This Supply Chain Matters commentary serves as a side-panel to our prior posting: Supply Chain Matters Insights from the Global Trade War August 24 , 2018. We wanted to highlight a perspective of a Chinese enterprise, who previously diversified into the U.S., also being impacted by ongoing tariff dynamics.

Background

In May of 2013, China based Shuanghui International announced a $5.7 billion acquisition of U.S. based pork producer Smithfield Foods.  Smithfield’s brands include names such as Armour, Carrando, Farmland, John Morrel, and Health Ones among others. This acquisition was primarily about providing China’s meat consumers access to more trusted U.S. brand and food-focused supply chain products.  Shuanghui, which has a significant food supply chain presence in China wanted to spur growth in providing Chinese consumers broader choices in U.S. branded meat products sourced in the U.S. and exported to China. Since the acquisition announcement, Shuanghui International was renamed to WH Group

Post-acquisition, the meat producer quickly unveiled new lines of premium ham, shoulder meat and other muscle cuts of pork products targeted at China’s growing middle-class consumers who typically remain distrustful of Chinese-based food supply chains and more trustful of U.S. or other international brands. Plans further called for as many as four new production plants to be constructed in China that will produce branded pork products from animal products sourced in the U.S. farm supply chain.

Current Situation

Earlier this month, WH group, which is now termed the largest pork producer in the world, reported worse-than-expected financial performance for the first-half of 2018. The company reported a 7.7 percent drop in net profit as it U.S. and European operations were impacted by lower margins. Revenues were up 4.8 percent to $11.1 billion but came in lower to analyst estimates.

According to reporting from the South China Morning Post, the meat producer’s U.S. business (Smithfield) operating profit dropped by $140 million compared to the year-earlier period, while the fresh pork segment suffered an operating loss of $15 million. The decline was attributed to declining hog prices brought about by a building domestic market surplus amid U.S. pork industry fears of tariffs impacting China based exports. U.S. hog prices dropped 4.6 percent in the first-half of 2018.

Last year, the company’s U.S. business contributed to more than half of total sales and was double that of the China. Packaged meats and fresh pork drove the bulk of revenue growth while prices in the U.S. and China remained favorable.

The Chairman of WH Group indicated that if the current trade dispute drags on, U.S. export volumes will be adjusted to China as well as Japan and South Korea. The company will reportedly limit hog production in the U.S. as well as “accelerate the company’s pace of acquisitions in Europe.”

According to the China news outlet, as news of a potential trade war among China and the U.S. continues to permeate business and general media, WH Group shares have declined nearly 37 percent in 2018.

Takeaway

In our May 2014 Supply Chain Matters commentary, we opined that the Smithfield acquisition represented a somewhat “perfect storm” strategic move of reduced domestic China pork supply, higher yield, coupled with a huge China consumer market demand potential.

Over four years later, a building trade war among the U.S. and China has complicated that strategy, which is now entangled in the crossfire of building trade tensions and in polarizing farmer political constituencies in both countries.

 

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