China’s agricultural space is ripe for disruption, presenting big opportunities for global agtech innovators.
Chinese policymakers recognize that an underdeveloped agricultural sector that leans heavily on imports to make up for production shortfalls is an Achilles’ heel. It threatens the country’s economic rise, leaving it vulnerable to the vagaries of international supply chains and geopolitics.
To remedy this, the Chinese government is emphasizing self-reliance in many areas, including food security. It’s seeking to foster a ‘dual circulation’ economy that boosts domestic demand and innovation, while simultaneously reducing dependence on foreign products that might harm the country’s long-term interests. But, at the same time, China will welcome overseas enabling technology that helps it achieve these objectives.
In this article, I outline some important trends and areas which international agtech firms can target to win business in the country.
Current state of play
Before getting into the weeds of the matter, baseline data on China’s agricultural sector provides a useful perspective on why modernization is high on the government’s priority list.
The country has 18% of the global population, but only 7% of the world’s arable land, so high yields are essential to feed 1.4 billion mouths. But here, China lags: its yields from staples including corn and soybeans are only 50-60% those of the US, despite using up to five times more fertilizer, herbicides and pesticides - itself an environmental catastrophe.
There are 270 million farms in China, providing a livelihood for more than 500 million people in rural areas. As of 2019, more than 90% of farms held less than 0.67 hectares of land. Compare this with average farm sizes of 61 hectares in Germany, 86 in the UK, and 180 in the US – nearly 300 times larger than the typical Chinese holding.
Wheat is a mechanized row crop, but mechanization rates for other key row crops are markedly lower, especially in the sowing, fertilizing and harvesting stages.
Despite an excess of labor, China still imports a staggering amount of grain, reaching a record high of 140 million tons in 2020 - including 55 million tons from the US, a massive rebound from the depths of the trade war in 2018 and 2019. And China’s voracious appetite for foreign grain did not abate in 2021, when it imported more from January to September than any other time.
Producing more with less
Against this backdrop, increasing yields of key crops is paramount to achieve self-sufficiency and food security. To accomplish this, the government is focusing on, among other things, advanced breeding programs, while simultaneously trying to reduce chemical fertilizer use.
China’s stance on the cultivation of GMO plants for commercial purposes – long considered taboo, even though the country has been importing genetically modified crops for years – is changing.
Last November, the Ministry of Agricultural and Rural Affairs (MARA) introduced a draft law making it easier for firms to commercialize various GM traits. And, in December, it announced its intention to approve the cultivation of GMO crop varieties from local companies such as Longping and Dabeinong.
Additionally, just last month, MARA published guidelines simplifying the registration process for gene-edited plants, potentially allowing a pathway for such crops to avoid time consuming and costlly field trials.
This shift is a potential watershed for the industry, and not just for its domestic players: our work in the sector has shown Chinese companies are eager to form partnerships with foreign firms that can offer cutting-edge technology to enable the development of new seed varieties and traits.
China’s overuse of chemical fertilizers, meanwhile, has caused widespread environmental harm. While this is partly related to the prevalence of small farms, it is also due to subpar fertilizers, soil amendments and pesticides. The government is well-aware of this problem, which was an impetus for state-backed ChemChina to acquire Swiss-based agricultural science group Syngenta in 2017.
Last February, Syngenta announced it was building a $240 million R&D facility in Nanjing to develop biologicals. Startups are getting in on the action too: California-based Sound Agriculture announced a strategic partnership with Syngenta to deploy its flagship SOURCE product in China - a technology that could drastically reduce the use of nitrogen fertilizers.
Big Tech plows in
China’s Big Tech firms have also stepped up their agtech game in recent years – again opening opportunities for western firms.
Alibaba has capitalised on its cloud computing expertise to create ‘ET Agricultural Brain’ - a platform using AI, visual and voice recognition, and real-time environmental monitoring to optimize productivity at pig, fruit and vegetable farms. JD and Huawei have also launched similar services.
