An Interview with COFCO President Patrick Yu
After World War II, the People’s Republic of China—war-torn, struggling and isolated—found itself coping with existential challenges, chief among them the feeding of an enormous, fast-growing population. Famine was widespread, resulting in millions of deaths. In response, in 1949, the Communist central committee created COFCO—an acronym for China National Cereals, Oils and Foodstuffs Corporation—a state-owned grain trading company exchanging agro-products between China and overseas.
More than half a century later, malnutrition has vanished as a national crisis, supplanted by China’s impressive economic growth. Supermarket shelves carry an array of food products. Some of the world’s finest dining can be found in Shanghai and other cities. Along with the upgrading of diets for Chinese consumers, COFCO has evolved from a grain trader into an ambitious, integrated—and acquisitive—global agribusiness.
With multiple proficiencies, including processing soybeans and bottling Coca-Cola, COFCO controls 11 publicly traded companies, and in recent years has diversified into winemaking and dairy products, proprietary branding and financial services. Lately, COFCO has grown its portfolio by acquiring foreign assets and in so doing has fashioned a global perspective that has brought the company into competition with the top tier of first-world food conglomerates, the so-called “ABCD”: Archer Daniels Midland, Bunge, Cargill and Louis Dreyfus Commodities.
Patrick (Xubo) Yu, COFCO’s president, in many ways embodies the pragmatic, sophisticated and modernizing spirit of the Chinese economy. Yu joined COFCO as a clerk in 1988 following completion of a degree in economics. During a study trip to the U.S., he honed his expertise in trading, futures and hedging, rising to the post of general manager of the company’s futures brokerage in 1997. He earned an executive MBA from Shanghai-based China Europe International Business School in 2004 and in 2007 was named president of COFCO, today a conglomerate with annual revenue of $71.7 billion.
Given COFCO’s remarkable creation and evolution, could you please explain the company’s current strategy and how it aligns with China’s economic progress?
A: With the country opening up, COFCO has come a long way from a traditional import-export company. We started to look at how we could consolidate our business. After import-export, we started building the industrial side of the business: food processing, flour milling, soybean crushing. Over the years we expanded into property, services, finance. We viewed ourselves as an agriculture and food company, but as China’s markets developed, domestic prices grew very high due to low productivity. We were serving about 20 percent of the working population with 9 percent of the arable land. We had to look at ourselves and at how to grow our business. That led to investment in the industrial side—soybean crushing and food processing. Now we can see overcapacity in that area. Compared to the ABCD and other peers, we’re short on global supply chain. Instead of building a local network, we’re building a worldwide network. That’s why we invested in Noble Agri and Nidera to help fulfill our long-term growth strategy. [On March 3, COFCO completed its purchase of Noble Agri, with trading and processing operations in Australia, South America and other regions. In 2014, COFCO bought a majority stake in Dutch grain giant Nidera.]
Africa has 20 percent of the world’s land mass and 60 percent of the Earth’s naturally irrigated and arable land. Is Africa on the map for COFCO in the next 10 to 15 years?
A: Yes, definitely. Noble Agri [now known as COFCO Agri] and Nidera are our global food-source originations. We want the company to grow its global network and footprint. Expanding the company to serve global markets is definitely one of our goals. If you look at Africa today, it’s more of an import market. In China, we’re a big population and have potential for future growth in terms of agricultural production. Everyone has been really focusing on Africa and doing a lot of research. Maybe we won’t see big growth overnight, but definitely longer term.
As COFCO expands interests in Ukraine and countries around Eastern Europe, you see economies that have been hurt by the drop in commodity prices. Once there’s a bounce in prices, their GDPs could reach 6-8 percent growth. Is COFCO there to assist food supply to China or to compete with ABCD?
A: Of course, it will better serve the China market. But, we keep saying that we made the investments in both Noble and Nidera to get a global agriculture company. The purpose is not to be a company only for China. The purpose is to enhance our global presence to become a global agribusiness and a peer of the ABCD competitors. COFCO would like to be a global agriculture company with our origination points working in major production areas. You talk about Ukraine, you talk about South America, talk about North America, talk about Asia Pacific, Australia; those are definitely markets where we have to be in order to better serve our population and consumption in the global market.
Are COFCO’s interests ranging beyond grains, oil and seeds to meat and poultry, and all the rest of the food goods that could be supplied?
A: Yes, not just grain trading. We’re also managing the dairy business, protein business, pork and imported beef. All of which gives us much better insight into where the market is going and the trends of future growth.
Please tell us about the sustainability of food production and the role of innovation in improvement of production.
A: In the past few years, the government kept raising price supports to farmers. Price supports naturally have a positive impact on production. If you look around the world, the biggest positive factor has been innovation and technology. In China, we don’t have much area to expand given the current situation on the water and on the land. An organization may increase its scale by increasing the amount of land, but the overall amount of land is limited, so you have to think more about innovation.
If you look at food trends and consumption, they’re affected by factors such as poverty and prosperity. People are adding meat to their diets as well as health products. Have these had an impact on your production?
A: Whether you are talking about flour milling or oil-seed crushing, you’re seeing mills everywhere. With economic development and urbanization, we’re seeing city people consuming more in terms of protein in their diet and going to restaurants more often. And you’re seeing country people starting to spend more money to buy food from outside instead of producing it by themselves and only eating at home. Chinese demand per capita in terms of pork consumption, dairy, seafood, sugar and edible oil is increasing —even though the economy has been slowing. And this increase isn’t just on the coastal area and the capital, but also in the interior.
