Givaudan Smells Opportunity in China

Does anyone want to try the ginger-lemon shampoo? Or the strange blue drink? In a pleasantly appointed research lab in Shanghai, chemists, food technicians, and perfumers from Givaudan are exploring wild new ideas for flavors and fragrances. They are testing the flavors of Chinese teas. And intrigued by the tingling properties of the Sichuanese peppercorn, they are adding its essential oils to experimental blends of toothpaste and breath fresheners.

As China gets richer and Chinese consumers' tastes and lifestyles evolve, Givaudan is expanding its staff and infrastructure in China. The Swiss flavor and fragrance company already employs 200 in China and operates a formulation plant, a customer support center, and a product development center in Shanghai. It will build a new plant and technical center for flavors elsewhere in the city by 2006.

Speaking with stock analysts and fund managers in Shanghai earlier this month, Givaudan's chief executive officer, Jürg Witmer, had only a few reservations in his otherwise boundless enthusiasm for China, which he sees as both a market and a source of human resources. "There is an incredible explosion of consumer spending here," Witmer said.

Givaudan does not break down its sales by country. But Witmer disclosed that sales in China amount to roughly $85 million a year, compared with about $125 million in Japan, where the firm has operated for much longer and where consumers are far more affluent. "I want China to become Givaudan's second largest market [after the U.S.] in seven, or maybe five, years," he said. Givaudan reckons it's the leader in the Chinese fragrance ingredients market, with a 24% share. In flavors, Witner said, Givaudan is also number one but is "less dominant" than in fragrances.

Consumer product companies such as Procter & Gamble, Unilever, and their increasingly strong Chinese competitors are launching new products at a frenetic pace in efforts to capture market share. Many of the products feature scents or flavors tailored to appeal specifically to Chinese tastes. These companies often turn to Givaudan because of its reliability and international expertise in flavor and fragrance development, the firm says.

CONSUMER GOODS companies are also adjusting their product offerings in line with Chinese social trends. The proportion of Chinese living in cities is also surging. According to Vernon Chow, director of Givaudan's flavors business in China, 50% of Chinese will live in cities by 2011, compared with only 29% in 1995. This trend results in stronger demand for instant noodles, frozen food, perfumes, and personal care products. Packaged-food consumption is growing faster than consumption of home-cooked food, Chow reported.

Givaudan's is a high-margin business. Flavors and fragrances are a key feature in a wide range of items like detergents, toothpastes, and candies. Yet these ingredients account for only a small proportion of the cost of the products. Under these conditions, Givaudan's customers don't argue much about price. Cosimo Trimigliozzi, the firm's Asia-Pacific president of flavors, says a customer's product development manager, not the cost-sensitive purchasing manager, makes the decision on whether to buy from Givaudan.

A lot of companies claim that their people are their most important asset. In Givaudan's case--and particularly in its Chinese labs--that credo rings true. In China, the company carefully selects candidates for lab work who it believes are endowed with the right mix of technical and creative skills. Givaudan further develops its flavorists by sending them to its U.S. facilities and its perfumers to its labs in France. This in-house training can last several years but is worth it for Givaudan if the recruits return to China able to invent unique and appealing flavors and fragrances.

Holding on to good people is a big problem in China. In major cities like Shanghai or Beijing, competition for high-quality human resources is intense. Furthermore, the most capable employees are often keen to launch their own firms. In these conditions, Givaudan admits, annual salary increases can reach 15%. In certain job categories, Chinese salaries are already as high as they are in Singapore. Givaudan's senior managers throughout Asia take part in the company's stock-option program.

The company has decorated its Shanghai facilities most appealingly, making it difficult for anyone to find a more agreeable work environment elsewhere. And Givaudan recently assigned one of its more senior international managers, based in Singapore, the task of developing systems to retain employees. "We emphasize being an employer of choice," Witmer summed up.

Investing in production facilities is perhaps more straightforward than investing in people, but it is also a challenge. In China, one must always think big, Witmer said. Givaudan has run out of space in the Zhang Jiang suburb of Shanghai where it is located. When the company first took an option on the land in 1987, it was a rice field that was a three hours' drive from Shanghai. It is now part of a busy industrial park served by new roads and tunnels that can reach the center of the city in only 15 minutes.

The new flavor plant and development center will be built in Jin Qiao, a district of Shanghai that is 20 minutes by car from Zhang Jiang. The plant will cover 50,000 m², considerably more space than in Zhang Jiang. The technical center is scheduled to start operating in a year; and the plant, by the middle of 2006. The company declines to reveal how much it is investing in the plant.

Sales growth in China can be erratic. In 1998, Givaudan's sales there dove nearly 10%. But they bounced back the following year, by 25% for flavors and 45% for fragrances. Witmer admits that there is a risk of overheating in the Chinese economy at present. But he expects a slowdown--if any--to be only temporary. "There might be hiccups, bad quarters, bad years. We won't have double-digit growth every year," he said.

One thing is certain: Being endowed with a strong creative streak is crucial in the Chinese flavor and fragrance industry. Leading brewer Tsingtao recently launched a seaweed-flavored beer. Givaudan won't say whether the taste was created in its labs. But such an exotic flavor would not be beyond the scope of its technicians.