3-drfu speech final

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Dr. FuYuning

May 2010

Cold Chain Logistics In China



2

Executive summary

Rising middle class in China will demand more and safer food

The changing regulatory environment is driving up food safety standards andcompliance

Distributing food in China safely and efficiently is a formidable challenge

CMAC will offer an attractive value proposition to MNC manufacturers



3

Urbanization in China has significantly increased

disposable income levels of the middle class

295437 622

1,335

713

1999

1,258

820

1989

1,127

832Rural

Urban

2009

295.4

198.5

127.2

42.0

7.60.5

20091985 2025

17.5%

1995 2005 2015

Increase in Chinese urbanization(Population millions)

Growth of Chinese middle class(Millions of urban households)

Source: National Bureau of Statistics of China; China statistics abstract; Chinese Academy of Social Science; The Great Electronic Wars 9/0 6

+42%

-13%

+48%

-1%



4

As food safety becomes a greater concern, the urban

population tends to buy more from supermarkets

(1) Weighted average of all the health concerns held by food and beverage buyers(2) Including all the consumers that are concerned about safety and are willing to pay a premiumSource: Insights China; Annual survey report on China consumers; Statistics of Food Safety Survey that is Zhejiang Provincial Government conducted

online in March –May 2009

% respondents whoare concerned about

food and beveragesafety

9%

No concern

91%

8

No premium

<5%

5-10%

10-20%

>20%

44

30

15

3

How much premiumwould consumers like

to pay to eliminatehealth concern(1)

(2)

Location preference for urbanpeople to buy food

Others 4.7%

Convenience store

1.5%

Roadside market

1.6%

Wholesale market 2.1%

Farm product market

8.8%

Supermarket 81.3%

Concern about food and beverage safety



5

As food safety becomes a greater concern, the urban

population tends to buy more from supermarkets

Concern about food and beverage safety is increasing

– Among the various expectations that consumers have in their food products, safety is themost intrinsic and essential quality. 90% of Chinese consumers are concerned aboutsafety in food and beverage products.

– Of the 90% who are concerned about food safety, half are willing to pay a premium forsafer food (30% of the consumers said that they are willing to pay up to 5% premium)

Internet survey result of “Where do you believe you can buy safer food (single choice)”

– Supermarket is a primary choice for urban people who wish to buy safe food

– Concerns about food safety focus on hygienic processing environment, fake products usedas genuine articles, inferior products used as qualified articles, additives being illegallyadded, residue of pesticide/veterinary drugs, false or exaggerated marketing, orexpired/spoiled foods



6

A three-tier farm produce market system for rural areasA three-tier farm produce market system for rural areas

Food type in rural areasFood type in rural areas Food sourcing channel in rural areasFood sourcing channel in rural areas

In the rural areas, consumers have developed a weak

sense for food safety

Other unpacked food products

>15%

>15%

Packed food products

<70%

Urban food wholesale markets

40%

Mobile food selling vehicle

60%

Rural consumersFood businessoperators

Regulators

Source: National Bureau of Statistics of China; Sina news

Unpacked confectionary, delicatessen, driedfruit



Executive summary


The changing regulatory environment is driving up food safety standardsand compliance





The Chinese government has issued new standards and

regulations on food safety

Food safety supervision over whole supply chain

Special attention to cold chain transportation

Clarification of food safety responsibility

Food Safety Law of the People's Republic of China

These new food safety standards and enforcement of these standards will

drive out non-compliant players in the supply chain



Current food safety supervisory

structure

Current food safety supervisory

structure• Food, like healthcare products

and pharmaceuticals directlyimpact human health

• Developed countries placesupervision of food and drugunder one organization

• Drug Supervision Administrationcan transfer lessons learned fromthe pharmaceutical supply andvalue chain to the food industry

One unified supervision for food & drugs

Food Safety will now fall under China’s Ministry of Health

State Food and DrugAdministration

China’s Ministry of Health

• All players in the supply chain,including purchasing, transportation,storage, and sales will be monitored

