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China China - - An Economic Dragon An Economic Dragon Atlantic Provinces Economic Council Atlantic Provinces Economic Council OUTLOOK 2005 OUTLOOK 2005 November 19, 2004 November 19, 2004 Alastair O’Rielly Alastair O’Rielly Managing Director Managing Director Canadian Centre for Fisheries Innovation Canadian Centre for Fisheries Innovation

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China China -- An Economic DragonAn Economic Dragon

Atlantic Provinces Economic CouncilAtlantic Provinces Economic Council

OUTLOOK 2005OUTLOOK 2005November 19, 2004November 19, 2004

Alastair O’RiellyAlastair O’RiellyManaging DirectorManaging Director

Canadian Centre for Fisheries InnovationCanadian Centre for Fisheries Innovation

Research and Development Agency– Owned by Memorial University; Managed by Industry; Funded by

ACOA– Dedicated to the Fishery and Aquaculture Industries – Links Industry to Atlantic Canada’s Universities and Colleges– 560 Innovative Initiatives over 15 years, worth $65 million:

Conservation Equipment DevelopmentEmerging Species Value-added Product DevelopmentAquaculture

China: A Country on the MoveChina: A Country on the Move

• Population of 1.3 Billion• $1 Trillion in GDP/Four times 1980’s GDP• Exports estimate for 2003: $436.1 Billion• Second largest purchasing power parity in

world, next to USA

China: Enormous Development & Upheaval

• “The World’s Workshop” Manufactures for the World:– 1/3 its Computers ½ Digital cameras– ½ DVD Players ½ Clothing– 2/3 Photocopiers & Microwaves

• Consumes 20% world’s stainless steel (More than Japan & US, combined)

• One-half of world’s 20 tallest towers• 100 million new cars in next 10 years• Biggest cell phone market in the world• Over 236,000 millionaires• Consumes 40% the world’s cement; dominant force in world’s

market for copper, steel, iron ore, soybeans & oils

China: Enormous Development & Upheaval

• 46.7% of population below poverty line ($2/day)• 66 million peasants (& rising) made landless since

early 1990s• Home to 13 of the 20 worst polluted cities in world• Workers earning less than $100 annually up by

800,000 in 2003• Average urban income six times higher than rural

income• Despite monthly wages of $60-$125, 70% of labourers

are still owed wages

Trade between Trade between China and CanadaChina and Canada

$0$2,500,000$5,000,000$7,500,000

$10,000,000$12,500,000$15,000,000$17,500,000$20,000,000

Tho

usan

ds

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Can. Exports Can. Imports

Total Exports to China from Total Exports to China from Atlantic CanadaAtlantic Canada

$0$50,000,000

$100,000,000$150,000,000$200,000,000$250,000,000$300,000,000$350,000,000$400,000,000

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

Fishery Exports to China from Fishery Exports to China from Atlantic CanadaAtlantic Canada

$0

$50,000,000

$100,000,000

$150,000,000

$200,000,000

$250,000,000

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

All Seafood Shrimp & Crab

PRODUCTION2003 harvest: 40 –45 million metric tons One-third global supplyProduces 75% of world’s aquaculture outputImports 2.3 Million TonsExports 2 MT

China’s Seafood IndustryChina’s Seafood Industry

MARKETS• Domestic market enormous

– Middle class growing: Over 100 million, 2003– Consumer preference for seafood - “without fish, no real dinner”

• Unfettered access to global markets Joined WTO, 2001– 2003 & 2004: biggest seafood exporter in world– 2 million Tons: $5.5billion

• Seafood trade with USA: – $520 Million in ’99 – $1.3 Billion in ‘03

China’s Seafood IndustryChina’s Seafood Industry

China’s Competitive Advantages

• Wage rates extremely low• Labour supply seemingly inexhaustible• Highly motivated, skilled, competent workers• Fully aware of market issues• Lax or non-existent regulatory regime• Low interest state loans, undervalued currency &

access to slightly outdated low-cost technologies• Flexibility and Adaptability to Change• Canadian seafood processors/marketers can’t pass

costs back to harvesters or on to consumers

Hourly Compensation, Hourly Compensation, Food, Beverages & Tobacco, 2002Food, Beverages & Tobacco, 2002

