China’s food industry is modernizing at its fastest pace ever, using more technology to scale up and meet higher standards, according to Alex Zhang, cofounder and management partner of Beijing Hosen Investment Management (Hosen Capital). And he should know; Hosen has invested over $300 million in food and agribusiness-related companies that are either directly located in China or are directly involved in meeting Chinese demand since launching its first funds in 2010.
Last month, Hosen Capital closed its third and largest fund on $440 million, with investment from institutions across the US, Europe, the Middle East and Asia.
Fund III will continue to invest in the supply chain and in food companies — it prefers value-added processing companies to primary agriculture producers — but will put a greater emphasis on investing in deals where it can take a controlling stake in a business. Previously it focused a little more on growth capital investments.
This change is strategy is due to where Zhang and his colleagues see the food industry going over the next few years.
“The whole industry is modernizing at a speed we haven’t seen in Chinese food industry history, and if we follow a similar pattern to how the US food industry evolved in the past, we are now at the stage that we will see more and more sector consolidation. We will see more trade sales and large Chinese food companies will continue to go global,” said Zhang.
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“Our food industry will evolve in a similar fashion to our internet industry where four of the world’s top 10 companies are Chinese; we will probably see something similar in 10 years time in the food industry.”
“We are naturally evolving with the space to have a mixed investment strategy across growth capital and control deals,” he added.
Zhang has reason for such a bullish take on where the Chinese food industry is going; food consumption in China still represents 25% of household expenditure as the single biggest purchase. The Chinese population is three times bigger than the US and food prices are generally higher in China because it doesn’t have the agricultural base of nations like the US.
“The cost of pork production in China, for example, is about 50% higher than in the US, because around 60%-70% of the cost is animal feed. The US is a very efficient producer of corn and soy so already has an advantage there. This creates an environment of opportunity for investment and growth,” said Zhang.
Zhang also expects Hosen Capital to become more hands-on with its portfolio companies in Fund III on strategy, operational improvements and M&A; “an important tool for industry positioning.”
Hosen Capital has and will invest in technology companies, and Zhang believes it’s particularly important on the digital side to improve the traceability of food and the communication between farmers, suppliers, and distributors.
“There should be a data infrastructure to support mechanization and to make sure we have the right information flowing from the farm to the plate, but this will require some basic infrastructural upgrades in China.”
On the biotechnology front, Zhang is already seeing gene-editing tools being used and is interested in any technologies that can make protein production more efficient such as new animal vaccines or improved breeding tools.
And there is potential for products that reduce or eliminate the use of synthetic pesticides and fertilizers.
The Chinese government has passed policies regarding the use of pesticide and fertilizer to ensure producers pay a higher price if they have a negative environmental impact.
“The trend of technology adoption and environmental sustainability in China is very clear and quickly progressing,” said Zhang. “How quickly it will reach its goals we don’t know although I think we will see a very different picture in five years’ time; I just hope a country like Brazil will not repeat the same mistakes that China did.”
New Hope Group, the largest agricultural conglomerate in China, was the first LP in Hosen Capital, joined by JD.com. DealStreetAsia reports that Mitsui & Co, Singapore’s state investment fund Temasek Holdings, the International Finance Corporation, Archer Daniels Midland are also among the founding investors of Hosen Capital.
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