Car Industry Booming in China

Automakers are ramping up their operations in China to take advantage of record-breaking growth in vehicle sales. China replaced Japan last year as the world's second-biggest auto market, and industry experts predict the growth will continue as the country's booming economy encourages greater consumption of luxury goods. VOA's Mil Arcega reports.

Buying a new car in China

For automakers, China is the new frontier:  the world's fastest growing market with millions of new consumers. Even more attractive to foreign retailers is the emerging class of young successful Chinese.

"This new group, which they define as 'Tweens' - it's a combination of the words teens and in-between," says Charlotte Rylme, general manager at the Swedish Trade Council. "They have a new job, they earn a lot of money, and they live and stay at home with their parents, some of them, and they are very attracted to buy foreign brands, so they are very attractive for foreign retail companies. And they buy more than 300 billion RMB ($40 billion) annually."

Charlotte Rylme

They are also buying a lot of cars.  More than 7 million new cars were sold in China last year.  This year the number is expected to surpass 8.5 million. 

Swedish carmaker Volvo expects to double its sales in China this year.  Company  Vice President Lex Kerssemakers says in China, having a good brand is the key to success. "You see people walking around here with all sorts of branded stuff, from sunglasses to jeans to trousers," he says. "So they are very brand focused.  Volvo has a good reputation here from the past, and what we need to do is, we need to continue to build on that reputation and strengthen our premium in a market which will be very premium oriented."

Lex Kerssemakers

Although the competition is fierce, car dealer Eddie Lai says Chinese consumers like to buy cars that show how worldly and how successful they are. "The economy is growing, the society is growing, and young people are getting more on an uptrend scale," he says, "and they are going to fit into the lifestyle as in the European countries and American country, and it's the status symbol in China.  It is a status symbol for the young generation to demonstrate that they are successful, that they are intelligent, that they are up on society's expectations."

Carmakers are capitalizing on those expectations by increasing production quotas.  While factories are closing in North America and Europe, new plants go up almost daily in China.  Industry executives project the Chinese market could grow to 20 million vehicles per year by 2020.

Copper keeps rising as China uses more

Copper rose for a third consecutive session Thursday after industrial production unexpectedly accelerated in China, the world's largest user of the metal, and on speculation that strikes in Chile would disrupt supplies.

Nickel slipped while aluminum and zinc gained.

China's output increased 18.1 percent in May from a year earlier, the National Bureau of Statistics said Wednesday, after gaining 17.4 percent in April.

That beat the 17 percent median estimate of 19 economists surveyed by Bloomberg News.

Contract workers at the Codelco mine in Chile, the world's largest copper producer, plan to strike June 20, a labor leader said.

"This kind of production growth is positive for metals," David Thurtell, a London-based analyst at BNP Paribas, said. "Possible strikes in Chile are also helping."

Copper for delivery in three months on the London Metal Exchange gained $123 to $7,321 a metric ton.

The metal used in power cables and wiring has dropped 10 percent since trading at an 11-month high of $8,335 a ton on May 4.

Inventories tracked by the LME fell for a 19th consecutive session, slipping 0.7 percent to 119,075 tons, the exchange said. That is the lowest since Oct. 23.

China is increasing domestic production to meet rising demand. China, the world's most populous nation, increased copper output 17 percent in May from a year earlier, to 278,000 metric tons. That beat the previous record of 274,000 tons in April.

The planned walkout by contract workers at state-owned Codelco would hamper company output, said Cristián Cuevas, president of the Confederation of Copper Workers, a group representing contract employees. The workers are demanding more pay.

At Doña Inés de Collahuasi, one of the largest copper mines in Chile, workers will not return to talks unless the owners, Xstrata and Anglo American, submit a new wage offer, said Pedro Díaz, the treasurer of a union.

Nickel fell $200, to $40,025 a ton.

Nickel's 14-day relative strength index, used by some investors to gauge price direction, fell to 29.7 on Wednesday. A reading below 30 typically signals prices may advance.

