Various financial and business media report that Nestle, the global goliath in food production, is one of several companies in confidential talks to acquire and form a partnership with Hsu Fu Chi International (HFCI), China’s largest confectioner. The company produces chocolates, candy and pastry. Shares of Hsu Fu Chi stock were voluntarily suspended yesterday on the Singapore Exchange as a result of this news.

So much for confidential!

The deal if successfully completed will have significant impact, including supply chain related implications. The company reported a 31 percent increase in fiscal year  2010 profits.  The supply chain profile of HFCI includes 45 production plants that produce more than 700 different confectionary products.  Products are distributed through retail, hypermarkets and supermarkets.

Supply Chain Matters readers will recall our previous commentaries related to Kraft Foods and its acquisition of Cadbury PLC, a move to broaden and diversify Kraft’s presence in the confectionary arena and particularly in growing emerging consumer markets such as China and India. Kraft has had to re-orient its supply chain production and distribution plans to support both its traditional food and now confectionary products, whose distribution channels are somewhat different.

Nestle, on the other hand, has been very experienced in global markets and distribution channels, particularly those in China. Its recognition in China dates back 20 years. The company has set a goal to dramatically increase its penetration of these markets.  If this potential deal, either in partnership or acquisition is successful, it will clearly deepen Nestlé’s influence and penetration in one of the world’s potentially largest consumer markets.  The Nestle brand  has garnered far more consumer trust in China in the wake of the previous milk powder contamination incidents that occurred in 2008. Chinese consumers have preferred trusted foreign brands over those within China. Nestle currently operates 23 factories in China and employs over 14,000 people.

Whoever is successful in a broadened business relationship with HFCI will likely inherit a broader and deeper distribution channel relationship within China which could prove to be a major plus.

Bob Ferrari

Last week, some key manufacturing indices reflected some optimism in continuing momentum of U.S. related manufacturing and supply chain activity, while China remains on a downward trend.

The ISM PMI Index of Manufacturing Activity was reported at 55.3 in June, up 1.8 percentage points from May, a positive and a very pleasant surprise.  Economists were expecting the index to contract because of headwinds in the economy. Once more, the new orders index indicated a slight increase, reflecting some optimism for continued momentum.  Manufacturing employment was up 1.7 percentage points which were a very positive sign of optimism. Prices of inbound materials also dropped 8.5 percentage points.   Of the 18 manufacturing industries reported, 12 indicated growth in June.

A cause for concern is the Inventories index which was reported to be 5.4 percentage points higher than May. Six industries accounted for the increase including Computer and Electronic Products, Electrical Equipment and Machinery, perhaps reflecting increased concern and hedging over the recent shortages caused by the earthquake and tsunami that occurred in Japan in March.  Customer-related inventories were also up.

Separately, the ISM-Chicago Area PMI Index rose to 61.1 reflecting a 4.5 percentage point increase from May.  The Wall Street Journal noted in its report that the increase in the Chicago index supported the argument that the spring slowdown in manufacturing was mostly reflected by the impacts from the Japan earthquake rather than underlying deterioration in the U.S. economy.  That stands to reason given the Chicago region reflects a heavy presence of automotive and industrial manufacturing. Indices reflecting the New York, Philadelphia and Dallas regions however reflected a decline for manufacturing activity in June.

China’s PMI Index, reported by the China Federation of Logistics and Purchasing and China’s National Bureau of Statistics fell to 50.9 in June from 52.0 in May, its lowest point in 28 months. Weaker global demand and tighter monetary policy has the index now approaching a signal of defined contraction, reflected by a value of 50 or below.  Among 10 indices, all but one fell, indicating continued signs of a broader-based slowdown. A report featured on The Economic Times web site indicates that U.S. retailers are planning conservatively for the upcoming holiday season, attempting to avoid being stuck with unsold goods or untimely inventories.

A separate news story published in today’s printed Wall Street Journal (paid subscription required) notes that a stronger yaun and continued rising wage rates are motivating some larger manufacturers to consider a variety of measures to offset higher labor and export costs.  Wage rates in China have doubled for companies such as Brooks Sports and United Technologies, who are now looking toward other areas such as Vietnam Indonesia or Malaysia for factories, or investing in higher levels of labor automation for existing Chinese factories.

What about your organization’s current manufacturing strategies?  Is your organization cutting back in China in favor of other countries, including the U.S.?

Bob Ferrari