Selective Investments Pay Off in Overseas Manufacturing
The "Asian flu" is contagious, the ruble is "rubble," Brazil is on the brink of financial collapse, China is slowing down, Japanese banks are bankrupt and Mexican banks close to it.
It's a bad time to invest overseas. Yet U.S. food manufacturers continue to invest abroad, selectively targeting opportunities, weighing risks and benefits. Consolidation follows as trade barriers fall, with fewer but bigger plants serving wider marketing areas.
With a mature market at home, U.S. food manufacturers intensified their efforts during the '90s to boost income and market share through acquisitions and "greenfield" investments abroad. U.S direct investment in foreign food manufacturing surpassed foreign direct investment in U.S. food manufacturing in 1993 and stood at a cumulative $36.18 billion by the end of 1996.
But overseas growth has been elusive. According to a Schroder & Co. analysis earlier this year of the foreign operations of 10 major U.S. food manufacturers (1), "the percentage contribution to sales and earnings from overseas has shown little change over the past five years."
Trend toward full ownershipThe major strategy employed by large U.S. firms to enter foreign markets over the past decade is to acquire a regional processor who commands a major market share and build from there. Other strategies include joint-ventures with, or equity investments in, foreign manufacturers. Many companies which originally broke into foreign markets by exporting have evolved into manufacturing abroad. Because processed foods can often be produced in the host country for less than the delivered cost of exports; population growth and rising incomes in developing nations have boosted demand for processed foods; foreign-investment rules have been liberalized in a number of countries over the past several years; and regional trade agreements such as NAFTA (North American Free Trade Agreement) and MERCOSUR (South American Common Market, comprised of Argentina, Paraguay, Uruguay and Brazil) have encouraged investors.
Dr. Charles Handy of USDA's Economic Research Service (ERS) estimates that 1997 sales by U.S-affiliated food manufacturers abroad reached $133.7 billion, more than four times the $31.3 billion of U.S. processed food exports. Handy detects a trend toward wholly-owned facilities because it allows for greater control.
Food companies continue to form joint ventures, however. Example: Frito-Lay announced November 25 a joint venture with Empresas Polar S.A. in Venezuela to manufacture and distribute the products of both companies throughout nine Latin American nations.
In spite of economic uncertainty abroad, "food and beverage
projects have been reasonably strong in South America, China and Western Europe," says Tucker G. Maloney, business development manager at the Atlanta office of Lockwood Greene Engineers (Spartanburg, S.C.). "The developing nations, which most need our services, are hungry for foreign investment. However, a number of projects in Russia and other parts of Asia have been placed on the 'backburner.'"
Latin America: new focusAccording to a March 1998 ERS report coauthored by Handy (U.S. Foreign Direct Investment in the Western Hemisphere Processed Food Industry), 90 percent of the $11 billion invested by U.S. food processors in the Western Hemisphere is directed toward four nations: Canada, Mexico, Brazil and Argentina.
In addition to recent acquisitions in Latin America, U.S. food manufacturers are investing in greenfield and renovation projects. Kellogg is building a new 15,000 sq.-meter cereal plant in Buenos Aires. Altecnica Lockwood Greene (ALG), a wholly-owned subsidiary of Lockwood Greene Engineers, executed preliminary design, cost estimates, civil engineering, building construction, utilities and process engineering. ALG also designed and built a 4,000 sq.-meter Ralston Purina pet food plant which started-up in May 1997 at Santo Tome, Argentina, and is currently expanding and renovating the Pepsi Cola/Seven-Up bottling plant operated by Baesa (Buenos Aires Bottling Co. S.A.).
