed food in the U.S. market include concern about dieting and obesity, which are generating interest in weight- loss food products and low-carbohydrate options due to the popularity of the Atkins diet. The sports and fitness market is growing, and products that offer nutrition and energy benefits are popular.

Organic food is another market segment that is growing rapidly due to increased consumer interest in healthy products. Organic food can now be found in traditional supermarkets, natural food stores, and other retail markets. According to DataMonitor, the U.S. organic market is projected to reach a value of $30.7 billion by 2007 with a five-year annual compound growth rate of 21.4 percent between 2002 and 2007. USDA estimates that organic product sales were more than $11 billion in 2003 and will reach almost $22 billion in sales in 2010. Although USDA and DataMonitor figures differ, both indicate the rapid growth of this segment of the processed food industry. Popular organic products include fresh produce, nondairy beverages, breads and grains, packaged foods, and dairy products. In response to rapid growth in the industry, USDA issued new Federal standards for organic food in October 2002. In accord with the new standards, a certified organic processed product must use at least 95 percent organic ingredients to be labeled or represented as organic.

U.S. Processed Food Trade

The U.S. processed food industry is a major participant in the global economy, active in both exporting and foreign direct investment. In 2003, the U.S. processed food industry

exported $26.7 billion of product and imported $23.7 billion. Weakness of the U.S. dollar contributed to the growth of food exports. The processed food industry’s trade surplus has been narrowing over the last several years and in 2003, dropped to about $3 billion. 2

U.S. International Trade in Processed Food 1997-2003

0

5

10

15

20

25

30

1997 1998 1999 2000 2001 2002 2003year

($ b

illi

on

s)

Exports

Imports

Balance

Source: U.S. Dept of Commerce, U.S. Treasury, International Trade Admin.

Almost half of the world’s top 50 food processing firms are headquartered in the United States (21 out of 50 in 2003 according to Prepared Foods). Acquisitions and mergers have resulted in consolidation of some of the largest companies in the industry. In 2003, 15 of the top 25 food and beverage companies worldwide were U.S. companies. Major foreign competitors were Nestle (Switzerland), Unilever (England), Diageo (England), Groupe Danone (France), Kirin Brewery (Japan), Asahi Breweries (Japan), Snow Brand Milk Products (Japan), Heineken (Netherlands), Cadbury Schweppes (England), and Nippon Meat Packers (Japan). According to USDA, global food consumption patterns are changing, leading to increased trade and demand for processed food products. Improvements in transportation, higher income, and consumer perceptions of quality and safety are important factors affecting sales of processed food. Income growth in developing countries has resulted in increased demand for meat products which may in turn drive demand for imports of products such as animal feed. In countries with low-income levels, consumers need to meet basic calorie requirements and any increases in income lead to consumption of carbohydrates, which are high in calories. In higher income countries, consumers are able to meet their basic calorie needs and, thus, demand for food is driven by taste, cultural trends, quality, and convenience. In developed countries, higher income growth has led to more demand for high value added and better quality processed food products. Increased demand for these items can be met domestically and/or by increasing imports.

2 This chart reflects growth in current dollars, not real dollars and does not account for changes in inflation

Standards for food safety vary across countries with wealthier countries often having stricter food safety regulations. Consumers in these countries are willing to pay more for increased food safety. Differing standards for food safety can affect trade patterns since producers may find adhering to an exporting country’s regulations costly. Alternatively, when domestic regulations are strict, domestic producers may face increased costs of production relative to importers and thus have an interest in applying the same sets of standards to their competitors. In response, countries are working within international organizations and multilateral trade agreements to move towards mutual recognition of systems and harmonization of standards.

Top International Markets for Processed Food Products

In 2003, five foreign countries accounted for 62 percent of U.S. processed food exports: Canada (21%), Japan (15%), Mexico (15%), Korea (7%), and China (4%).

In 2003, five countries accounted for 53 percent of U.S. imports of processed food products: Canada (31%), Mexico (7%), Australia (6%), New Zealand (5%), and Italy (4%).

The 1994 North American Free Trade Agreement (NAFTA) is one factor that spurred trade growth and foreign direct investment in processed food between Canada, the U.S., and Mexico. The United States is the largest source of foreign direct investment in Mexico’s processed food industry. Because U.S. food processing affiliates in Mexico export only about 25 percent of their sales to the U.S., demand is dependent on the status of the Mexican economy. Increased trade and foreign direct investment between Mexico, Canada, and the United States, due to NAFTA, have created a regional food market and can mean more efficiency in providing food to consumers due to extended growing seasons, expanded consumer choice, and increased food quality.

U.S. Trade Patterns in Food Manufacturing (NAICS 311) in 2003 (millions of dollars; percent)

Exports Region Value Share, % NAFTA 9,608 36 Latin America 2,192 8 Western Europe 2,464 9 Japan/Chinese Economic Area 6,566 25 Other Asia 3,193 12 Rest of World 2,677 10 Total 26,700 100 Top 5 Countries Value Share, % Canada 5,561 20 Japan 4,129 15 Mexico 4,046 15 Korea 1,862 7 China 1,116 4

Imports Region Value Share, % NAFTA 8,869 37 Latin America 2,682 11 Western Europe 4,726 20 Japan/Chinese Economic Area 1,464 6 Other Asia 2,781 12 Rest of World 3,178 13 Total 23,700 100

Top 5 Countries Value Share, % Canada 7,319 30 Mexico 1,549 6 Australia 1,375 5 New Zealand 1,101 4 Italy 1,068 4

Values may not sum to total due to rounding

Source: U.S. Department of Commerce, Bureau of the Census

According to the U.S. Department of Agriculture, the best markets for processed food exports in the top five countries are the following:

Canada : Snack foods, organic foods, seafood, pet food, processed meat

Japan: Pork, beef, tuna, crab, pet food, cheese, flatfish, prepared whole tomatoes, chocolate confectionary, fresh and frozen berries, frozen desserts, frozen pizzas

Mexico: Meat, fish and seafood, frozen desserts, sauces, snack foods, healthy foods, and food ingredients

Korea: Red meat, poultry meat, seafood, processed potatoes, frozen vegetables, sauces, confectionary, bakery products, pet food, processed fruits and vegetables

China : Red meat, poultry meat, dairy products, processed fruit and vegetables, snack foods, salmon, crab and crabmeat, tree nuts, fish paste, roe and urchin, egg products, pet food

Major Trade Shows for the Processed Food Industry

The following are major processed food trade shows supported by the U.S. Department of Agriculture. To search for future events, go to USDA’s website at: http://www.fas.usda.gov/scripts/agexport/EventQuery.asp

• U.S. Food Export Showcase & Food Marketing Institute's (FMI) Annual Exposition (Processed Foods)

May 3-5, 2005 Chicago, Illinois Number of visitors: 30000

USDA Contact: Sharon Cook USDA Trade Show Office 1400 Independence Ave. SW Stop 1052 Room 4939-South Building Washington, DC 20250 Phone: 202-720-3425 Fax: 202-690-4374 Email: [email protected]

• Taipei International FoodShow 2004

June 17-20, 2004

Khaliaka Meardry USDA Trade Show Office 1400 Independence Avenue, SW Washington, DC 20250-1052 Phone: 202-720-3065 Fax: 202-690-4374 Email: [email protected]

• Abastur 2004

September 29- October 1, 2004

Teresina Chin Room 4642-South Bldg 14th Street & Independence Ave., S.W. Washington, D.C. 20250-1052 Phone: 202-720-9423 Fax: 202-690-4374 Email: [email protected]

• Foodex Japan 2004

March 8-11, 2005 Tokyo, Japan Number of visitors: 93637

Khaliaka Meardry USDA Trade Show Office 1400 Independence Avenue, SW Washington, DC 20250-1052 Phone: 202-720-3065

Fax: 202-690-4374 Email: [email protected]

REFERENCES

Changing Structure of Global Food Consumption and Trade/WRS-01-1, Economic Research Service, U.S. Department of Agriculture.

The Outlook for Food Prices in 2003, USDA Food Price Outlook.

Organic Food Industry Taps Growing American Market, Agricultural Outlook/October 2002, Economic Research Service/USDA.

U.S. Farm Sector Overview, Economic Research Service, U.S. Department of Agriculture, March 31, 2003.

U.S. Food Sector Linked to Global Consumers, Regmi, Anita and Greg Pompelli, FoodReview, Spring 2002, Economic Research Service, USDA.

USDA Agricultural Baseline Projections to 2011, Interagency Agricultural Projections Committee, February 2002.

Food Price Inflation to Moderate in 2002 and 2003, Agricultural Outlook/October 2002, Economic Research Service, USDA.

Canada Exporter Guide Annual 2002, Gain Report #CA2132, 11/22/2002, Approved by Gary C. Groves, U.S. Embassy, Prepared by George Myles and Marion Bailey, U.S. Department of Agriculture. Available at: http://www.fas.usda.gov/GainFiles/200211/145784692.pdf

Mexico Exporter Guide Annual 2001, Gain Report #MX1171, 10/1/2001, Approved by Chad Russell, U.S. Embassy, prepared by Kate Deremer, U.S. Department of Agriculture. Available at: http://www.fas.usda.gov/GainFiles/200110/130682070.pdf

Korea Exporter Guide Annual 2002, Gain Report #KS2046, 9/19/2002, Approved by Susan Phillips, U.S. Embassy, prepared by She Won Kim, U.S. Department of Agriculture. Available at: http://www.fas.usda.gov/GainFiles/200209/145783927.pdf

Japan Exporter Guide U.S. Food Exporter’s Guide to Japan 2002, Gain Report #JA2514, 3/29/2002, Approved by David Miller, U.S. Agricultural Trade Office, Tokyo, prepared by Promar Japan and the U.S. Agricultural Trade Offices, U.S. Department of Agriculture. Available at: http://www.fas.usda.gov/gainfiles/200203/135683861.pdf

“U.S. Firms Invest in Mexico’s Processed Food Industry,” Food Review, Volume 22, Issue 2, Economic Research Service, USDA. Available at: http://www.ers.usda.gov/publications/foodreview/may1999/frmay99g.pdf

“Globalization of the Processed Foods Market,” Agricultural Outlook/January-February 1997, Economic Research Service/USDA.

“Food Manufacturing,” J. Michael Harris, U.S. Food Marketing System, 2002/AER-811, Economic Research Service/USDA.

INTERNATIONAL MARKET ANALYSES

FOOD PROCESSING 2005

Best International Markets: Canada China Japan Korea Mexico SOURCE: National Trade Data Bank- a product of STAT-USA, U.S. Department of Commerce


In cooperation with

B a y A r e a W o r l d T r a d e C e n t e r

CCCOOOMMMMMMEEERRRCCCIIIAAALLL GGGUUUIIIDDDEEE TTTOOO

FFFOOOOOODDD PPPRRROOOCCCEEESSSSSSIIINNNGGG MMMAAARRRKKKEEETTT IIINNN CCCAAANNNAAADDDAAA

2005

2

Canada Food Processing Market Analysis Report Description of Market . . . . . . . . 3 Banking, Political and Business Environment . . . . . 8 Distribution Channels. . . . . . . 11 Resolving Disputes . . . . . . . . 16

3

I. Description of Market, Factors affecting market and trends: Canada is the largest market for US exports of food and farm products. American products account for 2/3 of total Canadian agricultural imports. In 2003, more than 16% of total US food and agricultural exports were to Canada totaling US$56.2 billion. In addition, of total $22.6 billion of US exports of consumer oriented agricultural products to the world, more than 28%, or $6.4 billion was destined for Canada. US agricultural exports to Canada reached a record high of $8.6 billion in 2002. Canada’s economy resembles the US in terms of per capita output and its market-oriented economic system. In 2002 the Canadian economy grew 3.3% due to strong domestic demand. This was a 1.9% increase from the previous year. Despite this growth, in 2003, ongoing domestic demand and sound provincial finances, forecasters including the bank of Canada have downgraded their growth outlook for the economy to 2 %. Production and services are predominantly privately owned and operated. The federal and provincial governments are significantly involved in the economy. Spending on goods and services by the two levels of government in 2002 accounted for over 20 percent of Gross Domestic Product. Although Canada has a population of 1/10 of the US, the Canadian economy mirrors the US economy in about the same ratio. This, as well as North American Free Trade Agreement (NAFTA)-implemented tariff free benefits, makes Canada an ideal export and investment destination for American companies.

Advantages of Canadian Market:

• Proximity • Similar lifestyles and consumption trends • Wide exposure to American culture • Frequent business and personal trips to United States • Duty free tariff treatment for most products under North American

Free Trade Agreement (NAFTA) • Ease of entry for business travel • Awareness and demand for product brands • High US quality and safety perceptions • Similar food shipping patterns

Challenges of Canadian Market: • Low value of Canadian currency • Differences in standard of package sizes • Differences in chemical residue tolerances • Differences in nutritional labeling • Bilingual (English and French) labeling • Tariff rate quotas for certain products

Under the tariff elimination of NAFTA, the majority of US agricultural products have entered Canada duty-free since January 1, 1998. Common culture, proximity, language, similar lifestyle pursuits and the ease of travel facilitates trade with

4

Canada. Canada’s grocery product and food service trades have been quick to seize opportunities under NAFTA that permit them to expand their geographical sourcing area to the United States. On the Basis of current market trends and conditions, the best prospects for US exports of food and agricultural products to Canada include: Foodservice, Fresh Vegetables, Seafood, Snack Foods, Fruits and Vegetable juices and Organic Food.

Food Service: The Canadian foodservice industry sales reached US $29.5 billion during 2002. This includes restaurants, caterers, taverns as well as foodservice sales at hotels, institutions, sports stadiums, vending machines and department stores.

Fresh Vegetables Canada is the number one market of US exports of fresh vegetables to Canada and reached a record US$963 in 2002. This was a 10 % increase over the previous year. Due to climatic factors in Canada, the domestic growing season for fresh vegetables is short, making demand for imported fresh vegetables from the United States higher. U.S. EXPORTS OF Fresh Vegetables FY 1999 - 2003 AND YEAR-TO-DATE COMPARISONS (IN THOUSANDS OF DOLLARS)

Leading Market

Rank 2001 2002 2003 Oct-Aug Comparison 2003 2004

%Change Oct-Aug

Canada 1 894,406 950,854 968,700 923,230 951,315

3.0

Japan 2 144,264 117,675 114,504 104,569 88,110

-15.7

Mexico 3 70,849* 64,608 65,271 57,354 63,346

10.5

Taiwan 4 24,575 22,951 22,162 19,079 23,257

21.9

All fruits and vegetables imported into Canada must meet specific standards and packaging regulations laid out in the Canada Agricultural Products Act’s Fresh Fruit and Vegetable Regulations and Processed Product Regulations. U.S. fresh fruits and vegetable exporters must:

• Comply with Canadian grade standards and packaging regulations • Obtain Canadian Confirmation of Sale form. Consignment selling is prohibited • Obtain special waiver of standard container regulations for bulk products • File a Canada Customs invoice

Beginning in 1995, Canada dropped the mandatory requirement (except for apples, onions, and potatoes) that U.S. exports of fresh produce be accompanied by United

5

States Department of Agriculture’s Agricultural Marketing Service (AMS) certification that the produce meets Canadian import requirements. Some U.S. exporters still choose to obtain AMS certification as evidence that the produce left the shipping point in grade and condition.

Canada requires all foreign shippers of fresh produce to place a grade on consumer size packages for which Canadian grades are established. The law also requires a country of origin declaration with the grade and weight (in metric) printed in a letter size directly proportional to the size of the package display surface. Consignment selling of fruits and vegetables into Canada is prohibited by law and a confirmation of sale form is required for entry. Canada Customs will release only produce that is pre-sold at the border.

Seafood US exports of fish and seafood to Canada during 2002 reached US$574 million and accounted for almost 20% overall American exports. In 2004 Canada was the second most important export market for US seafood behind Japan. Per capita fish consumption in Canada is higher than that in the United States and a growing demand for seafood in the retail and food service sectors is expected to boost American seafood sales.

Fish and fish products are subject to the Fish Inspection Act and Regulations, which contain requirements for wholesomeness, labeling, packaging, grading, and health and safety. There is no requirement under those regulations for imported fish products to be accompanied by a health certificate. However, the person that imports fish into Canada must hold a fish import license, provide written notification to the Canadian Food Inspection Agency (CFIA) for each imported shipment of fish, and must make the fish available for inspection. Product inspections are conducted at frequencies that depend on the product's risk and the exporter's history of compliance. The normal inspection frequency for fresh fish from an exporter with a good history of compliance would be 2%.

Labeling requirements for packaged fish must include all mandatory information normally found on consumer packages such as:

• Country of origin • Common name of the fish • Name and address of the manufacturer • Day, month and year of processing • Quantity (metric or imperial units)

U.S. EXPORTS OF FISH & SEAFOOD PRODUCTS, EDIBLE FY 1999 - 2003 AND YEAR-TO-DATE COMPARISONS (IN THOUSANDS OF DOLLARS) Leading Market


%Change Oct-Aug

6

Japan 1 1,129,229 1,078,075 967,781 876,067 910,927

3.98

Canada 2 569,789 576,776 568,495 467,605 544,472

16.4

Korea 3 326,789 308,608 387,340 345,277 301,426

-12.7

China 4 124,703 136,959 169,024 147,573 228,619

54.9

Snack Foods The Canadian retail market for snack foods is valued at approximately US$2.2 billion and is growing at a compound annual rate of about 5.8%. There are several significant differences between the Canadian and U.S. snack food markets which any U.S. company that is considering exporting snack food products to Canada must recognize. Most importantly, per capita consumption of snack food is lower in Canada than in the United States, so the Canadian market is somewhat smaller than might be expected based on its population of 31 million. However, since most of the same trends and influences that have generated the increased popularity of snacking in the United States also exist in Canada, Canadian consumers and snack food markets follow US trends, but lag slightly behind. U.S. EXPORTS OF Snack Foods (excl nuts) FY 1999 - 2003 AND YEAR-TO-DATE COMPARISONS (IN THOUSANDS OF DOLLARS) Leading Market


%Change Oct-Aug

Canada 1 661,452 687,242 735,123 663,029 778,488

17.4

Mexico 2 362,515 166,181 175,804 159,364 167,054

4.8

Japan 3 114,542 101,454 92,546 83,563 87,978

5.3

S. Korea 4 45,505 49,767 54,594 49,349 43,567

-11.7

Fruit and Vegetable Juices: Imports of fruit and vegetable juices from the United States rebounded to US$273 million in 2002 after a dip in 2001 reflecting lower economic activity following the events of September 11. US exports of fruit and vegetable juices captured about two-thirds of the Canadian import market in 2002. Canada is heavily dependent on imports of fruit and vegetable juices (fresh and frozen) to meet total market

7

demand. Best prospects include the retail market segment, custom retail packaging for Canadian distributors, and new products and blends in new packaging. U.S. EXPORTS OF Fruit & Vegetable Juices FY 1999 - 2003 AND YEAR-TO-DATE COMPARISONS (IN THOUSANDS OF DOLLARS) Leading Market


%Change Oct-Aug

Canada 1 272,037 262,871 294,066 967,295 296,214

10.82

Japan 2 131,636 108,777 94,471 87,617 88,027

0.47

Netherlands 3 86,680 115,189 81,239 72,341 98,870

36.67

S Korea 4 22,955 37,675 36,637 34,354 26,806

-21.9

Organic Foods The import and sale of organic food products in Canada are governed by the same rules and regulations that apply to non-organic food products. No distinction is made between organic and non-organic foods. According to the Canadian National Standard for Organic Agriculture, food products can only be considered “organic” if it consists of at leased 95% organic ingredients. When the food products contains a minimum of 70% organic ingredients a claim may be made, provided the percentage (by weight or fluid volume, excluding water and salt, of the total ingredients in the final product) of organic ingredients present in the food is made on the principal display panel (e.g., "contains x% organic ingredients" or "contains x% of organic (name the ingredient(s))."

In order to demonstrate that food products described as organic actually conform to this voluntary national standard, producers or processors may ask an independent certifying body to inspect the production unit and products to verify that all stages of the production, processing, packaging and distribution meet the requirements of the Standard. A food that has been certified by a certification body may be labeled with the trademark of the independent certifying body that carried out the inspection.

In Canada, the SCC, using guidelines set out by the International Organization for Standards (ISO), accredits independent certifying bodies. Provincial authorities may also provide accreditation of certifying bodies operating within their jurisdiction

8

through provincial legislation. This role is assumed in Quebec by the Conseil d'accréditation du Québec, and in B.C. by the Certified Organic Associations of British Columbia (COABC). Key Trade and Demographic Information of Canadian Market vs US

• Agricultural Imports From All Countries: $14.0 billion U.S. Market Share: 62%

• Consumer Food Imports From All Countries: $10.1 billion U.S. Market Share 61%

• Edible Fishery Imports From All Countries: $1.3 billion U.S. Market Share 45%

• Total Population April 2004: 31.8 million US July 2004: 2.93 million

Other Market Facts • Urban Population: 23.9 mil • Rural Population 6.1 mil

Percent Rural: 20% • Exchange Rate, average annual 2003 C$=US$.7135

• Number of Metropolitan Areas Over 100,000 people: 35 • Per Capita Gross Domestic Product (U.S. dollars) 2003; $27,346 mil • Unemployment Rate (August 2004) 7.2 % • Per Capita Food Expenditures (U.S. dollars) $1,563 mil • Total Employment 15.7 mil.

Women 7.3 mil / Men 8.4 mil

II. Banking Political and Business Environment Banking System: As of July 2002 there were 14 domestic banks, 33 foreign bank subsidiaries and 20 foreign bank branches operating in Canada. In total, these institutions had over $1.7 trillion in assets, which accounted for over 70 per cent of the total assets within the Canadian financial services sector. The six largest domestic banks accounted for the bulk of the activity, holding over 90% of banking assets. Canada’s banks operate through an extensive network that includes over 8,000 branches and close to 18,000 automated banking machines (ABMs) across the country.

Canada has the highest number of ABMs per capita in the world and benefits from the highest penetration levels of electronic channels such as debit cards, Internet banking and telephone banking. The six major domestic banks also have a significant presence outside Canada, in areas such as the United States, Latin America, the Caribbean and Asia. International operations accounted for approximately 33 per cent of their gross revenues in 2001.

The performance of Canada’s major banks in 2001 was down from the previous year due in part to the global economic slowdown and the impacts of the

9

September 11th terrorist attacks. Their average rate of return on common equity was 15.2 per cent compared to 16.8 per cent in 2000. The Financial Sector Stability Assessment, undertaken in 2000 by the International Monetary Fund, concluded that Canada has a stable and highly advanced financial system that is among the soundest in the world.

Canada’s banks play an important role in the national clearing and settlement system, which is among the most efficient payment systems in the world. In 2001 the system cleared over 4.4 billion transactions worth over $33 trillion for all Canadian institutions.1

US banks now enjoy a right of establishment and a guarantee of national treatment in Canada. NAFTA also established a Financial Services Committee to supervise implementation of the chapter and deal with any banking issues that arise between the three countries. If differences of interpretation cannot be resolved by the Committee, the NAFTA parties can take the issue to a dispute settlement mechanism. The Canadian dollar is fully convertible. Canada has no restrictions on the movement of funds into or out of the country. Banks, corporations and individuals are able to deal in foreign funds or arrange payments in any currency they choose. Canadian banks have become sensitive to the growing financial needs of franchised operations. Various loan and repayment plans for franchise operations are now offered by Canadian chartered banks. Depending on the need of the franchise or business in question, bank services can also include payroll and cash management services.

The Export-Import Bank (Exim) supports the financing of U.S. goods and services by assuming credit and country risks the private sector is unable or unwilling to accept. However, there are no US Government programs available for financing American exports to Canada. Neither the Ex-Im Bank of the United States nor the Overseas Private Investment Corporation (OPIC) maintains programs for the Canadian market. However, the political, economic and commercial systems in Canada are so stable and similar to those in the United States that the lack of government financing should pose virtually no problem to the overwhelming majority of US firms seeking to export to Canada. Private financing should be available from an American firm's own bank in the United States, or from a Canadian bank with branch operations in the United States, under terms similar to those a company would generally find in the US financial markets. US manufacturers exporting to Canada generally give a discount of one or two percent of the invoice if paid within ten days.

All these leading Canadian banks cover the entire territory of Canada and all offer retail banking services, as well as a range of financial services for small and medium-sized businesses and other financial institutions. Political Environment:

1 Department of Finance, Canada http://www.fin.gc.ca/toce/2002/bank_e.html

10

The United States and Canada are allies and close friends that share a wide range of fundamental values, a commitment to democracy, and traditions of tolerance and respect for human rights. Both have dynamic market economies with sophisticated industrial, agricultural, natural resource, and service sectors, and both are committed to high living standards for their citizens. With dynamic market economies, sophisticated industrial, agricultural, natural resource, and service sectors, the United States and Canada are committed to high living standards for their citizens. These factors compliment geographic facts that make the other’s best customer. Despite occasional disagreements over trade issues, bilateral trade continues to be positive and highly cooperative in what is probably the most intensive and complex trade relationship in the world.

Since 1984, the federal government has "devolved" many powers and social programs to the provinces, at first for political reasons and later, in the 1990s, in response to a fiscal crisis. During much of the same period, trade between individual provinces and the United States grew faster than inter-provincial trade, exacerbating economic strains on the Canadian federal system. 2 Canada is a parliamentary democracy and a federal state composed of ten provinces and three territories: Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Northwest Territories, Nova Scotia, Nunavut, Ontario, Prince Edward Island, Quebec, Saskatchewan, Yukon Territory. Executive Branch: Chief of state: Queen Elizabeth II (since 6 February 1952), represented by Governor General Adrienne Clarkson (since 7 October 1999) Head of government: Prime Minister Paul Martin (since 12 December 2003); Deputy Prime Minister Anne McLellan (since 12 December 2003) Cabinet: Federal Ministry chosen by the prime minister from among the members of his own party sitting in Parliament

Political Parties and Leaders:

Liberal Party – a centrist party, led by Prime Minister Jean Chretien, which currently has a healthy majority in the House of Commons with 170 out of 301seats; Leader Paul Martin

Canadian Alliance (formerly Reform Party) – a Western-based populist conservative party that holds 63 seats in Parliament and is the official opposition;

Bloc Quebecois – a Quebec sovereigntist party, the federal counterpart of the provincial Parti Quebecois, holding 36 seats; Leader: Gilles Duceppe

2 US&FCS Market Research Reports, Canada Country Commercial Guide FY 2003

11

New Democratic Party – a leftist, social democratic party that holds 14seats in the House; Leader: Jack Layton

Progressive Conservative Party – a center-right party, also known as the Tories, which holds 13 seats in the House. Leader: Stephen Harper

Elections: none; the monarchy is hereditary; governor general appointed by the monarch on the advice of the prime minister for a five-year term; Legislative elections, the leader of the majority party or the leader of the majority coalition in the House of Commons is automatically designated prime minister by the governor general 3

Provincial or Territorial elections were held in British Columbia in May 2001, which resulted in victory for the Liberal Party; in Alberta in March 2001 (Progressive Conservatives won); in Quebec in November 1998 (Parti Quebecois); in Newfoundland and Labrador (Liberals) and in Nunavut in February 1999; in Ontario (Progressive Conservatives) and in New Brunswick (Progressive Conservatives) in June 1999; in Nova Scotia in July 1999 (Progressive Conservatives); in Saskatchewan (New Democratic Party) and in Manitoba (New Democratic Party) in September 1999; in Northwest Territories in December 1999; and in Prince Edward Island (Progressive Conservatives) and in Yukon (Liberals) in April 2000.

III. Distribution Channels / Marketing US products and Services:

Sales to Canadian companies are handled through relatively short marketing channels, and in many cases products move directly from manufacturer to end-user. Distribution channels in Canada vary greatly according to the products and commodities involved. Large industrial equipment, for example, is usually purchased directly by end-users. In contrast, smaller equipment and industrial supplies are frequently imported by wholesalers, exclusive distributors, or by manufacturers' sales subsidiaries. US firms have historically preferred to appoint manufacturers' agents that regularly call on potential customers to develop the market.

Many sales agents expect to work on a two-tier commission basis. Agents receive a lower commission for contract shipments and a higher rate when purchases are made from the local agent's own stocks. Consumer goods are purchased by importing wholesalers, department stores, mail-order houses, chain stores, purchasing cooperatives, and many large, single-line retailers. Manufacturers' agents play an important role in the importation and distribution of consumer goods. In addition, the importance of department stores, mail-order houses and cooperative purchasing organizations as direct importers has increased

3 CIA the world factbook

12

substantially. Many of these groups have their own purchasing agents in the United States. Franchising

Canada is among the largest foreign markets for US franchises. Canada's franchising sector is comprised of roughly 1,300 franchises and over 80, 000 individual units. They range from restaurants to non-food retail establishments, from automotive product retailers to purveyors of business services. Approximately 45 percent of all franchise businesses are in Ontario, 18 percent in the Prairies, 17 percent in Quebec, 12 percent in British Columbia, and 8 percent in Atlantic Canada. Annual sales generated by franchised businesses in Canada, which account for only about 5 percent of total businesses in the country, total over US$60 billion, or roughly half of all service and retail sales.

Franchises have enjoyed exceptional success in Canada. The principal advantage US franchisers have over others is the strong recognition and familiarity of American products and services with consumers. The high volume of travel to the United States, combined with constant exposure to US media, results in very high receptivity even before these products and services come onto the market. Overall, US companies seeking operations (supported by sufficient marketing and promotional campaigns) can expect to be extremely well received by Canadian consumers and franchise investors.

The franchise model is an increasingly attractive method of doing business because no federal regulations exist which have specific restrictions. Alberta and Ontario are the only provinces with franchise legislation. These provincial regulations ensure that small business investors are better able to make informed decisions prior to committing to franchise agreements. Disclosure requirements intend that prospective franchisees know how sellers plan to approach key contractual issues, such as termination, and afford buyers stronger legal remedies regarding court action. Similar legislation is now under consideration in other provinces. US franchisers already doing business here, and those considering establishing themselves, should take note of the proposed legislation and the strong likelihood of its adoption. Franchisers should be prepared to review existing and/or new franchise agreements, internal disclosure policies, and operating procedures to ensure their consistency with the new legislation.

US franchisers seeking market entry should review guidelines and regulations as related in US Commercial Service market reports, available on our web site at: www.usatrade.gov. The Canadian Franchise Association also has a comprehensive web site located at: www.cfa.ca. Further, each province or territory in Canada should be viewed as a unique market, both on a regulatory and business level. Market entry strategy should include information on whether the company: is export ready as determined by its US penetration; has done the necessary market research and financial analysis to determine that its concept will work in Canada; is appropriately registered to ensure conformity of corporate disclosure documents

13

Business Customs Import Procedures Some US firms choose to obtain the services of a Canadian customs broker to help them comply with Canadian import requirements and in some cases market their product. Canada Border Services Agency (CBSA) licenses customs brokers to carry out customs-related responsibilities on behalf of their clients. A brokers service include:

• Obtaining release of the imported goods • Paying any duties that apply • Obtaining, preparing and presenting or transmitting the necessary

documents or data • Maintaining records; • Responding to any Canada Customs and Revenue Agency concerns

after payment. Importers who do not wish to transact business with the CBSA directly may authorize an agent to transact business on their behalf. Although importers may use an agent to transact business with the CBSA, the importer is ultimately responsible for the accounting, documentation, payment of duties and taxes, and subsequent corrections such as re-determination of classification, original de-valuation. The importer remains liable for all duties owing until either the importer or the agent pays them. Agents are required to obtain written authorization form their clients in order to transact business on behalf of their clients. This business may include but is not limited to: Registering for a Business Number, Importer Exporter Account, providing assistance in cases involving the Special Import Measures Act (SIMA), Submitting refund requests (B2s), Preparing release documentation, Preparing final accounting documentation, Remitting payment of duties and taxes to the receiver General of Canada. Food Brokers: For US companies entering the Canadian market, it is important to find a Canadian food broker to help with the logistics of entering the country in addition to marketing products.