0

20

40

60

80

100

120

140

Norw

aySw

eden

Unite

d St

ates

Fran

ceIre

land UK

Cana

daJa

pan

Spai

nKo

rea

Taiw

anM

exic

oBr

azil

Chin

a

USA = 100 Source: US Department of Labor & O’Rielly Pers. Information; Intrafish Industry Report, 2004

Chinese weekly wage = 2 hours’ pay in Norway

• Aquaculture Industry Boom – following 2000 years of development

• 30 Million Tonnes of Product Today-75% of Global Production

• New/emerging commercial species:– Scallops– Halibut– Catfish– Tilapia

Chinese Seafood Industry

World Production of Tilapia

China47%

CostaRica 1%

Equador 2%

Mexico 8%

Phillipines 6%

Thailand 7%

Brazil 5%Columbia 3%

US 1%

Cuba 3%

Eqypt 4%

Taiwan 6%

Others 4%

Indonesia 3%

1.5 MT

Source: FPIL’s NAIA Presentation, Feb. 2004

• China - $.70 / kg• Philippines/Indonesia - $.80 / kg• Brazil, Ecuador, Thailand $.85 / kg• Mexico $ 1.00/ kg• U.S. $2.00 /kg• Canada $2.10 / kg

Tilapia Production Costs

Source: FPIL’s NAIA Presentation, Feb. 2004

“Hewers of Wood & Drawers of Water”

• Since 1993 Canadian Imports into China – Seafood Increase 1,946% – Chemicals Increase 1,216%– Nickel Increase 1,233%– Wood Pulp Increase 593%– Auto Parts Increase 599%

The Atlantic Fishery TodayThe Atlantic Fishery Today

COMPETITIVE PROFILE

– Predominantly shellfish– Less processing required– Uncertain resource outlook – Over-capitalized– Diminishing human resource base– Continued social over-dependency on sector– Increasingly stiff global competition

Human Resource Crisis

UNATTRACTIVE PRODUCTION EMPLOYMENT

• Short employment periods• Incomes low• Aging workforce to exit labour market

within next five to ten years• Recruitment of youth non-existent

Current Trends for Seafood Processing

• 90% - 95% of Atlantic Canadian Crab Exports to Japan shipped to China first for Meat Extraction

• Lobster Meat Sector May be starting down Same Road • Processing of Alaskan & Russian Frozen At-sea Cod

Fillet Largely Shifted from Atlantic Canada to China

Processing Canadian Snow Crab for Export to Japan

• Japan bought 10,000 – 12,000 T in 2004• Exported to China for Meat Extraction

– Manual labour– Excellent quality– Proximity to Japanese market– Customized packaging– “Just-in-time” delivery

China’s Seafood Industry

Better Quality, Better Service, Lower Costs

Canadian Offshore Shrimp for Domestic Consumption

– 25% of offshore shrimp goes to China (25,000 – 30,000 T)– Cooked, shell-on – Prices lower than previous Japanese market

Competition Intense– P. vannemei taking over portions of market– Chinese excellent at copying product & package forms– Future price pressures will be unrelenting

China’ Seafood Industry

Response to Chinese Challenge

• “Automate to Save Jobs”

• Product/Market Differentiation

• “If you can’t beat ‘em, join ‘em”

New Automating TechnologiesCCFI Innovations

• Crab Meat• Crab Shoulder• Lobster • Sea cucumber

FPI Marystown Plant -Flatfish

Icewater Fisheries, Arnold’s Cove - Cod

Fresh Sales

• Fresh product forms consistently superior in quality (strict adherence to spec’s)

