DSM making long-term investment in China

By Dominique Patton

- Last updated on GMT

Related tags Dsm Vitamin c

The Dutch chemicals group DSM is on course to significantly bolster
its presence as a supplier to China's food industry, with major
investments in ingredient production expected to bear fruit in two
years time.

The firm, which wants to almost double the group's sales to this market to reach revenues of US$1 billion by 2010, is on the look-out for acquisitions in the nutrition area, as well as collaborations with local companies.

But it is also investing in its own production sites, building a new process flavours plant and collaborating with local scientists to make its vitamin-making processes more efficient.

DSM has had an important share of the vitamins market in China for some time, but a large part of the sales come from animal feed and infant nutrition. And its food ingredients business currently contributes little to overall revenue. But this is about to change.

"Historically, the Food Specialties division was not very active in China. We had very small sales, and only imported products. But we decided that this was something we needed to change,"​ said Stefan Sommer, responsible for DSM's China operations, in an interview with AP-Foodtechnology.com.

News earlier this year that the group would spend €10 million on building a new flavours plant on its site in Xinghuo, near Shanghai, is a major step towards creating a sizeable Chinese food business.

The manufacturing facility - its first for food in China - is expected to be fully operational by April 2007.

DSM should also make major inroads into the food market when it gets full approval for its joint-venture with NCPC. The deal with the Chinese vitamins and antibiotics maker was agreed last year but is still going through a highly complex approvals process, complicated by the Chinese firm's ownership - part state-owned and part public.

When the multiple approvals come through - hopefully by the end of next year - the venture will allow DSM to sell vitamin C in China for the first time.

In the early years the firm made a strategic decision not to compete on this market with its European-produced vitamin C, seeing no opportunity to realise the required margins.

But with the capacity gained at NCPC's facilities, it will be able to offer Chinese vitamin C to the rapidly growing processed foods market.

"As a global, leading vitamins player we need a vitamin C position, and we need it where the markets are. It makes a lot of sense to have a strong position in China as well as in the west,"​ said Sommer.

DSM has already invested $160 million in the venture but says it could make $250 million in revenue from the business. The larger part of this will come from vitamins, and a smaller share from antibiotics.

Both the food ingredients and nutritional products businesses are therefore about to acquire significant manufacturing capacity in the coming two years. This is part of the group's overall strategy to cut down on imports and build a China-based business.

"We realised that process flavours can't be competitively imported into China. And in the long-term, all of our products will have to be produced here,"​ said Sommer.

Currently more than half of the group's US$600 million sales come from products manufactured in China, and this number is expected to increase as imports from the group's headquarters in Europe go down.

"Nearly all our raw materials are bought locally,"​ added Sommer. "It's a fantastic specialty chemicals base here, and the quality is getting better and better all the time."

Energy supply is also improving, he said, and although many firms faced supply shortages last year, DSM managed to largely avoid this typically Chinese problem by sheer luck.

The Dutch company also believes that it can compete with Chinese manufacturers, known around the world for their low-cost production, even though it employs some 'expensive people' in China and spends more on its manufacturing sites in order to maintain the same safety standards as elsewhere.

"In the long-term, the benchmarks for our plants in China are our competitors here and not our plants in Europe,"​ explained Sommer, pointing out that product quality is increasingly comparable.

"It costs us a little more to run our plants but we think we can compensate some of these disadvantages by having highly efficient plants."

The drive for efficiency is seen across the chemicals sector these days but DSM has proven that it can significantly reduce costs, overhauling the group's operating expenses to report a strong rise in operating profit last year.

Whether it can carry off a similar strategy in the toughest of operating environments remains to be seen. DSM China is profitable, although overall it is slightly below DSM's total profitability.

"In certain businesses our plants are more efficient than our competitors and in others they're not,"​ said Sommer. "When we build new, we still don't build as the Chinese do and we'll have to find a compromise way to make our plants as efficient."

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