Perhaps the most unique food project in South America is the $42 million, 250,000 sq.-ft. FoodTown facilty designed by McClier (Chicago, IL), which started-up last September at Sao Paulo, Brazil. The complex integrates three McDonald's suppliers — a meat plant, a bakery plant and a distribution center — to minimize costs and boost efficiencies through shared resources and logistics. Each plant represents a joint venture between an American and a Brazilian company: OSI and Braslo Producto de Carnes Ltda. teamed-up for the meat plant, Fresh Start Bakeries and Fresh Start Bakery Ltd. for the bakery; and OSI Distribution and Brapelco for the distribution center. According to McClier Vice President David Dixon, project time-frame was "extremely aggressive," withcontract award in November 1997 and startup in September 1998. McClier contracted with local firms to execute phased design and construction.
Coca-Cola FEMA started-up a new bottling plant mid-'98 at Toluca, Mexico, which was designed and built as a turnkey project by Raytheon Engineers & Constructors (Princeton, NJ). In 1997, Raytheon engineered and constructed a co-generation plant as part of a corn processing facility at San Juan Del Rio, Mexico, for Arancia CPC — a joint venture berween CPC International and Mexico's leading corn refiner. According to C.K (Ken) Dietz, vice-president/general manager for food and consumer products at Raytheon's office in Downer's Grove, IL, Raytheon is also involved in global Y2K projects for major food companies including the General Mills/Nestle joint venture Cereal Partners Worldwide, Pillsbury and Proctor & Gamble.
The Stellar Group (Jacksonville, FL) is renovating airline-meal commissaries for LSG SkyChefs at Rio de Janeiro and Sao Paolo, Brazil, and at Caracas, Venezuela, with all three projects scheduled for completion in March. Meanwhile, Stellar is engineering and managing
construction of the new, 140,000 sq.-ft. Beaver Street Fisheries lobster and fish processing plant at Nassau in the Bahamas, with startup slated next October. International Dessert Partners, the joint-venture between General Mills and CPC International, started-up a new plant in Uruguay in 1997 to supply South American markets.
'Asian flu' strikes ChinaEconomic problems affecting other Pacific Rim nations are now impacting The People's Republic of China (PRC). According to a December 19 Chicago Tribune report from Beijing, "the days of unchecked growth are over. The Asian financial crisis is taking a deeper than expected toll on China's still relatively closed economy," with "the appearance for the first time of mass unemployment..." Industry observers report that some recently built U.S. food plants have been "mothballed," and planned projects have been delayed. Tyson Foods, which expected to break ground mid-1998 for the first of up to 10 poultry complexes in the PRC, has delayed its plans. "Asian economic problems have slowed us down in China," Tyson spokesman Archie Shaffer told Food Engineering. "It's where we want to go, but it's taking longer than we had hoped."
Sources contacted by Food Engineering concur that the major challenges to executing projects in China today are not only cultural but regional and political. "Each province operates differently," observes Darryl V. Wernimont, vice-president/business development at Ibberson International (Hopkins, MN). "Availability of building materials, access to raw materials and ingredients, local codes and regulations all differ. A lot depends on personal relationships."
Ibberson, which has executed 20 projects in China, joint-ventured in November 1997 with the China National Beijing Contracting & Engineering Institute for Light Industry (BCEL). The partnership designs and builds "fit-for-purpose" food plants in China. A fit-for-purpose plant, Wernimont explains, blends process and construction technologies with appropriate levels of automation, is compatible with regional resources yet complies with regional limitations and regulations.
Southeast Asia: confidence remainsOpportunities in Southeast Asia, currently wracked by collapsed currencies, should be evaluated on a case-by-case basis, says Dr. Yorgos Papatheodorou, market development manager at Lockwood Greene. "Those in for the long haul view the current situation as a temporary setback, will continue to build, and believe they will benefit from the turnaround," he observes. Currency devaluations have created some "attractively-priced assets," he adds.
Kellogg in 1997 started-up a new cereal plant in Thailand (where
Raytheon managed construction), and in August 1998 acquired a convenience foods plant in Malaysia. Campbell Soup last year added a soup line in Malaysia. Reuters reported on November 16 that PepsiCo Foods International plans to turn its Thailand snack-food facility into a quot;regional production and distribution hub" which in two to three years will serve other Asian nations such as Vietnam, Cambodia, Laos, Singapore and Malaysia.