Food Regulation: General labeling Requirements: The basic packaging and labeling requirements for US agricultural exports to Canada are: Labels in English and French, net quantities in metric, list of ingredients, durable life date, common name of product, company name and address, minimum type size specifications, conformity to standardized packages sizes stipulated in the regulations, country of origin labeling. Labeling of Shipping Containers:

14

Labels of shipping containers are exempt from bilingual labeling requirements. The out container requires a product description, the name and address of the company and a net quantity declaration in either metric or imperial measure. Nutrition Labeling: On January 2, 2003 Canada’s Health Minister announced that Canada was adopting mandatory nutrition labeling. New regulations published January 1, 2003, in the Canada Gazette, Part II, make nutrition labeling mandatory on most food labels; update requirements for nutrient content claims; and permit, for the first time in Canada, diet-related health claims for foods. U.S. food products exported to Canada must meet the same labeling requirements as foods produced in Canada. U.S. food manufacturers will have the same transition time to comply with the new nutrition labeling requirements. Industry has until December 12, 2005 to bring their food labels and advertisements into compliance with these new requirements. Smaller companies, those with revenues from sales of food in Canada of less than $1 million between December 12, 2001 and December 11, 2002, have until December 12, 2007 to bring their labels into compliance. During the transition period, food labels and advertisements may comply with either the former Regulations or the new Regulations, but may not use a combination of the two systems. The use of a Nutrition Facts table on a label with a claim under the former Regulations is not permitted. Certain foods and beverages are exempted from the new labeling requirements, for example, fresh fruit and vegetables and raw single ingredient meat and poultry that are not ground. Tariffs and Trade Rate Quotas(TRQs) Effective January 1, 1998 the tariff provisions of the U.S.- Canada Free Trade Agreement (FTA) removed all tariffs between the two countries with the exception of those products for which Canada implemented tariff rate quotas on January 1, 1995. The provisions of the FTA were incorporated into the NAFTA to which Mexico is also a signatory. The NAFTA came into effect on January 1, 1994. Packaging and Container Regulations Canadian regulations governing package sizes for fruits and vegetables, processed horticultural products and processed meats stipulate standardized package sizes that can differ from U.S. sizes. The standards of identity and the container sizes are generally stipulated in the regulations encompassing agriculture and food products. Electronic access to all Canadian food-related regulations is available through: http://www.inspection.gc.ca/english/reg/rege.shtml

Direct Marketing Per capita, Canadian consumers purchase more goods through the mail than do their US counterparts. Tapping into this market can be as easy as placing an advertisement in a magazine or on the Internet. In general, Canadian audiences are targeted using the same techniques that are used in the United States. However, shipping goods to Canadian customers involves additional preparation. When mailing goods to Canada, properly completed paperwork will ensure the goods reach their destination without delay. For most mail order shipments, the

15

only paperwork needed is a standard business invoice. When completing the invoice, two elements are critical: a description of the goods and the value of the goods. Companies should indicate the amount paid by the customer for the goods, in either US or Canadian dollars. If goods are shipped on a no-charge basis (samples or demos), companies must indicate the retail value of the shipment. Two copies of the invoice should be attached to the outside of the package. All goods entering Canada are cleared through Customs, where duties are levied based on the value of the item(s). Duties for a specific product are determined by the type of product and the country of origin. The Customs Act states "that the validation for duty is the selling price that appears on commercial invoices covering sales in the country of export. This price may include freight, warranty, and other charges applicable in the domestic market of the country of export." All shipments to Canada are also subject to the seven-percent Goods and Services Tax (GST), a multi-stage sales tax. Although companies pay the GST on each purchase, it is recoverable because the GST is a consumer tax, not a business tax. Canada Post also charges a C$5 (approximately US$3.40) processing fee on all packages that owe duty or tax. Mail-order companies can avoid having the C$5 fee assessed to their customers by registering to collect Canadian duties and taxes themselves as a Non-Resident Importer. Companies registering with Canada Customs and Revenue Agency (http://www.ccra-adrc.gc.ca/) will be required to prepay duties and taxes monthly. Companies can also arrange to put up a bond in the amount of the estimated duties and taxes. Test Marketing: Processed Food Products Canada's Processed Product Regulations permit, in special instances only, the test marketing of domestically manufactured or imported processed food products that may not meet packaging, labeling, or compositional requirements of the regulations. However, the provision is designed to facilitate the marketing of new products of a type that are new, unique and unavailable in Canada. U.S. companies should note that it does not apply to U.S. brand introductions into Canada for processed foods of a type already available on retail shelves. In the case of imported foods, applications for test marketing must be submitted to the Canadian Food Inspection Agency by the Canadian importer who may be granted authorization to test market a food product for a period of up to 12 months. A dealer wishing to conduct a test market must, six weeks prior to conducting the test market, file a Notice of Intention to Test Market in the prescribed form and manner. The Notice of Intention to Test Market should be completed on company letterhead and should include the following:

• A description of the prepackaged product, together with submission of a sample in prepackaged form or alternatively, an illustration of the prepackaged product and the label

16

• The quantity to be distributed • The period of time for test marketing (maximum period is 12 months) • The geographic area or region in which the test market is to be conducted. • Dealers must also include information, with supporting data, to substantiate

that the test market product was not previously sold in Canada in that form and to establish that it differs substantially from any other product sold in Canada with respect to its composition, function, state or packaging form.

Temporary Marketing Authorization Letter (TMAL) There is a distinction between a test market food and a food that has received Temporary Marketing Authorization. A Temporary Marketing Authorization Letter (TMAL), issued by the Assistant Deputy Minister of the Health Products and Food Branch, Health Canada, authorizes the sale of a food that does not meet one or more of the compositional, packaging, labeling or advertising requirements under the Food and Drugs Act and Regulations. The authorization is granted for a specified period of time, within a designated area and in a specified quantity for a specific manufacturer or distributor. A TMAL does not exempt foods from the requirements under the Consumer Packaging and Labeling Act and Regulations. The purpose of a Temporary Marketing Authorization is to generate information in support of a proposed amendment to the Food and Drug Regulations. For example, as a condition for obtaining a TMAL for the use of non-permitted labeling on a food, the companies involved agree:

• to use only those non-permitted labeling statements approved by the Health Products and Food Branch,

• to use these to carry out studies to determine consumer attitudes to the labeling and advertising material, and

• to submit the results of these studies to the Health Products and Food Branch.

Once the TMAL is issued, those manufacturers or producers of foods that are subject to mandatory label registration through the CFIA (such as registered meats and processed products) will be expected to follow normal procedures to register their labels. IV. Resolving Disputes Expropriation and Compensation Canadian federal and provincial laws recognize both the right of the government to expropriate private property for a public purpose, and the obligation to pay compensation. The federal government has not nationalized any foreign firm since the nationalization of Axis property during World War II. Both the federal and provincial governments have also assumed control of private firms—usually financially distressed ones—after reaching agreement with the former owners.

17

Dispute Settlement Canada is a member of the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards. The Canadian government has made a decision in principle to become a member of the International Center for the Settlement of Investment Disputes (ICSID). However, since the legal enforcement mechanism for ICSID would be the provincial court system, the federal government must also obtain agreement from the provinces that they will enforce ICSID decisions. It is unlikely that this will happen in the foreseeable future. Canada accepts binding arbitration of investment disputes to which it is a party only when it has specifically agreed to do so through a bilateral or multilateral agreement, such as a Foreign Investment Protection Agreement. The provisions of Chapter 11 of the NAFTA guide the resolution of investment disputes between the United States and Canada. The NAFTA encourages parties to settle disputes through consultation or negotiation. It also establishes special arbitration procedures for investment disputes separate from the NAFTA's general dispute settlement provisions. Under the NAFTA, a narrow range of disputes (those dealing with government monopolies and expropriation) between an investor from a NAFTA country and a NAFTA government may be settled, at the investor's option, by binding international arbitration. An investor who seeks binding arbitration in a dispute with a NAFTA party gives up his right to seek redress through the court system of the NAFTA party, except for proceedings seeking non-monetary damages.


FFFOOOOOODDD PPPRRROOOCCCEEESSSSSSIIINNNGGG MMMAAARRRKKKEEETTT IIINNN CCCHHHIIINNNAAA

2005

SOURCE: National Trade Data Bank-a product of STAT-USA, U.S. Department of

Commerce.

2

Food Processing Market in China

SECTION 1-1: MARKET SUMMARY 3

SECTION 1-2. CHINA’S MEAT INDUSTRY 8

SECTION 1-3. CHINA’S CEREAL INDUSTRY 11

SECTION 1-4. FRUIT AND NUTS 13

SECTION 1-5. FACTORS TO CONSIDER 17

SECTION 2-1. ROAD MAP FOR MARKET ENTRY 19

SECTION 2-2. BEST PRODUCTS AND PROSPECTS 222

SECTION 2-3. SUMMARY AND POST CONTACT 22

SECTION 3-1. POLITICAL ENVIRONMENT 23

SECTION 3-2. TRADE AND PROJECT FINANCING 24

SECTION 4-1. MARKETING U.S. PRODUCTS AND SERVICES 31

SECTION 4-2. ESTABLISHING A PRESENCE IN CHINA (REPRESENTATIVE OFFICE, WHOLLY FOREIGN OWED ENTERPRISE, OR JOINT VENTURE) 34

SECTION 5-1. LEGAL CONSIDERATIONS 37

SECTION 5-2. LEGAL SYSTEM 39


Commerce.

3

Section 1-1: Market Summary Over the past half century, China has transformed into one of the world’s fastest growing economies. With a population of 1.3 billion, China is the most populated country in the world. China is also the world’s third largest country by area, covering 9.6 million square kilometers.

The People’s Republic of China was founded in 1949. In 1979 China began its ‘open-door’ policy, which encouraged foreign investment and trade. In the past 25 years, China’s average GDP growth rate exceeded 8% and reached 9.1% in 2003. Together with rapid economic growth, the standard of living has improved as well. The urban per capita disposable income has been on the rise, with a growth rate of 9% in 2003, and for rural areas, the average growth rate of per capita net income was 4.3% that same year.

China is the 10th largest trading nation in the world. Its share in world trade is now around 2%, while its share in the incremental increase of global trade has been close to 20% in recent years. A market driven industry combined with China’s membership in the World Trade Organization may provide for more mergers and consolidation in order to attain greater profits and efficiencies in the next few years. Rapid economic growth combined with higher disposable income means stronger demand for high quality processed food by Chinese consumers. To meet this demand, China’s food processing industry also continues to grow at double-digit rates in excess of 10%. Experts predict that the Chinese food processing industry will surely have a bright future because currently only about one-quarter of China’ food production is processed compared to about 80 percent in more developed countries. Consumption of processed food products in China is extremely low but is increasing at a rapid rate. During the past year there have been a number of deaths related to unsafe or “fake” food products including imitation infant formula and tainted liquor. These cases have lowered many Chinese consumers’ confidence in the safety of the food supply in China. As a result, consumers are more willing to pay for well-known local and imported brands. Imported products and those branded products produced by foreign joint-ventures tend to have a better reputation for higher quality and food safety.


Commerce.

4

Many foreign companies are taking advantage of the increased demand for high quality processed food products and will benefit by the reforms being implemented by the WTO accession. Currently, the food industry sector is unable to advance further until all of its sub-sectors reach a more sophisticated level of manufacturing and produce products of higher quality. Only then will it be able to enter the worldwide market as a key player. This industry consists of the food-processing sector, the food-manufacturing sector and the beverage sector. The food-processing sector includes rice milling, flour milling, oil refining, sugar refining, slaughtering, salt processing, feed processing, and aquatic product processing. The food-manufacturing sector is composed of pastries and confections, dairy products, canned foods, fermented products, and condiments. The beverage sector involves the making of alcoholic beverages (i.e. distilled spirits, beer and wine), soft drinks and tea.

Figure 1: China's Food Industry Structure, 2001

Manufacturing21%

Beverage24% Primary Processing

55%

Primary Processing

Manufacturing

Beverage

Total RMB 707 billion

151.9382.35

172.71


Commerce.

5

Figure 2: China’s Food Industry Structure, 2002

Manufacturing22%

Beverage23% Primary Processing

55%

Primary Processing

Manufacturing

Beverage

Total RMB 821.62 billion

182.8451.6

187.3

Source: China Statistical Yearbook, 2002, 2003

According to the table above, the number of food-processing and food-manufacturing enterprises increased from 2001 – 2002, whereas the enterprises in the beverage sector slightly decreased. Although revenues

Table 1: The Food Industry in China 2001 2002 % Change

The Food Processing Sector No. of Enterprises 10,381 10,413 0.30% Revenue of RMB (in billions) 382.35 451.6 18.10% The Food-Manufacturing Sector No. of Enterprises 4,563 4,615 1.10% Revenue in RMB (in billions) 151.9 182.8 20.30% The Beverage Sector No. of Enterprises 3,307 3,287 -0.60% Revenue in RMB (in billions) 172.71 187.3 8.40% Total No. of Enterprises 18,251 18,315 0.35% Total Revenue in RMB (in billions) 706.97 821.62 16.20% Total No. of Employees (in millions) 2.35 2.28 -2.90%


Commerce.

6

increased in all three areas, within the beverage sector, the vanishing enterprises allowed for a much lower revenue increase compared to the other two sectors. Compared to the industry’s total revenue growth the beverage sector also lagged behind. The food-manufacturing sector leads the food industry in both number of enterprises and revenue growth.

Table 2: Distribution of Food Industry by Sub-Sectors

Total No. of Enterprises 2001 18,251

Total No. of Enterprises 2002 18,315

Total Revenues 2001 706.97 (in billions)

Total Revenues 2002 821.62 (in billions)

Food Processing 56.90 56.90% 54.10% 55% Food Manufacturing 25.00 25.20% 21.50% 22.20% Beverage 18.10% 17.90% 24.40% 22.80% Source: China Statistical Yearbook, 2002, 2003

Retail Sales In 2001 the total retail sales volume of food, beverage and catering businesses reached 542.57 billion RMB. This accounted for 14.4% of the total retail sales volume of all consumer goods. In 2002, it increased to 629.96 billion RMB, raising it to 15.4% of the total retail sales of all consumer goods. Table 3: Retail Sales of Food, Beverage & Catering (in billions RMB) 2001 2002

% Change

Food 91.74 104.22 13.60% Beverage 13.94 16.51 18.40% Catering 436.89 509.23 16.60% Total 542.57 629.96 16.10% Source: China Statistical Yearbook, 2002, 2003


Commerce.

7

The total retail sales of food, beverage and catering, at 16.1% between 2001 and 2002 is almost double that of the annual growth rate of retail sales of all consumer goods during the same period which was 8.8%. The beverage sector had an even higher growth rate of 18.4%. The total retail sales of food, beverage, and catering business each accounted for 76.7% of the food industry’s revenue, respectively in 2001 and 2002. Table 4 shows that the estimated total amount of money Chinese families spent on food in 2001 was RMB 1,629 billion (U.S. $197.1 billion). In 2002, this number increased by 11.9% to RMB 1,823 billion (U.S. $220.6 billion). Combined with the food consumption in hotels, restaurants and various organizations one can see that China’s food market is enormous. Table 4: Food Expenditure of Chinese Families, in RMB

Estimated Total Population in 2001/2002 (in millions)

Average Food Expenditure in 2001/2002 per capita

Total Food Expenditure in 2001/2202 (in billions)

Urban Families 480.64/502.12 2,014.02/2,271.84 968/1,141 Rural Families 765.63/782.41 830.72/872.39 661/683 Total 1,246.27/1,284.53 2,844.74/3,144.23 1,629/1,824 Source: China Statistical Yearbook, 2002, 2003

Table 5: Food Expenditure & Disposable Income in China, in RMB

Disposable Income 2001/2002

Food Expenditure 2001/2002

Increase in Disposable Income/Food Expenditure

Urban 6,859.6/7,702.8 2,014.02/2,271.84 12.3%/12.8% Rural 2,366.4/2,475.6 830.72/872.39 4.6%/5.0% Source: China Statistical Yearbook, 2002, 2003

Urban areas along the coast continue to lead the rest of the country in per capita spending, both overall and for food expenditures in particular. In 2002, the national per capita income was RMB 6030 (U.S. $730), whereas income levels in Shanghai, Shenzen and Guangzhou all exceeded RMB


Commerce.

8

10,000 (U.S. $1200). However, urban income levels vary widely, and many young, middle-class Chinese earn $7,000 to $10,000 a year. Chinese have traditionally spent a large percentage of their income on food – and the cosmopolitan aspirations of young professionals predispose them to spend a growing amount on foreign products. Last year, young professionals spent about 40% of their disposable income on food. A growing percentage of that amount was spent on imported products, such as meat, dairy products, fresh fruit and confectionary items. Many young professionals spend a sizable portion of their income dining out, increasingly at western or chain restaurants that use imported products such as U.S. beef, poultry, potato products or wine. For example, Pizza Hut, which uses American potato products and cheese, usually has long lines of eager customers and has become a popular birthday party destination for children in affluent cities in China. Between 2001 and 2002, the disposable income of urban families rose 12.3% and 4.6% for rural families. The urban families spent 12.8% more on food expenditures, while the rural families spent 5% more. With continuing urbanization in China, more residents in the rural areas will migrate to urban areas allowing for more money to be spent on food. Also, with the improvement of living standards of Chinese people, the consumption of processed food and beverages will continue to grow. Section 1-2. China’s Meat Industry In the past five years, China has been one of the world’s largest producers of agricultural products such as cereals, meat, cotton lint, in-shell peanuts, rapeseed and fruit. The production of the above-mentioned products continues to rise, while many basic cereals are being displaced by more profitable fruits and vegetables. The output of meat grew from 57.2 MMT in 1998 to 65.9 MMT in 2002, a growth rate of 15.1%. However, according to industry insiders, ready-to-eat meat products are less than 10% of the total production. With the increasingly fast paced life of the Chinese people, the demand for processed, ready-to-eat meat products will increase. In the 1990s, Hormel from the USA set up two JV processing factories in Beijing and Shanghai in order to meet the growing demands of Chinese consumers for processed meat products. Big domestic processors such as Shuanghui Group in Henan, whose daily meat processing capacity reaches 1,500 MT,


Commerce.

9

and Yurun Rood Group in the Jiangsu Province are expanding their meat processing capabilities in order to increase their market share.

Table 6: China's Output of Livestock/Seafood Products (MMT) Livestock Seafood 1998 57.24 39.07 1999 58.21 41.22 2000 61.25 42.79 2001 63.34 43.81 2002 65.87 45.65 Source: China Statistical Yearbook, 2002, 2003

Figure 3: China’s Output of Livestock/Seafood Products

0

10

20

30

40

50

60

70

1998 1999 2000 2001 2002

Livestock

Seafood

With the improvement of China’s living standards, meat products play an increasingly important role in the life of Chinese consumers. The per capita annual meat purchases in China increased from 23.87 KG in 1998 to 32.62 KG in 2002, a growth rate of 36.6%, while the level in the Guangdong province grew from 36.22 KG to 54.12 KG during the same period, a growth rate of 49.4%. The statistics in Table 7 show that the per capita meat purchases in Guangdong Province has been much higher than the national average. The reason for this is that the Guangdong people have a higher disposable income than people in most other parts of China. More disposable income also allows the Guangdong people to satisfy their desire to increase


Commerce.

10

purchases of more seafood products. The national average consumption of seafood in 2002 was 35.6 KG, while in Guangdong Province it was 80.3 KG. In Southern China, in Guangdong and Guangxi Provinces, pork consumption still ranks first among meat consumption, while in Northern China, due to lower disposable income levels, consumption habits and religious concerns, people tend to eat more beef and mutton products. Table 7: Guangdong Urban Household Per Capita Annual Meat Purchases vs. China's National Average (KG) Pork

Beef & Mutton Poultry Total

Guangdong Urban Household 1998 20.05 2.2 13.97 36.22 China's Average Household 1998 15.88 3.34 4.65 23.87 Guangdong Urban Household 1999 20.2 2 15 37.2 China's Average Household 1999 16.91 3.09 4.29 24.29 Guangdong Urban Household 2000 19.56 2.08 15.91 37.55 China's Average Household 2000 16.73 3.33 5.44 25.5 Guangdong Urban Household 2001 19.4 2.1 15.6 37.1 China's Average Household 2001 15.95 3.17 5.3 24.42 Guangdong Urban Household 2002 28.8 3 17.64 49.44 China's Average Household 2002 20.28 3 9.24 32.52 Source: Guangdong Statistical Yearbook, China Statistical Yearbook, 2002, 2003 China is also the world’s largest producer of cultured aquatic products. The total output of aquatic products increased from 39.1 MMT in 1998 to 45.6 MMT in 2002, a total increase of 16.6%, whereas production of cultured aquatic products grew from 21.8 MMT in 1998 to 29 MMT in 2002, a growth of 33%. China produces nearly two-thirds of the world’s cultured aquatic products. The main products are farm raised carp, tilapia and shrimp.

Table 8: Output of China's Aquatic Products (MMT)

Seawater Cultured

Freshwater Cultured

Total Aquatic Products

1998 8.6 13.2 39.1


Commerce.

11

1999 9.7 14.2 41.2 2000 10.6 15.1 42.8 2001 11.3 15.9 43.8 2002 12.1 16.9 45.6

Source: China Statistical Yearbook, 2002, 2003 Total includes Sea/Fresh Water Catch.

Section 1-3. China’s Cereal Industry According to China Customs figures, in 2003 the entire Chinese market imported 424,180 MT of wheat, 29.84% less than the previous year. China also exported 2,237,480 MT of wheat, a 225.39% increase from 2002. China’s net export of wheat was 1,813,300 MT. The United States, Canada and Australia are still the main players in the Chinese market. Cereal production has been falling in recent years due to poor weather conditions and more liberal production policies that favor more high-value crops such as fruits and vegetables. The Chinese government has already contracted for more than two million tons of high quality wheat imports through the end of this calendar year. The attached chart shows China’s wheat import/export figures since 1995.

Table 9: China's Wheat Imports/Exports Wheat Imports (MT) Wheat Exports (MT) 1995 11,585,580 16,188 1996 8,245,961 0 1997 1,860,612 709 1998 1,489,403 6,020 1999 448,121 204 2000 880,000 2,500 2001 690,050 450,000 2002 604,570 687,620 2003 424,180 2,237,480

Source: Chinese Customs Statistics


Commerce.

12

Figure 4: China’s Wheat Imports/Exports

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

1995 1997 1999 2001 2003

Wheat Imports

Wheat Exports

There are 55 flourmills, which together have a daily processing capacity greater than 1000 MT, located in Guangdong province. However, the biggest 6 players in the region dominate almost half of the production. These big players not only provide their products to local consumers, but also export their flour to the surrounding area, mainly Hong Kong, Macao and Southeast Asia. The Hong Kong and Macao markets are the key import markets for high quality wheat flour from China, while the Southeast Asia countries consume lower end products. The wheat processing capacity has already reached 480,000 MT per year in Guangdong province, but the actual products being processed only amounted to 250,000 MT last year. Hence, many mills are not operating at full capacity. The Chinese government adjusted the export commodities’ tax rebate rate last October. The tax refund rate for wheat flour exports was raised from 5% to 13%, while the rebate for wheat was lowered from 13% to 9%. The flourmills are very excited about the decision and said the new regulation will encourage their exports and increase their profit efficiency. Wheat imports are still dominated by the market’s biggest player – COFCO, which receives almost 90% of the yearly import quota. Most of the joint venture mills and privately owned mills only get several thousand tons of quotas each year. To get a better price from the exporter and eliminate the negative impact caused by high freight rates, those mills started to pool together their quotas to make joint purchases. Last year, eight flour mills worked together and brought in more than 100,000 MT of U.S. wheat.


Commerce.

13

Recently, about 200 joint ventures and privately owned mills received 905,000 MT of import quotas from the State Development and Reform Commission for 2004. With the approval of the next year’s quota, we anticipate the mills will continue to make joint purchases in the future. Most of the imported wheat will be used for blending with other varieties of local wheat for specific gluten and protein content. For example, higher quality bread flour will utilize imported hard wheat with a protein content of around 13% to 14.5%, while biscuit flour may utilize imported soft wheat flour with a protein content of around 7-9%. For instant noodles, imported wheat with proteins between 11.5% and 12.5% would be most appropriate. With increasing incomes and demand for higher quality food products, the usage of imported wheat will continue to grow. The distribution system in developed areas is also undergoing changes. Sales of bakery products via supermarkets/chain bakery stores have increased, while the number of small artisanal bakeries has decreased. People living in cities tend to purchase bakery products with known brand names out of concern for food safety. With the anticipated lower cereals production and smaller planted area, and increasing demand from consumers, we expect wheat imports to continue growing in the coming years. Section 1-4. Fruit and Nuts Fruit and Vegetable Processing In 2003, the total sales revenue of the fruits and vegetable processing industry amounted to around US$ 3.02 billion (RMB 25 billion), an increase of 30 percent over last year’s sales. Fresh fruits produced in China are mainly consumed fresh. Since technology for processing is fairly primitive in China, only about 5 percent of the fruit is processed into canned or preserved products. Imported fresh fruit are seldom used to make canned fruit. They are usually sold at a much higher price and consumed fresh by Chinese consumers.


Commerce.

14

Some of the imported fresh fruit is also used as food ingredients in cooking, such as cherries on cakes. Meanwhile, imported dried fruits such as prunes and raisins are usually purchased by Chinese consumers as snack foods. Chinese restaurants would also incorporate dried fruits as an ingredient to prepare either cakes or Chinese dishes. Dried fruits and nuts are commonly imported in bulk and then packaged and labeled locally. Dried Nuts Processing More than 90 percent of the tree nuts in China are imported from foreign countries, usually in bulk, and then processed and packed by food processors. The most popular items are pistachios, almonds, Macadamia nuts, hazelnuts and pecan. Most of these products are processed and then packed into smaller bags to be distributed to the retailers. Packaging plays a very critical role in the consumer’s purchasing decision. Chinese consumers like to buy attractively designed packages. Many food processors realize the significance of this and strive to provide a more creative design on their products. The imported dried nuts are mainly consumed as snacks. Some of them are simply processed with salt while others may be preserved with more ingredients, such as sugar, honey and even spicy items. The California Almond Board has been very active in China and is responsible for a growing trend for some restaurants to use almonds as an ingredient in preparing Chinese cuisine, or adding almond flakes into cake mixes to prepare birthday cakes. Market Entry Advice to US Food Companies Among raw materials and food ingredients, imported food products account for an increasingly large percentage of ingredients for the food processing industry. Products with the most potential include tree nuts, dried fruits, livestock and livestock products, poultry products, seafood and cereals. As the urban population demands higher quality and more variety of products, ingredients that enhance nutrition and appearance of products will be in great demand.


Commerce.

15

More and more foreign companies are entering the food processing sector because it is expected to flourish as China’s tariffs becoming lower. With much more advanced technology and stricter safety control, foreign companies enjoy a solid reputation for high quality products. Depending on the respective products, foreign countries undertake different marketing strategies to promote a particular product which include menu promotions, in-store promotions, trade show participation and training seminars. American companies are facing serious challenges from both domestic manufacturers and foreign-invested enterprises. Although the US currently enjoys a leading role in the imported food market, other competing countries are striving to create a strong presence. As for local processors, they are trying hard to upgrade their processing facilities with state-of-the-art imported equipment from outside China. Eventually, they will produce better quality food products and become more competitive, especially with their low labor cost advantage. To become more competitive, US food producers and/or processors should try to improve the quality of their food products, adjust the tastes of their products to meet the preferences of Chinese consumers, design attractive packaging and also develop strong business relationships with their Chinese trade contacts. After its accession to the WTO, China is obligated to lower its tariffs on imported products (see Table 1). The average tariffs on agricultural products will decrease anywhere from 22% to 17.5%, while American products will benefit from a decrease of 14.5%. Although the Chinese government is trying to follow the WTO requirements, there are still many areas that don’t have specific laws guiding the proper implementation at the moment. In order to be successful, American producers and processors interested in entering this dynamic market should be prepared to learn how to better understand Chinese consumers, follow up with the regulations implemented by the Chinese government, and approach this market with realistic expectations by being patient with market development activities.


Commerce.

16

Table 10: Tariff Rates on Major Fruits, Vegetable and Dried Nuts Products Tariff code MFN Rate for

2001 MFN Rate for 2002

MFN Rate for 2003

MFN Rate for 2004

Potato 0701.1000 13 13 13 13 Tomato 0702.0000 13 13 13 13 Cauliflowers and Broccoli

0704.1000 13 11.2 11.2 10

Lettuce 0705.1100 15 12.4 12.4 10 Peas 0708.1000 13 13 13 13 Beans 0708.2000 13 13 13 13 Asparagus 0709.2000 13 13 13 13 Sweet corn 0710.4000 13 11.2 11.2 10 Coconuts 0801.1100 15 13.2 12.6 12 Cashew nuts 0801.3100 28 24 22 20 Almonds, In-shell

0802.1100 29 26.4 25.2 24

Almonds, shelled

0802.1200 26 18 14 10

Hazelnuts 0802.2100 29 27 26 25 Walnuts 0802.3100 29 27 26 25 Pistachios 0802.5000 30 20 15 10 Hawaiian nuts

0802.9049 29 26.4 25.2 24

Bananas 0803.0000 25 16 13 10 Dates 0804.1000 19 15 15 15 Figs 0804.2000 30 30 30 30 Pineapples 0804.3000 20 15.2 13.6 12 Avocados 0804.4000 25 25 25 25 Guavas 0804.5010 23 19 17 15 Mangoes 0804.5020 23 19 17 15 Oranges 0805.1000 35 22.6 16.8 11 Grapefruits 0805.4000 35 23.2 17.6 12 Lemons 0805.5000 38 22.6 16.8 11 Grapes 0806.1000 40 23.8 18.4 13 Watermelons 0807.1100 29 27 26 25 Cantaloupes 0807.1920 30 19.2 15.6 12 Papayas 0807.2000 29 27 26 25 Apples 0808.1000 30 18 14 10 Ya Pears 0808.2012 27 19.2 15.6 12


Commerce.

17

Apricots 0809.1000 29 27 26 25 Cherries 0809.2000 26 18 14 10 Peaches 0809.3000 26 18 14 10 Plums 0809.4000 35 22 16 10 Strawberries 0810.1000 30 25.6 24.2 22.7 Raspberries & Blackberries

0810.2000 29 27 26 25

Cranberries 0810.4000 30 30 30 30 Kiwifruit 0810.5000 37 30 26.7 23.3 Durians 0810.6000 28 24 22 20 Lychee 0810.9010 42 36 33 30 Logan 0810.9030 30 21 18 15 Carambola 0810.9060 30 24 22 20 *Minimum rate applied to countries enjoying most favored nation (MFN) trading status with China. US are among those countries. The effective minimum rate is tariff rate plus VAT (Value Added Tax). The currently VAT rate for the majority of the products listed above is 13%. Sources: PRC Import and Export Tariff Handbooks for 2001, 2002, 2003 and 2004

Section 1-5. Factors to Consider Chinese Consumers Are Increasingly Aware of Food Safety Chinese consumers are attaching more and more importance to the safety and quality of their food. Generally speaking, Chinese consumers are predominantly price sensitive. However, for consumers in the more affluent urban areas, such as Beijing, Shanghai, Guangzhou and Shenzhen, safety and quality have become two determining factors when deciding on which products to buy. They are more willing to pay extra for quality and safety. Therefore, the central government is implementing the Fangxinshipin (safety guaranteed foods) policy, under which only foods from designated processing facilities are allowed for retail sales. Back in April 2003, China’s Ministry of Agriculture released a list of drugs banned from use in animal feeds and later in September announced the Administrative Regulations on the Quality and Safety of Aquatic Products. This regulations launched a nationwide campaign to ensure the safety of feed for animal use in order to guarantee that meat and aquatic products are safe for human consumption. Imports of Major U.S. Agricultural Products into China China had over 124,000 enterprises/companies involved in food trading in 2003, with total imports and exports valued at US$ 85 billion, an increase of 37.1% over the previous year. Exports were US$ 43.8 billion and imports


Commerce.

18

were US$ 41.3 billion, a growth of 34.6% and 39.9% respectively. China imported 20 MMT of soybean, mainly from the USA, Brazil, and Argentina, valued at US$ 5.4 billion. The top ten trading partners for China in 2003 were Japan, USA, EU, Hong Kong, ASEAN, Korea, Taiwan, Russia, Australia and Canada. Major imported agricultural products from the USA into China include soybean, tree nuts, fresh fruit and meat and poultry offal.

Table 11: China's Top Imports of Consumer Foods, 2002

Product Value ($ millions)

Poultry 426 Dairy (excluding cheese) 281 Fresh Fruit 276 Processed Fruit & Vegetables 260 Red Meat 200 Wine & Beer 76 Infant Foods 74 Snack Foods (excluding nuts) 70 Tree Nuts 67

Source: China Statistical Yearbook, 2002, 2003

China imported 99,886 MT of edible fruits and nuts from the USA in 2003, a growth of 15.5% from the previous year, and valued at US$ 78.8 million, a growth of 57.1%. As China’s second biggest trading partner, the USA is the largest supplier of meat and edible meat offal into China. In 2002, China imported 1,047,774 MT of meat and edible meat offal products from all over the world, among which 828,784 MT came from the USA. Guangdong Province in southern China plays an important role in the distribution of


Commerce.

19

imported meat and edible meat offal products. About 70% of all meat imports enter China through Guangzhou and Shenzhen ports and are distributed throughout China. In the Northern port cities, Shanghai handles about 20-25% of the total imports. U.S. beef and poultry products are currently banned from entering China. U.S. beef was banned in December 2003 due to the BSE case detected in Washington State and poultry products were banned in February due to the discovery of Asian Influenza in a few poultry flocks in the United States. Both situations are under control and discussions are currently under way to reopen the market to U.S. beef and poultry. Section 2-1. Road Map for Market Entry Since imported food products comprise an increasing percentage of the food processing industry, it is important to have specialized marketing strategies to help ensure a place in the industry. Marketing strategies vary according to the degree of popularity and acceptance that a particular product enjoys locally. The stories of three product groups – almonds, potato products and dairy products –illustrate the challenges that imported products face in occupying a sizeable position in the food processing industry. For U.S. products that already have large sales consumption and focus on ingredient application and technical training for more specialized usage. For instance, many high-end joint venture or local bakery chains now use American ingredients in their specialized products such as cakes and cookies. In the frozen potato products market, while the U.S. still enjoys 88% of the market share, increasing domestic competition and lower-cost imports from New Zealand and the EU have resulted in a 7% drop since 1999. The U.S. Potato Board has resolved to maintain market dominance and set quality standards emphasizing product profitability and specification in its marketing messages. U.S. Potato products can be found at most fast food restaurants and other quick serve retail food outlets. While the U.S. trails Australian and New Zealand dairy imports in China, the U.S.A. Dairy Export Council (USADEC) has capitalized on its comparitive advantage to fortify the U.S. position in China: they aggressively market a small selection of dairy products – whey, lactose and milk powder – to achieve market penetration in those product groups. For instance, to


Commerce.

