By Alexandre Klimis
In the market research business, a common question clients often ask is: What’s the best way to make money? When Infiniti Research consultants probed this question, it led them to some well-to-do, if rather eccentric, elderly men and women in the Chinese countryside. These people knew nothing about foreign exchange, securities and stock exchanges, but they didn’t have to.
This peculiar group had found their own money-spinner: fruit.
As curious as it may seem that this most primary of industries could still enrich a nation flooding to the cities, there are nevertheless some compelling reasons why fruit can make a good investment, for foreign companies as well as rural Chinese.
A cheap and easy-to-sell commodity
Fruit production in China has jumped from 150 million tons in 2004 to 250 million tons in 2014, according to the China Statistical Yearbook, for a compound annual growth rate of around 5.2 percent. Fruit has several appealing qualities for farmers:
Fruit is a universal commodity – if the local market cannot absorb the production, it's always possible to deliver to foreign markets.
Fruit harvesting is a labor-intensive task, especially for more delicate varieties such as blueberries and cherries. This means China can fully leverage its comparatively low labor costs and its large, varied territory to grow many types of fruit.
China is a growing market and slightly exotic fruits are one of the first luxuries that the growing middle class, even in lower-tier cities, can afford. As a result, the demand for fruit in China has risen steadily over the past 10 years at a compounded annual growth rate of 5.9 percent. As well as capitalizing on cheap labor in the main producing regions, fruit production can also command a high level of profitability in China and overseas. As the table shows, the profit margin of the top seven fruits in China, while perhaps not comparable to the iPhone's 70 percent or above, are still fairly decent (38 to 70 percent) for a product that does not require massive research and development outlays or initial investments.
If the margins don’t seem mouth-watering enough, it should be noted that the price of renting land for agricultural purposes is very reasonable at an average rate of $1,500 per hectare per year for blueberries, and $2,500 to $5,000 for most other types of fruit, including a production-ready orchard.
Opportunities for foreign investors
Even though the fruit business in China is solid, profitable and growing, few investors have the time and energy to circumvent all the regulatory, physical and technical challenges as well as the uncertainties that creating an agricultural business entails.
While local companies know how to grow, financing their operations to increase scale is a major hurdle to successful expansion. Banks traditionally offer reasonable interest rates on agricultural loans, but most of them are reluctant to lend in the first place. A good example is China Construction Bank’s policy to lend only to state-owned corporations. Others require collateral that farmers are simply unable to provide, limiting the amount they can borrow.
The only other option open to farmers is personal loans with limited guarantees. Usually these can only be contracted with very wealthy individuals with whom they have direct family ties. Obviously this method can’t meet the financing demands of expanding businesses and usually comes with prohibitive interest rates of 25 percent or more. There is thus clear demand for investors in this sector, who could provide a viable alternative for fruit companies to grow as well as benefit from a host of government measures promoting foreign investment.
Even wealthy provinces such as Jiangsu have ambitious foreign investment targets and provide substantial incentives to investors. The exact incentives will vary between regions and will have to be negotiated directly with the local foreign trade bureau, but they usually include: free office space, co-financing of infrastructure and tax reductions (up to 100 percent) for the first years of establishment in the case of wholly foreign-owned enterprises or joint ventures. There's been a recent crackdown on local government tax breaks, but that affects longer-term tax incentives, not these temporary tax breaks for new ventures, usually limited to one to five years.
To fully take advantage of these measures, it's advisable to start negotiating close to the reporting period, when each province is struggling to find the last investors to meet their targets.
Leveraging fame and branding
Now if a profit margin of 50 percent is not enough, a new trend in China offers an even bigger return for the marketing savvy – branding.
It's a secret for no one that building a solid brand name can help a company improve its profit margin but a few pundits have brought this rule to an unseen level for raw food products in China. The table above shows how successful three business owners have been in doing so.
We see that entrepreneurs with absolutely no link to the agricultural business and not even possessing a very pristine image were able to raise the sales price of their “personal fruits” by roughly 300 percent of the usual market price.
If we take into account the low level of trust of the Chinese population for local brands and the strength of many American brands in China with their perceived labels of quality, it's a wonder that Apple has not yet started to sell the products bearing its very name in the middle kingdom.
Alexandre Klimis is Director of the Beijing office of Infiniti Research.