• Methodologies and lessons learnedfrom supervising the pharmaceuticalindustry will be applied to the food

industry



USA EU

• Covers allfood

• Offer very

specificstandards andregulatoryprocedures

• Constitutevery tightregulations on

food safetyprotection

• Full-controltheory ‘fromfarm to table’

• HACCPsystems,requiringtraceability in

all food andfoodingredients

Gap of Chinese Food Safety Laws &

Regulations

• Lack of systematic and coordinated legalsystem

• Provisions of laws and regulations aretoo general, lacking of maneuverability

• Lack of self-improvement &complementary mechanism, laggingbehind in adapting new legal provisions

to new situations

• Lack of uniformity in food safety controlsystem

• Lack of food safety control legislation inrural areas

Food safety laws in USA and Europe Union

China still lags behind developed western countries



This places pressure on all players in the food industry to pursue operationalexcellence in food production, transportation, storage and sales

SalmonSalmon

Ice

Cream

Ice

Cream

Yogurt Yogurt

Deep-

frozen

Dumpling

Deep-

frozen

Dumpling

With the increased attentionfrom public opinion and

policies, manufacturers and

distributors can no longer just watch their own qualitystandards –

they must pay

attention to those of their partners

Many

scandals

on food

safety

issues

However, when problems arise, all players in the supply

chain are liable for prosecution



Executive summary







75% of the market will be in 2nd and 3rd tier cities

1st Tier Regions

2nd, 3rd Tier Cities

1st Tier Cities

Efficient reach requires a national distribution network

There are 50 cities with over 1 million population

Source: China Ministry of Construction

Guangzhou /Shenzhen

Beijing

Tianjin

ShanghaiXian

Qingdao

Chengdu

Urumqi

Lanzhou

Dalian

Harbin

Changchun

Shenyang

Xining

Nanning

Fuzhou

Hangzhou

TaiyuanBaotou

Kunming

Nanjing

Chongqing Nanchang

Guiyang

Changsha

Jinan

Zhengzhou

Lhasa

Xiamen

Wuhan



Food business operators typically employ three typicallytypes of cold chain distribution models

More and more players have been considering outsourcing their cold chainlogistics, to focus instead on sharpening their core competence

Cold Chain ModelCold Chain Model FeatureFeature Typical Player Typical Player

• Internally operate• Guarantee food safety• Huge volumes of cold chain

logistics costs

Internal OperationInternal Operation• The logistics business unit, which

is subsidiary to Yum Group,

• Much safer• Not common3rd-Party ColdChain Logistics

3rd-Party Cold

Chain Logistics• Kangxin Logistics• ShuangHui Logistics,COFCO• Sinotrans Yuhe Cold Chain

Logistics, Jinjiang Cold Logistics,Shandong Rongqing Logistics

• Havi Logistics

• Difficult to monitor the deliveryquality of the outsourcedlogistics;

• Or depth and breadth of marketcoverage is severely restricted

Pick-up /DeliveryPick-up /Delivery• Very common in China



Executive summary




Value proposition of CMAC to MNC manufacturers



Problems can easily occur within each interface of food

distribution process

Source

Linehaul

transporta-

tion

Plant or intermediate

(regional)