20

increase awareness of the versatility and cost benefit of using lactose in food processing, the USADEC conducts technical seminars and “one-on-one” consultation with large domestic food processing groups. Education and training regarding ingredient application has helped hasten the incorporation of American whey proteins, lactose and milk powder into the local food processing industry, thereby increasing the demand for imports of those ingredients from the U.S. Generally speaking, ordinary Chinese consumers are very price sensitive. For both sellers and buyers, price is the number one concern when deciding whether or not to purchase something. The second factor is quality. More than 90 percent of the tree nuts and dried fruits in the local market are imported raw from foreign countries, in bulk, and then are processed and packed in China. The most popular items include pistachios, almonds, Macadamia nuts, hazelnut, prunes, raisins and pecans. Many of these nuts and dried fruits are packed either in transparent plastic bags or paper cartons for sale, usually in the supermarkets. For the ready-to-cook products sold in the local supermarkets, most raw elements are of local origins. The more common elements are beef, pork, chicken, mutton, meatballs, fish balls, seafood and fresh vegetables. They are cleaned, cut to the preferred size, packed in a white Styrofoam plate and wrapped with a plastic transparent film for display in the refrigerated section of the supermarket. Due to the fast pace of urban life, many Chinese customers welcome these convenient and ready-to-cook products. The market for ready-to-cook products is promising. Imported beef, pork, seafood and other imported seasoning ingredients are available in high-end restaurants such as those in five-star hotels and JV supermarkets such as Park N Shop and Carrefour. Western style cuisines and cooking are gaining popularity in big cities all over China. They create a budding market opportunity for foreign food products. After the USA announced the first BSE case late December 2003, US beef products have been banned from entering the Chinese market. However, before the BSE case in USA, U.S. beef products, especially beef offal, was very popular in the Chinese market and was facing strong competition from New Zealand and Canada. U.S. seafood has strong competition from Norway, Australia and Canada. Beef jerky and pork jerky are two popular snacks made from


Commerce.

21

local elements. The two best selling seafood snacks are preserved squid and de-boned eels and are both are made with local products. Thailand and Australia are the only two countries that have a significant share of the imported rice market in China. The two most popular packages are 5 kilograms per bag for sale in supermarkets and 25 kilogram bags offered in the wholesale markets. Joint ventures such as Garden, AJC and Donghaitang produce most of the bakery products sold in the local supermarkets. They buy flour from domestic mills who buy wheat from the United States, Canada and Australia to blend with the local varieties. Foreign fresh fruits are available all year round in China. The technology for processing fruits is fairly primitive in China. It is estimated that only 5 percent of the fresh fruits grown in China are processed into canned or preserved products. The other 95 percent is consumed raw and fresh. Canned fruits such as peaches, pineapples and cherries are mainly used for baking. Canned litchis and longan are exported. Preserved fruits are consumed mainly as snacks. China manufactures a great variety of milk powder. Imported infant formula and milk powder used to be very popular among young parents who want to provide the best for their only child. With the development of the Chinese dairy industry and the establishment of joint ventured milk production in China, JV and local products have become the preferred choice of Chinese young parents because of their lower price and comparable quality. Worldwide brands such as Mead Johnson, Wyeth, Nestle, Dumex have joint ventures in China. Various brands of chocolate are readily available in South China. They include original imports such as Ferrero Rocher from Italy and Lindt from Switzerland and also products made in China, such as Hersey in Shanghai, Nestle in Tianjin, M & M in Beijing, and Montresor in Zhangjiagang.


Commerce.

22

Section 2-2. Best Products and Prospects The following foreign food items and ingredients are sold and well received in the Chinese market: almonds, pistachios, prunes, raisins, oranges, table grapes, grapefruits, hazelnuts, Macadamia nuts, apples, cherries, beef, chicken parts, bovine and swine offal, bakery ingredients, French fries, sweet corn, juices and concentrates, lobsters, clams, salmon, infant formula milk powder and candies. These items are especially popular during festival seasons like the Chinese New Year, the Mid-Autumn Festival, and Christmas. Developing health food, microwaveable food, instant food, infant food, food for primary and high school students, and low calorie, low fat, low saturated fatty acid, low salt, low cholesterol, high fiber and high calcium for older people are among China’s food industry’s priorities. Section 2-3. Summary and Post Contact The food industry in China is adjusting to market forces. It is getting ready for a higher level of development. Its immediate and urgent needs are finding the resources for upgrading the processing and manufacturing facilities and importing or building production equipment to meet consumers’ demand for better quality food items and food safety concerns. Its expansion is contingent on finding new markets within and beyond its borders. The quality and pricing of the products will determine if they are able to compete domestically and internationally. Improvement of the production facilities and equipment will create demand for imported and better quality food ingredients and raw materials. They will also require better quality control. Inquiries about this report can be directed to ATO Guangzhou, Shanghai and Beijing. The telephone numbers for the three posts are 011-8620-8667-7553, 001-8621-6279-8622 and 011-8610-8529-6418. The fax numbers are 011-8620-8666-0703, 011-8621-6279-8336 and 011-8610-8529-6692, respectively. Currently ATO/Guangzhou website www.atoguangzhou.org carries current information on the South China market. The three posts will incorporate a FAS nationwide website to provide overall information on the China market in the coming weeks.


Commerce.

23

Section 3-1. Political Environment Although there has been considerable reform of China's economic model - from a centrally planned economy to a market-oriented one - the same is far less true of the PRC (People’s Republic of China) political system. The Chinese Communist Party (CCP) still dominates the entire political apparatus, and its leaders make all major policy decisions. Party members hold most senior government positions at all levels of administration. Ultimate authority rests with the 24 members of the CCP Politburo and, in particular, the nine-member Standing Committee. Ministries and lower-level counterparts implement policy on a day-to-day basis, and China's parliament, the National People's Congress (NPC), reviews and approves legislation and nominees for government offices. Many provincial governments, especially those in fast-growing coastal regions, actively adapt central government policy decisions to suit local needs. Senior leaders generally agree on the need for further economic reform, but stability remains the paramount concern, and differences exist within the leadership over the content, pace, and goals of both economic and political reform. The November 2002 16th Communist Party Congress began the transition of power from former Party General Secretary Jiang Zemin to Party General Secretary Hu Jintao. This transition was finalized in March 2003 during the first annual plenary of the 10th NPC, which named Hu Jintao President of the People’s Republic of China and Wen Jiabao Premier. Jiang Zemin retained his position as Chairman of the CPC Central Military Commission. Since their appointment, Hu and Wen have been seen as focusing on improving the average person’s standard of living, particularly in rural or less developed areas. China faces a growing disconnect between its reforming economy and society and its fundamentally unchanged political system. The growing disparity between urban and rural incomes, income gaps between the wealthy coastal regions and the poor interior, a large "floating population" of itinerant workers, mounting unemployment created as State-Owned Enterprises restructure and downsize land confiscation, coerced relocation and official corruption are the chief potential threats to stability. So far, none has prompted the kind of mass protest movement that erupted in Beijing in the spring of 1989, although a number of localized large-scale labor protests occurred in 2002. The central government continues to


Commerce.

24

control the media and has increased efforts to use sophisticated technology to control information from the Internet. The central authorities seek to minimize tensions through the implementation of pragmatic policies. They recognize that moves to reduce personal and economic freedoms would harm China's long-term interests. Nonetheless, the national leadership would respond forcefully if confronted with what it regarded as another serious threat to its monopoly on political power, as it did after approximately 10,000 members of the Falun Gong spiritual movement appeared outside the leadership compound in Beijing in April 1999. As evidenced by harsh sentences handed down to labor activists and Internet dissidents in May and June 2003, the new leadership appears to be continuing to place strong emphasis on stability and perceived threats to power. China’s political relations with the United States temporarily deteriorated following the accidental bombing of the Chinese Embassy in Belgrade, Yugoslavia, in May 1999 and again following the collision of a U.S. EP-3 reconnaissance aircraft and a Chinese fighter in international airspace in April 2001. Bilateral relations have gradually recovered from both incidents. China came out firmly in support of the United States following the September 11 terrorist attacks. Relations further improved with the October 2001 and February 2002 visits by President Bush to China, the October 2002 visit of then President Jiang Zemin to the United States and the December 2003 visit of Premier Wen to the United States. Differences, remain between the U.S. and Chinese governments on issues such as human rights and Taiwan and these will continue to color the relationship. Section 3-2. Trade and Project Financing A. Banking System China's banking system has undergone significant changes in the last two decades: banks are now functioning more like banks than before. China's accession to WTO will lead to a significant opening of this industry to foreign participation. 1. Central Bank and Banking Regulatory Commission


Commerce.

25

The People’s Bank of China (PBOC) is China’s central bank, which formulates and implements monetary policy. (The State Council, however, continues to make all final decisions on major financial and monetary policy issues.) The PBOC maintains the banking sector's payment, clearing and settlement systems, and manages official foreign exchange and gold reserves. It oversees the State Administration of Foreign Exchange (SAFE) for setting foreign-exchange policies. According to the 1995 Central Bank Law, PBOC has full autonomy in applying the monetary instruments, including setting interest rate for commercial banks and trading in government bonds. The State Council maintains oversight of PBOC policies. China Banking Regulatory Commission (CBRC) was officially launched on April 28, 2003, to take over the supervisory role of the PBOC. The goal of the reform is to improve the efficiency of bank supervision and to help the PBOC to further focus on the macro economy and currency policy. According to the official announcement by CBRC posted on its website, the CBRC is responsible for “the regulation and supervision of banks, asset management companies, trust and investment companies as well as other deposit-taking financial institutions. Its mission is to maintain a safe and sound banking system in China.” 2. State-Owned Commercial Banks – The ‘Big Four’ In 1995, the government introduced the Commercial Bank Law to standardize the operations of China's commercial banking institutions. At present four major state-owned banks, the Bank of China (BOC), the China Construction Bank (CCB), the Agricultural Bank of China (ABC), and the Industrial and Commercial Bank of China (ICBC), dominate the banking system and together account for well over half of all loans and deposits in China's banks. The Industrial & Commerce Bank of China (ICBC) is the largest bank in China by total assets, total employees and total customers. ICBC differentiates itself from the other state-owned commercial banks by being second in foreign exchange business and first in RMB clearing business. It previously was the major supplier of funds to China's urban areas and manufacturing sector.


Commerce.

26

The Bank of China (BOC) specializes in foreign-exchange transactions and trade finance. In 2002, BOC Hong Kong (Holdings) was successfully listed on the Hong Kong Stock Exchange. The USD 2.8 billion offering was over-subscribed by 7.5 fold. The deal was a significant move in the reform of China’s banking industry. The China Construction Bank (CCB) specializes in medium to long-term credit for long-term specialized projects, such as infrastructure projects and urban housing development. The Agriculture Bank of China (ABC) specializes in providing financing to China's agricultural sector and offers wholesale and retail banking services to farmers, township and village enterprises (TVEs) and other rural institutions. 3. Policy Banks Three "policy" banks-the Agricultural Development Bank of China (ADBC), China Development Bank (CDB), and the Export-Import Bank of China (Chexim) - were established in 1994 to take over the government-directed spending functions of the four state-owned commercial banks. These banks are responsible for financing economic and trade development and state-invested projects. CDB specializes in infrastructure financing; ADBC provides funds for agricultural development projects in rural areas; and Chexim specializes in trade financing. 4. Second Tier Commercial Banks In addition to the big four state-owned commercial banks, there are smaller commercial banks. The largest ones in this group include the Bank of Communication, CITIC Industrial Bank, China Everbright Bank, Hua Xia Bank, China Minsheng Bank, Guangdong Development Bank, Shenzhen Development Bank, China Merchants Bank, Shanghai Pudong development bank and Fujian Industrial Bank. The second tier bankshave, on the whole, tended to adhere more closely to commercial principles in their operations but, nevertheless, have also encountered problems with respect to asset quality.


Commerce.

27

5. Trust and Investment Corporations In the midst of the reforms of the 1980s, the government established some new investment banks that engaged in various forms of merchant and investment banking activities. Many of the 240 or so international trust and investment corporations (ITICs) established by government agencies and provincial authorities, however, experienced severe liquidity problems after the bankruptcy of the Guangdong International Trust and Investment Corporation (GITIC) in late 1998. The largest surviving ITIC is China International Trust and Investment Corporation (CITIC), which has a banking subsidiary known as CITIC Industrial Bank. 6. NPLs and Asset Management Companies In 1999, four asset management companies (AMC) were established to transfer the non-performing assets from the banks. The AMCs plan to repackage the non-performing loans into viable assets and sell them off to the investors. Based on the five-category classification, the outstanding balance of NPLs held by the main banking institutions declined by RMB96.6 billion yuan, and the NPL ratio was reduced by 4.37 per cent to 18.74 percent in the first nine months of 2003. In particular, the outstanding balance and the ratio of NPLs of the four state-owned banks stood at RMB1999.23 billion yuan and 21.38 percent respectively, which were RMB88.876 billion yuan and 4.83 percent lower than those at the beginning of the year. As of the end-June, 2004, the four asset management corporations (AMCs) have altogether disposed of RMB567.26 billion worth of non-performing assets, and recovered an aggregate of RMB112.83 billion in cash, accounting for 19.9 per cent of the disposed non-performing assets. To be specific, China Huarong Asset Management Corporation has disposed of RMB169.56 billion and recovered RMB33.84 billion in cash, accounting for 20 per cent; China Great Wall Asset Management Corporation has disposed of RMB176.49 billion and recovered 18.3 billion in cash, accounting for 10.4 per cent; China Orient Asset Management Corporation has disposed of RMB92.3 billion in non-performing assets and recovered RMB19.17 billion in cash, accounting for 20.8 per cent; China Cinda Asset Management Corporation has disposed of RMB128.91 billion in non-performing assets and recovered RMB41.48 billion in cash, accounting for 32.2 per cent.


Commerce.

28

B. Banking System Reform Currently, the state-owned commercial banks occupy a dominant share in China s banking industry, accounting for 56 percent of the total banking assets in China. Therefore, the banking industry reforms are centered on the wholly state-owned banks. Progress has been made over recent years in reforming the wholly state-owned banks in areas including the improvement of the banks’ risk management, the enhancement of the banks’ internal controls and the upgrade of the banks’ IT systems However, in order to meet the needs of economic and financial developments and opening-up, the CBRC deems it necessary to further accelerate the reforms so as to transform the wholly state-owned banks into modern financial corporate entities with good corporate governance, a sound operational mechanism, well-defined business strategies, strong financial conditions and competitiveness in international markets. Subsequently, the qualified wholly state-owned banks will be restructured into joint-equity banks, and the eligible banks will be further allowed to be listed on the stock market. The reform of the banking system has been accompanied by the Chinese leadership's decision to decontrol interest rates gradually over an indefinite period of time. Market-based interest rate reform aims at establishing the pricing mechanism of deposit and lending rate based on market supply and demand. The central bank would continue to adjust and guide the interest rate development which allowing the market mechanism to play a dominant role in financial resource allocation. The sequence of the reform, as outlined by the PBOC, is to liberalize the interest rate of foreign currency before that of domestic currency, lending before deposit, large amount and long term before small amount and short term. As a first step, the PBOC liberalized the interest rates for large deposits (USD 3 million and over) and loans in foreign currency in September 2000. Rates for deposits below USD 3 million remains subject to PBOC control. In March 2002, the PBOC unified foreign currency interest rate policies for Chinese and foreign financial institutions in China. Small foreign exchange deposits of Chinese residents with foreign banks in China were included in the PBOC interest rate administration of small foreign exchange deposits, so that domestic and foreign financial institutions are


Commerce.

29

treated fairly with regard to the interest rate policy of foreign exchange deposits. As interest rate liberalization progressed, the PBOC has liberalized, simplified or abandoned 114 categories of interest rates initially under control since 1996. At present, 34 categories of interest rates remain subject to PBOC control. The full liberalization of interest rates on other deposit accounts, including checking and saving accounts, is expected to take much longer. On the lending side, market-determined interest rates on loans will first be introduced in the rural areas and then followed by rate liberalization in the cities. C. Opportunities to Foreign Banks China’s entry into the WTO will bring tremendous opportunities to foreign banks. As a milestone move to honor its WTO commitments, China released the Rules for Implementing the Regulations Governing Foreign Financial Institutions in the People’s Republic of China in January 2002. The rules provide detailed regulations for implementing the administration of the establishment, registration, scope of business, qualification, supervision, dissolution and liquidation of foreign financial institutions. They also stipulate that foreign bank branches conducting full aspects of foreign-currency business and full aspects of RMB business to all categories of clients are required to have operating capital of at least USD 72.3 million, of which at least USD 48.2 million must be held in RMB (RMB 400 million) and at least USD 24.1 million in freely convertible currency. Client restriction on foreign currency business was lifted immediately after China’s entry into the WTO on December 11, 2001. For local currencies, geographic restriction will be phased out beginning with four major cities—Shanghai, Shenzhen, Tianjin and Dalian being open upon China’s WTO accession. Foreign-funded banks were further allowed to do RMB business in Guangzhou, Zhuhai, Qingdao, Nanjing and Wuhan from December 1, 2002. With respect to the client restriction, foreign financial institutions have been permitted to provide foreign currency services to Chinese enterprises and individuals, and will be permitted to provide local currency business to all Chinese clients within five years after WTO accession. By July 15, 2004, 100 foreign banking institutions (making up 50 per cent of all foreign banking institutions incorporated in China) have been approved to


Commerce.

30

conduct RMB business, including 53 in Shanghai, 19 in Shenzhen, 8 in Tianjing, 6 in Dalian, 7 in Guangzhou, 2 in Zhuhai, 2 in Qingdao, 2 in Fuzhou, and 1 in Wuhan. Among these institutions, 53 have been granted to provide RMB services to the Chinese enterprises. In comparison, the number of foreign banks authorized to conduct RMB business was 30 at the end of 2001. D. Foreign-Exchange Controls The PBOC and SAFE regulate the flow of foreign exchange in and out of the country, and set exchange rates through a "managed float" system. To better control this flow, almost all Chinese enterprises and agencies are required to turn over their foreign currency earnings to the banks in exchange for RMB. (Large exporters were allowed to retain up to 15 percent of their earnings beginning in late 1997.) When foreign exchange is required for import and other authorized transactions, they then apply to designated banks that are members of the interbank foreign-exchange market. The Chinese Government has eliminated the foreign-exchange swap centers on which FIEs used to trade among themselves, and all FIEs have been integrated into the formal banking system. Foreign-invested enterprises (FIEs) are permitted to keep foreign exchange in foreign exchange accounts at commercial banks. Since 1995 China has required that FIEs submit an annual report on their foreign-currency transactions, known as the Foreign-Exchange Examination Report. This report must be prepared by a certified public accountant registered in China and approved by SAFE and is necessary to qualify for foreign-exchange privileges. The purpose of the report is to ensure that FIEs' foreign-exchange earnings from exports are sufficient to meet their own requirements as well as any obligation to repatriate profits. Once the report is approved, firms receive a stamped Foreign Exchange Registration Certificate that enables them to obtain foreign exchange. On July 1, 1996, China began to allow all FIEs in China to buy and sell foreign currency and exchange RMB in authorized banks for trade and services, debt payment and profit repatriation. The PBOC has lifted limits on exchanging and remitting currency for non-trade purposes and raised the ceilings for the amount of foreign exchange for private use. In mid-1998, however, SAFE cracked down on many of the loopholes used to get around


Commerce.

31

the controls on capital account transactions. Many FIEs complained that delays occurred when SAFE screened their documentation more closely. SAFE has streamlined its system, but the requirement for proof that all relevant local taxes have been paid is a burden for many offshore service providers. In June 2002, SAFE authorized FIEs to draw on foreign exchange in their capital fund accounts for transaction settlements without prior SAFE approval. SAFE has also authorized designated Chinese commercial banks to change domestic currency needed by Chinese citizens for educational or travel expenses within specified limits, thus streamlining access to foreign currency for many individuals. Nevertheless, China's stated goal of achieving a fully convertible currency remains distant because of political concerns over the potential impact to the Chinese economy, and the authorities refuse to commit to a specific timetable for capital account liberalization. Foreign banks, their branches and foreign joint-venture banks are authorized to buy or sell foreign exchange from or to foreign-funded ventures. Foreign-funded banks or branches are not allowed to accept local currency deposits or to make RMB loans unless they are in certain designated cities and have been specially licensed for domestic currency business. Elsewhere, foreign banks and their branches are prohibited from accepting RMB deposits (liabilities) but may establish RMB accounts to convert currencies for their joint venture and foreign customers. China has pledged to eliminate all geographical restrictions within five years of its 2001 entry to he World Trade Organization (WTO) and has subsequently increased the number of cities in which foreign banks may undertake RMB business each year since its WTO accession. Section 4-1. Marketing U.S. Products and Services A. Distribution and Sales Before China’s accession to the WTO, China prohibited foreign companies from distributing imported products or providing repair and maintenance services. Since WTO implementation, China has worked towards liberalizing its distribution system to provide full distribution rights for U.S. firms. However, this is an issue still very much in debate and with much improvement to be made. Current restrictions for most distribution related services are to be phased-out within three years from the date of accession,


Commerce.

32

although the schedule of commitment until that time remains according to the service, (for more information on China’s commitments on the WTO, please refer to the U.S. Embassy website links to the Economic Section and Trade and Commerce at: www.usembassy-china.org.cn). Trading and Distribution are two separate issues and are, accordingly, covered separately by the WTO implementation documents. Trading simply covers the rights to import and export product into and from China. Distribution, on the other hand, covers the sale/resale of products once the products are in China. 1. Trading Companies One of the legal changes as a result of WTO was the release in July of 2001 of the Expanding Import and Export Management Rights of Foreign Invested Enterprises (FIEs) rule. Prior to WTO accession, FIEs always had the rights to import materials needed for production and export the products they produced. The rule was designed to allow manufacturing FIEs to become export trading companies, purchasing and exporting any products free from quotas, license control and government monopoly. This is the first step towards implementing China’s commitment to liberalize trading rights. FIEs in foreign trade zones are now allowed to establish offices outside the zones, which will enable FIEs to establish distribution networks across the country before the phase-in of the distribution rights. China’s WTO implementing documents state that 3 years after China’s WTO accession, all Chinese companies that have RMB 1 million in capitalization and are registered, can obtain an import/export license. The law was to cover the establishment of FIE service suppliers (distribution companies) on December 11, 2002, but then only through joint ventures in which an FIE has a minority stake. However, this did not happen. The Chinese government maintains that as FIEs can set up wholesaling and retailing companies that they meet their requirements. It is unclear at this time whether FIEs will be able to distribute products they do not manufacture in China or whether the foreign invested would need to establish a minority foreign-owned distributor. 2. Distribution


Commerce.

33

As we continue to wait for distribution rights to become more liberalized as per the WTO implementation documents, business remains in a similar state as last year. Distribution covers 1) commission agent services, 2) wholesale services, and 3) retailing. Regarding FIEs, the WTO implementation documents state that FIES can distribute products they produce/manufacture as well as related subordinate services. Given that there was no action as of the due date of December 11, 2002, industry must wait for China’s next step. Given the complexities of the markets in China it is advised that foreign companies use a domestic Chinese agent for both importing into China and marketing within China. With careful selection, training, and constant contact, a U.S. exporter can obtain good market representation from a Chinese trading company, many of which are authorized to deal in a wide range of products. Some of the larger companies have offices in the U.S. and other countries around the world, as well as a network of offices and affiliates in China. However, given transportation and communication difficulties as well as regional peculiarities, most of these trading companies cannot provide diversified coverage throughout China. China's WTO accession promises a three-year phase in of improved trading rights that should improve such conditions for foreign firms. 3. Local agents In addition to trading companies, China is witnessing an explosion in local sales agents who handle internal distribution and marketing. Most of these firms do not have import/export authorization. They are the next layer down the distribution chain, buying imported products from those entities that have an import/export license. They may be representative offices of Hong Kong or other foreign trading companies, or domestic Chinese firms with regional or partial national networks. Given China's size and diversity, as well as the lack of agents with wide-reaching capabilities, it makes sense to engage several agents to cover different areas, and to be cautious when giving exclusive territories. China can be divided roughly into at least five major regions: the South (Guangzhou), the East (Shanghai), the Central/North (Beijing-Tianjin), West China and the Northeast.


Commerce.

34

The U.S. Commercial Service (USCS) assists new-to-market firms. The International Partner Search (IPS) will locate, screen, and assess potential qualified overseas sales representatives, agents, distributors, joint venture partners, licensees, franchisees or strategic partners for your products or services. The IPS program locates up to six potential agents or distributors, screened from a large pool of candidate firms. Normal turnaround time is around 30 calendar days after each post receives USD 450 for each product line and the company’s product literature. A report is developed from on-the-spot research by U.S. Embassy staff and provides the contacts needed to launch marketing efforts in China. As a next step, a visit to China can be supported by our Gold Key Service (GKS), which is designed to set-up appointments with prospective agents and distributors, and key government officials responsible for an industry (USD 600 per location). IPS clients can upgrade their existing IPS to meet one-on-one with those identified companies (i.e, GKS) for USD 150 if done within 6 months upon completion of the IPS. Regional IPSs and GKSs are available from the USCS offices in Beijing, Shanghai, Guangzhou, Shenyang, and Chengdu, but nation-wide searches are not available. For those firms unable to travel and seeking potential partners, USCS continues to offer BuyUSA.com as a user-supported "B2B" web site. Companies seeking foreign partners may list their firm's information, and foreign buyers are enlisted worldwide Section 4-2. Establishing a Presence in China (Representative Office, Wholly Foreign Owed Enterprise, or Joint Venture) Representative offices are the easiest type of offices for foreign firms to set up in China, but these offices are limited by Chinese law to performing "liaison" activities. As such, they cannot sign sales contracts or directly bill customers or supply parts and after-sales services for a fee, although most representative offices perform these activities in the name of their parent companies. Despite limitations on its scope of business activities, this form of business has proved very successful for many U.S. companies as it allows the business to remain foreign-controlled.


Commerce.

35

China's Company Law, which has been in effect since July 1, 1994, permits the opening of branches by foreign companies but, as a policy matter, China still restricts this entry approach to selected banks, insurance companies, accounting and law firms. While representative offices are given a registration certificate, branch offices obtain an actual operating or business license and can engage in profit-making activities. Establishing a representative office gives a company increased control over a dedicated sales force and permits greater utilization of its specialized technical expertise. The cost of supporting a modest representative office ranges from USD 250,000 to USD 500,000 per year, depending on its size and how it is staffed. The largest expenses are rent for office space and housing, expatriate salaries and benefits. 5. Establishing a Chinese Subsidiary A locally-incorporated equity or cooperative joint venture with one or more Chinese partners, or a wholly foreign-owned enterprise (WFOE, often pronounced "woofy"), may be the final step in developing markets for a company's products. In-country production avoids import restrictions - including relatively high tariffs - and provides U.S. firms with greater control over both intellectual property and marketing. The establishment of a WFOE in China has gained in popularity among U.S. firms as a result of an easing of restrictions, directly attributed to China’s accession to the WTO. The role of the Chinese partner in the success or failure of a joint venture cannot be over-emphasized. A good Chinese partner will have the connections to help smooth over red tape and obstructive bureaucrats; a bad partner, on the other hand, can make even the most promising venture fail. Common investor complaints concern conflicts of interest (e.g., the partner setting up competing businesses), bureaucracy and violations of confidentiality). The protection of intellectual property, no matter the form of cooperation, is one of the most pressing matters for U.S. firms doing business in China. American companies should bear in mind that joint ventures are time-consuming and resource demanding, and will involve constant and prudent monitoring of critical areas such as finance, personnel and basic operations in order for them to be a success. 6. Licensing


Commerce.

36

Technology transfer is another initial market entry approach used by many companies. It offers short-term profits but runs the risk of creating long-term competitors. Due to this concern, as well as intellectual property considerations and the lower technical level prevailing in the China market, some firms attempt to license older technology, promising higher-level access at some future date or in the context of a future joint venture arrangement. Licensing contracts must be approved by and registered with the Ministry of Commerce (formally, the Ministry of Foreign Trade and Economic Cooperation (MOFTEC)). A tax of 10-20 percent (depending on the technology involved and the existing applicable bilateral tax treaty) is withheld on royalty payments.

7. Franchising Many foreign companies are beginning to establish multiple retail outlets under a variety of creative arrangements, including some which for all practical purposes function like franchises. Virtually all of the foreign companies who operate multiple-outlet retail venues in China either manage the retail operations themselves with Chinese partners (typically establishing a different partner in each major city) or sell to a master franchisee, which then leases out and oversees several franchise areas within the territory. Within three years of WTO accession, restrictions on equity share, number of outlets and geographical area are to be eliminated. 8. Direct selling Major U.S. direct selling companies entered the China market in the early- to mid-1990's, when China's legal and regulatory framework for this industry was not very clear. Direct selling was quickly modeled after by domestic Chinese companies, some of whom abused this legitimate format of doing business and operated scams to cheat consumers and evade taxes. In early 1998, the Chinese Government started implementing a series of strict controls over this industry, culminating in the re-licensing of all direct selling companies. Although a few major U.S direct selling companies were re-issued business licenses, restrictions are severe and requirements many, resulting in difficult a business environment. 9. E-Commerce


Commerce.

37

The Chinese Government has adopted an open attitude towards the advent of electronic commerce in China. Interest among both Chinese and international businesses focuses on investing and on establishing vertical integration and sales channels on-line. Investment is risky, however, due to the lack of clearly defined regulatory powers over the industry, an effective Chinese certificate authentication system, secure and reliable on-line settlement system, and an efficient physical delivery system. Many U.S. IT sector companies have been actively engaged in jointly developing these systems in China, and WTO accession will increase the speed of these developments. E-commerce in China has great potential, but first must overcome three major impediments: 1) China is still a cash-based society and use of credit cards is not widely adopted; 2) channels of distribution in China are not well developed for the delivery of items purchased over the Internet; and 3) Internet security. There are several Chinese Internet companies that have been very successful in a cash-on-delivery e-commerce model in the major cities. The recent SARS epidemic proved that China is ready to adopt greater e-commerce technology. Section 5-1. Legal Considerations G. Expropriation and Compensation Chinese law prohibits nationalization of FIEs, including investments from Hong Kong, Taiwan, and Macau, except under "special" circumstances. The Chinese government has not defined "special" circumstances although officials claim that "special” circumstances include national security considerations and obstacles to large civil engineering projects. Chinese law calls for compensation of expropriated foreign investments but does not define the terms of compensation. There have been no cases of outright expropriation of foreign investment since China opened to the outside in 1979. However, the Department of State believes that there are several cases that may qualify as expropriations under Section 527 of the FY94-95 Foreign Relations Authorization Act.


Commerce.

38

H. Dispute Settlement - Arbitration Although China is a member of the International Center for the Settlement of Investment Disputes (ICSID) and has ratified the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (a.k.a. the New York Convention), it places strong emphasis on resolving disputes through informal conciliation and mediation. If it is necessary to employ a formal mechanism, most parties prefer arbitration to litigation. The authorities greatly prefer arbitration through institutions in China. Most foreign investors consider arbitration as a last resort and have found it to be time-consuming and unreliable. Most Chinese parties and form contracts propose arbitration by the China International Economic and Trade Arbitration Commission (CIETAC). During the past few years, some foreign parties have expressed satisfaction with and obtained favorable rulings from CIETAC. Difficulties in other cases have led several Western participants and panel members in CIETAC proceedings to raise concerns about CIETAC's procedures and effectiveness. In one instance, a respected American member of an arbitration panel threatened to resign from CIETAC over alleged procedural irregularities during consideration of a case. For contracts that involve a purely foreign party (i.e., not an FIE), offshore arbitration may be adopted. If CIETAC arbitration is chosen, a panel with a foreign arbitrator is also possible, although not for FIEs. Provinces and municipalities also have their own arbitration institutions. Some foreign investors have been favorably impressed with the Beijing Commission despite its lack of foreign arbitrators. Enforcement of arbitral awards is sporadic. Sometimes, even when a foreign company wins in arbitration in China, the local court may delay or fail to enforce the decision. Even when the courts do attempt to enforce a decision, local officials often ignore court decisions with impunity. There have also been investment dispute cases in which local authorities have intervened on the part of a Chinese company in a manner considered unfair and capricious by the foreign investor. For example, local courts have occasionally intervened to prevent the sale or transfer of foreign-owned assets, pending resolution of a commercial dispute between a foreign company and a Chinese company. In general, most cases have been


Commerce.

39

resolved through negotiation between the commercial parties and/or intervention of central authorities. Section 5-2. Legal System Chinese society is in transition from rule by man to rule of law. Most laws are general; details are specified in implementing regulations. Many foreign businesses report that Communist Party and government officials at times interfere in court decisions. China's top leaders undoubtedly play a major role in deciding sensitive political cases. China's legal system is civil law in origin but now includes some common law elements, although it places relatively less emphasis on legal precedent. The 1979 "Organic Law of the People's Courts of the People's Republic of China" authorized establishment of economic courts at China's National Supreme Court and three levels of provincial courts. The economic courts are given jurisdiction over contract and commercial disputes between Chinese entities; trade, maritime, intellectual property and insurance; other business disputes involving foreign parties; and various economic crimes including theft, bribery, and tax evasion. In 1994, the lowest level of provincial courts started to try economic cases involving foreign parties. Foreign lawyers cannot act as attorneys in Chinese courts, but may observe proceedings informally. Over the past four years, the United States has been working with China on projects relating to commercial and economic law under the umbrella of the U.S.-China Joint Committee on Commerce and Trade. J. Bankruptcy and Creditors' Rights China's provisional bankruptcy law, passed in December 1986 and applicable only to SOEs, provides for creditors' meetings to discuss and adopt plans for the distribution of bankrupt property. The resolutions of creditors' meetings, which are binding on all creditors, are adopted by a majority of the attending creditors, who must account for more than half of the total amount of unsecured credit. Other laws govern bankruptcy by non-SOEs, but bankruptcy law as a whole is incomplete, inefficient, unprofessional, and subject to gross inequities.