• MAP and HPP technologies

• Superior service possible for both USA and European markets

Icewater Seafoods – Arnold’s Cove• Portion control with strict adherence to specs• Marketing to upscale segment in USA & EU• Commanding premium prices• Relationship-based• “Just in time” delivery

Product Upgrading

Market Differentiation

• Target Special Segments of Market –e.g.UK Buyers of C&P Shrimp :

• Marks and Spencer• Sainsbury’s• TESCO’s

– Labour standards– Environmental policies – Strict quality standards

– Premium over Warm-water Shrimp Product

• Creating global seafood sourcing company– Blue Ice Group in Iceland acquires Iceland Seafood

Corporation to link Chinese product to USA Markets

• Contracting processing companiesin Qingdao and Dalian as is being done by many seafood companies, e.g..High Liner Foods Inc.- Lunenburg

“Joining ‘em”

• Industry may become much smaller – Decrease in labour force (1986 – 2001: 50% fewer)– Fewer companies producing low-value products or distributing

products with no added value– Possibly small concentration of companies producing high-end

products/ in niche markets requiring little labour

• Phase out of mainstream commodity production • Processing whole frozen fish, including frozen-at-sea

groundfish & pelagics• Significant displacement of individuals from fishery-

dependent areas of Atlantic Canada – Curse or Happy Coincidence?

Fishery’s Future Trend Line

Response to Chinese ChallengeOther Sectors

High Tech• High-Tech Manufacturing

– LOTEK• High technology specialized products

– Small number of units– Short product lifecycle– IP Protection

– Guigne International – Possible Encapsulation of Technology

Manufacturing– Garrison Guitars

• Product Differentiation: Having your cake and eating it too!

– High-end market with high value product manufactured in Newfoundland and Labrador

– Mainstream market with similar product, manufactured in China for wider group of consumers

Other Sectors

Pharmaceuticals• North Atlantic Biopharma

• Seal oil-based Omega-3 fatty acid derivative• Connections to China enabling• Access to low-cost research environment • Standards stringent; researchers highly competent• Results allow access to huge Asian market and

are relevant to launch product testing elsewhere

Other Sectors

• Development Accelerating– Potentially Unstable Environment – discrepancy

between rich and poor, urban and rural

• Worldwide - fundamental change well under way – Business cannot ignore China

• Every business plan should include section on China –Influence felt in virtually all markets

• Canada may be a late-comer to dealing with China’s challenges and opportunities - need to catch up

China - A Work in ‘Rapid’ Progress

India

• 1.07 billion people• Since 1990 average GDP growth of 6%

– (In 2003, 8.3%)– Total Exports of $57.24 Billion f.o.b.– Total Imports of $74.15 Billion f.o.b.

Source: CIA World Fact Book, India

Indian Seafood Exports to Canada

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$CA

D ,0

00

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Source: Strategis Online

$0

$20,000

$40,000

$60,000

$80,000

$100,000

1995 1996 1997 1998 1999 2000 2001 2002 2003

Canadian Seafood Exports to India

Source: Strategis Online

• Implications of China’s insatiable demand for raw materials

• Canada’s status as long-standing friend of China • Policies to ensure Canadian society reaps benefits

– Employment and Income– Resource industries’ development– Manufacturing industries– Economic opportunities when labour force is aging and

industry is over-capitalized• And then, there’s India…almost 1.1 billion, high

GDP growth…

How Should Canada React

Don’t Just Stand There!

It’s Your Move

Acknowledgements• Globe and Mail: Special Weekend Edition on China.

October 23, 2004• Intrafish Industry Report: China: The Country that is

changing everything. August 2, 2004• Industry Canada: Strategis: Trade On line• Seafood.com

• Randy Bishop Brian Blanchard Dave Dyer • Andy Fisher Paul Grant Chris Griffiths • Paul Hearn Stuart Inkpen Brian Rogers• Dave King Dr. Hu Liu Tom McKeever• Andy Miller Derrick Rowe Keith Stoodley • Karl Sullivan Bruce Wareham CCFI Staff