We talked about innovation in farming, being able to produce more food with fewer plants. Can you speak about precision farming (optimizing crop yield through scientific methods) and its effect on water usage?
A: There’s lots of discussion about precision farming. As urbanization takes place there will be more land available for cultivation. Larger-scale farms will appear, no doubt, and I think in the short term. Larger areas in the west and north and even in the middle of the country are becoming available because farmers are migrating to cities where it’s easier for them to earn money than on a farm. With more large-scale farming, more investment in machinery and better seed is possible, and with more precise methods. Advanced technology lets the farmer know exactly how much water is needed. More water will be piped underground, making its consumption more efficient.
How can COFCO help to address the slowdown in Chinese markets?
A: The slowdown concerns us because food is very much in demand in terms of growth. Though demand grows, we see a slowdown of economic activity, fewer workers are visible. Eventually, that will affect us. We can see prices falling and a squeeze on industry profit. To sustain growth we have to restructure, make sure we’re focusing on our strengths, operate efficiently and get rid of unnecessary expenses, and concentrate on making a return for shareholders. Comparatively, the downturn is bigger in property and financial sectors—but it doesn’t matter what area you’re in, you have to look at the long term, which forces you to get out of certain businesses.
Does the Chinese government support this approach?
A: The government is very much involved in optimizing the supply side of the economy, where we may have unnecessary capacity or industries. We must make sure we have stronger health services, since the elderly are becoming a larger percentage of our population. You see a lot of Chinese students going overseas, so we may need better schools at home. With urbanization we may need more infrastructure, so in terms of competitiveness of commercial enterprises, we may need more reform to encourage innovation. Even with the slowdown, the economy has a lot of potential.
In order to operate in the same league as the ABCD companies, please tell us what COFCO’s priorities are for strengthening and developing its internal capabilities.
A: You always need to have better communication because the world, with telecommunications technology, is becoming so transparent. You really have to invest in IT, so you can coordinate from (food) origination to consumption destination markets on a very regular, daily basis. You have to invest in human resources to get the most experienced talent in different commodity areas—and you’ve got to own the assets of origination and export terminals. We’ve got some assets in Brazil, Argentina and the Black Sea—it’s not enough, certainly compared with ABCD. But we’re just starting. We’d like to brand ourselves differently than ABCD. They’ve been around for hundreds of years, have built strong networks and control their own systems. As a latecomer, we partner with others. Partnership is a major theme for COFCO globalization. We make sure to partner with local players who are specialized, good at origination and know the local farmers very well. That’s their advantage. COFCO’s advantage is that it knows destination markets. Nidera and Noble know how to trade globally. By partnering, we can align all the players along the value chain. No one has to own the whole system. This way we can share among us and become competitive much faster.
Has attracting talent been difficult?
A: I’d say the most critical and challenging part for us isn’t money, it’s talent, finding the managers who run the business. When you get a good manager in place, it saves my time and lets me sleep better. Otherwise, when something’s not working, you have to spend your time talking, analyzing, thinking of ways to solve situations. The most efficient method of succeeding in a new area of business is to invest in a pool of talent. As we globalize through acquisition, getting a good CEO on board as part of the acquisition is number one. A good CEO definitely knows where to get talent and definitely is a major part of our global strategy.
You’ve been with COFCO pretty much your entire career. You’ve gone from the bottom to the top, something you don’t see much in the West anymore. Do you favor promoting and developing talent within or getting new blood from the outside?
A: Developing talent internally is essential. Having a system to develop talent and let talent benefit from the company’s growth—to offer an equal chance to be engaged and really benefit—are the things managers are looking at. Once you get into a new area or the business gets really big, it can be beyond a manager’s capacity. You can adjust with training, definitely. But when you get into a different business it’s critical to invest in the best talent and expertise from the market.
How do you retain those people?
A: With 11 listed companies, it’s important for us to maintain good governance by empowering managers to make their own decisions, to take risks and to make decisions, to grow the company and to create shareholder value. You need a competitive compensation scheme so managers know if they’ve tried very hard and with great effort made the business great, and shareholder interests are aligned with management’s contribution, then they will be rewarded. COFCO has lots of [stock] option programs. We have short-term incentives and we’re building long-term programs as well. People want to be able to see big potential and benefit from strategic growth down the road. That’s the most critical way to maintain talent. The other way is to create bigger business platforms. Otherwise, you’re watching business shrink and no one wants to stay around for that.
Looking back over your career, of what successes are you most proud at COFCO?
A: Over the years, COFCO has merged with a number of agricultural and trading companies, many of them state-owned. We’ve been able to engage people with a very clear strategy to grow ourselves into the strongest agriculture and food company. We didn’t want mergers for their own sake but because we believed in their expertise and capacity to help us grow and achieve our vision of becoming a full-value food chain organization. To make it work, you have to be very inclusive, because you’ve got people coming from different backgrounds, different companies, different corporate cultures. That’s not easy for Chinese companies. Unlike a typical Chinese company, COFCO has been known for our openness, our inclusiveness and the way our people are aligned with the company’s strategy. Everyone is part of the game and enjoys the process, even though we work very hard. I’m proud of all that. We want to be the most reliable food company in China and maybe one day, with our globalization strategy, to be the most reliable in the global market.
How do you relax?
A: I try to get home a bit early to enjoy a good dinner and have 45 minutes to an hour to walk with my wife. That helps me relax a lot.
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