Commerce.

40

Even Chinese officials contemplating broad enterprise reforms recognize the inadequacy of China's current provisional bankruptcy law. A unified enterprise "Bankruptcy Law" is in draft but is still in relatively rough form, in part because the authorities remain reluctant to address the social consequences of bankruptcy. A major problem for Chinese commercial banks is the formal and informal constraints on liquidating the assets of non-performing SOE loans. Notably, local political leaders, through the ubiquitous apparatus of the Communist Party, continue to control or to influence not only the courts but also the state-owned banks themselves and can effectively block efforts to dispose of SOE assets. The November 2002 Sixteenth Congress of the Chinese Communist Party mandated the creation of a new paradigm for the management of state-owned enterprises and other assets designed to clarify the ownership rights and responsibilities of central, provincial, and local authorities over state property located under their respective jurisdictions. The establishment in March 2003 of the State Asset Supervision and Administration Commission (SASAC) to replace the State Economic and Trade Commission as the leading institution with respect to China's state-owned industrial sector, is one manifestation of this new system, the significance of which has yet to be fully clarified. In October 1995, China put into effect a "Security Law," the first national legislation covering mortgages, liens, pledges, and guaranties. The Law defines debtor and guarantor rights and provides for mortgaging of property, including land and buildings, as well as other tangible assets such as machinery, aircraft, and other types of vehicles. While some areas of the Law remain unclear -- such as how the transfer of property under foreclosure is effected -- the law represents an important step forward. Chinese commercial banks have successfully repossessed vehicles from delinquent borrowers. Although mechanisms have been created for foreign investors to take over non-performing debt from the domestic banking system (generally through the asset management companies established by the major state-owned banks in 1999), numerous bureaucratic hurdles remain in the process of acquiring and liquidating these assets.


FFFOOOOOODDD PPPRRROOOCCCEEESSSSSSIIINNNGGG MMMAAARRRKKKEEETTT IIINNN JJJAAAPPPAAANNN

2005


Commerce.

2

Japan Food Processing Market Analysis Report

MARKET OVERVIEW 3

BEST PRODUCT PROSPECTS 6

GOVERNMENT ROLE IN ECONOMY 8

POLITICAL SYSTEM 10

BANKING AND ECONOMIC OVERVIEW 11

DISPUTE SETTLEMENT 14

DISTRIBUTION CHANNELS 17


Commerce.

3

Market Overview Japan is a vibrant, prosperous country, with the world’s second largest economy, with a GDP of roughly $4 trillion in 2002. Japanese consumers spend hundreds of billions of dollars on food, clothing, travel, entertainment and a wide variety of other consumer goods and services. The top Japanese firms are among the most efficient and best-run firms in the world. Unemployment, while high by historic Japanese standards, is around 4.7% -- lower than in most developed countries. The average Japanese household has around $90,000 in savings, and disposable income of $3,800 per month. Japan is the largest overseas market for U.S. exporters, with imports from the U.S. in excess of $52 billion in 2003. However, the prosperous is not the Japan that most Americans have been reading or hearing about. Japan’s economic malaise is well-known: a decade or more of slow or no growth; a banking system struggling to deal with a crushing bad loan problem; several years of deflation; soaring government debt; unprofitable and often uncompetitive domestic firms; and a political system seemingly incapable of taking the decisive action necessary to fix these problems. These problems are real, and they are serious. However, considerable reform has taken place, particularly at the corporate level, and Prime Minister Koizumi and his economic team continue to push for structural reform of the economy. In the meantime, the economy has recovered -- real GDP growth for JFY 2003 (April1, 2003 - March 31, 2004) was 3.2%, and estimates for JFY 2004 are in the range of 3%. Japan is the United States' largest non-NAFTA trading partner. Measured in dollar terms and at current exchange rates, that is roughly 38 percent of the United States' GDP, although fluctuations in the dollar/yen rate can change this figure significantly. Measured on the same basis, Japan's annual output is almost equivalent to that of Germany and France combined. It is roughly three and a half times the annual output of China, and nine times that of India. U.S. exports to Japan were roughly equal to U.S. exports to the United Kingdom and France combined, and more than two times exports to China in 2002. Opportunities for foreign direct and portfolio investment are on the rise. With banks focused on consolidation and balance sheet improvement, Japanese firms are increasingly looking overseas for investment capital. Further, consolidation and reorganization throughout the Japanese corporate sector has led to a wave of asset sales--properties, plant and equipment, and subsidiary companies--as firms seek to spin-off poorly performing or non-core elements of their operations. Some of the most noteworthy foreign investment deals in recent years have occurred in the financial sector, where the failure of some institutions and the need to return nationalized assets to private hands led to a relaxation of long-standing barriers


Commerce.

4

and negative attitudes toward foreign investment. Business tie-ups, joint ventures, and distribution affiliations between foreign and Japanese financial services providers have also accelerated as new opportunities arise as a result of financial deregulation. Improvements in land and labor mobility have also raised new possibilities for greenfield investment, although entry costs for some industries still remain high. Foreign direct investment into Japan fell to $17.4 billion in fiscal year 2001, down 30 percent from a year earlier. Japanese direct investment abroad fell 26 percent year-on-year to $31.6 billion. The Japanese food-processing sector has shown little change over the last five years and was valued at an estimated US$196 billion (23.6 trillion yen). Due to lack of arable farmland and high production costs, Japan has historically been a major importer of basic foodstuffs for use in further processing.. The US, China, Australia, Canada and Thailand are the major agricultural exporters to Japan. The total value of exported agricultural food products in 2001 from the US accounted $11.1 billion. Key market drivers for the food processing sector include:

• Increasing importance of health and functional foods, especially as the Japanese population ages

• Deflationary economic environment, causing processors to seek out lower cost food inputs, especially imports, to remain competitive

• Heightened consumer concerns for food safety as a result of food scares over the past few years

• Continuing internationalization of the Japanese diet, and growing popularity of “ethnic foods” from outside Japan

• Increasing emphasis on convenience and ready to eat food • Increasing number of Japanese food processors establishing production

facilities outside Japan to take advantage of lower costs and to expand their global reach

• Increasingly stringent government controls related to food safety issues

Advantages Challenges US food products have a positive image for safety issues compared to many other Asian countries

Higher costs for US exports due to the strong dollar and high labor costs relative to Asian producers are making products less competitive

The US has a reputation and history as a reliable supplier of food inputs (availability and delivery)

Consumers perceive Japanese food production to be safer than imports, including from the US

The success of US fast food chains help introduce American style inputs into the general diet

Tighter Japanese government regulatory enforcement is making it more difficult and riskier to export to Japan


Commerce.

5

Lacking an efficient agricultural sector, Japan has increasingly been a major net importer of basic foodstuffs for use in further processing. 60% of Japanese food consumption (on a caloric basis) was supplied by imported foods in 2001 according to the Japanese Ministry of Agriculture. Relying on low cost imported food inputs, food processors have developed a multitude of items that are further processed in Japan for the general population. In an effort to reduce costs, an increasing number of Japanese food processors have been going off shore recently to source processed food items they have traditionally produced domestically. In general foreign direct investment in the Japanese food processing market is minimal. Most US brands that are produced in Japan are licensed or co-packaged. The United States is the largest supplier of agricultural products to Japan, with 34% of market share and import value totaling approximately $11.1 billion in 2001, followed by China (13% market share) Australia (9%), Canada (7%) amd Thailand (5%) Red Meats and Poultry Meat products: The US is the largest supplier of fresh chilled and frozen red meats to Japan with imports from the United States totaling $3.1 billion in 2001 and a market share of 46%. For poultry products, the US si the third largest supplier with 13% of the import market after China (44%) and Thailand (29%) Fish and Seafood Products: The US is the second largest supplier of edible fish and seafood to Japan after China. Imports from the US totaled $1.4 billion in 2001 represented 11% of total items. Dairy Products: The US is the third largest supplier of dairy products to japan after Australia and New Zealand. Japanese imports from the US were $217 million (14% of market share) in 2001. Fruits and Vegetables The US is the largest supplier of imported fresh fish and fruits into Japan with 2001 imports of $537 million representing a 40% market share. The US is the second largest supplier of fresh vegetables to Japan with 2001 imports of $848 million occupying a 25% market share. For processed fruit and vegetables, the US is the second largest supplier after China. Frozen items including potatoes, corn, beans, peas and mixed vegetables were the leading import items from the US.


Commerce.

6

BEST PRODUCT PROSPECTS Based on current macro-trends, the following food products and ingredients have the potential to do well in the future. For many of these no published figures for market size are available. PRODUCTS PRESENT IN THE MARKET THAT HAVE GOOD SALES POTENTIAL 1. Health and Functional Foods The market for health related and functional foods is expected to continue to expand in the future. Ingredients which should benefit include dietary fiber, oligosaccharides, non-carcinogenic sweeteners, calcium, iron, mineral absorption promoters, beta-carotene, PUFA (DHA and EPA), chitosan, specified soy protein, collagen, polyphenols, Other health related food ingredients becoming more popular include: Collagen (for joints and skin), vitamin C, nutritional supplements such as chondroitin and pycogenol, aloe, noni, and prune extract. Food supplements with vitamins should also continue to grow in the future. 2. Organic Foods While still a niche market, the demand for organic products is steadily increasing. As a result of the recent establishment of national organic standards in the U.S. by USDA and agreement with Japan on certification p r o c e d u r e s f o r o r g a n i c p r o d u c t s e x p o r t e d t o J a p a n (S e ewww.ams.usda.gov/nop/NOP/TradeIssues/Japan.html), the opportunity for organic products will expand in the future. Organic soybeans, frozen vegetables & fruits, juice concentration are examples of popular organic ingredients. Competition for the organic market will come from Australia and New Zealand among others. 3. Dietary Products The use of sweeteners such as xylitol and sorbitol has surged since 1997 when these items were approved for use in products such as chewing gum. The market for sugarless gum rose from $167 million (20 billion yen) in 1996 to $492 million (59 billion yen) in 2001. Warner Lambert introduced Recaldent chewing gum in 2000 which contained not only xylitol, but also casein phospho-peptide (CPP) and amorphous calcium phosphate (ACP) to increase calcium in teeth. Sales of this brand of gum were over $42 million (5 billion yen) last year. 4. Beverage Flavored teas, coffees, juices and related waters are becoming more popular in Japan. For example Coca Cola launched a new line of flavored fruit drinks in 2000 called QOO. The beverages feature four varieties of fruit juices (20% levels): orange, apple, white grape, and peach, which are fortified with calcium and vitamin C. Sales were $308 million (37 billion yen) in its first year. Wine is also expected to


Commerce.

7

continue to grow in the future as less hard liquor is consumed. California and other West Coast wines can participate in this growth with good marketing. However, the market is fairly saturated as many other producing countries including France, Italy, Chile and Australia have been expanding their penetration in the marketplace. 5. Ethnic Foods The popularity of ethnic foods is expected to continue to grow and with it the market for ingredients. Tex-Mex products such as tortillas and salsa are one example. One major U.S. fried chicken fast food chain has sold over 100 million tortillas imported from the U.S. since it launched a burrito-like item two years ago. Wrap sandwiches featuring flavored tortillas are also beginning to appear in the marketplace. Asian cuisines including Vietnamese, Thai, and Korean Foods are also popular. Japanese food manufacturers have developed, for example, special condiments for Korean spicy dishes for use in both home cooking and food service. Also, many Italian food items such as spaghetti sauce, olive oil, and pasta have become regular items even for home cooking and consequently, Japanese food manufactures have developed a variety of ready-to-use spaghetti sauces in recent years. Pizza chains such as Pizza Hut and Domino’s have been successful in expanding the market for pizza. The U.S. is a major supplier of meat toppings as well as tomato based pastes and crust. 6. Frozen Foods and Convenience Foods Frozen foods are growing in usage. Dough products in particular have done well in recent years. For example, the launch of “Cinnabon” two years ago in Japan sparked a surge in the sales of cinnamon buns in Japan. U.S. suppliers provided not only the raw ingredients but also finished dough for many customers. Bagels are also becoming more well known in Japan. More recently, scones have increased in popularity after being introduced by Starbucks and are now on the menu of other fast food giants such as McDonald’s. Frozen dough food exports to Japan increased from 46,000 MT in 1994 to 77,000 MT in 2001 and continue to represent a potential growth area for the future. 7. Other Other items with potential for increased sales include the following products: Processed meats such as pre-cooked bacon and sausages that are microwavable have the potential for growth with foodservice groups such as hotels. Turkey is also a product traditionally unfamiliar to Japan, has made inroads by its introduction by companies such as Subway Japan. Smoked turkey legs are also a very popular item in Tokyo Disney and is getting widespread exposure as a result. Likewise, the expansion of western style coffee shops (e.g. Starbucks, Seattles Best, Tullys, etc.) has presented opportunities for deli meats, cheese, soup and pastries. The U.S. is a major supplier of bulk commodities such as wheat and soybeans and should remain so in the Japanese food processing sector.


Commerce.

8

Other products including frozen potato, chilled pork, dried fruits and nuts, surimi, and roe and urchin have also been successful. DOMESTIC ECONOMY (Billions of U.S. Dollars) CY1999

(actual) CY2000 (actual)

CY2001 (actual)

Gross Domestic Product (billions of U.S. dollars)

4,493.3

4,765.1

4141.4

GDP growth rate (percent) 0.7 2.5 -0.6 GDP per capita (USD) 35,439 37,515 32,515 Government spending as a percentage of GDP

23.9

23.5

24.1

Inflation (CPI) (percent) -0.3 -0.7 -0.7 Unemployment (percent) 4.7 4.7 5.0 Average Exchange Rate YEN/USD (used in this table)

113.9

107.8

121.5

Debt Service Ratio NONE NONE NONE U.S. Economic Military/ Economic Assistance

NONE

NONE

NONE

Source: Government of Japan APPENDIX B TRADE (Billions of U.S. Dollars) CY1999

(actual) CY2000 (actual)

CY2001 (actual)

Total country exports (*) 403.88 459.54 383.53 Total country imports (*) 280.49 342.84 313.33 U.S. exports (**) 56.35 64.01 U.S. imports (**) 130.88 146.48 Average Exchange Rate YEN/USD (used in this table)

113.9

107.8

121.5

Sources: Ministry of Finance ** USDOC data GOVERNMENT ROLE IN THE ECONOMY Traditionally, the bureaucracy -- created in 1868 -- has played a leading role in the Japanese economy. The ministries' power was drawn from the thousands of required licenses, permits and approvals that tightly regulated business activity in Japan and by informal, but in practice virtually compulsory, edicts called "administrative guidance." The reach of the bureaucracy has been further extended by a plethora of organizations that perform semi-regulatory functions. Business in


Commerce.

9

Japan has maintained very close relations with the bureaucracy and politicians--a set of relationships commonly referred to as the "iron triangle." Japanese ruling party politicians have depended on contributions by business. Major companies and industry associations also provided lucrative "amakudari" ("descent from heaven") employment for high-level bureaucrats retiring from government service. Bureaucratic paternalism blocked new companies from entering the market and pushed up prices. Members of the Japanese National Diet (parliament) have small staffs and traditionally have relied on bureaucrats for policy initiatives and the drafting of legislation. The role of government institutions in the economy has been changing over the last several years as Tokyo pursues administrative reform and deregulation. On January 6, 2001, the bureaucracy was reorganized from 22 ministries and agencies to 13. A Cabinet Office was established and located above the other ministries on government organization charts to serve as a think tank for politicians and to coordinate policies among the other ministries. At the same time, the number of politicians posted to senior positions in the ministries was increased from an average of two or three to five, to try to increase the administration's control over the bureaucracy. The reorganization -- together with changes to political contribution laws, stricter guidelines on the use of administrative guidance, and increased criticism of "descent from heaven" (amakudari) employment practices -- is slowly eroding the strength of the "iron triangle" (close relations among business leaders, the bureaucracy and the politicians), and weakening the bureaucracy's influence over the economy. Until 1980, the Japanese Government controlled access to the market by allocating foreign exchange and by conditioning foreign investment approvals on technology transfer to Japanese companies. These controls are largely gone, but the Japanese Government continues to play a significant role in promoting certain favored industries. Many bureaucrats believe that the proper role of a national government is to lead industry into higher value-added manufacturing. While nods have been made in the direction of improving the average citizen's standard of living, GOJ policy and regulatory framework continue to favor domestic producers over consumers. This can sometimes translate into a "protective attitude" when it comes to foreign competition and new products from the outside. When Japan's asset "bubble" burst in 1991 and the economy worsened, businesses strengthened their call for deregulation of the economy in order to stimulate growth and to respond to foreign competition. At the same time, companies began to move production off shore in order to cut costs. This prompted fears of a "hollowing-out" of Japanese industry. In areas where deregulation effectively took place, such as consumer goods and distribution, markets experienced explosive growth and imports reached previously unheard of highs. However, in areas like industrial goods, deregulation efforts have been less visible.


Commerce.

10

In general, it is increasingly possible for foreign companies to participate in the Japanese market. The Japanese Government has removed most legal restrictions on exports and foreign investment in Japan. The U.S. and Japanese governments continue to work on removing anti-competitive and exclusionary business practices and resolving market access problems through bilateral dialogue. Under the Economic Partnership for Growth, launched by President Bush and Prime Minister Koizumi in June 2001, the U.S. and Japanese governments have worked to cut regulations in sectors of key economic importance where U.S. firms are globally competitive -- telecommunications, medical equipment and pharmaceuticals, energy (including power generation and transmission equipment), information technology and financial services. Prime Minister Koizumi is taking new approaches to restructuring Japan's economy. For example, his administration's initiative to create Special Zones for Structural Reform (SZSR) is an attempt to revitalize Japan's regional economies through locally led regulatory and structural reform. The new Industrial Revitalization Corporation of Japan, established in May 2003 aims to accelerate non-performing loan workouts by helping viable debtor companies restructure and return to profitability. While Japan's business system is different from the United States, American companies can successfully adapt. The 1,000 company, 3,200 member American Chamber of Commerce in Japan (ACCJ) is the largest overseas AmCham in the world, and its 40-plus committees and sub-committees are highly visible lobbyists for U.S. business interests. U.S. Embassy officers are liaison to over 20 of these committees, and work closely with the ACCJ on market access and investment issues. Some knotty regulatory barriers and discrimination still exist, and when a company cannot solve such problems by itself or through its legal advisers in Japan, the U.S. Government stands ready to help Political System Chief of state: Emperor AKIHITO (since 7 January 1989) Head of government: Prime Minister Junichiro KOIZUMI (since 26 April 2001) Cabinet: Cabinet appointed by the prime minister Elections: none; the monarch is hereditary; the Diet designates the prime minister; the constitution requires that the prime minister must command a parliamentary majority; therefore, following legislative elections, the leader of the majority party or leader of a majority coalition in the House of Representatives usually becomes prime minister note: following the resignation of Prime Minister Yoshiro MORI, Junichiro KOIZUMI was elected as the new president of the majority Liberal Democratic Party and soon thereafter designated by the Diet to become the prime minister


Commerce.

11

A bicameral Diet or Kokkai consists of the House of Councillors or Sangi-in (242 seats - members elected for six-year terms; half reelected every three years; 144 members in multi-seat constituencies and 98 by proportional representation); House of Representatives or Shugi-in (480 seats - members elected for four-year terms; 300 in single-seat constituencies; 180 members by proportional representation in 11 regional blocs)

Elections: House of Councillors - last held 11 July 2004 (next to be held in July 2007); House of Representatives - last held 9 November 2003 (next election by November 2007)

Election results: House of Councillors - percent of vote by party - LPD 47.52%, DPJ 33.89%, Komeito 9.92%, JCP 3.72%, SDP 2.07%, others 2.88%; seats by party - LDP 115, DPJ 82, Komeito 24, JCP 9, SDP 5, others 7 : House of Representatives - percent of vote by party - LDP 49.38%, DPJ 36.88%, Komeito 7.09%, JCP 1.88%, SDP 1.25%, NCP .84%; seats by party - LDP 237, DPJ 177, Komeito 34, JCP 9, SDP 6, NCP 4, others 13; distribution of seats as of 13 November 2003 was: LDP 244, DPJ 177, Komeito 34, JCP 9, SDP 6, others 10 note: the Liberal Party merged with the Democratic Party of Japan in September 2003; the New Conservative Party merged with the Liberal Democratic Party following the election in November 2003 (2004) Japan enjoys strong and close political relations with the U.S. The political relationship, based in large part on the mutual security treaty, which underpins the U.S. security presence in the Far East, is characterized by cooperation on a broad variety of issues, from ensuring peace and security on the Korean peninsula, to supporting the anti-terrorism effort in Afghanistan and Iraq, to cooperation in the U.N. Security Council. Japan has supported U.S. policy in such areas as providing assistance to Indonesia, funding a substantial portion of Afghan reconstruction, and assisting in building Iraq. U.S. businesspeople working in Japan will find that many elements in Japan’s political economy are similar to our own. Diet members tend to be very sensitive to “pocketbook” issues, interest groups play a key role in promoting and/or blocking legislation and regulations, the free press plays a key watchdog role. But they will find the specifics of the Japanese system very different. Bureaucrats and regulators are much more powerful in Japan than they are in the U.S., and they have more discretion to act as they see fit. Disputes in Japan are rarely settled in court, and it is difficult to appeal an unfavorable ruling by a regulator to a higher authority. Business lobbying in Japan is more often done by associations rather than by individual firms. Banking and Economic Overview Banking System


Commerce.

12

Japanese banks are among the largest in the world, yet they are some of the least profitable. Burdened by recent bank failures and the poor performance of the economy, the Japanese banking sector is in transformation. In The Japanese Banking Crisis: Where Did it Come From and How Will it End? (NBER Working Paper No.7250), Takeo Hoshi and Anil Kashyap predict a shift in Japanese banking to a new steady state. The authors suggest that there will be a substantial decline in the prominence of Japanese banks as the financial markets become as liberalized as U.S. markets. An important force behind this transformation is deregulation, a process that began more than 20 years ago. The reform program, commonly referred to as the "Japanese Big Bang," represents the conclusion of the deregulation process. Deregulation allowed large bank customers to quickly shift from bank financing to capital market funding. Hoshi and Kashyap show that large Japanese firms, particularly manufacturers, are now almost as independent of bank financing as comparable U.S. firms. Deregulation was less favorable for savers, and they continued to deposit their money with banks. Japanese banks were not permitted into new lines of business; consequently, their new loans primarily flowed to small businesses and expanded real estate lending. Both actions proved unprofitable. A result was the immense banking crisis in the Japanese economy. The estimates of bad loans in Japan remain large, at roughly 7 percent of GDP (several times the size of the U.S. crisis). This crisis has included the first significant Japanese bank failures since the end of the U.S. occupation of Japan. The banking problem is not just a reflection of poor performance of the economy as a whole. Hoshi and Kashyap present evidence that banks' performance was worse in the 1990s than would be expected on the basis of macroeconomic conditions. They also find that the banks most at risk of losing customers to the capital markets under performed others. Both results indicate the importance of deregulation. The Japanese government during the 1990s has taken steps to address the financial problems: a private loan purchasing company to purchase non-performing loans, the establishment of a bank to take over failed credit cooperatives, reorganization of the supervision authority for banks, and the provision of funds for bank reorganization and capitalization. Nevertheless, the authors believe that a recurring problem with the Japanese government attempts to overcome the crisis has been a lack of a clear vision for the future of the Japanese banking industry. By 2001, when the Big Bang is complete, banks, securities houses, and other financial institutions will be competing on a level playing field. At that time, Japanese financial markets may even be less regulated than U.S. markets. Once financial deregulation is complete, the authors say that even relatively small firms will start following the route already taken by the large firms and will cut their dependence on bank loans. The Japanese allocation of savings and investment financing patterns will move further towards the patterns seen in the United States. The authors present estimates showing that this impending shift implies a massive contraction in the size of the traditional banking business in Japan.


Commerce.

13

The speed of adjustment depends on three factors: how fast corporations modify their financing, how fast households shift their funds out of bank deposits, and how fast the banking industry is reorganized. The authors expect the adjustment on the corporate side to be complete within 10 years. The most significant elements of the liberalization of savers' options have started only recently, but even a modest shift in this aspect would be substantial because the savers dependence on deposits has been extremely high. Lastly, the speed of reorganization depends on the government policy actions toward bank failures. According to the authors, the Japanese government is taking initial steps to address the bad loans problem. Once the restructuring begins in earnest, it will take several years for doomed banks to exit, but reorganization should be complete within the 10-year period. Importantly, the recently announced mergers among several of the largest Japanese banks should only be viewed as progress if the mergers help these institutions to reduce their size: merely combining banks without eliminating redundancies will only postpone the inevitable down-sizing. Ultimately, the transition to the new regime for the banking industry should be almost complete by the end of the next decade.1 Japan's economy has been in the tank for a decade because for all its post-war reforms that led to its business boom, one key element of the pre-war system remained unchanged: banking. In Japan, businesses were encouraged to get most of their financing from banks, which were then allowed to own equity in the businesses. In the U.S., banks were prohibited from owning equity and businesses got most of their financing from bonds and stock. The result in Japan was very concentrated business ownership, versus the much more decentralized ownership in America -- and eventually Japanese businesses and banks became deeply interlocked. In the 1980s, liberal economists saw this as a source of strength for Japan, because businesses could manage for the long term without pressure from stockholders for profits or fear of hostile takeovers. In fact, it meant Japanese businesses had no pressure to perform and ultimately became complacent. During the 1990-91 recession, American businesses restructured; Japanese companies made no significant reforms. When the savings and loan problem hit the U.S., banks were closed, assets sold and the issue put behind us. When similar banking problems hit Japan, however, banks were reluctant to write-off bad corporate loans because they also owned the companies, so they continued throwing good money after bad.

1 http://www.nber.org/digest/nov99/w7250.html National Bureau of Economic Research


Commerce.

14

Today, the Japanese banking system is paralyzed with so many bad loans on it books that it cannot make loans to new businesses or existing ones needing capital for expansion. But rather than bite the bullet and liquidate the bad loans, the Japanese government just keeps hoping that the problem will take care of itself. Even if Japan pulls out of the worst of its current difficulties, it is hard to see a return to high growth without drastic reforms 2 Recurrent depressed economy, recent stock market volatility and new accounting method lead to significant losses and threaten the banks' capital. The distinction between city and regional banks became less. The major banking sector concentration is listed as below.

• Mizuho Holdings (October 2000): Fuji bank, Dai-Ichi Kangyo bank and Industrial Bank of Japan - the world's largest bank in assets.

• Mitsubishi Tokyo Financial Group (April 2001) : Bank of Tokyo Mitsubishi, Mitsubishi Trust & Banking and Nippon Trust Bank

• UFJ Holdings (April 2001): Sanwa bank, Tokai Bank and Toyo Trust & Banking Co.Ltd.

• Sumitomo Mitsui Banking Corporation (April 2001): Sakura bank and Sumitomo bank on a full-fledged merger

• Daiwa Bank Holdings (October 2001): Daiwa bank with two regional banks - Kinki Osaka bank and Nara bank. Asahi bank plans to join by March 2002.

The government has eventually ample reserves to bail out "systemic risk" in the banking sector but warned that full bail-outs of banks will soon be a thing of the past. Beyond March 2002, The Deposit Insurance Corporation will cover only up to JPY 10 million per depositor plus interest, but liquid deposits, such as current and savings account will be fully protected for another year to March 2003.3 Dispute Settlement There have been no major bilateral investment disputes since 1990, and there are no outstanding expropriation or nationalization cases in Japan. There have been no cases of international binding arbitration of investment disputes between foreign investors and the GOJ since 1952. Japan is a member of the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitration Awards. However, it has long been considered an inhospitable forum for international commercial arbitration. The Japan Commercial Arbitration Association, the only organization that arbitrates international trade and investment-related disputes, 2 Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, October 14, 2002. 3 http://www.interex.be/home.asp?lang=ang


Commerce.

15

had only 63 cases submitted to it between 1998 and 2002. Of these, only 37 went to arbitration. There are no legal restrictions on access by foreign investors to Japanese lawyers, and significant reforms in laws governing legal services and the judicial system are increasing the ability of foreign investors to obtain adequate legal advice on doing business in Japan – despite some foot-dragging by the Federation of Japanese Bar Associations (Nichibenren). Based on the Program for Promoting Justice System Reform endorsed by the Cabinet in March 2002, the Government of Japan submitted and secured passage of legislation in the 2003 ordinary Diet session to promote cooperation and collaboration between Japanese lawyers (bengoshi) and foreign lawyers qualified under Japanese law (gaiben). The legislation included the “Bill to Amend the Special Measures Law Concerning the Handling of Legal Business by Foreign Lawyers” that provides for the following amendments (which will come into effect within two years of promulgation of the law based on the Cabinet order): a. the elimination of the prohibition on the employment of bengoshi by gaiben; b. the elimination of the regulations on joint enterprises between gaiben and bengoshi; and c. the abolition of legal provisions for specified joint enterprises (tokutei kyodo jigyo) and the establishment of joint enterprises between bengoshi or bengoshi professional corporations (bengoshi hojin) and gaiben (gaikokuho kyodo jigyo). Enactment of the bill will have the following results: A gaikokuho kyodo jigyo organized as a single law firm or as separate firms will be able to provide integrated legal advice and legal services on any and all matters within the competence of its members; Gaiben and bengoshi or bengoshi hojin in gaikokuho kyodo jigyo will be able to adopt a single law firm name of their choice; Gaiben and bengoshi in gaikokuho kyodo jigyo will be free to determine the profit allocation among them freely and without restriction; Gaiben will be permitted to hire bengoshi to work with them directly or in a gaikokuho kyodo jigyo or in a gaikokuho-jimu-bengoshi jimusho composed of multiple gaiben; and Gaiben and bengoshi will continue to be permitted to enter into relationships on an ad hoc basis that involves the sharing of profits and expenses.


Commerce.

16

Another significant step was the establishment of the Judicial Reform Promotion Headquarters on December 1, 2001, based on the Law on Promotion of Judicial Reform. The Headquarters has developed a reform program, based on the recommendations of the Judicial Reform Council. On March 19, 2002, the Cabinet adopted a program that provides for the following:

• To increase the number of legal professionals, the Ministry of Justice (MOJ) will increase the annual number of persons who pass the Bar Examination to 1,500 by 2004 and to 3,000 by around 2010; and the Headquarters, in cooperation with the Ministry of Education, Culture, Sports, Science and Technology, will introduce a new system of law schools, commencing in April 2004, and in preparation will develop standards for selecting the universities that will be allowed to establish law schools.

• To reform the arbitration law, the Headquarters submitted legislation to the

Diet in mid-January 2003, which will include a major revision of the existing Arbitration Law and improvement of the legal framework for arbitration, including international commercial arbitration.

• To increase the speed and efficiency of civil litigation, the Headquarters and

MOJ submitted legislation to the Diet in mid-January 2003 to reduce by half the length of time required to complete court trials through measures to promote efficient scheduling of hearings, increase significantly the number of judges and court personnel, and facilitate litigants' collection of evidence at early stages of litigation.

• The Headquarters and MOJ submitted legislation to the Diet in mid-January

2003 to reduce filing fees for civil litigation.

• To strengthen judicial oversight over administrative agencies, the Headquarters is undertaking a comprehensive study of judicial oversight over administrative agencies, including review of the Administrative Case Litigation Law, and will take necessary measures to strengthen judicial oversight by November 30, 2004.

• To make the specialized departments concerning intellectual property rights

in both the Tokyo and Osaka District Courts function substantially as “patent courts,” the Headquarters and MOJ submitted legislation to the Diet in mid-January 2003.

More generally, Japan’s civil courts enforce property and contractual rights, and the courts do not discriminate against foreign investors. However, they are sometimes ill suited for litigation of investment and business disputes. As in many other countries, Japanese courts operate rather slowly. As noted above, the Judicial


Commerce.

17

Reform Promotion Headquarters is enacting a number of changes to speed the conduct of trials. In addition, the courts lack contempt powers to compel a witness to testify or a party to comply with an injunction, and timely temporary restraining orders and preliminary injunctions are very difficult to obtain. While filing fees for large civil cases were reduced in 1992, they are still based on the amount of the claim, rather than a flat fee. Lawyers usually require large up-front payments from their clients before filing a lawsuit, with a modest contingency fee, if any, at the conclusion of litigation. Contingency fees familiar in the U.S. are relatively uncommon. A losing party can delay execution of a judgment merely by appealing, and in appeals to the high courts, additional witnesses and other evidence are sometimes allowed. Courts do have power to encourage mediated settlements, and the courts have a supervised mediation system. Parties can manipulate this system to delay resolution, however, and because judges move frequently, continuity is often lost. As a result, it is very common for companies to settle out of court. DISTRIBUTION AND SALES CHANNELS Japan’s distribution system remains complex, labor-intensive and filled with outmoded business practices. It is also expensive and accounts for much of the difference between prices in Japan and the rest of the world. The last decade was a difficult time for the distribution industry. Consumers demanded a more efficient market, lower retail prices and better selection of goods. This trend has become stronger, as Japanese buyers face tougher economic conditions. Nevertheless, the traditional system stubbornly survives in many industries. The drag on the domestic economy has been recognized, and is slowly changing, but remains a formidable barrier to imports of goods and services. Difficulties with Japanese distribution are often due to inherent, deep-rooted business practices. Domestic consumers have a strong demand for a wide variety of goods and services, but can be hesitant to disrupt longstanding relationships with suppliers--even when a U.S. supplier can offer a superior product at a lower price. Although the trend is changing, some retailers and wholesalers still fear retaliation from existing Japanese vendors if they switch to new overseas sources. At the same time, they may also be concerned that a foreign supplier will not make timely shipments or may lack adequate after-sales service ability, for which Japanese expectations run very high. These doubts stem in part from a traditional reluctance to do business with strangers, who could introduce uncertainty into predictable, existing business relationships. A clearly demonstrated commitment to foster long-term relationships with a Japanese counterpart is crucial to overcome this reluctance. An established presence in the market (if only through a knowledgeable and committed agent) is also vital to winning trust.


