China’s taste for Thai fruit drives prospects for logistics businesses

Improved road network means fresh produce can reach markets faster, but cold-chain and related facilities needed.

Growing exports of Thai fruit to China are creating opportunities for logistics providers along overland routes between the two countries.

China’s imports of tropical fruit, particularly from Thailand, have risen sharply. The Chinese are enthusiastic eaters of fruit, with per-capita consumption estimated at 149 kilogrammes per year, twice the global average. China is the world’s top grower of fruits, yet its imports of tropical fruits have been increasing substantially due to several factors.

The expansion of China’s middle class has driven new consumer demand, while domestic distribution systems have improved, and, most importantly, import tariffs on fruits and vegetables have fallen to zero under the China-Asean Free Trade Agreement.

Tropical fruit from Thailand accounts for almost 50% of China’s tropical fruit imports, on the back of rapid demand growth. In 2011, Thai fresh and frozen fruit exports to China increased by 117% year-on-year, representing 14 billion baht, or 4% of GDP in the Thai agricultural sector. The largest export volumes were for durian, longan, mango, mangosteen and banana.

Growth in Thailand’s exports of fresh and frozen fruits to China averaged below 10% a year before 2003. But since tariffs were eliminated that year, the growth rate escalated to over 90% in both value and trade volume.

Thailand ships relatively small quantities of vegetables to China, where most of the types of vegetables consumed are widely grown domestically. But the growth rate of these exports skyrocketed by 453% right after tariff elimination. Shipments of both fruits and vegetables have grown on average by more than 25% annually thereafter.

Helping drive these remarkable export growth figures are factors including proximity, preferential tariffs and the quality and taste of Thai produce.

Cross-border or overland exports of Thai produce are only 7% of Thailand’s total fruit and vegetable exports to China via all routes, but they show strong growth potential. A major contributor has been the memorandum of understanding (MoU) the two countries signed in 2011 on the general administration of quality supervision, inspection and quarantine. In the first nine months of this year, overland exports of Thai fruit grew by 44% year-on-year, versus 25% growth of Thailand’s total fruit exports to China.

Overland shipments can now be made via Route R3A, a 1,100-kilometre path that begins in Chiang Khong, in Thailand’s Chiang Rai province, and passes through Laos before reaching Kunming, in China’s southern province of Yunnan.

The signing of the MoU last year has resulted in a reduction of transshipment times and procedures. Pre-inspected fruits transported from Thailand can pass through Laos and go directly to the border crossing in Mohan, in Yunnan, without being reloaded onto Lao trucks, which helps reduce handling costs.

In terms of costs, however, current road freight transport from Bangkok to Kunming can be as high as 120,000 baht per 20-foot shipping container. But road freight offers door-to-door service and takes just two days for delivery. Sea freight and inland water transport via the Mekong River are cheaper but take more time, which is unsuitable for perishable goods.

Sea shipments from Laem Chabang to Guangzhou or Shanghai cost less than 50,000 baht for a 20-foot reefer container but take five to seven days. Transport via the Mekong River, from Chiang Saen to Jinghong, costs about 45,000 baht per 20-foot container and allows delivery in three to four days.

But river boats are impeded during the dry season due to low water levels and are also barred by dams in the river’s northern reaches in China.

A new development will help change the scenario next year, when the new Thai-Laos Friendship Bridge opens at Chiang Khong. This factor, together with faster customs procedures and easier transit rules, is likely to result in Thai fruit shipments to China being shifted to land transport via Route R3A.

In light of these developments, logistics businesses will enjoy substantial opportunities at the Chiang Khong border and in providing cold-chain systems.

The Chiang Khong crossing is the most promising location for logistics service providers to build facilities for shipping fruit. Already, overall transit trade via Laos to China at Chiang Khong has grown rapidly; exports there grew by 186% year-on-year in 2011, the highest growth rate at any of Thailand’s crossings.

As a key link in Route R3A, Chiang Khong is planned to become a special economic zone, with multi-modal freight facilities to enhance the efficiency of logistics activities at the border. The further development of Yunnan as a gateway to Southeast Asia, and the formation of the Asean Economic Community in 2015 will generate a huge increase in cargo transport volumes along the North-South Economic Corridor, especially among Thailand, Laos and China.

Together with the increasing consumer demand for Thai fruits, these factors create good opportunities for the development of cold-chain warehouses, distribution centres and specialised logistics services in Chiang Khong, which will reduce inventories, transit times and transport-fleet idle times. And these improvements will help reduce logistics costs.

Advanced climate-controlled and cold-chain logistics businesses are urgently needed to serve transit trade in perishable goods. The percentage of fruits and vegetables among shipments through cold-chain logistics is only 30-40% in Thailand, while it is around 80-85% in developed countries. So there is still room for cold-chain logistics services to grow.

Since fresh and frozen fruits are temperature-sensitive, they require proper packaging, temperature protection and monitoring to ensure quality.

Modern climate-controlled units offering different temperature conditions and zones for different goods within the same container can increase shipment quantities so that containers are shipped with full loads, greatly decreasing the transport cost per unit.

This together with rising demand of fruit produce across borders and increased expectation of freshness would significantly escalate demand for climate-controlled and cold-chain services.

In addition, the current logistics market lacks qualified end-to-end integrated service providers. The supply chain now consists of many participants and handling processes. This fragmentation significantly increases the risks of spoilage and product quality deterioration in transit. This situation points toward significant potential for Thai operators to offer integrated climate-controlled logistics and cold chain services, e.g. refrigerated trucks and cold chain warehouses.

It is expected that Chinese demand for Thai fresh and frozen fruits shipped overland will rise sharply in the near future. Logistics businesses should be prepared to offer integrated services to serve Thai exports and take advantage of this opportunity.

EIC, a unit of Siam Commercial Bank Plc, offers in-depth macroeconomic outlook and sectoral impact analyses. For more information, visit www.scbeic.com or contact eic@scb.co.th

About the author

Writer: SCB Economic Intelligence Center