That was the first time the index had fallen below 30 since November 2005. The index jumped to 38.5 on Thursday.

Nickel has lost 18 percent since trading at a record $51,800 a ton on May 9.

Crude oil rose above $67 a barrel in New York and gasoline jumped after a government report showed that U.S. refineries had unexpectedly cut operating rates and Iran said that it was not willing to suspend its nuclear program.

Refineries operated at 89.2 percent of capacity last week, the lowest level since May 4 and the lowest in 15 years for the second week in June, an Energy Department report showed Wednesday.

Iran said its nuclear research was advancing. The United States has accused Iran of developing nuclear weapons.

Concern that the dispute over Iran's nuclear program might disrupt shipments from the country and the curtailment of supplies from Nigeria has bolstered prices since January 2006.

Crude oil for July delivery rose $1.39 to $67.65 a barrel on the New York Mercantile Exchange, the highest since June 7. Prices are down 2.8 percent from a year ago.

"Refineries should be operating at 95 percent of capacity right now as we approach July 4 and peak demand," said Michael Fitzpatrick, vice president for energy risk management at Man Financial in New York. "We aren't building a gasoline supply cushion against disruptions and glitches."

Gasoline for July delivery in New York rose 6.94 cents to $2.2247 a gallon.

"It looks like we built in too bearish an expectation in advance of the report," said Tom Bentz, an oil broker with BNP Paribas in New York. "It's questionable we'll break out of this range. There will have to be a strong close today to confirm that there's been a reversal."

Gasoline inventories rose 3,000 barrels to 201.5 million in the week that ended June 8, the report Wednesday showed. A gain of 1.5 million barrels was expected, according to the median of 16 responses in a Bloomberg News survey.

U.S. energy prices jumped 4.1 percent last month, the biggest increase since November.

CHINA AIMS TO BUY UP MORE OVERSEAS COMPANIES - FT.com

Record numbers of Chinese companies are looking for overseas acquisitions, according to results of a survey published yesterday which foreshadows a global buying spree with potential political repercussions.

China Inc has to date been a reluctant player on the world stage, apart from in the state-controlled energy sector, with most companies either unprepared or fearful of managing assets overseas.

By contrast, Indian companies have recently embarked on a global acquisitions binge, highlighted by Tata Steel's $11bn takeover this year of Corus, the Anglo-Dutch steelmaker.

However, more than 90 per cent of Chinese respondents to the new survey conducted by the Economist Intelligence Unit and Norton Rose, the law firm, said they were looking to conduct a merger or acquisition over the next 12 months.

The executives of Chinese companies said they were looking in Asia, Europe and North America.

Richard Crosby, a Hong Kong-based partner of Norton Rose, said: "The findings show an increasing willingness among Chinese companies to consider deals outside Asia."

The findings suggest Chinese executives are seeking to build global scale, two years after US lawmakers famously prevented CNOOC, the state oil company, from acquiring Unocal for "strategic" reasons.

Bankers who advise mainland companies predict that China's leading telecommunications and financial services companies will lead the acquisitions charge. Rodney Ward, UBS Asia chairman, said: "Corporate China will continue to seek overseas acquisitions to exploit economies of scale."

The findings form part of a survey on cross-border corporate deals based on responses from 258 executives across Asia, excluding Japan and Australia.

The EIU found that intra-Asian M&A climbed over the past five years from 1,102 cross-border acquisitions valued at $30bn to 2,073 deals valued at $52bn. Buy-outs by Asian companies in Europe and North America rose from $2.6bn in 2002 to $15bn in 2006.

The survey found that while China is expected to lead the region's M&A boom this year, respondents believe that the mainland remained the most challenging terrain in Asia to conduct business from a regulatory perspective.

Asian executives voted the US and France as the most difficult western countries in which to operate because of the higher likelihood of M&A deals being blocked on political grounds.