Commerce.

18

Until quite recently, about half of all consumer purchases were made at neighborhood "mom and pop" stores (with five or fewer employees), and these stores rarely carry imported goods. These stores often maintained strong ties to major domestic manufacturers that included product consignments, low interest loans, equity investments, and/or exclusive marketing arrangements. However, the economic stagnation over the past decade has taken a serious toll on small retailers. Their numbers are declining to such a level that soon they’ll disappear - - convenience stores, self-service discount stores, and "superstores" have taken over. The ascendance of more efficient retailers is also helping to reduce the layers in the distribution system and make imported goods more price competitive. Imported consumer goods have traditionally been found at larger outlets such as department stores and discount houses. The new millennium has also brought about dramatic growth in specialty retailers, notably foreign names. Hand-in-hand with this development, direct importing--bypassing trading houses and as many other intermediaries as possible--has become increasingly popular as companies become leaner and more cost conscious. As larger retail outlets have spread in Japan, the regulation of “large stores” (those stores with over 500 square meters of sales space) is now part of the bureaucratic landscape. In 2000, the Large-Scale Retail Store Location Law went into effect. The law is intended to give local authorities the power to regulate new large stores only on the basis of environmental considerations. METI has made clear its intent to assure that stiffer environmental standards be used and that the new law will be applied with reasonable uniformity to all localities. The new law applies both to new store openings and to significant changes in the business operations of existing stores (such as an expansion of floor space or an extension of business hours). Many municipalities in Japan are taking advantage of the new law to draft ordinances that mandate parking space provisions and operating restrictions stricter than national norms or those recommended by METI. Japanese deflation has made consumers of the world’s second largest economy appreciate low prices. Giant foreign distributors and retailers who survived fierce competition in their home and overseas markets with cost competitiveness and merchandise development have focused on the Japanese market. For example, Toys 'R' Us, which entered the market in 1991, now operates 140 stores in Japan. COSTCO opened its first store in 1999 and has expanded to four stores in four years. Wal-Mart, which is in the process of buying out a Japanese chain store, Seiyu, has several hundred stores in Japan. Metro (Germany) opened its first store in December 2002 jointly with a Japanese major trading company Marubeni, to focus on food business customers. Recently, Tesco (UK) announced its entrance into the Japanese market by buying out a medium-size supermarket chain. However, Japanese consumers do not always accept the "foreign" way of retailing. Carrefour (France) entered the Japanese market in 2000 and operates four stores


Commerce.

19

but has had to change their newest store to a more "Japanese style" -- for example, by lowering fixture heights, increasing delicatessen space, and adding prestigious brand merchandise that it does not carry in France.


FFFOOOOOODDD PPPRRROOOCCCEEESSSSSSIIINNNGGG MMMAAARRRKKKEEETTT IIINNN KKKOOORRREEEAAA

2005


Commerce.

Korean Food Processing Market

SECTION 1.1: BEST PROSPECTS FOR U.S. EXPORTERS 3

SECTION 2.1: POLITICAL CONSIDERATIONS 7

SECTION 2.2: TRADE AND PROJECT FINANCING 9

SECTION 3.1: LEGAL CONSIDERATIONS 16

SECTION 3.2: LEGAL METHODS 20

SECTION 4.1: DISTRIBUTION AND SALES CHANNELS 24

SECTION 4.2: JOINT VENTURES/LICENSING 29


Commerce.

SECTION 1.1: Best Prospects for U.S. Exporters Total imports of U.S. agricultural, food, fishery and forest products by Korea dropped to USD 1,188 million during January–April 2004 from USD 1,280 million during the same period in 2003, according to U.S. export information. The drop was largely due to the import ban on U.S. beef and beef products put in place with the finding of one cow infected with BSE in December 2003. Imports of fresh/chilled/frozen red meat dropped from USD 246 million in January-April, 2003 to USD16 million during the same period in 2004. Beef imports in 2004 were product that had cleared quarantine inspection prior to the import ban but were kept in bond until later. Imports of fish and seafood products from the United States also dropped by 15 percent to USD195 million during the first 4 months of 2004, while basic product imports increased by 115 percent to USD 228 million. The general outlook for U.S. basic commodity sales is promising as the participation of China is declining and it is unclear when China might move to regain market share. Demand for consumer-oriented food items dropped by 43 percent during this period, due to poor consumer economic conditions. Note: All 2004 statistics that follow are projections. . All statistics listed in the charts below are quoted in metric tons (MT) or USD000. Animal By-Products (oxtail, feet, stomachs, etc.) HS Code: 0206 & 0504 2001 2002 2003 2004

(P) (MT) (MT) (MT) (MT) A. Total Market Size N/A N/A N/A N/A B. Total Local Production N/A N/A N/A N/A C. Total Exports 5,560 1,886 818 2,500 D. Total Imports 46,067 68,633 146,629 60,000 E. Total Imports from U.S. 28,597 44,689 103,613 10,000 Note: Koreans like to eat beef and pork by-products such as ox tails, head, feet, tongues, stomachs, livers, etc. Total imports of animal by-products reached USD 147 million in 2003. Imports from the United States increased to USD103 million in 2003. However, because of BSE, most of these products from the United States have been banned since December 2003. The BSE issue has negatively impacted consumption of such by-products. Trade numbers are from the Korea Customs Service.


Commerce.

Beef HS Code: 0201 & 0202 2001 2002 2003 2004 (P) (MT) (MT) (MT) (MT) A. Total Market Size 316,900 416,900 415,000 323,000 B. Total Local Production 162,500 141,200 133,800 143,000 C. Total Exports 0 0 0 0 D. Total Imports 154,400 275,700 281,200 180,000 E. Total Imports from U.S. 86,700 175,000 189,112 15,000 Note: Beef imports were liberalized on January 1, 2001 at a 41.4 percent tariff, and the 2004 tariff for beef is 40 percent. There are no more import quotas or restrictions on beef. In 2003, U.S. beef was extremely competitive in both quality and price, vis-à-vis domestic and competitor products. However, due to the sluggish economy and concerns created by BSE incidents in Japan and United States, in addition to European countries, beef consumption has slackened from normal levels. It remains to be seen when Korea will allow resumption of imports of beef and beef products from minimum risk countries, such as the United States. Numbers are on a boneless basis (carcass divided by 1.36). Trade numbers are from Korea Customs Service and the National Livestock Cooperatives Federation. Poultry HS Code: 0207 2001 2002 2003 2004 (E) (MT) (MT) (MT) (MT) A. Total Market Size 490,537 533,506 522,457 459,500 B. Total Local Production 401,000 436,000 430,000 410,000 C. Total Exports 1,950 1,947 1,694 500 D. Total Imports 91,487 99,453 110,000 50,000 E. Total Imports from U.S. 54,244 67,643 48,550 20,000 Note: Total imports of poultry in value in 2003 slightly decreased to USD96 million from USD102 million in 2002. Imports of poultry products from the United States decreased to USD35.4 million in 2003 from USD56.2 million in 2002. Owing to the outbreak of Highly Pathogenic Avian Influenza in the United States, poultry products other than heat-treated products have not been permitted for import into Korea since February 7, 2004. Numbers are on a Ready to Cook (RTC) basis.


Commerce.

1/ Local production refers to broiler production. Other poultry production is not included. Trade numbers are from Korea Trade Information Service and the Ministry of Agriculture & Forestry. Pet Foods HS Code: 2309.10 2001 2002 2003 2004

(E) ($000) ($000) ($000) ($000) A. Total Market Size: N/A N/A N/A N/A B. Total Local Production: N/A N/A N/A N/A C. Total Exports: 10,306 9,425 7,338 7,000 D. Total Imports: 19,749 35,560 50,919 50,000 E. Total Imports from U.S.:

11,535 16,553 27,666 21,000

Note: One feature of the growing affluence of Koreans is the trend to own pets. More consumers are turning to ready-made imported pet food such as Kibble and canned products. Pet food was one of the fastest growing products in this market. However, U.S. pet food with ruminant origin protein is currently banned from Korea owing to the BSE issue in the U.S. Only retail-packaged U.S. products (repackaging from bulk into small packages and sales from open bulk bins at retail is prohibited) that do not contain ruminant origin protein are allowed and must be accompanied by a health certificate (certifying the product does not contain ruminant origin protein) issued by the government of the exporting country. U.S. pet food exports to Korea are expected to decrease in 2004 because of the ban but should recover once the market is reopened. Trade numbers are from the Korea Trade Information Service. Fish and Seafood HS Code: Chapter 03 2001 2002 2003 2004 (E)

($000) ($000) ($000) ($000)

A. Total Market Size: 4,366,007 4,297,623 4,933,508 4,950,000 B. Total Local Production:

3,779,019 3,421,035 3,975,681 3,700,000

C. Total Exports: 878,045 799,477 779,662 700,000 D. Total Imports: 1,465,033 1,676,065 1,737,489 1,950,000 E. Total Imports from U.S.:

*328,825 *296,090 *383,362 *380,000


Commerce.

U.S.: *BICO Reports Note: Demand for seafood in Korea is especially strong and supplies are short. Korean local catch is shrinking. The U.S. market share in Korea is small but is expected to grow substantially in the future. U.S. fish are considered as high quality but also expensive compared with those of competitors. Trade numbers are from the Korea Trade Information Service and Ministry of Maritime Affairs and Fisheries except as noted. Processed Fruits, Nuts and Vegetables (e.g. pickles, juices, tomato paste, peanut butter, canned fruit and vegetables, etc.) HS Code: 2001 – 2008 2001 2002 2003 2004 (E) ($000) ($000) ($000) ($000) A. Total Market Size N/A N/A N/A N/A B. Total Local Production

N/A N/A N/A N/A

C. Total Exports 84,255 97,013 116,437 115,000 D. Total Imports 189,158 215,242 248,594 260,000 E. Total Imports from U.S.

91,638 91.045 85,772 93,000

Note: Demand for consumer-ready high-value products continues to surge as the number of two-income families increases. Consumer confidence in and a growing acceptance of western food products support increased demand for prepared fruit and vegetable products. The excellent reputation and quality of U.S. food products put U.S. suppliers in a strong position in this market. Trade numbers are from the Korea Trade Information Service. Other Prepared Foods (e.g. soups, seasonings, ketchup, sauces, etc.) HS Code: 2103, 2104 & 2106 2001 2002 2003 2004 (E) ($000) ($000) ($000) ($000) A. Total Market Size: N/A N/A N/A N/A B. Total Local Production:

N/A N/A N/A N/A

C. Total Exports: 125,375 146,240 168,689 180,000 D. Total Imports: 341,279 367,330 358,180 380,000 E. Total Imports from 145,035 141,035 114,061 130,000


Commerce.

U.S.: Note: Competition is expected to be stiff among suppliers. Superior quality and a rapidly increasing demand for convenience foods make the outlook especially bright for exporters of these U.S. products. Tariffs for this category of imports are relatively low, around 8 percent and strong growth is expected to continue. Trade numbers are from the Korea Trade Information Service.

SECTION 2.1: Political Considerations South Korean democracy has become firmly established since 1987. The last four presidential elections have been free, open and fair. Human rights lawyer Roh Moo-hyun, 58, was elected president in December of 2002. Despite some strains and friction over the past year, the U.S.-ROK relationship has continued to grow in breadth and depth; the two countries are friends, partners and allies. Korea and the United States today are working together, both in the region and in the rest of the world, to combat international terror and to advance democratization and human rights. The United States has a strong security relationship with the Republic of Korea and is committed to maintaining peace and stability on the Korean Peninsula. The United States is obligated under the 1953 U.S.-Korea Mutual Defense Treaty to help Korea defend itself from external aggression. The United States maintains about 37,000 uniformed personnel in the country, commanded by a U.S. four-star general who is also commander of the United Nations Command. U.S. forces include the U.S. Second Infantry Division (2ID) and air force squadrons. Major Political Issues Affecting the Business Climate President Kim Dae-jung was elected President in December 1997 at the height of the Asian financial crisis. He promised sweeping economic and political reform, transparency in business practices, and further liberalization in trade and investment. Much of that agenda has been implemented, including legislative changes to promote labor flexibility, corporate transparency, and capital market liberalization. However, much remains to be done, and President Roh has indicated he will pursue incremental rather than drastic reform of the large conglomerates that form an important part of Korea’s economy. President Roh’s Uri Party won a resounding victory in the April 2004 parliamentary election. Winning 152 of the 299 seats in the National Assembly, the Uri Party snatched the majority away from the conservative Grand National Party. In June 2004, President Roh named reformist lawmaker Lee Hai-chan as his prime minister, indicating the administration’s intent to push ahead with domestic political reforms.


Commerce.

Major clashes with labor have been avoided. Labor has, however, criticized the Korean government’s economic reform program, and there has been some labor unrest -- most recently evidenced by strikes in April of 2002 by electrical and railroad workers opposed to privatization. President Roh appears to be approaching the privatization of both the railroads and the national electric company cautiously. A work stoppage by truck drivers in May, 2003, seriously disrupted exports at Busan, Korea’s major port. The drivers resumed hauling after several concessions by the government, including a promise to rebate in full all future fuel tax increases. Relations between the two Koreas also affect the business climate. After the North-South Korean summit was held in June 2000, the range and frequency of inter-Korean contacts increased dramatically for a time. Ten cabinet-level meetings, including a Defense Ministerial, were held. Six reunions of families separated since the Korean War have been held, briefly reuniting several thousand members of divided families. However, key economic projects and agreements have not been fully implemented, including re-linking the main rail line between South and North, establishing a Special Economic Zone at Kaesong in the DPRK, and opening a land route for southern tourists to the scenic tourist zone of Mt. Kumgang in the North. Presently, there is limited official contact between the two governments, but private exchanges continue. North Korea continues to maintain and develop its massive military force. Tensions on the peninsula have increased since the onset of a nuclear impasse that began in October of 2002, when North Korea admitted that it was continuing with a program to develop and manufacture nuclear weapons. Both South Korea and the U.S. have agreed that the presence of nuclear weapons anywhere on the peninsula is undesirable, and the issue should be resolved through dialogue and diplomacy. Brief Synopsis of the Political System, Schedule for Elections and Orientation of Major Political Parties Korea is governed by a directly elected President and a unicameral National Assembly selected through direct elections. The president serves a single five-year term. National Assembly legislators are elected every four years. Roh Moo-hyun was elected president in December 2002 and inaugurated in February 2003. The last National Assembly election was held in April 2004. President Roh’s Uri Party won 152 of the 299 seats, while the conservative Grand National Party claimed 121. The April 2004 election also saw the pro-labor Democratic Labor Party enter the National Assembly for the first time, with 10 seats, making it the third largest party. The Millennium Democratic party won only nine seats.


Commerce.

SECTION 2.2: Trade and Project Financing

In response to the 1997-98 financial crisis, the Korean government closed or merged scores of insolvent banks and financial institutions; and by May 2004 had injected upwards of 164.5 trillion Korean Won (about USD 131 billion) into the banking system, with plans to spend 5,490 billion Korean Won (about USD 4.6 billion) more; set up the Korean Asset Management Corporation (KAMCO) to dispose of non-performing assets; required banks to raise their capital adequacy ratios to the BIS standard of 8 percent; introduced strengthened asset classification standards for banks; and imposed “forward-looking” criteria (FLC) to force the banks to provision adequately for non-performing loans, among other reforms. More stringent prudential oversight has generally tightened bank credit. The government has exercised tight control over its domestic credit markets, largely to reduce inflationary pressures, but also to meet other economic policy objectives. In the 1970’s, the government allocated credit (so-called "policy loans") through Korean banks at subsidized interest rates to priority export industries and the agriculture sector. In the 1980's the Korean economy grew rapidly. Growth-oriented Korean chaebol (conglomerates) expanded domestically and overseas, often without regard for profitability and accumulating debt. The government slowly abandoned its policy-loan approach, but did not use its financial supervisory authority to pressure banks and other financial institutions to assess credit risk adequately. In the 1990's the government tried without apparent success to limit loans to 30 large business conglomerates to reduce economic concentration. The result was high levels of non-performing loans in the Korean banking system, due to distortions in credit allocation due to government controls; limited risk-analysis; weak prudential oversight; tightly bound societal relationships; and moral hazard arising from the widespread belief that the government would make good any and all losses. Traditionally, most trade and project financing has gone to large Korean conglomerates (chaebol), due to their perceived financial security and immense capital base. The banking industry gave scant attention to domestic small and medium-sized companies. This attitude has changed, particularly since the spectacular mid-1999 collapse of Daewoo Group, at that time Korea’s second-largest chaebol. Daewoo’s demise, which involved around USD 80 billion of unpaid debt, was easily the world’s biggest corporate bankruptcy. Since then, banks have moved to modernize their lending capabilities. SMEs, particularly information-technology firms, have benefited from easier access to bank lending. Korean companies often request or insist on extended credit terms for international trade, such as open account, even for the first transaction. U.S. exporters might want to resist granting too favorable terms to Korean businesses until they have


Commerce.

carried out some initial transactions on a secured basis and established mutual business confidence. The Daewoo bankruptcy and following liquidity crisis suffered by Hyundai affiliates further aggravated conditions in the financial sector, which was already undergoing restructuring initiated as result of the 1997 financial crisis. Non-performing loans at banking and non-banking financial institutions amounted to 28.7 trillion Korean Won (USD 22.9 billion) at the end of 2002. The government has encouraged mergers among banks by offering government support and enacted a financial holding company law. Effective July 1, 2000, Investment Trust Companies (ITC’s) must use “mark-to-market” accounting (instead of par value) for new investment into existing funds and for funds launched after November 1998. Brief Description of the Banking System Korea’s financial system consists of banking and non-bank financial institutions. The Financial Supervisory Commission (FSC) and the Financial Supervisory Service (FSS), its regulatory arm, are responsible for supervising and examining all banks, including specialized and government-owned banks, as well as securities and insurance companies. The FSC has played a key role in financial restructuring and has strengthened the regulatory and supervisory framework governing the entire financial sector. Oversight standards are improving but they will need more time to meet international standards. Audits generally are performed by the Korean branches of international accounting firms. Although audit quality is recently improving, it is still far behind the global standard. The accounting fraud of SK Global, SK group’s trade arm, March 2003 amounted to 5 trillion and it damaged the positive outlook on the financial and accounting system in Korea. (The government reduced the unlimited guarantee for bank deposits to 50 million Korean Won (USD 38,000) per account beginning in 2001 to further activate market disciplines. Foreign Exchange Controls Affecting Trade The 1998 Foreign Exchange Transaction Act liberalized foreign exchange controls, easing restrictions on capital movements in two phases over two years. The Ministry of Finance and Economy (MOFE) described its guiding reform principles as creating a simplified and transparent framework in line with OECD benchmarks. The first phase of liberalization, implemented on April 1, 1999, included five major changes: (1) a negative list system replaced the previous positive system for capital account transactions; (2) all capital account transactions related to business activities of firms and financial institutions were liberalized, including a firm's short-term borrowings from abroad; (3) non-residents were allowed to issue Korean Won-denominated securities abroad; (4) all qualified financial institutions were permitted to engage in the foreign exchange business, with most remaining


Commerce.

restrictions on the foreign exchange business to be removed; and, (5) participants in the spot and forward markets no longer had to demonstrate their business purpose to purchase forward currency contracts. Also, a commercial foreign currency brokerage system was introduced. Second stage measures, effective January 1, 2001, liberalized most capital account transactions that were not liberalized in the first stage, including those related to national security and crime prevention. Non-residents are now able to invest in Korean Won-denominated domestic deposits with maturities of less than one year, and residents will have the right to invest in foreign-currency-denominated overseas deposits. Some foreign investors complain that MOFE’s foreign-exchange-transaction reporting requirements are burdensome. According to the revised Foreign Exchange Management Regulations, limits on foreign exchange purchases by Korean overseas travelers as well as on monthly overseas expenses were removed. Korean residents living offshore longer than two years can purchase foreign real estate without any limit. In addition, Korean residents are now permitted to hold deposits abroad; however, individuals should inform the BOK of the transaction if the deposit is more than USD 50,000. Proposed foreign capital remittances are guaranteed when investment approval is obtained. A foreign firm that invests under the terms of the Foreign Capital Promotion Act (FCPA) is permitted to remit a substantial portion of its profits, providing it submits an audited financial statement to its foreign exchange bank. To withdraw capital, a stock valuation report issued by a recognized securities company or the Korean Appraisal Board must also be presented. Foreign companies not investing under the FCPA must repatriate funds through authorized foreign exchange banks after obtaining government approval. Although Korea does not routinely limit the repatriation of funds, it reserves the right to do so in exceptional circumstances, such as in situations which may harm its international balance of payments, cause excessive fluctuations in interest or exchange rates, or threaten the stability of its domestic financial markets. To date, the Korean government has had no instances of limiting repatriation for these reasons, even during and after the 1997-98 financial crisis. A three-stage long-term plan for improving the Korea foreign exchange market by 2011 was announced in April 2002. During the first stage (2002-2005), procedural regulations for individual external payments and corporate current account transactions are to be eased. The second stage (2006-2008) will continue easing FX transaction regulation even further, particularly eliminating the need for capital transaction permission. During the final stage (2009-2010), the FX market will be fully liberalized with only safeguard provisions remaining. General Financing Availability


Commerce.

Medium and short-term credit is available from Korean and foreign banks and through the issuance of debentures. Domestic companies generally have better access to local funding as well as informal and secondary financial markets charging higher interest rates. Debentures are a financing alternate, although slightly more expensive than bank financing. Long-term debt is available from the Korea Development Bank, but generally for high priority industries. After the 1997-98 economic shock, the government decided that its foreign loan system was distorted, and eased its restrictions on foreign long-term credit. In the past, Korean companies were obliged to obtain approval from MOFE for loans over USD 10 million with maturities of over one year. As of July 1, 1998, companies need only to notify MOFE of loans over USD 50 million with maturities over one year. How to Finance Exports/Methods of Payment The Korean financial system is perennially hard-pressed to meet the demand for financing and capital. Foreign companies in a start-up operation with a Korean partner often invest financial resources for the joint venture, while their Korean partner makes an investment in kind, i.e., land or facilities, as the Korean share of equity. Joint-venture companies and foreign firms often work with branches of foreign banks for local-currency financing, although the branches of foreign banks control a small portion of Korean Won availability. Other potential sources of Korean Won financing include domestic nationwide commercial banks, regional banks and specialized banks including the Korea Development Bank, the National Agricultural Cooperative Federation, the Industrial Bank of Korea, and Korea Housing Bank. There are three documentary practices in settling Korea's imports: (1) sight and usance Letters of Credit, (2) Documents against Acceptance (D/A) and Documents against Payment (D/P); and, (3) Open Account Transactions. D/A and usance LCs are forms of extended credit in which the importer makes no payment for the goods until the date called for in the credit; however, the importer may clear the goods from customs prior to payment. D/P is the same as D/A except that the importer cannot clear the goods from customs prior to payment. In some cases an importer can clear goods prior to payment under a sight LC. LC transactions generally follow standard international UCP codes. Limitations on the use of deferred payment terms for imports, D/A and usance L/Cs were abolished in July 1998. The Commercial Service of the U.S. Embassy in Seoul recommends that U.S. companies consider dealing on a confirmed letter of credit basis with new and even familiar clientele. A confirmed L/C through a U.S. bank is recommended because it prevents unwanted changes of the original L/C, and it shifts responsibility for


Commerce.

collection onto the familiar banks involved, rather than onto the seller. This may cost a bit more, but may be well worth it. Types of Available Export Financing and Insurance OPIC In 1991, the Overseas Private Investment Corporation (OPIC) stopped writing insurance policies for companies making new investments in Korea under Section 231A of the Foreign Assistance Act. In light of economic difficulties in Korea, OPIC announced in June of 1998 that it would resume operations in Korea. OPIC has never had to cover claims for expropriation, political risk or currency inconvertibility in Korea. Further, the United States and Korea are negotiating a Bilateral Investment Treaty (BIT). The conclusion of a BIT would provide greater confidence to the American investment community. U.S. Export-Import Bank (Eximbank) Prior to the economic crisis, loans and guarantees from the U.S. Export-Import Bank (Eximbank) of the United States were not commonplace because international trade transactions were being conducted in a stable environment. At the height of the economic crisis, when many foreign banks reduced their exposure to Korea, Eximbank agreed to provide short and medium-term credit guarantees for capital goods and services to help to ensure confidence in the Korean market. Since 1987, Korea has been a member of the Multilateral Investment Guarantee Agency of the World Bank Group. The Republic of Korea (ROK) is a recent graduate of the International Bank for Reconstruction and Development (The World Bank), though it is again a recipient of World Bank loans. Within the World Bank Group, the ROK is a member of the International Bank for Reconstruction and Development (IBRD), the International Development Association (IDA), the International Finance Corporation (IFC), and the Multilateral Investment Guarantee Agency (MIGA). The Commercial Service of the U.S. Department of Commerce has a presence at the World Bank Group within the Office of the U.S. Executive Director. Contact information at the World Bank is as follows: Janice Mazur, The World Bank, The Commercial Service Liaison Staff Office of the U.S. Executive Director, 1818 H Street, NW, Washington, DC 20433 Tel. 202-458-0120/0118, Fax. 202-477-2967 E-mail: [email protected] Export Credit Guarantee Program The Commodity Credit Corporation (CCC), U.S. Department of Agriculture, administers export credit guarantee programs for commercial financing of U.S. agricultural exports. The programs encourage exports to buyers in countries where


Commerce.

credit is necessary to maintain or increase U.S. sales, but where financing may not be available without CCC guarantees. Korea is included in two of these programs. 1) Export Credit Guarantee Program (GSM-102): The CCC underwrites credit extended by the private U.S. banking sector (or, less commonly, by the U.S. exporter) to approved Korean banks using dollar-denominated, irrevocable letters of credit to pay for food and agricultural products sold to Korean buyers. GSM-102 covers credit terms up to three years. The CCC provides the guarantee, but the financing must be obtained through normal commercial sources. Typically, 98 percent of principal and a portion of interest at an adjustable rate are covered by a guarantee. 2) Supplier Credit Guarantee Program (SCGP): Under this program, CCC helps exporters offer direct, short-term credit to Korean buyers of U.S. food and agricultural products. In that, CCC reduces the financial risk to exporters by guaranteeing a large portion of the payments due from importers under financing arrangements of up to 180 days. The direct credit extended by the exporter to the importer for the purchase of U.S. agricultural products must be secured by a promissory note signed by the importer. A substantially smaller portion of the value of exports (currently 65 percent) is guaranteed under the SCGP than under the GSM-102, where CCC is guaranteeing foreign bank obligations. Additional Information on program participation and other program details may be obtained by contacting Tel: (202) 720-3224 or Fax: (202) 720-2949 to request program regulations and applicable notices and announcements. Program information is also available on the FAS web site at http://www.fas.usda.gov/excredits/default.htm. List of Major American and Korean Banks in Korea (Note: Telephone dialing information when calling from outside of Korea: 82 is the country code for Korea, followed by 2 which is the city code for Seoul) List of American Banks in Seoul American Express Bank Ltd. (Seoul Branch) 15th Floor, Kwanghwamoon Bldg. 64-8, Taepyungro 1-ka, Chung-ku, Seoul 100-101 Tel: 82-2-399-2900, Fax: 82-2-399-2923 Web site: www.aexp.com Fleet National Bank (Seoul Branch) 15th Floor, Kyobo Bldg. 1, 1-ka Chongro, Chongro-ku, Seoul 110-714 Tel: 82-2-397-3300, Fax: 82-2-733-6989 Web site: www.fleet.com Bank of America NA & SA (Seoul Branch)


Commerce.

9th Floor, Hanhwa Bldg. 1, Jangkyo-dong, Chung-ku, Seoul 100-797 Tel: 82-2-729-4500, Fax: 82-2-729-4560 Web site: www.bankamerica.com Bank of California, N.A. (Seoul Branch) 12th Floor, Kyobo Bldg., 1, 1-ka Chongro, Chongro-ku, Seoul 110-714 82-2-721-1830, Fax: 82-2-732-9526 Web site: www.uboc.com Bank of New York (Seoul Branch) 23rd Floor, Young Poong Bldg., 33, Seorin-dong, Chongro-ku, Seoul 100-752 Tel: 82-2-399-0001/6, Fax: 82-2-399-0055 Web site: www.bankofny.com Chase Manhattan (Seoul Branch) Chase Plaza Bldg. 34-35, Jung-dong, Chung-ku, Seoul 100-120 Tel: 82-2-758-5114, Fax: 82-2-758-5423 Web site: www.chase.com Citibank, N.A. (Seoul Branch) CitiCorp Center Bldg. 89-29, Shinmoonro 2-ka, Chongro-ku, Seoul 110-062 Tel: 82-2-2004-1760 Fax: 82-2-722-1426 Web site: www.citibank.co.kr First Chicago NBD (Seoul Branch) 15th Floor, Oriental Chemical Bldg. 50, Sokong-dong, Chung-ku, Seoul 100-718 Tel: 82-2-316-9700, Fax: 82-2-753-7917 Web site: www.bankone.com First Union National Bank, NA (Representative Office) 10th Floor, Samhwa Bldg. 21, Sogong-dong, Chung-ku, Seoul 100-070 Tel: 82-2-3706-3114, Fax: 82-2-3706-3141~3 Web site: www.firstunion.com List of Major Korean Banks in Seoul Chohung Bank 14, Namdaemoonro 1-ka, Chung-ku, Seoul 100-757 Tel: 82-2-733-2000, Fax: 82-2-3700-4971/4972 (Int'l. Div.)


Commerce.

Web site: www.chb.co.kr Hana Bank 101-1, Ulchiro 1-ka, Chung-ku, Seoul 100-191 Tel: 82-2-2002-1111, Fax: 82-2-773-8515 (Int'l. Div.) Web site: www.hanabank.co.kr Woori Bank 203, 1-ga, Hoehyun-dong, Chung-ku, Seoul 100-792 Tel: 82-2-2002-3000, Fax: 82-2-2002-5685/5686 (Int'l. Div.) Web site: www.wooribank.com Kookmin Bank 9-1, Namdaemoonro 2-ka, Chung-ku, Seoul 100-703 Tel: 82-2-317-2114, Fax: 82-2-317-2704 (Int'l. Div.) Web site: www.kookmin.co.kr Korea Exchange Bank 181, Ulchiro 2-ka, Chung-ku, Seoul 100-793 Tel: 82-2-729-8000, Fax: 82-2-775-9819 (Int'l. Div.) Web site: www.keb.co.kr Korea First Bank 100, Gongpyoung-dong, Chongro-ku, Seoul 100-702 Tel: 82-2-3702-3114, Fax: 82-2-3702-4936 (Int'l. Div.) Web site: www.kfb.co.kr Seoul Bank 10-1, Namdaemoonro 2-ka, Chung-ku, Seoul 100-746 Tel: 82-2-3709-5114, Fax: 82-2-3709-6443/6445 (Int'l. Div.) Web site: www.seoulbank.co.kr

SECTION 3.1: Legal Considerations Why You Should Register Your Intellectual Property in Korea Basic intellectual property laws exist in Korea. However, protection of intellectual property and the laws governing enforcement of these protections are not necessarily extra-territorial. What is understood and practiced in the United States is not always practiced in Korea as well. So, U.S. companies wishing to sell their products or services in Korea should first and foremost find out if they have to register their intellectual property rights (copyright, trademark or patents) in Korea itself because when encountering problems in the IPR area, a firm (whether U.S. or Korean) is required to prove that they are the legal right-holders of an intellectual property, whether copyright, trademark or patent. Consequently, the speediest


Commerce.

means to enforce the right-holder’s claims is to have their intellectual property recognized by the Korean authorities and government. One of the most frequent IPR problems facing U.S. businesses in Korea is trademark protection. Unlike the trademark registration system in the United States, which is based on “first commercial use” or “first intent to use,” the trademark registration system in Korea is based on “first-to-file,” or more accurately, first to successfully register with the Korea Intellectual Property Office (KIPO). If a U.S. company is fortunate enough to have the foresight to consider entering into the Korean market, and no one has yet filed to register the same or similar trademark in Korea, it is highly advised that the U.S. company register its trademark first before another unauthorized party registers it. The company will save a lot of time, energy, resources, and legal fees in the long run. In order to successfully register a trademark, one must hire a qualified local attorney who is familiar with registration procedures. To have maximal effect using this prevention strategy, the company should be prepared to register the trademark in each product class category which is applicable for the product(s); should the trademark be challenged, protection is not generally provided under the Korean legal system if the company does not register in the pertinent particular product class category. Again, U.S. companies should be the first to file their trademark in Korea, and file in every applicable class category. During the course of trademark registration, information on registration pending applications becomes initially available from publications of the Korea Invention and Patent Association two to three months after the initial application. Official announcements of pending applications are published for comment by KIPO in its Official Gazette. Generally, U.S. companies hire a local attorney and ask the firm to look into the status of the company’s trademark in Korea. Sometimes, the U.S. company discovers from the aforementioned publications that an unauthorized party has already filed the trademark and is awaiting registration. In this case the company is eligible to file an Opposition Action Petition within a 30-day period of official publication. In an opposition action petition, the company states their case as to why the unauthorized party’s application should be rejected during the course of initial review. After reviewing the opposition action petition, KIPO can decide either to proceed to successfully register the unauthorized trademark application, or, KIPO can decide to reject the trademark application, enabling the U.S. company to clear the path for the American company’s successful registration at a later date. If the American company is not yet fully engaged in the process of registration but plans to enter the Korean market in the distant future, then the company may at least want to monitor KIPO’s public notices to see if someone tries to register the mark. If the company cannot monitor the situation from America, then the U.S. company should consider hiring someone in Korea, such as an attorney, who can. The March 1998 Trademark Act includes a new provision to increase the possibilities of a successful action of U.S. trademark holders. It provides KIPO, grounds to


Commerce.

reject a third-party application of the same or similar trademark application if KIPO is convinced that the registration is done in "bad faith." Even if an unauthorized party has filed for a U.S. company’s trademark, hopefully, the capable trademark examiner at KIPO will have done his/her homework and have the knowledge to reject a famous/well-known trademark application. As capable as trademark examiners can be, some trademark registrations by unauthorized registrants have slipped through the cracks and have been successfully registered. A registration by an unauthorized party is particularly unscrupulous in cases where the party registers the mark without intent to use the mark in a “predatory registration” (i.e., knowing that the mark belongs to another company, the unauthorized applicant registers the mark in hopes of cashing in when the legitimate trademark owner tries to enter the Korean market). In this case, because the Korean legal system is based on first to file, and because the unauthorized registrant successfully registered with KIPO, the unauthorized registrant is the legal owner of the trademark in Korea—even if it is the U.S. company’s mark and the American company has been using it in international commerce for the past several years! Provided that the mark was not used in commerce by the successful but unauthorized registrant in Korea for the past three years, the company can file a Cancellation Action petition to cancel the existing mark. If the cancellation action is successful and there is no appeal, the company can immediately file to register the trademark with KIPO, therefore, reclaiming the trademark. The most onerous scenario takes place when an unauthorized trademark application has been successfully registered with KIPO, and the party is actually using the U.S. company’s trademark in commerce in Korea. In this case, the legal remedy available is an Invalidation Action. An invalidation action petition can be filed anytime during the course of the 10-year life of a trademark, provided the trademark is actually being used by the unauthorized registrant. The American company’s petition would outline why the unauthorized trademark owner’s registration should be voided (invalidated), i.e. that the American company is the legitimate and original trademark owner, and that consumers know the trademark to be associated with the U.S. company. If the company follows either the invalidation or cancellation action routes, the burden of proof lies with the petitioner. U.S. companies should be prepared to provide all kinds of documentation showing commercial use (include samples of the product and show the uniqueness of the trademark and product); to substantiate financial investment in advertisements (include advertisements in every way, shape, or form); even to provide the results of a survey conducted to show that the brand name is recognized by the public at large in Korea and that the company is the source of the legitimate goods touting the trademark.


