One of the first things you need to know about a (potential) Chinese partner is to what system it belongs
This is a blog about food, drinks and their ingredients. However, as Chinese society, including its economy, is organized in a very unique way, it is useful to get more insight in its basic structuring. In fact, several aspects of that structure have been mentioned indirectly in various posts, in particular those about Mengniu Dairy and Yanjing brewing.
An important type of context is the industrial sector. Chinese economy is divided in a number of industries, headed by a central ministry or organization with ministerial status in Beijing. Each province and autonomous region has a Department corresponding with the central organization. Lower administrative regions have, again corresponding, Bureaus. Chinese usually refer to this as the system (xitong) to which they belong. According to the official parlance, a state-owned enterprise is the property of the entire people, but the central administrative organization of its industrial sector has been given the power to manage the enterprise in the name of the people. The central organization will then delegate that power to its corresponding lower level organization. Those organizations also establish and operate schools and colleges related to their sectors.
An example will help clarify the situation: food manufacturing is typically regarded as Light Industry in China. A state-owned flour plant in Suzhou (Jiangsu), will therefore be typically managed by the municipal Light Industry Bureau, which will report to the provincial Light Industry Department, which operates under the China National Light Industry Council in Beijing. This is the reason why so many company names in China start with the name of the city or province in which it is located: it refers to the main governing body. I have mentioned the Changyu Winery in earlier posts. Its official name is Yantai Changyu Wine Group, which indicates that its CEO is typically reporting to the government of Yantai Municipality in Shandong province.
The value of the place name in a Chinese brand name is attested by the story of Yanjing Brewing laid down in an earlier post. Located in Shunyi County, the brand name originally envisioned was Shunyi Beer, but a ministerial official proposed to change it to a name that was related to Beijing. As Beijing Beer already existed, it became Yanjing Beer.
There are also dedicated light industry colleges like the Zhengzhou University of Light Industry. As attested by several posts in this blog, Zhengzhou is located in one of China’s major food producing regions, the home of, e.g., China’s top snack producer Sinian.
This way of organizing creates a kind of matrix structure in which a Chinese company has to account for its activities and results to the local government, but simultaneously to its sector organization. To stick with Changyu, it is accountable to Yantai Municipality and the Light Industry sector. These two merge in the Yantai Municipal Light Industry Bureau, but it can happen that the provincial or national Light Industry organizations contact Changyu for information about its operations.
In the current stage of the development of China, this structure does no exercise a huge influence on issues related to production or marketing and sales. Larger state-owned companies are still affected in the field of human resource, in particular in filling the positions of top managers. Leading functions in companies like Changyu are usually appointed by the organization on the Ministry of Personnel, which also has branches in provinces, cities, counties and other administrative levels. The Party organization is also involvement in such appointments. Nowadays, only people with proven expertise and experience in the field will be considered for appointments of top functions in state owned enterprises, but the political aspect remains. This means that the social networks of the top executives of Chinese companies exercise considerable influence on the day to day managed of the enterprises.
The combination of the various stakeholders to which a Chinese enterprise is accountable and the social network can be called: the social embeddedness of Chinese companies. Insight in the affiliation of a Chinese enterprise is vital for Western companies who are seeking or have engaged in partnerships with Chinese counterparts. Too often, Western managers believe that their Chinese partner is ‘a company just like we are’ and that the CEO of the Chinese partner has ‘the same responsibilities as I have’. They aren’t and they don’t. Such misunderstandings will certainly play a role in the problems of companies like FrieslandCampina or Fonterra in China recently reported in the media.
Eurasia Consult’s founder Peter Peverelli is an expert in determining the social embeddedness of Chinese companies and the consequences for their Western partners
Food & beverage covers several sectors
The theme of this blog, food, drinks and ingredients, involves a complex situation, as the manufacturing of these three product groups is dispersed over more than one sector. Light Industry is definitely the largest one, but a number of food companies, in particular those using primary agricultural produce as raw materials, are operating under the Ministry of Agriculture. A special type of companies under Agriculture is State Farms. This name is based on the fact that the first of such companies were large state-owned farms established in rougher regions with no existing agriculture or other economic activity. These farms later also established processing plants of their own. A small number is part of the hierarchy of the Ministry of Commerce. The latter is in charge of distributing goods rather than making them, but in the early decades of the PRC, that ministry also established production units. An industry that is very disperses over those sectors is dairy processing. Interestingly, FrieslandCampina and Fonterra mentioned above are both dairy companies.
Light Industry Top 50 2017
As Chinese ministries (try to) keep track of the industrial statics of their respective sectors, the regularly publish compilations like the top 10, 50, 100 manufacturers of a certain product or sector. The China National Light Industry Council recently published the Top 50 Light Industry companies of 2017. I will list the top 10 in this post.
From this list it is obvious that food, drinks and ingredients are the major sector of Light Industry in China. Actually, it covers a broad range of products, like: toothpaste, detergents, brooms, toys, etc. However, the Top 10 and in fact the entire Top 50 consists of food companies. Regular readers of this blog will recognise several of the companies in this list.
Eurasia Consult Consulting can help you embed your business in Chinese society.
Peter Peverelli is active in and with China since 1975.