Western investors are seeking acquisitions in Asia to take advantage of fast growth rates. But respondents said western companies' focus on compliance-related issues "makes it difficult to negotiate deals with them".

China's satellite navigation has a promising future

China's Global Satellite Navigation Plan has emerged since Xichang Satellites Lunch Center successfully lunched a "Beidou" navigation satellite on April 14 this year.

The satellite navigation positioning is a newly emerging technology, which positions, navigates and monitors all kinds of targets by using the location, speed and time information provided by global satellite navigation and positioning system. Satellite navigation system plays an important strategic role in national security and economic construction.

As a global satellite navigation system with China's independent intellectual property rights, Beidou Navigation Satellite consists of 5 geostationary orbit satellites and 30 non-geostationary orbit satellites; the construction of the whole system will be completed before 2010. The system is expected to satisfy the demands for satellite navigation system of users in China and neighboring countries at that time, and it will be gradually developed into global satellite navigation system. The Beidou navigation satellite launched a month ago, namely COMPASS-M1, is one of the "5+30" system.

Huge potential for navigation industry

Part of industrial users in China are benefiting from "Beidou-1" satellite navigation test system, which has been put into operation. Since 2000, which represented the beginning of the prophase trial of Beidou Navigation Satellite System, China has successfully launched two "Beidou-1" operation satellites and one backup satellite successively, and has built "Beidou-1" Satellite Navigation Test System. Up until now, China has become the third country in the world that owns satellite navigation system following Russia and the USA.

Compared with satellite navigation and positioning systems of other countries, except for equivalent accuracy to GPS in fast positioning and accurate timing, "Beidou-1" also has an advanced and unique short message communication function. Now the System is offering highly efficient navigation and positioning services to national economic construction such as communication and transportation, meteorology, petroleum, ocean, forest, telecommunications, public security and other special industries.

In spite of the own technology characteristics of "Beidou-1", GPS is still monopolizing satellite navigation service market, especially over 95 percent of public service market, because China's independent satellite navigation system started relatively late. This is also the reason why the development of relevant industries in China is lagged far behind than the rapid development of satellite navigation technology. As reference shows, the market size of China's satellite navigation and positioning market had been expanded from nearly RMB1 billion yuan in 2000 to RMB12 billion yuan in 2005. Some experts predict that 5 years later, China will probably become the biggest satellite navigation application market in the world along with the completion of Beidou Navigation Satellite System. In 2010, the scale of satellite navigation and positioning industry of China will reach RMB10 billion yuan

Build the industrial giant of application and development

China's Beidou Navigation Satellite System is also the great white hope of a famous enterprise- Beijing BDStar Navigation Tech. Co., Ltd, which is an operation and service provider specially established for "Beidou-1" satellite navigation test system. Since BDStar obtained the first operating license of "Beidou" civil navigation system at the end of 2004, BDStar has completed technology accumulation from 5 aspects successively in just two more years. What is to say, BDStar has built network operation and service technology, information service technology of ocean fishing, ship-borne terminal technology of ocean fishing, mobile technology and navigation receiving technology basing on Beidou.

Last year, "Beidou Satellite Ocean Fishing Comprehensive Information Service" project, a subject of National 863 Plan undertaken by BDStar, won the bid of "Nansha Fishing Boats Position Monitoring and Commanding System" of Ministry of Agriculture. The project integrated the comprehensive technological methods such as satellite navigation and positioning system, geographical information system, satellite communication system, mobile communication network and database, etc, and easily realized the dynamic control and management of fishing boat position under jurisdiction through building a unified information management platform for Nansha fishing safety management. The project could also give alarm and provide rescue for emergency situations, and provide technical support for the command of fishing boats in avoiding and escaping from dangers.