Commerce.

Provided that the company and their attorneys put forth a convincing argument with meticulously documented details as to why the company is the legitimate trademark owner, the company has a good chance of winning the case before the KIPO Trial Board. However it may not be over as cancellation and invalidation actions have an appeals process from the KIPO Tribunal Board to the Korean Patent Court and finally, to the Supreme Court of Korea. The rule of thumb for trial date is first come, first served; petitions are filed by date with the trial dates occurring in order of the date of petition. Unlike the case of a successful cancellation action where the company may file for the trademark immediately with KIPO, in the event an invalidation action is successful and there are no appeals, the US company cannot officially file to register the trademark until one year has passed from the invalidation action date. However, US companies can seek enforcement measures from the date of invalidation of the Korean registration. Suffice it to say that the above means are legal means. There is always the possibility of settling out of court. And, because of the lengthy time it takes to go from the KIPO Tribunal Board to the Korean Patent Court, all the way up to the Supreme Court of Korea, some companies just cannot wait that long to re-claim their trademark. Time is money. Four years or more is not unheard of for a final decision using the legal process, and even then, there is no guarantee that the US company would win. Because the opportunity cost of not entering the lucrative Korean market is so great, some companies have opted to settle out of court, i.e., to buy their own trademark from the unauthorized (but legal) registrant for use in the Korean market. However, some companies have strictly limited themselves to legal battles based on moral principle; in either case, good legal counsel is an absolute must. Ultimately, the decision is up to the US company with good legal counsel as to how to proceed. How and Where to Register Your Intellectual Property in Korea U.S. companies can seek trademark and patent registration from the Korea Industrial Property Office (KIPO). Foreign applicants are required to retain a licensed local attorney in order to prepare applications in Korean and to conduct necessary follow-up correspondence locally. Under international law, copyrights do not have to be registered in order to be protected; however, like in the U.S. where copyright registration is possible, registration is also possible in Korea with the Ministry of Culture and Tourism. Enforcement of legally registered copyrights, trademarks, and patents are under the jurisdiction of the Prosecutor's Office in Korea. Type of Intellectual Property Where to Register Trademark, Patent Korea Industrial Property Office (KIPO)

www.kipo.go.kr Copyright Ministry of Culture and Tourism (MOCT)


Commerce.

www.moct.go.kr Copyright Registration Division: Copyright Deliberation and Conciliation Committee www.copyright.or.kr

In addition, if a U.S. company wanted to see if their trademark was registered without authorization, they would have to employ the services of a qualified Korean attorney because Korean law requires that foreign applicants designate a qualified attorney to represent them at legal proceedings in the Korean language (e.g. at trials to revoke or invalidate unauthorized registrations). If a U.S. company wanted to pursue legal avenues in the Korean legal system or in the KIPO Trial Board System, the intricacies of Korean IPR law in addition to the immense paperwork and documentation needed to be completed and compiled in the Korean language can be a daunting task for a U.S. firm that has neither full time local presence nor any contacts in the Korean government. Hence, in order to attempt to remedy most IPR problems in Korea, an effective local attorney is a key asset. Also, when registering for a copyright, trademark or patent, US companies, should maintain control of their intellectual property, even if they request their Korean agent to do the processing. This control is particularly relevant should the Korean-American partnership dissolve. In such previous cases where the Korean agent maintained control of the intellectual property, long, costly legal battles have ensued. The legal system is structured on an appeals process which could take at a minimum three to four years in the courts should a case go to the Supreme Court of Korea or to the Supreme Civil/Criminal Court. Again, even then, there is no guarantee that the US party would win. Hence, to avoid such legal disputes and hefty legal fees, US companies are urged to do their due diligence when choosing a potential Korean partner.

SECTION 3.2: Legal Methods

Need for a Local Attorney Although the industry is in the process of liberalization, the legal services sector is presently closed to foreign firms. Though in theory, foreign citizens may sit for the Korean judicial exam and eventually become a licensed attorney, in practice there are no licensed non-Korean attorneys. However, an increasing number of foreign attorneys are hired as consultants by Korean law firms. In international transactions, many so-called “foreign consultants” are essentially practicing law, with the exception of a final approval signature, which must be completed by a Korean attorney. Out of a population of 47 million people, the present Korean examination system establishes a limit of eight hundred newly graduated law students to enter into the


Commerce.

ranks of practicing attorneys each year. Over the last several decades, the Korean government has worked to liberalize the sector by allowing more graduates to enter into the profession. Since 1996, the quota has been raised from 300 per year to the current 800 per year, and further liberalization to 1,000 new attorneys per year is expected soon. Due to the limits placed on the number of new attorneys accredited each year, experienced counsel is at a premium. The Korean legal community has divergent opinions on liberalizing the market. The large established firms, which have a virtual monopoly on lucrative international transactions, resolutely oppose opening to foreign competition, which may drive legal fees down and provide more choices for Korean and foreign consumers. On the other side of the argument is an emerging group of small law firms that see the arrival of foreign firms in Seoul as an opportunity to forge new partnerships and capture some of the established business of the larger firms. A large proportion of the practice by Korean law firms focuses on international business and transactions. Most experts advise engaging a local attorney before making major business decisions in dealing with Korean companies. The legal advice that Korean firms with international experience can provide can be very important. In addition to advice on structuring deals or arranging contracts, Korean law firms are usually well connected into the power structure and have extensive contacts in the government ministries that can determine the fate of foreign companies and international transactions. Although it is important to have legal representation when a business in Korea reaches even a modest level of complexity, it is important to remember two things. First, as a matter of legal culture, Korean lawyers do not see themselves as businessmen and try to avoid intruding on business judgments. It is rather rare for Korean lawyers to venture far from recitation of applicable statutes. This is one reason why it is a good idea to seek a Korean firm employing foreign legal consultants who tend to provide a proactive, commercial-oriented practice philosophy. Second, although major Korean firms have extensive and excellent contacts with the Korean bureaucracy, for anyone planning long-term business involvement in Korea, it is often useful to establish direct contacts with the officials who oversee any given industry. List of Major Law Firms in Korea (*Note: ALL lists in this Country Commercial Guide are provided only to assist U.S. companies or individual investors to identify companies in Korea who may be able to meet the specific needs of U.S. companies. The lists are not meant to be an exhaustive one, nor is it intended that inclusion in the list be construed as a U.S. Embassy endorsement or recommendation of the companies so listed. The Department of Commerce and the U.S. Embassy assume no responsibility for the


Commerce.

professional ability or integrity of the persons or firms whose names appear in the lists given below. Aram International Law Offices 5th Fl., Hoesung Building, 51-7, Banpo-dong, Seocho-gu, Seoul 137-040 Tel: 82-2-592-0892; Fax: 82-2-596-6081 Web site: www.aramlaw.com Bae, Kim & Lee, P.C. 6th - 12th Fl., Hankuk Tire Building, 647-15, Yuksam-dong, Kangnam-gu, Seoul 135-080 Tel: 82-2-3404-0000 Fax: 82-2-3404-0001 Web site: www.bkl.co.kr Chin, Ahn, Ha & Seo 8th Fl, Il-Heung Building, 1490-25, Seocho-dong, Seocho-gu, Seoul 137-870 Tel: 82-2-586-2240; Fax: 82-2-586-3184 Web site: www.tllawyer.co.kr First Law Offices of Korea 275-7, 17th Fl., KEC building Yangjae-dong, Seocho-gu, Seoul 137-130 Tel: 82-2-589-0001; Fax: 82-2-589-0002 Web site: www.firstlaw.co.kr Hwang Mok Park & Jin Law Offices 9th Fl., Daekyung Building, 120, 2-ka, Taepyong-no, Jung-gu, Seoul 100-724 Tel: 82-2-772-2700; Fax: 82-2-772-2800 Web site: www.hmpj.com Kim, Shin & Yu 12th Fl., Leema Bldg., 146-1, Susong-dong, Jongno-gu, Seoul 110-755 Tel: 82-2-2000-5000 Fax: 82-2-739-6606, 82-2-739-6182 Web site: www.ksy.co.kr Law Offices of Lee & Ko 17th-20th Fl. Marine Center Main Bldg. 118, 2-ga, Namdaemunno, Jung-gu, Seoul 100-770 Tel: 82-2-772-4000 Fax: 82-2-772-4001/4002 Web site: www.lawleeko.com Sojong Partners 9th Floor, Star Tower, 737 Yeoksam 1-dong Kangnam-gu, Seoul 135-984 Tel: 82-2-2112-1122; Fax: 82-2-2112-1115 Web site: www.sojong.com


Commerce.

Wonjon Intellectual Property Law Firm 8th Fl., Poong Lim Bldg. 823-1 Yeoksam-dong, Gangnam-gu, Seoul 135-784 Tel: 82-2-553-1246 to 1250; Fax: 82-2-553-0990 or 0987 Web site: www.wonjon.co.kr Expropriation and Compensation Korea follows generally accepted principles of international law with respect to expropriation. The law protects all foreign-invested enterprise property from expropriation or requisition. If private property is expropriated, it can only be taken for a public purpose, and then only in a non-discriminatory manner. Property owners are entitled to prompt compensation at fair market value. The Embassy is not aware of any cases of uncompensated expropriation of property owned by American citizens. Dispute Settlement Serious investment disputes involving foreigners are the exception rather than the rule in Korea. The exemptions are cases involving intellectual property rights protection. There exists a body of Korean law governing commercial activities and bankruptcies that constitutes the means to enforce property and contractual rights, with monetary judgments usually levied in the domestic currency ( Korean Won). The judgments of foreign courts are not enforceable in Korea. Although commercial disputes can be adjudicated in a civil court, foreign businesses often feel that this is not a practical means to resolve disputes. For example, proceedings are conducted in the Korean language, often without adequate translation. Foreign lawyers (i.e., who have not passed the Korean Bar) are almost always prohibited by Korean law from representing clients in Korean courts. Civil procedures common in the United States, such as pretrial discovery, do not exist in Korea. During litigation of a dispute, foreigners may be barred from leaving the country until a decision is reached. Legal proceedings are expensive and time-consuming. Lawsuits often are contemplated only as a last resort, signaling the end of a business relationship. Commercial disputes may also be taken to the Korean Commercial Arbitration Board (KCAB). The Korean Arbitration Act and its implementing rules outline the following steps in the arbitration process: 1) parties may request the KCAB to act as informal intermediary to a settlement; 2) if unsuccessful, either or both parties may request formal arbitration, in which case the KCAB appoints a mediator to conduct conciliatory talks for 30 days; and 3) if unsuccessful, an arbitration panel consisting of one or three arbitrators is assigned to decide the case. If one party is a not resident in Korea, either may request an arbitrator from a neutral country. When drafting contracts, it always is a good idea to provide for arbitration by a neutral body such as the International Commercial Arbitration Association (ICAA). U.S. companies should seek local expert legal counsel when drawing up any type of


Commerce.

contract with a Korean entity. Korea is a member of the International Center for the Settlement of Investment Disputes (ICSID). It has also acceded to the New York Convention (formally called the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards). Korea is a member of the International Commercial Arbitration Association and the World Bank's Multilateral Investment Guarantee Agency (MIGA). It is important to keep in mind that Korean courts may ultimately be called upon to enforce an arbitrated settlement.

SECTION 4.1: Distribution and Sales Channels Local representation is essential for the success of foreign firms in the Korean market. This is especially true when considering the fact that in Korea, business relationships are built upon personal ties and social introductions, and that much of the major third-country competition is only a few flight-hours away. In addition, for sectors that involve any type of government procurement, an entity must be registered with the Korean government in order to bid on the procurement projects. Hence, many American firms enter into a consortium with a Korean company or enter into a representative agreement, especially for the purposes of market entry. Finally, the language barrier and established social/ business circles make it extremely difficult to enter the Korean market without a qualified Korean representative. Distribution methods and the number and functions of intermediaries vary widely by product area and local conditions. The market for most consumer products is concentrated in major cities. Retail distribution is accomplished through a highly complex network, the majority of which are small family-run stores, stalls in markets, and street vendors, though this traditional distribution method is changing rapidly toward large-sized discount stores. There are many large retail stores in the major cities, especially Seoul, Daegu, Busan, and their outer-lying suburbs. This distribution channel is one of the best ways to market foreign products to Korean consumers. Recently, retailing concepts such as Full-Line Discount Stores (FDS) including Price Costco (USA), Wal-Mart (USA), Carrefour (France), and E-mart (Korea) have gained tremendous popularity in Korea. Rapid expansion of these discount chain stores is planned nationwide, with suburban satellite cities attracting the greatest number of stores. In November 1995, regulations from the Korean Ministry of Finance and Economy (MOFE) went into effect, which allowed the legal entry of parallel imports. Prior to this legislation, distribution was disciplined with exclusive distributor/agents agreements. Besides an authorized and registered distributor/agent, no other importer could legally clear goods through Korean customs. As a result, importers


Commerce.

that were not the exclusive distributor/agent found their shipments frequently held up at customs. The effect of parallel imports is to marginally reduce the value of an exclusive distribution agreement. Many American companies continue to give exclusives, since they have in place territorial limits in neighboring countries that enhance the value of the exclusive in any one country. Likewise, any parallel importer in Korea that is not receiving the support of the OEM, and does not deal in the same volume, cannot be guaranteed a steady source of supply. As noted above, the legitimate exclusive distributor still has considerable advantages in Korea. Information on Typical Product Pricing Structures The rate of commission for using an agent or distributor varies depending on the type of product and the transaction amount. On average, Korean agents require a 10percent commission, particularly when a transaction is conducted on a spot basis, but this varies for different products. Generally, a 5-7 percent commission applies to product categories such as general machinery including packaging, construction, and material handling equipment. Meanwhile, more sophisticated products such as medical, laboratory, and scientific analytical instruments usually require a commission of 15-18 percent or more, since these are products for which after-sales service is considered to be very important. On August 1, 2000, the Korean Ministry of Commerce, Industry, and Energy (MOCIE) passed consumer-protection legislation requiring that consumer items be labeled with both the manufacturer’s sales price to the retailer and the marked-up retailer’s price to the consumer. The mark-up from manufacturer to consumer ranges from 50 percent to 150 percent. Use of Agents/Distributors; Finding a Partner The most common means of representation include: 1) appointing a registered commissioned agent (more commonly known as an “offer agent” in Korea) on an exclusive or non-exclusive basis, 2) naming a registered trading company as an agent, or 3) establishing a branch sales office managed by home office personnel with Korean staff. Any traders registered with the Korea International Trade Association (KITA) can import goods in their own names. Appointing a registered trading company (rather than an "offer agent") as an agent has its advantages because these agents can handle all of the importing paperwork and imports for their own account. Registered trading companies tend to be larger firms and they split their businesses between exports and imports. However, these larger firms may be less attentive to building the U.S. supplier's business, placing a higher emphasis on diversifying their portfolio of products from different countries. Similarly, while the larger general trading companies may be influential and well known in the market, they also may not devote as much attention to a single product as smaller firms do.


Commerce.

To find a local representative, a good place to begin with is a fee-based service called the International Partner Search (IPS) through the U.S. Export Assistance Centers (USEAC) located throughout the U.S. and Commercial Service Korea (CS Korea). For a modest fee, CS Korea’s industry specialists will tap into their well-established network of industry contacts and trade associations. The client will soon receive an annotated list of three to five potential, qualified representatives. The next step would be to plan a visit to Korea, perhaps calling upon CS Korea to arrange market briefings, a meeting schedule, and an interpreter/secretary under another fee-based service called the Korea Gold Key (KGK). Another good contact is the Korea Importers Association (KOIMA), a well-established, private trade association founded under government auspices dedicated to increasing imports into Korea. To fulfill its original mission of promoting balanced trade, KOIMA helps execute Korea's import diversification plan, leads annual purchasing missions to the United States, Latin America, and Europe, and holds monthly meetings between member agents and the commercial sections of various embassies located in Korea. In the past, Korean law stipulated that a sales agent must be a member of KOIMA to issue and make price quotations, or make pro forma invoices in their own names. However, since the beginning of January 2000, this once mandatory registration requirement is now voluntary. Quotations, locally used as 'offers,' issued directly by foreign suppliers are no longer subject to case-by-case approval by KOIMA. A commissioned agent/distributor does not have to be registered with KOIMA. American businesses can contact KOIMA by sending their company catalogs with a letter specifying the items for which they are seeking an agent or visit the KOIMA office directly. Catalogs are displayed in the KOIMA library and inquiries are published free of charge on the association’s web site or in the monthly KOIMA Magazine (KOIMA contact information is listed at the end of this section). The U.S. Commercial Service of the U.S. Embassy also works closely with KOIMA to advertise requests for agents received from American companies. Generally speaking, an agency contract includes an outline on the termination of the contract. When there are no specific provisions in a contract on agent termination, the Korean Commercial Arbitration Code can specify the provisions for terminating an agent contract. This compensation clause allows the agent to claim compensation from the principal. The amount of compensation is usually determined as the total year average of one year’s sales commission (i.e. total sales commission over the years divided by the number of years). As a mutually signed contract between supplier and agent/distributor overrules the default Korean provisions of claims for a commercial agent, U.S. companies are advised to include provisions on agent termination. The U.S. Commercial Service in Korea recommends that U.S. companies seek legal counsel prior to signing a contract in Korea. The legal advice that a law firm with international experience provides is very important. Most experts recommend hiring


Commerce.

a local attorney prior to making major business decisions in dealing with Korean companies. U.S. companies should also seek legal counsel with regard to protecting their intellectual property. Trademark and patent registration (if applicable) with the Korea Industrial Property Office (KIPO) is the minimum safeguard for your intellectual property rights in Korea. U.S. companies are advised to seek the services of a local attorney to directly register their trademarks and/or patents in their own names, not the Korean agent’s name. In order to have control over these important intellectual property rights, registration must be done in the U.S. company’s name. Korean law requires that only local attorneys be allowed to fill out and submit applications to KIPO. A list of major attorney firms in Korea is listed at the end of this chapter in the section entitled “Need for a Local Attorney.” List of Useful Contacts Regarding Agents/Distributors (Note: Telephone dialing information when calling from outside of Korea: 82 is the country code for Korea, followed by 2, which is the city code for Seoul) Association of Foreign Trading Agents of Korea AFTAK Bldg., 218 Hankangro 2-ka Yongsan-ku, Seoul 140-012, Korea TEL: 82-2-792-1581/4 FAX: 82-2-785-4373 Website: www.aftak.or.kr The Korean Commercial Arbitration Board (KCAB) 43rd Floor, Trade Tower 159 Samsung-dong Kangnam-ku, Seoul 135-729 Korea Trade Center P.O. Box 50 TEL: 82-2-551-2000/19 FAX: 82-2-551-2020 Website: www.kcab.or.kr Branch Office, Busan Korea (KCAB) Rm. 805, Daehan Tongun Bldg. 1211-1, Choryang-dong Dong-ku, Busan 601-714 Korea TEL: 82-51- 441-7036/8 FAX: 82-51-441-7039 Website: www.kcab.or.kr Korea International Trade Association (KITA) 6th floor, Trade Tower, KWTC 159-1, Samsung-dong, Kangnam-gu, Seoul, Korea Tel: 82-2-6000-5267


Commerce.

Fax: 82-2-6000-5161 E-mail: [email protected] Website: www.kita.or.kr Direct Selling Door-to-Door Sales There were 17,786 door-to-door sales firms in Korea, as of December 31, 2002. The major door-to- door sales items include home education materials, books, household consumer goods, cosmetics, health foods, sporting goods, and service products, such as insurance and travel counseling. According to the Korea Direct Selling Association (KDSA), the Korean door-to-door sales market for 2002 totaled about USD 3.9 billion. Multi-level Marketing: Korea’s multi-level sales for 2002 reached USD 4.8 billion. As of December 31, 2002, the multi-level marketing (MLM) industry employed about 3 million active distributors. Over the years, the Korean government has derided MLM as an “undesirable or inappropriate business form” for Korea, claiming that it neglects consumer safety, profits "excessively," and threatens the Korean social fabric through its "pyramid schemes." However, MLM’s negative image in Korea appears to be changing due to the combined efforts of U.S. firms, Commercial Service Korea, the U.S. Trade Representative (USTR), AmCham Korea, and the Korea Direct Selling Association (KDSA), whose membership includes almost all U.S. MLM companies doing business in Korea. KDSA also is a member of the World Federation of Direct Selling Associations in Washington, D.C. In keeping with its deregulation plan, the Korean Ministry of Commerce, Industry and Energy (MOCIE) reduced the restrictions on MLM companies by amending its original Door-to-Door Sales Act (DDSA), which the Korean National Assembly recently passed on January 5, 1999. The new legislation eliminated most existing market barriers against MLM industry’s products, such as the obligation to disclose retail prices on the MLM product label. In addition, on May 25, 1999, the authority to enforce this new legislation was transferred from MOCIE to the Fair Trade Commission (FTC) by the newly revised Government Reorganization Law. On July 2002, with a continued effort of Commercial Service Korea, USTR, and U.S. MLM companies, the new DDSA passed after it cleared through the National Assembly and was signed by the Korean President. The new DDSA has raised price limitations on business transactions to KW 1.3 million (about USD 1130) from KW 1 million (about USD 870) to open up the market. Despite these recent changes, DDSA still contains some restrictive provisions that the MLM industry is working on modifying in order to further protect Korean consumers. For example, the new DDSA requires all MLM companies take out a consumer protection and


Commerce.

compensation insurance policy. The insurance is to protect distributors and consumers in the event MLM companies go out of business. Currently, in the case of misfortune, a distributor is to receive a 70 percent refund of the price of goods, whereas a consumer is to receive 90 percent of the price of goods. As a result of these market liberalization measures, multi-level marketing activities by U.S. firms in the cosmetics, cleaning products, and kitchenware sectors have been expanding. In order to garner further successes, however, U.S. multi-level sales firms should promote their products and services appropriately and efficiently by carefully analyzing Korean market trends. Prior knowledge of the market conditions can help prevent unnecessary conflicts with government officials, consumer ‘watchdog’ groups, or industry groups. Direct Marketing The Korea E-Commerce & Direct Marketing Association (KEDMA) estimates that by December 2002, there were approximately 33,000 direct marketing firms in Korea. Gross revenues for the Korean direct marketing industry in 2002, including catalog sales and TV and Internet shopping, are as follows: Catalog sales: USD 705 million TV home shopping: USD 3,070 million Internet shopping: USD 2,113 million Total: USD 5,888 million

SECTION 4.2: Joint Ventures/Licensing

Since the late 1997 economic crisis, the Korean government has made a dramatic and high-profile effort to attract foreign investment for the purposes of restructuring the Korean economy and bringing in much needed foreign capital. In its efforts to counter the economic downturn, the government has not only publicly encouraged foreign investment, but it has also implemented liberalization policy measures, including an increase in foreign equity ownership, in order to accommodate its goals. Though a group of high-level officials headed by President Roh and the Prime Minister's Office have spearheaded efforts to de-regulate and liberalize the economy, some foreign companies have responded negatively to the initiatives, with claims that the policies block restrictive regulations that would eliminate trade and investment barriers at the working level. Nevertheless, many foreign companies that already have operations in Korea chose this opportunity to increase their involvement in Korea, such as Coca-Cola and Pfizer. Meanwhile, other U.S. investors continue to be cautious because of continued concerns over corporate transparency and indebtedness. Opportunities


Commerce.

exist for such prudent investors though it may be some time before many investors regain former levels of confidence. Foreign investment approval is controlled by the Ministry of Finance and Economy (MFE) and governed by the Foreign Investment Promotion Act (FIPA) of 1998. The FIPA is expected to enhance investor rights and incentives as well as remove bureaucratic obstacles to investment. Selecting the appropriate partner is one of the most difficult and crucial aspects of initiating a joint venture in Korea. The large Korean conglomerates “chaebols” still exercise considerable influence in Korea, permeating throughout the country’s government and financial institutions. On the other hand, the Korean government's attempts at a policy shift toward the support of small and medium-sized businesses mean that the participation of a “chaebol” in a joint venture could create additional obstacles in terms of obtaining necessary approvals and local financing. This is further compounded because of the recent government policy shift towards anti-monopoly behavior. In addition, “chaebols” tend to insist on operating a joint venture in accordance with the overall policies and business culture of the group, sometimes to the detriment of the foreign shareholder's interest. Though an injection of foreign capital may be deemed necessary for the survival of a company, there is a tendency inherent in Korean business culture to maintain local control, regardless of the percentage invested by foreign entities. A U.S. company may therefore consider assigning its headquarters staff to Korea in order to closely monitor and influence the activities of a newly established joint venture company. Management control must be evaluated on three levels: 1) shareholder equity; 2) representation on the board of directors; and 3) active management (representative director and subordinate management). Legally, Korean board meetings require the physical presence of all members as well as a quorum of the directors. Therefore, if a foreign investor intends to exercise day-to-day management, he/she must appoint a representative director who resides in Korea. Moreover, the representative director will need the support of and access to key functional areas of the company in order to manage in accordance with the foreign investor’s wishes. Therefore, the internal organization of a joint venture company as well as key management appointments should be worked out and agreed upon by all involved parties as early as possible. The compatibility of goals between the Korean and foreign partners is also crucial to the joint venture's success. Problems may arise due to conflicting goals. For example, the foreign investor's primary goal may be to send profit dividends offshore while his/her Korean counterpart may be most concerned with corporate growth in Korea, particularly through exporting to overseas markets. To most Koreans, a contract represents the current understanding of a "deal" and is the beginning of rather than an end to negotiations with a Korean partner. If changing circumstances result in omissions or points that no longer accurately


Commerce.

reflect the original agreement, then problems will arise. The same is true if the contracting parties change. This type of experiences in Korea has led many foreigners to believe that Koreans place less importance on a written contract than Westerners. Though Americans may regard a written contract as legally binding, Koreans may regard the same contract as a "gentlemen's agreement" that is subject to further negotiations should conditions change. Therefore, contract negotiations with Koreans should be viewed as a process of extensive dialogue and as having the following objectives: 1) reaching a common understanding of the deal that includes each party’s responsibilities; 2) recording that detailed understanding; and 3) being prepared to modify the terms of the agreement should there be a change in circumstances. Certain terms of the commercial relationship between the joint venture partners, such as technology transfer, raw material supply, marketing and distribution, should be agreed upon in detail in the joint venture agreement. Though circumstances are slowly changing, Korean companies have not invested a great portion of their operating funds towards research and development. For this reason, there is a large Korean demand for technology transfer licensing agreements from foreign countries, particularly the United States, whose companies have a comparative advantage in the high technology area. American companies should proceed with caution when they enter into a transfer technology licensing agreement. A company’s intellectual property is not necessarily protected and may be particularly vulnerable in the later stages of a business relationship when the survival of a Korean company is dependent on the technology. Though U.S. companies oftentimes register their patented technology with the Korean Industrial Property Office (KIPO) before entering into a licensing agreement, the most successful American companies intentionally withhold a small but key component of the manufacturing process or component from their Korean partner. This preventative strategy allows the U.S. company to control the use of the licensed technology as well as maintain the integrity of the licensing agreement. If a contract is violated in Korea, the country’s legal procedures can be lengthy, cumbersome and expensive. Hence, if at all possible, the best strategy to employ is to prevent all possible conflicts. The identification of a viable and trustworthy business partner from the outset is essential; therefore, foreign investors should exercise due diligence when selecting a business partner. One precautionary approach is to consult with attorneys throughout negotiations of a contract. (Please refer to a list of attorneys in Korea at the end of this chapter.) In addition to consulting with an attorney, foreign investors should also consult with the Korean Commercial Arbitration Board (KCAB). The KCAB is staffed with counselors who advise U.S. companies on contract guidelines. At the company's request, an assigned KCAB counselor can review the contract and stress the importance of an arbitration clause in the contract. The KCAB contact information is as follows:


Commerce.

Mr. Lee, Joo-Won, Manager Public Information Section The Korean Commercial Arbitration Board 43rd Floor, Trade Tower (Korea World Trade Center) 159 Samsung-dong, Kangnam-ku Seoul 135-729, Korea Tel. 82-2-551-2073 Fax. 82-2-551-2020


FFFOOOOOODDD PPPRRROOOCCCEEESSSSSSIIINNNGGG MMMAAARRRKKKEEETTT IIINNN MMMEEEXXXIIICCCOOO

2005


Commerce.

2

Table of Contents

Mexican Food Processing Market

SECTION 1-1. MARKET SUMMARY 3

SECTION 1-2. COMPETITION 9

SECTION 1-3. BEST PRODUCT PROSPECTS 11

SECTION 2-1. POLITICAL ENVIRONMENT 12

SECTION 2-2. TRADE AND PROJECT FINANCING 15

SECTION 2-3. BANKING SYSTEM 19

SECTION 3-1. LEGAL CONSIDERATIONS 20

SECTION 3-2. LEGAL METHODS 22

SECTION 4-1. DISTRIBUTION, SALES CHANNELS, AND PARTNERS 24

SECTION 4-2. OTHER MARKETING CONSIDERATIONS 27


Commerce.

3

SECTION 1-1. MARKET SUMMARY According to the Mexican Secretary of Commerce business registry (SIEM), there are 7,065 food manufacturing companies processing a wide range of products including red meat, poultry, fish and dairy products, baked goods, snack foods, prepared fruit and vegetables, oilseed products, beverages, dry goods, condiments, specialized food ingredients and prepared meals. The industry produced $38.3 billion in 2002. From 1999 to 2002, the industry grew by an average 8.1 percent per year in production value. The following sub-sectors experienced the highest growth in this period: Beverages (41.1 percent), Baked Goods (38.4 percent), Confection, (27.9 percent), Snack Foods (26.9 percent), Canned Foods (25.6 percent), Dairy (24.5 percent), Meat and Poultry (21.4 percent), other (coffee, gelatins, yeast, syrup, concentrates, etc.) (17.3 percent), Sugar (14.7 percent), Animal Feed (13.7 percent), Fish and Seafood (12.4 percent), Flour and Grains (7.5 percent), Vegetable Oil (0.9 percent). The sector is expected to produce $41.3 billion in 2003. Production Value of Mexico’s Food Processing Industry (USD Millions)

Industry Number of Firms (1)

Total Inputs (2)

1999 (3)

2000 2001 2002 Growth 99-02

Meat and Poultry 526 1,400 2,117 2,440 2,555 2,571 21.4% Dairy 426 2,600 3,198 3,684 4,005 3,982 24.5% Canned Foods 100 715 2,037 2,216 2,505 2,559 25.6% Fish and Seafood 59 198 275 279 292 309 12.4% Flour and Grains 337 778 1,301 1,284 1,366 1,399 7.5% Baked Goods 3,963 703 1,605 1,853 2,090 2,222 38.4% Vegetable Oil 75 1,200 2,001 1,951 2,008 2,020 0.9% Sugar 61 1,100 1,908 1,848 2,368 2,188 14.7% Confection 280 250 727 861 861 930 27.9% Snack Foods 163 341 1,612 1,949 2,106 2,045 26.9% Other (coffee, gelatins, yeast, syrup, concentrates, etc.)