warehouse

Linehaul or multi-stoptransporta-

tion

Marketfacing

warehousing

Local

delivery

Retail

operations

ImportImport

ManufacturingPlant

ManufacturingPlant

Grower Grower

Manufacturer,Distributor, or 3PL Warehouse

Manufacturer,Distributor, or 3PL Warehouse

Manufacturer,Distributor,

3 PL or Retailer-

Warehouse

Manufacturer,Distributor,

3 PL or Retailer-

Warehouse

1st Tier Wholesaler

1st Tier Wholesaler

2nd Tier Wholesaler

2nd Tier Wholesaler

3rd Tier Wholesaler

3rd Tier Wholesaler

Retail storesRetail stores

RestaurantsRestaurants

Institutional,Hospitality and

other Consumption

Points

Institutional,Hospitality and

other Consumption

Points

Retail storesRetail stores

Institutional and

Hospitality

Institutional and

Hospitality

RestaurantsRestaurants

Food safety process is broken

• Fragmented supply chain• Lack of standards

• Inadequate audit and enforcement

• Reliance on trust and visualinspection

Source: CIES food safety operator survey



Successful management of food distribution logistics

systems ultimately requires “end-to-end” management

Therefore retailers must influence the entire food supply chain as muchas possible

• Maintain quality and safetyfrom farm to consumerpurchase or consumption

• Ensure temperature andsanitation integritythroughout logisticsprocess

• Provide certifiable productat retail

• Increase customersatisfaction

• Maintain quality and safetyfrom farm to consumerpurchase or consumption

• Ensure temperature andsanitation integrity

throughout logisticsprocess

• Provide certifiable productat retail

• Increase customersatisfaction

• Temperature abuse is thesingle most importantissue in cold chainlogistics in China today

• Temperature abusetypically happens at theinterfaces, where “hand-offs” occur

• The integration challengeis substantial: multiple

participants, functions andhand-offs

• Temperature abuse is thesingle most importantissue in cold chainlogistics in China today

• Temperature abuse

typically happens at theinterfaces, where “hand-offs” occur

• The integration challengeis substantial: multiple

participants, functions andhand-offs

Technical IssuesTechnical IssuesObjectivesObjectives Operational issuesOperational issues

• Significantly more complex

• More expensive (facilities,equipment)

• Multiple participants and

hand-offs• More attention and

discipline required

• Requires seamlessintegration throughout the

process

• Significantly more complex

• More expensive (facilities,equipment)

• Multiple participants and

hand-offs• More attention and

discipline required

• Requires seamlessintegration throughout the

process



Multi-national food producers entering into China should seek nationwide andall-along-cold-chain strategic cooperation with logistics vendors that are

leaders in the industry

StrongLocal Experiences

WeakLocal Experiences

Strong AbilitiesIn International

Logistics

Weak Abilities InInternational

Logistics

Vendors that have cold chain logistics as their core business

(1) Industry standards are defined by reference to best players in the industry, since their practices have undergone market test and thereby developedpracticability

Capabilities of logistics vendors must be analyzed before a

vendor can be selected

• International logistics abilities

• Local experience

• Logistics as core businesses

• International logistics abilities

• Local experience

• Logistics as core businesses

Criteria for selectingoutsourcing vendors

Criteria for selectingoutsourcing vendors



CMAC is ready to be your strategic partner to set up an

efficient distribution network in China

CMG has a 51% stake in CMAC

• Strength in ports and logistics network along the coast and rivers, with goodunderstanding of local logistics market

• Meet cold chain logistics industry standards and are and familiar withgovernment policies

• Have close relationship with government

• Economies of scale result in low operating costs

AmeriCold, with 49% stake in CMAC, will inject its International

logistics

capabilities

• Has 30 million sqm cold storage• Able to service many large food producers and wholesalers

CMAC offers logistics service as its core businesses

• Comparing to some big China state-owned companies who mainly serve internalcold chain logistics needs, CMAC is a public cold chain logistics service providerwho prioritizes client needs



Appendix: Introduction of CMAC



Founded in 1872 ,China Merchants was the firstnational enterprise in China’s modern history and

the legacy of the “Westernization Movement”

Li Hongzhang,Founder of China

Merchants

In 1979, China Merchants establishedChina’s first industrial zone opening tothe outside world – China Merchants

Shekou Industrial Zone

First Headquarter (Shanghai)

“Yidun”

First vessel

bought in 1872

CM’s branches inhistory

CMG introduction —

A hundred and thirty-seven year

voyage…



Subordinated To The State-owned Assets Supervision And AdministrationCommission (SASAC) Of The State Council