One of the largest Big Tech movers in agtech has been Pinduoduo. Virtually unheard of just a few years ago, the company surpassed Alibaba in 2020 with 788 million active users.
Pinduoduo’s core business is to connect consumers directly to farmers – cutting out grocers – using an interactive, ‘gamified’ platform. Furthermore, one of its stated goals is to promote ‘smart agriculture’, using digital solutions to modernize the country’s agriculture sector.
To this end, in 2020, Pinduoduo launched Duo Duo Farm, a collaborative initiative with Yunnan province using AI to help poor farmers boost their income. Last March, its founder, Colin Huang, stepped down as chairman to “pursue research in the food and life sciences, disciplines where breakthroughs could drive the future of [Pinduoduo].” And in August, the company announced its ‘10 Billion Agriculture Initiative’, a RMB 10 billion fund designed to drive advancements in agtech.
Despite the checkered publicity Chinese tech firms often receive abroad, they actually have a strong history of working with global SMEs. Indeed, we’ve closed deals on behalf of our clients with many of the firms mentioned in this article, and western agtech companies with innovative technologies aligning with their agricultural objectives should find a receptive audience.
VC investment
At the same time, China is one of the largest destinations for agtech venture capital - second only to the US - with $5.6 billion invested in firms in 2020, according to AgFunder.
Major conglomerates such as Legend Holdings, Fosun and New Hope Group have established VC and other funds focused on agriculture and food. Pinduoduo’s 10 Billion Agriculture Initiative has earmarked funds for agricultural startups. And Shanghai-based Bits x Bites, China’s first VC exclusively focused on agtech, had a final close of $100 million for its second funding round last November, easily surpassing its target of $70 million.
In the past year, Bits x Bites has invested in several startups including an agricultural drone firm, a manufacturer of innovative nutrients purportedly increasing crop yields, and a company that develops microbial proteins for plant-based meats.
Many of the companies I’ve mentioned have also made investments in international agtech firms. For instance, Legend Holdings has acquired Chilean salmon producer Australis to increase supply of the fish in China. And Bits x Bites has invested in startups in Israel, the UK and Singapore to help these firms grow their China businesses.
International agtech startups should take note: your next round of funding could very well come from China.
Where’s the beef?
Investment in plant-based proteins and other meat substitutes in China have also taken off in recent years. The country’s meat substitutes market reached approximately $11 billion in 2020 and is expected to grow to at least $14 billion by the mid-2020s.
US industry leader Beyond Meat opened its first production facility in China last year. And Impossible Foods is seeking regulatory approval to hawk its products.
Chinese firms are getting in on the act too, piggybacking on a rich history of meat substitutes: Buddhists have used plant-based products, especially tofu, for millennia to craft meat imitations.
YouKuai, producer of plant-based pork substitute Zrou, completed a $7.3 million A-round of funding last year. Shanghai-based alternative meat startup Hey Maet is making ground pork substitutes from soybeans for traditional Chinese dishes like dumplings.
And, this January, Shenzhen’s Starfield Food Science & Technology closed a whopping $100 million Series B funding round, the biggest for a plant-based meat company to date in China. The company will use the investment to ramp-up production and transform its R&D.
Foreign PE and VC firms should also keep a close eye on developments in the country’s dynamic alternative protein scene: the next big thing may well be made in China.
Lucrative opportunities
Over the past two decades, then, western countries have viewed China as a key export market for raw agricultural products, and we see this remaining so well into the future. But, as the country’s leadership is making such a concerted effort to secure supplies within its borders, much of the technology China needs to accomplish this lags that of western nations - creating lucrative opportunities for international agtech firms.
Nonetheless, China is a notoriously tricky market to navigate, and success hinges on well-designed entry strategies. Above all, local representation is essential to bridge the business, language and cultural gaps that companies will face, and to lay the best foundation for long-term success.
To discuss the opportunities for your agtech business in China, contact Sol Bergen Bartel at sol.bergenbartel@intralinkgroup.com.