263 1,400 2,891 3,198 3,327 3,390 17.3%

Animal Feed 163 1,200 1,561 1,599 1,775 1,775 13.7% Beverage Industry 649 2,500 9,122 11,03

0 12,006

12,870

41.1%

Total 7,065 14,385 30,355

34,192

37,264

38,260

26.0%

Source: 1. SIEM; 2. INEGI Encuesta Industrial 2000; 3. INEGI Encuesta Industrial Mensual 2002 Trade statistics paint a favorable picture for U.S. suppliers to the food processing sector. Mexico imports from the United States almost five times as much raw material1 for the industry as it exports. Moreover, imports rose 22 percent while exports fell almost 30 percent between 2000 and 2002. Although a strong peso during the period may account for some of this imbalance, the figures indicate a strong and growing dependence on foreign suppliers to the industry.

1 CCG selected approximately 70 categories of “food ingredients” from government statistics in determining the trade balance between the United States and Mexico.


Commerce.

4

The following imports of raw materials for the food processing sector experienced the highest rates of growth from 2000 to 2002: Cloves (660 percent); Cereal grains, germs (490 percent); Vanilla beans (450 percent); Soybean residues (262 percent); Cocoa paste (200 percent); Other fixed vegetable oil (179 percent); Animal/vegetable hydrogenated (179 percent); Oats (131 percent); Soybean oil (131 percent); Various spice seeds (117 percent); Palm nut or kernel (100 percent); Vegetable waste for animal feed (95 percent); Unsweetened cocoa powder (80 percent); Bran (79 percent); Olive oil (75 percent); Wheat or meslin flour (73 percent); Cane/beet, solid form (73 percent); Rapeseed, colzo/mustard (68 percent); Yeasts; baking powder (50 percent); Palm oil (not chemically modified) (47 percent); Wheat and meslin (40 percent). Advantages/Challenges for U.S. Exporters Targeting Mexico’s Food Processing Sector: Advantages Challenges The United States is already the leading supplier of ingredients to Mexico’s food processing industry.

The European Union, Chile and other Central American and South American countries have free trade agreements with Mexico giving them preferential duties for some products.

Geographical proximity gives U.S. exporters a competitive advantage over third country suppliers.

As Mexico’s transportation and distribution infrastructure improves, other countries will be able to deliver product more efficiently to the Mexican market.

Because of NAFTA, U.S. products have preferential import duties compared to products from many third country suppliers. As of 2003, most U.S. food and agricultural product exports to Mexico are duty-free.

Commercial barriers such as labeling, phytosanitary and sanitary regulations and NOMs (Mexican quality standards) continue to pose obstacles for importing some U.S. products.

Rising per capital income, more women in the work-force, and increasing foreign investment are driving the demand for processed foods.

U.S. firms must aggressively solicit new business and establish in-country sales and servicing infrastructure.

Raw materials for the industry imported from the U.S. by Mexican food processors are subject to less stringent labeling requirements.

U.S. exporters still must comply with all sanitary and phytosanitary requirements, which are frequently modified.

Mexico’s domestic production of milk powder, lactose and sweet whey, poultry, red meat, cocoa, grains and flour, canned fruits, sugar, cereals and pet food cannot meet domestic demand. (Source: Bancomext)

Imported products are relatively more expensive and take longer to arrive.

Mexican processors view U.S. ingredients such as red meat, pork, dairy, poultry and other products as having high quality.

Strong competition from local producers and Asian and European suppliers.

B. COMPANY PROFILES

Nine individual products accounted for approximately 65 percent of the total food processing production value: Soft drinks and non-alcoholic beverages (18 percent), beer (10 percent), packaged milk (seven percent), sugar products (six percent), vegetable oil and shortening (five percent), animal feed (five percent), breads and baked desserts (five percent), corn-based snacks (five percent) and red meat and poultry (three percent). The following table provides detailed information on some of the largest processors in Mexico.


Commerce.

5

Company Industry Sales 2002 (in 000s USD)

End-Use Channel

Production Location Procure-ment

Agro Industrial Exportadora, S.A. de C.V.

Processed fruit and vegetables

350 Export Jalisco NA

Alfa, S.A. de C.V. (holding): Sigma Alimentos S.A. de C.V.

red meat, poultry, dairy, prepared and frozen meals

5,300; 100 Retail Nuevo Leon (2) (HQ), San Luis Potosi, Chihuahua, Jalisco (2), Hidalgo, Mexico City; Total: 8

Direct

Grupo Bafar S.A. de C.V. red meat, poultry, and dairy

53 Retail Chihuahua (HQ), Cd. Obregon; Sonora; Total: 2

Direct

Industrias Bachoco tobacco, poultry, red meat and eggs

1,100 Retail, HRI Total: 400 Direct & Brokers

Grupo Mac Ma prepared gourmet meals, cookies and confection

18 Retail NA

Qualtia Alimentos S.A. de C.V.

red meat, poultry products and dairy

NA Retail Nuevo Leon (HQ);Total: 3 Direct

Grupo Corvi confection 1,400 Retail Mexico City (HQ); Total: 4 Direct Grupo Industrial Lala S.A. de C.V.

dairy NA Retail Nuevo Leon, Coahuila (HQ) Durango (4); Total: 7

Direct

Ragasa Industrias S.A. de C.V.

oilseed NA Retail & Processors

Nuevo Leon (2) (HQ), Tamaulipas; Total: 4

Direct

Grupo Minsa corn flour, tortillas and other products

202 Retail and Processors

Edo de Mexico (HQ), Sinaloa , Coahuila, Jalisco, Veracruz, Chiapas; Total:6

NA

Grupo Bimbo S.A. de C.V. confection, baked goods and snacks

4,200 Retail Total: 44 Direct

PepsiCo Inc (holding): Gamesa S.A. de C.V.; Sabritas S.A. de C.V.

snack food NA Retail Gamesa: Nuevo Leon (2) (HQ);Total: 8 Sabritas:Total: 7

Direct

Grupo La Moderna S.A. de C.V.

baked goods and wheat flour

281 Retail NA

Nacional de Alimentos y Helados SA de CV (Botanas Bokados)

snack food NA Retail Nuevo Leon (HQ); Total: 1 Direct

Nutrisa Health foods and snacks

29 Retail Direct

Jugos del Valle S.A. de C.V. fruit juice 370 ** Retail Edo. de Mex, Mexico City (HQ), Nuevo Leon, Zacatecas, Baja California, Veracruz; Total: 8 Mexico, 1 Brazil

Direct & Brokers

Grupo Herdez 400 prod.- canned fruit and veg., pasta, sauces, etc.

471 Retail, HRI Ensenada, Yavaros, S.L..P. (2), Celaya, Mexico DF (2), Cuernavaca, Veracruz, Chiapas; Total: 10

NA

Grupo Azucarera de Mexico (holding company)

Refined sugar and honey

37 Retail Mexico City (HQ), Jalisco , Michoacan, Veracruz (2), Tabasco; Total: 5

NA

Fomento Economico Mexicano, S.A. de C.V. (FEMSA) (holding): Cerveceria Cuauhtemoc Moctezuma

alcoholic drinks 5,500; 2,100

Retail & Food Service

Nuevo Leon (HQ);Total: 6 Direct & Distributors

Grupo Modelo alcoholic drinks 3,700 Retail & Food Service

Zacatecas , Coahuila , Sonora, Sinaloa, Jalisco, Oaxaca, Mexico City (HQ); Total: 7

Direct

Grupo Continental (holding) soft drinks 1,000 Retail & Food Tamaulipas (HQ); Total: 17 Direct


Commerce.

6

Service Pepsico (holding): Grupo de Embotelladoras Unidas

soft drinks 329 Retail Guadalajara, Morelia, Uruapan and Celaya

Direct

Embotelladoras Arca (holding):

soft drinks 1,400 Retail & Food Service

Nuevo Leon (2) (HQ); Total:18 Direct

Gruma S.A. de C.V. (holding): GIMSA S.A. de C.V., Molinera de Mexico S.A. de C.V., Gruma Corp.

corn & wheat flour, tortillas

2,000 ; 491; 146*; 775*

Processing Ind. & Retail; Bakery Industry, Retail & HRI

Nuevo Leon (HQ), Total: 17; Total: 9; USA: 13

Direct & Distributors

PepsiCo Inc (holding): Sonric’s

confection NA Retail Total: 1 Direct

Grupo Sanborns S.A. de C.V. (holding): Controladora y Administradora de Pastelerias S.A. de C.V.

bakery products 1,800; 74* Retail & Food Service

Total: 123 Direct & Distributors

Fomento Economico Mexicano, S.A. de C.V. (FEMSA) (holding): Coca Cola FEMSA

soft drinks 5,450; 1,800

Retail & Food Service

Total: 8 Direct

Nestle de Mexico Pet food, coffee, cereals, ice cream, powdered milk, confection, etc.

NA Retail Edo. de Mexico, Queretaro, Tlaxcala, Cuautepec, Chiapas, Jalisco, Puebla, Mexico City (HQ) , Monterrey; Total: 16

Direct

Unilever de Mexico Ice Cream, margarine, sauce, vegetable oil

NA Retail Edo de Mex, Mexico City (HQ), Morelos; Total: 3

Mostly Direct

* Figures from 2001, **Figures from 2000; HQ = Headquarters

Source: Bolsa Mexicana de Valores and Direct Contacts. C. SECTOR TRENDS

Foreign Direct Investment Between 1999 and 2002, $3.6 billion in foreign direct investment (FDI) flowed into 635 of Mexico’s food, beverage, and tobacco firms. Of these, the United States invests in 312 companies, or 56.5 percent of the total. Regarding the number of firms with foreign investors, 15.3 percent are food processors, 14.5 percent are dedicated to soft drinks, 7.1 percent prepare bottled fruits and vegetables and 5.3 percent cultivate other products. Tobacco, soft drink, cream/butter/cheese, and beer processors in Mexico received 38.5 percent, 13.8 percent, 6.7, and 5.7 percent respectively of total FDI in the processed food sector. According to the Secretary of the Economy statistics, 20 percent of processed food companies account for 67 percent of FDI within the sector. Some of the larger companies with foreign investment include: Grupo Modelo (35 percent Anheuser Busch); Jerome Mesoro (Jerome Mesoro, USA); Harinera la Espiga (affiliated with General Mills); Gamesa (100% Pepsico); Agroindustrias del Noroeste (Smithfield Foods); Carroll's Foods de Mexico S.A. de C.V. (Carroll's Foods, Inc); Farmland Industrias, SA (Farmland, Kansas City, MO); Tyson de


Commerce.

7

Mexico, S.A. de C.V. (Tyson USA); Delimex de Mexico S.A. de C.V. (Heinz Corporation); Gollek Interamerica, S. de R.L. de C.V. (Kellog's Company); Grupo Herdez, S.A. de C.V. (McCormick Inc. / Hormel Foods, USA); Grupo La Moderna, S.A. de C.V. (Miller Milling Co.); J.M. Smucker de Mexico, S.A. de C.V.; Kellogg de Mexico, S.A. de C.V. (Kellogg Company); Kraft Foods de Mexico, (Nabisco) S. de R.L. de C.V. (Kraft Foods North America); Laboratorios Griffith de Mexico, S.A. de C.V. (Laboratorios Grifith Corporate y Grifith Inc., USA); Pillsbury Mexico, S.A. de C.V.; Productos del Monte, S.A. de C.V. (Conagra Grossir and Products); Sana International, S. de R.L. de C.V. (J.R. Simplot); Molinos Azteca, S.A. de C.V. (ADM); Hershey de Mexico S.A. de C.V. (Hershey Foods); La Corona S.A. de C.V. (Newbridge Latin American); Sabritas, S.A. de C.V. (Pepsico); Tecnica Mexicana de Alimentacion S.A. de C.V. (Prisma, USA); Tutsi, S.A. de C.V. (Tootsie Roll Industries Inc.). Consumption Trends Following are some of the more important trends affecting processed food production. • Quick and easy food. According to INEGI, more women are working and

comprised approximately 38 percent of the formal workforce in 2002. As more women are employed, their families will eat out more often and will turn to easy meal options.

• Healthy and low-calorie food consumption is increasing. Most processors, including Nestle de Mexico and Grupo Herdez, confirm that consumers are more health-conscious. But many other companies commented that Mexicans have been slow to demand low-fat foods on a major scale.

• Frequency of eating out. According to ANTAD (the Association of Retail Stores), 39 percent of Mexicans eat out no more than once per month.

• Flavors. According to Mane, a snack food distributor, there is a worldwide tendency towards “exotic” (Asian, Indian, Tex-Mex, etc.) snack foods. Mexico continues to appreciate the lime and chile combination on snack foods, whether salty or sweet.

• Changing beer consumption. Dark beers and ales have grown in popularity over the past year, but industry experts feel that this trend is temporary.

Industry Trends Following are some of the trends affecting the processed food industry. • Growth in the market in general. Mexico’s food processing sector has been

expanding at a brisk pace of eight percent per year over the past three years. • Multi-grain/wheat bread. Multi-grain bread production, mostly from small and

mid-sized bakeries, increased from 78,000 tons in 1999 to 115,000 tons in 2002, a 47 percent increase. According to INEGI, annual domestic production of


Commerce.

8

wheat bread/wholemeal bread has grown by more than 35,000 tons between 1999 and 2002.

• Sugar use will affect production location. Foods that use sizeable quantities of sugar will increasingly be manufactured domestically, replacing imports. Because of the high cost of sugar and cocoa, the confection industry has been focusing on developing and increasing sales of sweets that are cheaper to manufacture such as marshmallows, tamarind and spicy candies. For example, La Abuelita is using cocoa powder instead of solid bars to make their packaged hot chocolate.

• Foreign investment. Although foreign investment dropped significantly in 2002, the food processing industry remains one of the principal sectors for foreign investment receiving $3.4 billion from 1999 to 2002.

• Joint ventures. Sigma Alimentos has established a subsidiary in alliance with ConAgra Foods for prepared meals using the brand names Banquet, Sugerencias del Chef, El Cazo Mexicano and Menu del Sol. Sigma also has distribution rights for Oscar Mayer products.

• The Hispanic market in the United States has boosted Mexico’s exports. The demand of the large Mexican-American population across the border for familiar processed foods has boosted production in Mexico.

• Improved packaging. The canned foods, snack foods, beverage and baked goods industries are focusing attention on modernizing packaging to make products easier to consume and longer lasting.

• Adapting to regional tastes. Unilever adapts its products according to the region in which the foods are being marketed. For example, foods sold in Northern Mexico have a higher salt content than in the South and Center of the country.

• Potential for exports of Mexican foods to the United States to serve a growing Mexican market. Mexican food processors are taking advantage of the demand for Mexican food among Mexican-American and non-Latin consumers alike. While this trend increases production in Mexico, the effects have not yet been fully realized in snack foods and baked goods since large Mexican producers such as Bimbo have facilities in the U.S.

• Nutrition is important. Most producers indicate that nutrition is important to consumers. Others commented that healthy foods have been slow to take hold among Mexican consumers. Virtually all of the industry representatives interviewed stated that their products have been moderately or heavily incorporating different types of additives such as vitamins, calcium and protein.

• Some imported goods are being replaced by growing domestic production. It is not cost effective to import some relatively inexpensive products, such as snack foods, because of high freight costs. Thus, these products are increasingly produced locally.

• Demand for high quality ingredients. Although Mexican food processors tend to be price-sensitive, they also demand high quality ingredients for increasingly sophisticated products.


Commerce.

9

SECTION 1-2. COMPETITION Domestic suppliers are the biggest competitors to U.S. exporters of ingredients to Mexico’s food processing industry. Regarding imports, the competition varies depending on the wide variety of products used as food ingredients. Following is a summary of the main competitors in their respect categories: Meat

• Top suppliers of imports: United States (81 percent), Canada (12 percent), Australia (3 percent).

• Sigma Alimentos is the country’s number one producer of processed red meat, poultry meat and frozen food products.

• Virtually all of Sigma Alimentos’s poultry inputs are imported from the United States; their red meat inputs are imported from the United States or are domestically produced.

• Mexican production of sausages and cold cuts is dominated by Sigma Alimentos, Qualtia and Bafar which together account for 75 percent of total domestic production.

Dairy

• Top suppliers of imports: United States (36 percent), New Zealand (25 percent), Canada (eight percent).

• The yogurt industry is dominated by European and Mexican firms: the French company, Danon, commands 35 percent of the national market, while Nestle (Swiss) has 18 percent followed by the Mexican companies Sigma Yoplait (15 percent), Alpura (12 percent) and others (20 percent).

• Unilever (Dutch and British), the maker of Holanda, Bing and Magnum brands, has approximately 60 percent of the ice cream market followed by Nestle (Swiss) which holds another 25 percent.

• The Mexican companies Lala (15 percent UHT, 55 percent fresh), Alpura (45 percent UHT, 20 percent fresh), Parmalat (12 percent UHT), Sello Rojo (10 percent fresh) and San Marcos (8 percent fresh) dominate the sale of fresh and UHT milk.

• Chilchota, Chen, Sigma Alimentos and Lamesa are the leading producers of cheese. Cheese production continues to be largely artisan, and consumer tastes vary by region, making it difficult for producers to achieve nationwide distribution. Mexico produces essentially no hard cheese.

Confection

• Top suppliers of sugar imports: United States (77 percent), Ecuador (4 percent), Spain (3 percent). Top suppliers of cocoa imports: United States (55 percent), Canada (7 percent), Argentina (6 percent).

• Nestle (Swiss), Hershey (U.S.), Joyco (Spain) and Tutsi (U.S.) are the principle foreign companies that process chocolates and sweets in Mexico. According to the National Association of Chocolate, Candy and Related Product Manufacturers


Commerce.

10

(Asociacion Nacional de Chocolates, Dulces y Similares), Mexican companies such as Grupo Lorena, Turin, Larin and Grupo Vera hold approximately 35 percent of the market share.

• There continues to be considerable artisan production of sweets that are influenced by regional tastes.

Baked Goods • Top suppliers of imports: United States (56 percent), Ireland (nine percent),

Netherlands (six percent). • Although Grupo Bimbo continues to have a near monopoly on the production of

white bread, multi-grain breads made by smaller bakeries are making their way onto the retail shelves. Several fairly new brands such as Filler (Mexican), Delibrot (Mexican) and Taifelds have achieved rapid customer acceptance.

• CANAINPA (Baked Goods Chamber of Commerce) and U.S. Wheat Associates concur that there is sizeable room for growth and for companies to use multi-grain formulas for breakfast bars and baking mixes.

• According to the 1999 INEGI Industrial Census there are more than 15,000 baked goods producers that have two or fewer employees. Small and medium sized bakeries dominate production of non-sliced bread.

Snack Foods

• Imports are still dominated by the United States, although they dropped by 52 percent in 2002.

• Mexico has strong domestic production of snack foods and a price advantage over imports. Domestic production value grew 27 percent from 1999 to 2002.

• Healthy snack food selection in Mexico is limited, but there will likely be growth in this area.

Beverages

• Top suppliers of imports: United States (46 percent), Spain (15 percent), France (eight percent).

• Coca-Cola and Pepsico tend to dominate the sale of soft drinks in Mexico, but the country does have several national soft drink brands: Jarritos, Sidral Mundet, Sangria Senorial.

• Fruit juice production is divided between Jugos del Valle (25 percent), Jumex (25 percent) and Boing (12 percent).

• Grupo Modelo (65 percent) and Cuauhtemoc (35 percent) dominate beer sales almost entirely.

Flour and Grains

• Top suppliers of flour imports: United States (91 percent), France (3 percent), Spain (3 percent). Top suppliers of grains imports: United States (77 percent), Canada (9 percent), France (3 percent).


Commerce.

11

• Mexico imports practically no milled flour. The country has 93 mills supplying the processed food and retail sectors.

• According to the U.S. Wheat Board, half of the wheat consumed in the country is domestic, while the remainder is imported from the United States (70 percent) or through the Canadian Wheat Board (30 percent).

• Almost all of the yellow corn consumed in Mexico originates from the United States while white corn is nearly entirely domestic. Corn importers must obtain a permit to buy yellow corn.

• According to Grupo Modelo, Mexican breweries are encouraging Mexican barley production by only importing when local production has been exhausted.

SECTION 1-3. BEST PRODUCT PROSPECTS PRODUCTS PRESENT IN THE MARKET THAT HAVE GOOD SALES POTENTIAL - Red meat - Pepperoni - Liquid cheese - Pork meat - Sweet whey - Pizza crust - Beef brisket - Milk powder - Soybean - Turkey meat - Butter - Soybean meal - Chicken meat - Lactose - Soybean oil - Marinated poultry - Lard - Fruit flavored drinks - Mechanically de-boned poultry

- Chicken fat - Isolates

- Chicken and turkey parts - Sunflower - Dry soup preparations - Italian sausage - Wheat flour - Doughnuts - Raw turkey - Marshmallow - Concentrates - Shortening - Yogurt - Multi-grain baked goods - Mixed fruit juice - Breakfast bars - Mixed and salted nuts - Spicy candy - Ice cream bars PRODUCTS NOT PRESENT IN SIGNIFICANT QUANTITIES BUT WHICH HAVE GOOD SALES POTENTIAL - Malt - Spices - Artificial and natural seasonings and flavorings - Iced tea and iced coffee drinks - Cookie dough and baking mixes - Variety flavored carton ice cream PRODUCTS NOT PRESENT OR WHOSE EXPORT TO MEXICO IS PARTICULARLY DIFFICULT BECAUSE OF SIGNIFICANT BARRIERS


Commerce.

12

Most U.S. food and agricultural products became duty free on January 1, 2003 as the ten-year implementation period for the North America Free Trade Agreement (NAFTA) came to an end. However, the potential increase in imports associated with this opening resulted in negotiations to contain U.S. exports of certain products. Thus, some products still face quotas or other barriers: fresh poultry, beef carcasses, bone-in meat, boneless beef cuts, prime beef cuts, fresh potatoes, sugar, cocoa and cacao, white corn and high fructose corn syrup, among others. Furthermore, since the discovery of Bovine Spongiform Encephalitis in the United States early in 2004, the Mexican government has instituted a ban on a broad range of beef products imported from the U.S. This has considerably decreased the sales of American firms in Mexico from previous years. The ban is only short term however, the trend is toward a repeal of the ban. For more information on the regulations please view the USDA report at: http://www.fas.usda.gov/gainfiles/200408/146107300.pdf Among the products currently banned are:

• Live cattle • Bone-in meat • Boneless meat from cattle 30 months of age or older • Bovine offal and viscera other than those currently authorized • Products derived from non-protein-free tallow • Protein-free tallow fit for human consumption • Gelatin and collagen prepared from bone • Ruminant meal

SECTION 2-1. POLITICAL ENVIRONMENT Broad and complex, the United States - Mexico relationship is the paramount bilateral relationship for both countries. It is also a tapestry of cultural differences, economic disparities, mutual interests, shared problems, and growing interdependence. The two countries cooperate on trade, finance, narcotics, immigration, labor, environment, science and technology, and cultural relations. Beyond those diplomatic and official contacts, extensive networks of commercial, cultural, and educational ties flourish, especially along our 2,000-mile border where state and local governments as well as citizens' groups interact closely. A strong and economically healthy Mexico is a fundamental U.S. interest. Since 1981, bilateral discussions on ways to improve cooperation on a range of bilateral issues have been formalized in the unique U.S.-Mexico Bi-National Commission (BNC), which is composed of U.S. and Mexican Cabinet members. The Commission holds annual plenary meetings, and its many subgroups meet at various times during the year to discuss myriad topics, such as trade negotiations, migration, law enforcement, cultural relations, education, border cooperation, and the environment.


Commerce.

13

The most outstanding feature of our bilateral relationship in recent years has been the North American Free Trade Agreement (NAFTA), which created a free trade zone for Mexico, the United States, and Canada. NAFTA, which includes parallel agreements on the environment and labor rights, also created the North American Development Bank to help finance border infrastructure and environmental projects. MAJOR POLITICAL ISSUES AFFECTING THE BUSINESS CLIMATE Elections have steadily become more free and fair and the general political climate is calm. For the 75-80 percent of Mexicans who live in urban settings, crime and quality of services are major complaints. President Fox has promised results on the crime front, and the Federal Attorney General’s Office (PGR) has embarked on an important re-organization. Between 2001 and 2003, several major drug traffickers and organized crime figures were apprehended. There is regular and ongoing national debate regarding potential initiatives to improve Mexico’s long-term energy supply situation, but Fox’s efforts to expand foreign investment in Mexico’s energy sector have been stymied by the opposition-controlled Congress. CIVIL SOCIETY Mexico has a long-standing arrangement for providing private sector input into economic decision-making. The Business Coordinating Council (CCE) is an umbrella organization that carries the views of the major business chambers to the government. In recent years, the Mexican Council for Foreign Trade (COCME) has represented the interests of the private sector during free-trade negotiations. RELATIONS BETWEEN THE FEDERAL EXECUTIVE AND STATE LEADERS Political reforms over the last decade have made it possible for more than a dozen opposition candidates to win the top state job in free and fair elections overseen by state election commissions. The PRI currently holds 17 of the 32 statehouses, the PAN - 9, the PRD - 5, and a PAN-PRD alliance - 1. The states have few means of raising their own revenues. In fact, about 80 percent of the average state budget comes from the central government, and that money has traditionally been distributed disproportionately to the southern states, which are both poorer on average and have been more consistently pro-PRI. Northern and more prosperous states have long groused that their citizens contribute substantially more to federal coffers than they receive back from the federal government either in services or budgetary support. During PRI-led administrations, opposition governors often complained about a lack of state-federal government coordination, especially on law enforcement issues. The PRI


Commerce.

14

has begun to advocate less centralization and enhanced federalism. However, Fox’s efforts to put meat on the bones of a greater federalist skeleton have so far been blocked by an opposition-controlled Congress reluctant to grant Fox any significant legislative victory. THE POLITICAL SYSTEM The structure of the Mexican government resembles that of the United States as both countries have divided power among three branches: Executive, Legislative, and Judicial. However, by tradition and law, Mexico's President is far more powerful than his U.S. counterpart and has traditionally dominated the other two branches and politics in general. This has begun to change, however, with Fox’s election and Mexico’s first modern experience of a sitting President whose party does not dominate the Congress. The President is elected to a six-year term and cannot be re-elected. Since 1997, the bicameral Congress has gained increased autonomy from the executive branch, especially in the lower House or the Chamber of Deputies, after the PRI lost its absolute majority (which it regained in the July 2003 elections). In the 128-seat Senate, the PRI holds a majority of 60 seats to the PAN’s 46. Senators serve six years in office and cannot be elected to consecutive terms. In the 500-member Chamber of Deputies, the PRI currently holds a narrow majority over the PAN. Deputies are elected to three-year terms and consecutive re-election is prohibited. The Mexican judiciary has long been hamstrung by presidential influence and consequently was unable to assert itself as a co-equal branch of government. Major judicial reforms have made some progress toward solving these systemic problems, and the current Supreme Court has recently emphasized its independence from the President, the Congress, and the political parties. MEXICAN DEMOCRACY A non-partisan council runs the Federal Elections Institute (IFE), the agency that oversees federal elections. Corresponding bodies administer state-level elections, and the judiciary is empowered to protect civil rights in voting matters. Moreover, Mexicans now have the right to observe the electoral process from start to finish with specific legal authority to report irregularities. Foreign "visitors" have also been welcomed to witness Mexican elections. The IFE provides technical support and training to state and local electoral authorities. ORIENTATION OF THE MAJOR POLITICAL PARTIES For decades, the PRI, the largest political party, used its vast nationwide organization and access to government resources to tilt elections in its favor. The PRI likes to claim that it owns the center of Mexican politics, but in reality the party


Commerce.

15

has often changed its ideology to fit the political needs of the moment. The PAN advocates private sector-oriented policies and is generally less inclined than the other two parties to encourage or tolerate government intervention in the economy. The PRD espouses a leftist populist and nationalist ideology and believes in more government intervention in the economy than the other two parties. SECTION 2-2. TRADE AND PROJECT FINANCING A critical step in the export procedure is to receive the money for the products sold to Mexican end-users. The two most important points are correctly finishing export documents, including banking paperwork, and identifying a secure method of payment. There is no room for errors on export documents, either in dealing with banks or Mexican customs officials. Documents should be forwarded the same day the shipment leaves the factory or point of origin. Original export documents should not be entrusted to truck drivers for delivery to anyone. FINANCING AVAILABILITY Credit is limited and expensive in Mexico, with interest rates typically averaging 20 percentage points over the 28-day government bond rate (CETES). Only about 36 percent of all Mexican companies utilize or have access to commercial bank financing. For this reason, most Mexican customers ask for financing from the manufacturer and/or distributor on 60 or 90-day terms. Products are ordered as they are needed, and it can be difficult to find stocking distributors. TRADE FINANCE Advance Payment Exporters will find a very limited universe of customers willing and/or able to purchase through advance payment. This method of payment is used mainly to pay for consumer products or for products whose price is relatively low. However, some American exporters of industrial products request advance payment when selling spare parts, when selling small quantities of raw or intermediate materials, or when selling sporadically. Letters of Credit A letter of credit (L.C.) is the preferred method of paying for imports because it provides assurance to the exporter and to the importer that they will receive what they expect. Nevertheless, most Mexican companies are reluctant to pay for their purchases through an L.C. because banks require 100 percent collateral either in


Commerce.

16

the form of a cash deposit or an approved line of credit, the latter of which is unavailable to the majority of small and medium size Mexican companies. Thus, the L.C. is perceived to be virtually equivalent to a cash payment, with a hefty fee attached. Many small and medium size Mexican distributors lack sufficient liquidity or credit to pay a U.S. supplier until they themselves have sold the imported good(s) and collected payment. Major commercial banks in Mexico and the National Bank for Foreign Trade (Banco Nacional de Comercio Exterior – BANCOMEXT) offer letters of credit to Mexican importers. BANCOMEXT has also undertaken the responsibility of educating small and medium firms to use LC's to pay for their imports. Documentary Collections There are two types of documentary collections: cash against documents (usually referred to as sight drafts) and documents against acceptance. Banks manage both types, which are similar to LC’s. In a cash against documents transaction, the exporter sends the shipping documents and a collection form to a bank designated by the importer. The importer’s bank calls the importer to tell him that the documents have arrived, and to come to pay for them. Once the importer pays for the shipment, the bank delivers the documents to the importer who can then take possession of the goods. Finally, the importer’s bank sends the money to the exporter’s bank. Documents against acceptance are a slight variation of this method. However, instead of paying for the goods immediately, the importer signs a draft agreeing to pay at a date specified in the collection form. Although the importer may fail to honor his agreement, this method provides a documented trail in case of a dispute. In addition, the importer can be persuaded because his bank will know of the failure. While documentary collection entails more risk than a letter of credit, due diligence and prudent credit review practices may allow U.S. companies to sell under this payment form without undertaking undue risk. Use of the Commercial Service's International Company Profile report (ICP) can help assure the U.S. supplier of the credit worthiness of the Mexican firm. Open Account Many U.S. companies sell to Mexico via open account. Most Mexican distributors ask for open account to pay for imported goods. The basic requirement for using this method is that the Mexican company proves its credit worthiness. It is not unusual, and experience indicates that, with prudent due diligence and credit review practices, open account sales in Mexico need not be inherently risky. Credit information is available through the Commercial Service’s International Company


Commerce.

17

Profile report (ICP) as well as through private credit reporting agencies. For any sizeable transaction or relationship, exporters should demand financial statements just as they might in the United States, and they should visit the customer's facility and meet with the major officers to assess their capacity and seriousness. Open account is a relatively secure method to receive payment once a business relationship has been established. Other Means of Collections Recently, the Mexican Congress approved a law to promote the use of electronic methods of payment. However, the infrastructure needed to use electronic commerce is still being developed in Mexico. Another recent development in the financial sector is the pending approval of a new law to expedite the bankruptcy process. This change should make it easier for creditors to take over the loan collateral pledged by Mexican firms. U.S. EXIM Bank The Export-Import Bank of the United States, an independent agency of the federal government, offers various short, medium and long-term export finance and insurance programs. Of specific interest to U.S. exporters are the guarantees for medium-term loans to purchasers of capital equipment. Most loans are actually made by American banks with EXIM Bank’s guarantee. EXIM Bank very active in Mexico, which represents its top two markets. Much of EXIM Bank’s activity is under so-called bundling facilities. A bundling facility is a large medium-term loan made to a Mexican bank by an American bank with the guarantee of EXIM Bank. The Mexican bank then makes loans for the purchase of American capital goods to Mexican companies. It undertakes the credit assessment and risk since it effectively counter guarantees the loans it makes. There also are a number of U.S.-based banks that extend EXIM Bank credits in Mexico. The major Mexican commercial banks have signed agreements with EXIM Bank to grant lines of credit to Mexican firms that purchase U.S.-made products. In the past year, EXIM Bank has signed several Master Guarantee Agreements with major Mexican banks, such as Santander Serfin, UPS Capital, Banamex and others. Such credits generally are available only to Mexican blue chip companies and to their suppliers with firm contracts. Small and medium size Mexican firms may be able to indirectly access EXIM Bank credit through the programs of the Mexican small business development bank, Nacional Financiera, or Nafinsa. In December of 2003, EXIM Bank and Nafinsa signed an agreement to provide a mechanism for small and medium-sized companies for loans with a minimum of $100,000. For more information, please see www.exim.gov. Receivables Insurance


Commerce.