• One of 10 Chosen SOE publicized as Model

State-owned Enterprise• Selected as “The Most Admired ChineseEnterprise” by Fortune

• Awarded Grade A enterprise by SASAC• Two-fold growth in key financials within a 3-

year period

• Awarded “Enterprise with OutstandingPerformance” by SASAC

• Awarded Grade A enterprise by SASAC

2008

2007

2004 -

2006

2009

• Ranked 7th most profitable amongst all SOE

… Mainland China

Enterprise based inHong Kong

•Headquartered in HKand started business inHong Kong in 1873, andis the oldest mainlandChina enterprise

operating in HK


Large state-owned enterprise



Transportation & related infrastructure, property development & management,financial investment & asset management

Assets portfolio —

2009 Profit contributions —

2009


Core business sectors

Transportationinfrastructure

Ports

Logistics

Energy shipping

Toll roads

Others

Industrial zone

Propertydevelopment

Securities

Fund

Banking

Insurance

The largest public port operator in

China

The leading logistics vendor in China

With the largest deep-sea energy shipping fleet in the Greater China

China’s largest investor and

operator in toll roads

Propertydevelopment

Finance

34%44%

22%

Finance

TransportationInfrastructure

Property

50%

34%

16%

Finance

TransportationInfrastructure

Property



• Total Assets amounting to USD40 billion and managing asset value of US$368 billion (end of 2009)• Net Profit of US$1.41billion (for 2009)

Total assets(US$ billion)

40

30

18

8

64

200219981994

+17%

200920082006


Financial strength

368

255

147

18168

19981994

+29%

2009200820062002

1.4

1.2

1.6

0.9

0.6

0.5

0.3

2005 20092006 2007 2008

+29%

20042003

Managed assets(US$ billion)

Net profit(US$ billion)



QianhaiwanFree Trade Zone

MWT

CCT

SCT

CMAC

CMAC

CMG Cold Chain —

Cold chain business

CMAC is a joint venture, held 51% by China Merchants and 49% by AmeriCold, involved indeveloping cold chain logistics industry in China

CMAC owns cold storage space 24,500㎡ near West Port, one of the two designatedrefrigerated food inspection storage warehouses endorsed by the General Administration ofQuality Supervision, Inspection and Quarantine of the People’s Republic of China inShenzhen

Furthermore, CMAC has constructed a 12000㎡

cold storage warehouse at Qianhaiwan

Free Trade Zone. And by leveraging the favorable policies that are entitled by a free tradezone, CMAC also provides innovative services for import and export traders



• CMAC will own/operate 8 DCs with

75,000 sqm of frozen and chilled space,and a fleet of over 100 temperaturecontrolled trucks by the end of 2010

• In synergy with the internal logisticsproviders owned by China Merchants

Group, CMAC can leverage the strengthof the consolidated resources in bothgeneral goods logistics and cold chainlogistics, thereby providing an integratedlogistics service that covers generalgoods logistics and cold chain logistics

• The dry-storage warehouses that CMGoperates occupy totally 1,000,000 squaremeters, of which self-owned warehousesoccupy near 300,000 square meters. Italso owns 500 vehicles

• CMAC will own/operate 8 DCs with

75,000 sqm of frozen and chilled space,and a fleet of over 100 temperaturecontrolled trucks by the end of 2010

• In synergy with the internal logisticsproviders owned by China Merchants

Group, CMAC can leverage the strengthof the consolidated resources in bothgeneral goods logistics and cold chainlogistics, thereby providing an integratedlogistics service that covers generalgoods logistics and cold chain logistics

• The dry-storage warehouses that CMGoperates occupy totally 1,000,000 squaremeters, of which self-owned warehousesoccupy near 300,000 square meters. Italso owns 500 vehicles

CMAC

Cold Chain Network

— 2010

And Beyond

CMG Cold Chain —

Development planning

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