Eastern Europe: selective opportunitiesThe best opportunities for U.S. food manufacturers in Eastern Europe are in those nations striving to join the European Union (EU) by 2002: Poland, Hungary and The Czech Republic. Opportunities in Poland are "vast, in every food sector" but especially in the meat/poultry industries, reports Alexander Kahl, marketing coordinator at Epstein Development Sp.zo.o, the Warsaw-based unit of A. Epstein & Sons International (Chicago). Many of these plants need upgrading to USDA and EU standards. During the '70s, Epstein designed and built three turnkey, USDA-compliant (for export) abattoir/meat processing plants for the Polish government. Since then, Epstein has executed more than 30 food/beverage projects in Poland for Polish, West European and U.S.-affiliated food companies including PepsiCo, Cargill and Gerber International. In a joint venture with Animex Export Import and Rolpasz, Epstein designed, built and jointly operates the 60,000 sq.-meter Constar plant started-up in 1993 at Starachowice and considered "Europe's most modern slaughtering and meat processing plant." In other Polish/American joint-ownership ventures, Epstein designed and built the 10,000 sq.-meter Konspol-Bis poultry processing plant started-up in 1994 at Slupca, and is currently building the 14,000 sq.-meter Ekodrob poultry plant at Ilawa, slated for startup this year.
Most sources contacted by Food Engineering consider Russia a problem. With no credit available, "the biggest challenge is getting your money," says Virgil Eischen, president of Eischen Enterprises (Fresno, CA). Eischen recently engineered and installed a pasteurized milk line in an ice cream plant operated by the Vladivostok Cold Storage Co. "You can only do business where the local government has money, such as in an oil-drilling area," he adds.
Yet selective opportunities exist. Foodpro International (San Jose, CA) is currently renovating a building and installing potato processing equipment for a joint venture between the Russian farm cooperative Dimitrov Growers and the Russian Farm Community Project (Minneapolis, MN), a farm group headed by former Land O'Lakes President Ralph Hofstad. The Russian farmers "believe in self-help and local ownership," says Hofstad. "What they need is credit, farm supplies and marketing." Located at Dimitrov, about 70 miles from Moscow, the plant will start-up this month and manufacture products such as fries and chips. The Russian farmers "have lots of potato storage," says Foodpro President Bill Washburn. "Value-added products are what they need."
Western Europe: eye to the EastWestern Europe is also a mature food market "but the European Union (EU) has 375 million consumers and the greater European market -- including the East -- totals more than 800 million," says Paul J. Kleijne, Midwest Area Director for the Netherlands Foreign Investment Agency (Chicago, IL). Advances in information technology, the growing common market, an efficient distribution network and introduction of the euro all make it possible to better serve the greater European market from a single location, he points out. The Netherlands, long a food manufacturing and distribution hub, currently hosts at least 32 U.S. food manufacturers. Recent new plant construction includes the McCain potato-processing plant at Lelystad, the Nielsen-Massey Vanilla plant at Leeuwarden, the MasterFoods sauce plant (a unit of Mars) at Oud-Beijerland, the Piemonte Pizza Crusts plant (a joint-venture between Piemonte Foods and Sabatasso Europe) at Etten-Leur, and the $80 million Iams pet food plant which started-up late 1998 at Coevorden. The euro, which took effect January 1 for business-accounting purposes, will simplify cross-border transactions, eliminate foreign-exchange problems within the EU and "improve the openness of the single market," leijne believes.
Nobody operates more globally than Coca-Cola Co., with its worldwide affiliated bottlers now selling 1 billion soft drink servings per day in nearly 200 countries. According to Irish newspaper reports, Coca-Cola last March broke ground at Ballina in County Mayo for a $160 million concentrate plant which -- along with Coke's existing plant at Drogheda -- will supply bottlers in 75 countries across four continents. The project is slated for completion in June and will be fully operational by year-end.