18

Several parties offer receivables insurance in Mexico. The best known are the U.S. Export-Import Bank, American International Group (AIG), and the Foreign Credit Insurance Association (FCIA). This insurance can enable a company to give terms of up to 180 days to purchasers. Knowledgeable international banks will finance insured receivables, whereas most banks will not finance uninsured foreign receivables that are not under letters of credit. The cost of insurance and financing can often be passed on to the customer at a higher product price. It is not recommended that financing costs, whether under insurance or any other financing mechanism, be set out as a separate line item such as in a pro forma invoice, since the interest payment will cause a Mexican tax liability. U.S. Small Business Administration The U.S. Small Business Administration (SBA) provides financial and business development assistance to encourage and help small businesses in developing export markets. The SBA assists businesses in obtaining the capital needed to explore, establish, or expand international markets. SBA’s export loans are available under SBA’s guaranty program. Prospective applicants should tell their lenders to seek SBA participation, if the lender is unable or unwilling to make the loan directly. SBA also offers an Export Revolving Line of Credit (ERLC) program that is designed to help small businesses obtain short-term financing to sell their products and services abroad. The program guarantees repayment to a lender in the event an exporter defaults. By reducing a lender’s risk, the ERLC provides an incentive for lenders to finance small business exporters’ working capital needs. The ERLC provides only the lender from default by the exporter; it does not cover the exporter should a foreign buyer default on payment. Lenders and exporters must determine whether foreign receivables need credit risk protection. Borrowers can use different SBA loan programs and types of loan guarantees simultaneously, as long as the total SBA-guaranteed portion does not exceed the agency’s $750,000 statutory loan guaranty limit to any one borrower. Credit Programs for U.S. Food and Agriculture Products The U.S. Agricultural Trade Office (ATO) administers four export credit guarantee programs in Mexico. The GSM-102 and GSM-103 Credit Guarantee Programs facilitate the export of U.S. agricultural products by providing credit guarantees to U.S. exporters from 90 days to two years for GSM-102 coverage, and from three to seven years for GSM-103 coverage. The ATO also administers the Supplier Credit Guarantee Program (SCGP). The SCGP is designed to assist exporters of U.S. agricultural commodities who wish to directly provide relatively short-term credits (15 to 180 days) to their importers. Finally, the Facility Guarantee Program (FGP) is


Commerce.

19

a relatively new program that provides credit guarantees for the sale of U.S. capital goods and services. Detailed program information is available at http://www.fas.usda.gov/export.html. At the beginning of each fiscal year (October), the U.S. Department of Agriculture (USDA) establishes and announces the amount of credit guarantees that are authorized under each of these four programs. For fiscal year 2004, the program authorization was as follows: GSM-102 - $300 million; GSM-103 - $35 million; and for the Suppliers Credit Guarantee Program (SCGP) - $500 million. For 2004, similar allocations are expected. USDA regularly monitors sales made under these programs and, as necessary, revises the authorization levels. USDA will announce the new credit guarantee program authorization levels for fiscal year 2005 in early October 2004. Local Sources of Financing Exporters should be aware that BANCOMEXT, Mexico's equivalent of EXIM Bank, and Nafinsa, a government-owned development bank, have programs to finance imports by Mexican companies. Covered products include capital goods and technology intended to modernize companies to enable them to become more competitive and to start exporting. These programs can also pay for raw materials and other inputs. Many Mexican companies may have difficulty accessing financing under these programs, however, or may be unaware that they exist. Adding to the problem is that these institutions and other banks are often unwilling to provide smaller loans to small and medium sized enterprises. SECTION 2-3. BANKING SYSTEM Commercial Banks Mexico's commercial banks offer a full spectrum of services within one institution. These services range from offering deposit accounts, consumer and commercial lending, corporate finance, and the operation of trusts and mutual funds, to foreign exchange and money market trading. Mexico's commercial banking sector has been opened to foreign competition. The North American Free Trade Agreement (NAFTA) permits U.S. and Canadian banks or any other foreign bank with a subsidiary in the United States or Canada to establish wholly owned subsidiaries in Mexico. Foreign banks are now allowed to operate in Mexico. They are allowed to undertake financial inter-mediation or to solicit customers for their parent bank. Almost all the major banks, with the exception of Banorte, are under the control of foreign banks.


Commerce.

20

The Secretariat of Finance, the National Banking and Securities Commission, and the Bank of Mexico are the principal regulators of the banking system. The Secretariat of Finance is concerned with institutional issues such as licensing and sets credit and fiscal policies. The Bank of Mexico (the Central Bank) implements these policies and also operates inter-bank check clearing and compensation systems. The Institute for the Protection of Bank Savings (IPAB, replacing the former institution FOBAPROA) acts as a deposit insurance institution. The National Banking and Securities Commission, a semi-autonomous government agency, is responsible for supervision and vigilance. The Mexican Banking Association (ABM) represents the interests of Mexico's banks. Development Banks The mission of development banks is to fill financing shortfalls in the commercial banking sector. Mexico has eight government-owned development banks that provide services to specific areas of the economy. The dominant institutions are Nacional Financiera (Nafinsa) and the Foreign Trade Bank (Bancomext). These institutions have become primarily second-tier banks that lend through commercial banks and other financial intermediaries such as credit unions, savings and loans, and leasing and factoring companies. Nafinsa's primary program funds micro, small and medium-sized businesses. Nafinsa also undertakes strategic equity investments and contributes equity to joint ventures. Bancomext provides financing to Mexican exports and to small and medium-sized companies. It also offers working capital, project lending, and training to firms in several specific sectors that require support, such as textiles and footwear. The other Mexican development banks are BANOBRAS (Public Works Infrastructure Bank) and FINANCIERA RURAL (Rural Agriculture Bank). The U.S. EXIM Bank has a program through Nafinsa to provide small and medium size Mexican companies with financing to import U.S. manufacturing inputs. EXCHANGE CONTROLS There are no controls on the transfer of dollars into and out of Mexico. This means that profits can be repatriated freely. SECTION 3-1. LEGAL CONSIDERATIONS The legal and regulatory requirements in any country affect the way a company does business, and maneuvering through the legal maze in Mexico can present many pitfalls for foreign firms. After the North U.S. Free Trade Agreement (NAFTA) was signed in 1992, Mexico undertook a concerted effort to bring its laws and regulations into line with the accord's provisions, as well as to adopt commercial laws more in line with standard international practices. This has resulted in greater legal continuity among the NAFTA countries, but important differences remain.


Commerce.

21

Many U.S. firms make the mistake of assuming that Mexico's legal framework is very similar to that of the United States and depend on their U.S. legal counsel to advise them on doing business in Mexico. However, Mexico's legal tradition is based on the Napoleonic Code, rather than English common law, and therefore much of the advice that would be applicable to a business venture in the United States is inappropriate for Mexico. Indeed, unlike the United States, where judge-made law (common law and precedent) shapes much of the legal landscape, the Mexican legal framework is built on a system of codes, which govern all civil, criminal and commercial matters. Because of these and other differences, the U.S. Embassy recommends that a Mexican lawyer, or an U.S. lawyer trained in Mexican law, review all legal documents related to the firm's business operations in Mexico, including labor contracts, leases, and all other commercial agreements. The advice of an experienced Mexican corporate lawyer can be indispensable in, for example, conducting due diligence prior to investing and entering into a partnership or acquisition in Mexico. Moreover, litigation, as in the United States, is both lengthy and costly, and the outcome may be uncertain. Although the vast majority of laws affecting U.S. companies doing business in Mexico will come under federal jurisdiction (e.g. corporate law, international trade regulations, labor and employment law, intellectual property protection), companies must also be alert to the requirements of state codes when investing in Mexico. In our experience, the majority of investment disputes have been handled in state courts, which are largely independent of the federal legal system. U.S. and Mexican parties enjoy freedom of contract with respect to the content of agency, distributorship, and partnership agreements to be carried out in Mexico. However, considerable Mexican tax and labor obligations may flow from agency agreements not carefully drafted in accordance with Mexican and international law. In addition, contracts should contain all of the elements considered prudent in the United States, such as rights and responsibilities of the partners, compensation, term, escape clauses, and designate the applicable law and forum for resolving commercial disputes. U.S. firms that want to do business in Mexico have a full range of options to consider with respect to business entities, each presenting different legal issues. Other legal aspects, such as foreign investment regulations and standards are discussed in other sections of this report. Mexico’s Foreign Investment Law (FIL), enacted in 1993, delineates those sectors and activities in which foreign participation is restricted or limited. The FIL also outlines the limitations placed on foreigners wishing to acquire property on the Mexican border and in coastal zones. However, the FIL establishes as its basic premise that foreign investors may hold unlimited equity in Mexican corporations,


Commerce.

22

acquire fixed assets, expand into new areas of economic activity, and own and operate all types of enterprises in Mexico, except as otherwise stated in the law. Accordingly, before committing resources to a given activity or initiative, U.S. companies are advised to consult the specific limitations and restrictions set out in the FIL. U.S. firms making direct sales to companies in Mexico need to be more concerned about following good international trade practices than about Mexican law. The biggest worry for a company selling internationally concerns payment risks. There are many types of payment commonly used, which include letters of credit, pre-payment, documents against payment, receivable insurance, and open account. The latter is sometimes a source of headaches for U.S. exporters wishing to increase their sales. They should be aware of the prolonged lack of liquidity in Mexico, which causes many firms to default or delay payments. Take care before granting “open account” treatment. Mexico is a member of the United Nations Convention on International Sales of Goods, and U.S. firms are encouraged to become familiar with this treaty as they can request the Mexican importer to honor the provisions of this convention, if appropriate. Firms doing business from the United States that do not establish a fiscal or physical presence in Mexico do not create income tax or other obligations with the Mexican government. However, in order for the Mexican buyer to carry out the importation, the buyer may require a Certificate of Origin from the U.S. firm in order to obtain preferred NAFTA treatment. In addition, the U.S. company is expected to issue an invoice, which includes its tax registration number. This is used by Mexican customs for the purpose of assigning a value to the goods and determining the taxes to be paid by the importer. These documents are only intended for the Mexican importer, and they will not be a cause of commitment by the U.S. firm to any Mexican authority. SECTION 3-2. LEGAL METHODS DUE DILIGENCE U.S. firms must keep in mind that it is recommended to do due diligence on a Mexican firm or individual before entering in any type of agreement. In Mexico’s larger cities, it is possible to find a local consulting or law firm that can find information on a firm or individual. Also, local chambers and associations can assist U.S. firms in locating economic reports on a particular firm. There are only a few private firms that do due diligence all over the country. U.S. firms should know that the U.S. Commercial Service has a service called


Commerce.

23

International Company Profile (ICP) that can be ordered from our offices in Tijuana, Monterrey, Guadalajara, and Mexico City. The ICP is a report in English that includes financial and commercial information on a Mexican firm or an individual. The service can also be ordered and paid for in any of the more than 100 U.S. Commercial Service Export Assistance Centers located in major cities of the U.S. OPENING AN OFFICE IN MEXICO Types of Business Incorporation For U.S. companies wanting to establish a presence in Mexico, the General Law of Mercantile Organizations (or the Civil Code) regulates the many different forms of business entities. The type of business incorporation that a U.S. company or individual chooses is extremely important because it determines the operations they are allowed to perform in Mexico and, among other liabilities, the amount of taxes they pay. Some of the most commonly used types of business forms are the Sociedad Anonima (Corporation) identified with "S.A." at the end of the company name, and the Sociedad Anonima de Capital Variable (Corporation with Variable Capital) identified with "S.A. de C.V." One of the advantages of the latter is that the minimum fixed capital can be changed subsequent to the initial formation. The Limited Liability Partnership (Sociedad de Responsabilidad Limitada) identified with "S. de R.L." is similar to a closed corporation in the United States and it also has the option of having a variable capital (“S. de R.L. de C.V.”). As this is an organization formed by individuals, it can have similar characteristics to a partnership with the exception of the unlimited liability. Civil Partnership (Sociedad Civil) is the most common organization for professional service providers. It has no minimum capital requirements and no limit in the number of partners, but it is taxable in the same way as a corporation. It is identified with "S.C." Civil Association (Asociación Civil) is the form that charitable or nonprofit organizations adopt to operate and is identified with "A.C." Many industrial and commercial firms and professional organizations are grouped into this form. A foreign company may open a branch (“sucursal”) in Mexico as an alternative to incorporating. A branch can provide rights and responsibilities similar to a corporation, including tax liability and access to local courts, but requires the approval of the National Foreign Investment Commission. DISPUTE SETTLEMENT


Commerce.

24

The Mexican government has a good record of handling investment disputes. Despite the large amount of U.S. investment in Mexico, the Embassy is aware of only ten unresolved cases. Both the WTO and NAFTA provide mechanisms for dispute settlement. Investors eligible for WTO and NAFTA treatment can choose either forum for dispute settlement. NAFTA investors may also have recourse to the World Bank's International Center for the Settlement of Investment Disputes. Under NAFTA, the first step in dispute settlement is consultations. Should consultations fail to resolve an issue within 30 to 45 days, any member country may call a meeting of the NAFTA Trade Commission. Absent a satisfactory solution there, a balanced and mutually agreed upon five-member panel of experts resolves disputes. Panel members are chosen from a roster of trade, legal and other experts, including experts from countries outside NAFTA. The panel issues its initial report within 90 days and a final report 30 days later. Once a panel decision has been made, either country may request the establishment of a three-member extraordinary challenge committee, comprising judges from the two countries. The committee may overturn a panel decision, in which case a new panel is established. There have been cases in which local executives of U.S. multinationals have been threatened with lawsuits involving potential arrest and detention, but the Embassy is not aware of any arrests being carried out. American investors should nonetheless understand that under Mexican law, many commercial disputes that would be treated as civil cases in the U.S. could also be treated as criminal proceedings in Mexico. Based upon the evidence presented, a judge may decide to issue arrest warrants. In such cases, Mexican law also provides for a judicial official to issue an "amparo" (injunction) to shield defendants from arrest. U.S. investors involved in commercial disputes should therefore obtain competent Mexican legal counsel, and inform the U.S. Embassy if arrest warrants are issued. SECTION 4-1. DISTRIBUTION, SALES CHANNELS, AND PARTNERS U.S. firms that seek to sell their products in the Mexican market can use different approaches to achieve this goal.


Commerce.

25

Selling Directly to the End-User This approach allows firms to eliminate the middleman and reap the benefits of direct contact. Negotiations will take less time. There is no distributor mark-up, and the U.S. firm will better understand first-hand the requirements of the client. Many Mexican firms employ English-speaking staff, but it is a good idea for the U.S. company to employ Spanish-speaking sales representatives. One drawback is, in selling directly to the end-user, the U.S. firm must be much more knowledgeable regarding the Mexican commercial environment. There also are cost considerations -- sales representatives based in the United States may have to do extensive travel in Mexico. Selling Through Distributors in the United States Mexican firms generally prefer to deal directly with the manufacturer rather than through U.S. distributors, since this incurs an extra mark-up. For U.S. firms, however, the advantage of this approach is that the costs of market development and any risks associated with non-payment are borne by the U.S. distributor. It is common for Mexican firms in the northern region to purchase through distributors located on the U.S. side of the border, as this can be cheaper than purchasing through a Mexican distributor. Selling Through a Mexican Manufacturer Some Mexican manufacturers sell products manufactured by U.S. firms. Usually, the Mexican manufacturer seeks to complement its product line using this method. U.S. firms that want to use this distribution channel should consider registering their products in Mexico in order to avoid possible patent infringements. Selling Through a Wholesaler Some U.S. firms use a Mexican wholesaler to distribute their products. Through this channel, U.S. firms can take advantage of the wholesaler’s distribution infrastructure. In addition, U.S. firms negotiate with only one party, facilitating the distribution process. However, some industry sectors have few, if any, wholesalers. A wholesaler is an efficient channel for consumer products or business and industrial consumables. Selling Through a Distributor/Retailer Many U.S. firms use a distributor and/or retailer to distribute their products in Mexico. This channel can be used to distribute products in various regions or to distribute to several lines of business. For example, a distributor can be used to sell to the automobile industry, and another distributor to sell to the financial sector. This channel is also efficient when the distributor is required to have a stock of the product.


Commerce.

26

Selling Through Agents Some U.S. firms sell their products through a sales agent. Usually, a sales agent is a freelancer. However, some Mexican firms are interested in serving as sales agents for U.S. firms. This channel can be efficient for reaching the smaller cities or more remote locations of the country. Selection of the appropriate agent or distributor requires time and effort. Though there may be many qualified candidates, U.S. firms should use high standards in selecting the agent/distributor. Since most Mexican firms are selling in a limited area, U.S. companies should consider appointing representatives in multiple cities to broaden distribution, and rarely, if ever, grant an exclusive, national agreement. It is important to develop a close working relationship with the appointed agent/distributor. Providing appropriate training, product support, and timely supply of spare parts is critical for success. There are no indemnity laws to prevent a company from canceling an agent or distributor agreement, but the cancellation clause should include specifics and be free of vague language. Sales performance clauses in agent/distributor agreements are permitted, and failure to meet established standards can be a reasonable cause for contract cancellation. Before signing the agent/distributor agreement, all parties should fully understand the terms and conditions and the relationship to be developed. Many relationships are strained because insufficient time is invested in developing a full understanding of what is expected. The Commercial Service and other organizations, such as the U.S. Chamber of Commerce and U.S. State government offices, maintain lists of Mexican agents/distributors, manufacturers, Mexican government offices, and private sector trade organizations. After identifying a suitable agent/distributor, the U.S. exporter is encouraged to conduct a commercial background check on the Mexican firm. The U.S. Commercial Service offers the service of providing an International Company Profile (ICP) report to provide background information on a potential business partner. If the product is new to the market, or if the market is extremely competitive, advertising and other promotional support should be negotiated in detail with your representative. Product and industry knowledge, track record, enthusiasm and commitment should be weighted heavily. Service and price are extremely important to Mexican buyers. The U.S. exporter should also schedule annual visits of Mexican personnel to the U.S. companies for training. Another factor to consider is financing, as the commercial and industrial sectors’ resources are limited due to high interest rates. Joint venture arrangements should also be investigated to strengthen market penetration. Direct marketing and telemarketing are still evolving marketing strategies, but they are gaining in popularity and scope.


Commerce.

27

SECTION 4-2. OTHER MARKETING CONSIDERATIONS FRANCHISING The franchise sector in Mexico continues with a stable and remarkable average growth of 20 percent, representing 20,000 new points of sale from 1999 to 2003. Proving that the franchise business is an important source of job creation, self-employment and wealth strengthened considerably in the past few years, positioning Mexico as the 11th leading nation worldwide in franchise development. In Mexico there are currently a total of 550 franchises registered in more than 65 different sectors. The regional distribution of the franchises is concentrated in Mexico City -- 50 percent, Northern region -- 17 percent (of which 10 percent is located in Monterrey), Western region -- 14 percent (Guadalajara -- 7 percent), and rest of the country -- 19 percent. During the last 5 years, points of sale in Mexico have increased from 16,000 to 36,000. Conservative estimates indicate that this sector will grow at least 10 percent in the number of franchises and 12 percent in sales for the next two years. According to the sector experts’ estimates, only a very small portion of the market, less than 0.36 percent, could close during the following two years. The growth of the franchising industry during the last two years has been triggered by Mexican entrepreneurial projects and a strong diversification of the already existing ones, as well as an openness to explore new sectors and franchises from other countries. Sixty-two percent of the franchises are of Mexican origin, 28 percent are U.S., and the rest are from Spain, France, Italy and Asian countries. Foreign firms continue facing strong competition since they are more expensive than local franchises; competition between the latter has also intensified, as there are still not enough incentives or financial facilities available for such types of investment. These last two years have been characterized by a remarkable professionalism of the sector. Industry experts consider that Mexico’s market is mature and is currently in what they call the ¨third generation¨ (export of local franchises), preparing to enter the “fourth generation” (local investors going outside to import franchising concepts). Business opportunities are in many sectors, including: food, beauty, entertainment centers, education, restaurants, dry cleaners, etc. Top prospects for new franchising opportunities include: low investment franchises, Mexican agro, and social and professional services franchises. There are no barriers to franchisers of any products or services in Mexico.


Commerce.

28

PRICING Exporters should look carefully at import duties (taking into account the NAFTA progressive tariff reductions), brokers’ fees, transportation costs, and taxes to determine if the product/service can be priced competitively. The import duty, if applicable, is calculated on the U.S. plant value (f.o.b. price) of the product, plus the inland U.S. freight charges to the border and any other costs listed separately on the invoice and paid by the importer. These can include charges such as export packaging, inland freight cost, and insurance. Value Added Tax (IVA) Mexican Customs collects a value-added tax or IVA from the importer, on foreign transactions, upon entry of the merchandise into Mexico. This IVA is assessed on the cumulative value consisting of the U.S. plant value (f.o.b. price) of the product(s), plus the inland U.S. freight charges, any other costs listed separately on the invoice such as export packing, insurance, plus the duty, if applicable. The IVA is 10 percent for products exported to the “border zone”, defined as 20 km from the U.S.-Mexico border. For final shipping points, other than the border zone, a 15 percent IVA is charged. The importer will pay other IVA fees for such services as inland Mexico freight, warehousing, and custom brokerage fees, if applicable. The IVA typically is recovered at the point of sale. Sales of real property (real estate) within the border zone are taxed at the 15 percent IVA rate. The law considers several exceptions for the payment of the IVA taxes, including:

- Products imported under the PITEX program (Program of temporary imports to produce articles to be exported), when they comply with the requirements specified for this program.

- Donated products imported by institutions accredited and authorized to

receive donations from foreign institutions. Estimated minimum prices To avoid dumping practices, the Mexican authorities have set minimum prices for a wide range of imported products, including textiles, clothing, leather products, shoes, some metals, stationary products, tools, some glass products, bicycles, children’s accessories, and others. These minimum prices will be taken as the base for calculating any duty or taxes, if applicable, for all products imported under certain Harmonized System Codes.

EEEAAASSSTTT BBBAAAYYY’’’SSS TTTOOOPPP TTTEEENNN LLLIIISSSTTT OOOFFF

FFFOOOOOODDD PPPRRROOOCCCEEESSSSSSOOORRRSSS

2005


Source: Refrigerated & Frozen Foods 2005 Top 150 Food Processors

EAST BAY’S TOP FIVE LIST OF

FOOD PROCESSING COMPANIES

Discovery Foods Co. 2395 American Ave Hayward, CA 94545 Tel: (510) 293-1838 Toll Free: (866) 454-6454 Web: www.4linglings.com Description Entrepreneurial drive and a passion for food has made Discovery Foods the nation’s leading producer of fresh frozen dumplings. Founded in 1986 by brothers Clarence and Alfred Mou, the company has grown from one employee making dumplings by hand to 130 employees and 40,000 square feet of production facilities producing a half million dumplings daily. In 2005, Discovery Foods will open an additional 30,000 square feet of production adjacent to its Hayward, California headquarters. Discovery Foods’ success is due to its ongoing commitment to fresh, high-quality ingredients. Unlike most Dumplings, Ling Lings are filled only with fresh vegetables, herbs and spices, and lean cuts of meat. They contain no MSG, flavor enhancers, or additives. Products • Chicken & Vegetable Dumplings: Boneless, skinless cuts of chicken are combined with fresh

vegetables and spices to create this tasty Dumpling. • Pork & Vegetable Dumplings: Ling Lings Pork & Vegetable Dumplings contain lean blade-cut pork,

fresh vegetables, such as cabbage and green onions, and freshly grated ginger. • Cheese & Vegetable Dumplings: A terrific combination of mozzarella and ricotta cheese blended with

tender, fresh vegetables including broccoli, roasted red onion, carrots, and roasted red pepper. Honors March 2005 – Dicovery Foods Named on Refrigerated & Frozen Foods Top 150 Food Processors List as #21 in Snacks, Appetizers & Side Dishes Category

Dreyer’s Grand Ice Cream 5929 College Avenue Oakland, CA 94618 Tel: (877) 437-3937 Fax: (610) 871-2275 Web: www.dreyers.com Description Dreyer's Grand Ice Cream Holdings is engaged primarily in the business of manufacturing and distributing ice cream and other frozen dessert products to grocery and convenience stores, foodservice accounts and independent distributors primarily in the US. Nestle owns approximately 67% of the company.



EAST BAY’S TOP FIVE LIST OF FOOD PROCESSING COMPANIES CON’T

Dreyer's Grand Ice Cream uses only the highest quality ingredients. Fresh cream and milk are delivered daily to our plants, and we use select added ingredients, like pure vanilla beans from Madagascar, our own rich, home-style fudge, slow-roasted almonds and chewy baked brownies. At Dreyer's, each and every flavor is carefully formulated to create the perfect balance of ingredients for optimum flavor. While most ice cream manufacturers have one basic mix recipe for all of their flavors, Dreyer's uses more than 40 different mix formulations that are customized to bring out the best in each flavor. We double churn our ice cream to make it extra smooth and creamy. During churning, ingredients are carefully monitored and measured to ensure consistency. Freshly filled cartons of ice cream are whisked off on a conveyer belt to the "hardening room," kept at a chilly 40 degrees below zero. After the ice cream has spent five to six hours in the hardening room, it travels to the cold warehouse, kept at 20 degrees below zero, where it is stacked on pallets to await delivery. From there we distribute it all over the world. Products The company's premium product line includes Dreyer's and Edy's Grand Ice Cream. This ice cream utilizes traditional formulations with all natural flavorings. The company also offers frozen yogurt as well as no sugar added and fat free ice creams. The Dreyer's Grand Ice Cream line of products is marketed throughout the western US, Texas and certain markets in the Far East. The Edy's Grand Ice Cream line of products is sold throughout the remaining regions of the US and certain markets in the Caribbean and South America. Dreyer's' super premium product line includes Haagen-Dazs and Starbucks Ice Cream. The company distributes Starbucks Ice Cream products under a joint venture with Starbucks Corporation. Dreyer's also produces and markets Grand Soft, a premium soft serve product. Its frozen snack line features fruit bars, Starbucks frappuccino bars, Dreyer's and Edy's ice cream bars and sundae cones. The company also manufactures and distributes frozen snack products under license from Nestle US prepared foods, Nestle, Societe des Produits Nestle and Nestec. These include Drumstick ice cream sundae cones, Nestle Crunch and Butterfinger ice cream bars and Carnation ice cream sandwiches. In addition, Dreyer's distributes partner brands. The company has partner brand relationships in terms of sales with Unilever and ConAgra Foods. Honors March 2005 – Dreyer’s Grand Ice Cream Named on Refrigerated & Frozen Foods Top 150 Food Processors List as #13 in Dairy Category May 2004 - The International Dairy Foods Association (IDFA) honors Dreyer’s Grand Ice Cream with IDFA Dairy Plant Safety Recognition Awards for Small, Medium and Large Size Plants 2004 - Dreyer's Grand Ice Cream awarded the 2004 Best Taste Award from the American Culinary Institute (ACI) in the Favorite Foods category August 2003 - Dairy Foods Magazine Names Dreyer’s Grand Ice Cream as #11 on Top 100 Dairy Processors in North America




Nancy’s Specialty Foods 6500 Overlake Pl Newark, CA 94560 Tel: (510) 494-1100 Fax: (510) 494-1141 Web: www.nancys.com Description Nancy Mueller founded Nancy's Specialty Foods in Menlo Park, CA in 1977. An accomplished entertainer, Nancy prepared more than 2,500 hors d'oeuvres by hand for her annual holiday celebrations. Nancy's guests gave her bite-size creations rave reviews. Encouraged by family and friends, Nancy decided to make enough product to supply local stores. Although she increased the number of hors d'oeuvres she made, Nancy was determined to maintain the look and taste of homemade. Nancy made more hors d'oeuvres, but continued using the same top-quality ingredients she used in her own kitchen - butter, flour, eggs, milk, cheese and fresh, local ingredients. With a simple hand-operated pie press system she made each Quiche by hand and delivered them store-to-store throughout the San Francisco Bay Area. Her unflagging persistence paid off. In 1982, Nancy took 2,500 Petite Quiche to a warehouse club store where the product sold out in just four hours. The store ordered an additional 550 cases for its shelves and other Northern California locations. This was a turning point in Nancy's business. In 1994, Nancy moved the company to its current 86,000-square foot, state-of-the-art manufacturing facility in Newark, CA, near San Francisco. She personally designed and built this facility to meet her exacting standards and needs. Additional people with extensive food preparation experience were brought aboard to ensure that quality ingredients and leading-edge production standards were translated into top-quality, mouth-watering products. Today, Nancy's produces and freshly bakes more than 35 tons of mouthwatering, gourmet food products daily. Nancy's continues to work with many of its original local suppliers to obtain top-quality, fresh ingredients such as eggs, butter, cheese, produce and milk. The company employs more than 250 people, many of whom began working with Nancy during the company's fledgling phase. Products • Entrees: Quiche Lorraine, Quiche Florentine, Quiche Cheese Trio, Quiche Broccoli Cheddar • Appetizers: Petite Quiche, Petite Quiche 24/48 ct., Florentine Puffs, Mushroom Turnovers, Mini

Cheese Soufflé, Santa Fe Tartlets, Seafood Crabcakes, Champagne Collection, Deli Spirals • Microwaveable Snacks: Petite Quiche, Petite Quiche 24/48 ct., Quiche Lorraine, Quiche Florentine,

Quiche Cheese Trio, Quiche Broccoli Cheddar • Vegetarian Snacks: Florentine Puffs, Mushroom Turnovers, Mini Cheese Soufflé, Santa Fe Tartlets,

Petite Quiche, Petite Quiche 24/48 ct., Quiche Florentine, Quiche Cheese Trio, Quiche Broccoli Cheddar

• Low Carb Snacks: Mini Cheese Soufflé, Seafood Crabcakes • Thaw & Serve Snacks: Deli Spirals, Pecan Tartlets, Belgian Chocolate Soufflé, Chocolate Caramel

Soufflé • Desserts: Pecan Tartlets, Apple Tartlets, Belgian Chocolate Soufflé, Chocolate Caramel Soufflé, Pie

Shells



EAST BAY’S TOP FIVE LIST OF

FOOD PROCESSING COMPANIES CON’T

Honors March 2005 – Nancy’s Specialty Foods Named on Refrigerated & Frozen Foods Top 150 Food Processors List as #14 in Snacks, Appetizers & Side Dishes Category

Otis Spunkmeyer 14490 Catalina Street San Leandro, CA 94577 Toll Free: (888) 275-6847 Fax: (510) 352-5680 Web: www.spunkmeyer.com Description Renowned as the pioneer in the fresh-baked cookie business, Otis Spunkmeyer began in 1977 as a California chain of retail cookie stores. After six years of success, the company shifted its focus to selling its fresh-baked cookie program to other foodservice operations on a wholesale basis. More than twenty-five years later, the company continues to offer this popular program complete with its trademark pre-portioned, gourmet frozen cookie dough, pre-set ovens, and merchandising tools. Otis Spunkmeyer ready-to-bake, frozen cookie dough is the #1 brand in foodservice. In 1990, Otis Spunkmeyer entered the retail market by rolling out its signature cookie dough in 1 lb. and 5 lb. packages. In that same year, the company added ready-baked muffins to its line of select bakery products. Otis Spunkmeyer Muffins are available in foodservice and retail outlets throughout North America and Europe. Today, Otis Spunkmeyer muffins are the #1 premium muffin brand in retail. Products Otis Spunkmeyer continues to be the leading manufacturer and distributor of frozen gourmet cookie dough, ready-baked muffins, cookies, bagels, pastries, brownies, cakes and a variety of other premium bakery products to foodservice facilities and retail outlets throughout the United States, Canada, Central and South America and Europe. Honors March 2005 – Otis Spunkmeyer Named on Refrigerated & Frozen Foods Top 150 Food Processors List as #5 in Bakery Category 2002 & 2004 – BEST Report 2004 and Wyoming FIT 2002 Name Otis Spunkmeyer #1 in every foodservice segment: K-12 Schools, College/University, Healthcare, Business Dining, Lodging, and Restaurants 2000 - Round Table for Women in Foodservice Awards Otis Spunkmeyer as Company of Distinction

Safeway Dairy Division Safeway Inc. 5918 Stoneridge Mall Rd. Pleasanton, CA 94588




Tel: (925) 467-3000 Toll Free: (877) 723-3929 Web: www.safeway.com Description For many Americans, "going to Safeway" is synonymous with "going to the grocery store." Safeway is one of North America's largest food retailers, with about 1,800 stores located mostly in the western, midwestern, and mid-Atlantic regions of the US, as well as western Canada. It also operates regional supermarket companies, including The Vons Companies (primarily in Southern California), Dominick's Finer Foods (Chicago), Carr-Gottstein Foods (Alaska's largest retailer), Genuardi's Family Markets (eastern US), and Randall's Food Markets (Texas). It owns about 54% of e-retailer GroceryWorks.com. Outside of the US, Safeway owns 49% of Casa Ley, which operates about 115 food and variety stores in western Mexico. Products Lucerne, Dairy Glenn, Safeway: milk products: non-dairy and milk subsitute, cream, non-dairy creamers, toppings: whipped toppings, milk products: whole milk, low fat milk, ice cream & snacks, sour cream, coffee creamers: coffee & coffee drinks Honors March 2005 – Safeway Inc. Named on Refrigerated & Frozen Foods Top 150 Food Processors List as #16 in Dairy Category August 2003 - Dairy Foods Magazine Names Safeway Dairy Division as #23 on Top 100 Dairy Processors in North America