The circle has reached the consensus that the application of Global Satellite Navigation Technology is limited only by people's imagination. Beidou Navigation Satellite, which was successfully launched by China, not only offers wider space for imagination of China's satellite navigation and positioning industry, but will also become the new opportunity of industrial development. Just like what Zhou Ruxin, President of BDStar, said, "within 3 years in the future, satellite navigation industry will bring about a lot of big enterprises and backbone enterprises. It might give birth to an enterprise that is like Lenovo in computer industry. BDStar hopes to be a leader among them."

China's auto sector sees rapid growth

The auto consumption of China is turning on high-speed development, and sales of new vehicles are growing increasingly. Relative analysis shows that, in the first quarter, the gross margin of listed auto companies was basically the same as that in previous year. Passenger car companies have been in the peak of industrial prosperity during the same period of last year and they had achieved performance at a rather high level. In comparison with passenger car companies, commercial vehicle companies grew much more rapidly. At present, the passenger car industry mainly relies on private consumption and new vehicle purchase, and has entered a fast growing period. Insiders reckon that in the foreseeable 5 years, the growth rate of passenger car sales will probably maintain at a level of not less than 25 percent.

SAIC Motor, being one of the three biggest vehicle-manufacturing groups in China, is keeping its steady growth. In 2006, SAIC Motor achieved an aggregated sales volume of 1.25 million and a market share of 15 percent. The company's market share in passenger vehicle field is 21 percent. Octavia series of Shanghai Volkswagen will launched in batch in the market; Buick Park Avenue of Shanghai GM will go to the market too; Roewe, a self-owned brand of SAIC Motor, will also begin mass production, indicating the company's strong capability of sustainable profit earning. SAIC Group has completed the overall listing of the group, for which insiders analyzed that listed automobile companies may obtain more quality assets through asset injection and profits repatriation, as well as more impetus for future development.

FAW Car Co., Ltd., being the first leading car manufacturer that has gone public, owns certain scale advantage. The main products include Red Flag, Mazda and Besturn, which was newly launched in last year. Mazda 6 is one of the leading models of car market in recent years. The brand value of FAW "Red Flag" has reached RMB5.828 billion. FAW Xiali sees bright future due to its dominant position in economy car sales. After taking control of distribution tache by acquiring all the shares of sales company, FAW Xiali figured out the problem of default in large amount of payment, and therefore the financial status was improved remarkably. However, the competition in economy car market is intense and the strength of rivals is increasing every day. As reference shows, FAW Toyota, of which 30 percent share was held by FAW Car Co., Ltd., is the main profit source of the company.

Changan Auto is a leading company in mini car industry of China, and is ranking No. 1 in Mini car industry throughout the country. It was introduced that Changan Auto plans to input RMB3 billion yuan in a few years in the R&D of high-tech small-displacement vehicles, and will launch a series of mini cars with completely independent IPRs. Moreover, the company has exported 7,050 vehicles in the first quarter of this year, far beyond the industry average of the country.

Golden Dragon Automobile has got a satisfactory business increase in 2006.

According to the annual report, the major business income was RMB9.6 billion yuan, up by 25 percent; the net profits were RMB150 million yuan, increasing by 53 percent. In 2006, the company sold 41 thousand passenger vehicles, increasing by 24 percent, in which large and medium sized passenger vehicles accounted for 27 thousand and increased by 18 percent, light passenger vehicles accounted for 13.8 thousand and grew by 36 percent. The company industrial position got raised. This year, the sales volume keeps growing, in the first quarter, sales volume of passenger vehicles increased by 23 percent, in which large sized passenger vehicle and medium passenger vehicle increased by 49 percent and 37 percent respectively.

In 2006, China National Heavy Duty Truck Group Co., Ltd. obtained a marked increase in income. The year's income was RMB9, 469.53 million yuan, increased by 45.54 percent year on year; the net profit was RMB 224.4 million yuan, increased by 48.97 percent year on year. The sale of heavy-duty trucks reached 44,447 units in 2006, up by 43.09 percent year on year. Analysts said that the prosperity of heavy duty truck of the company, especially those advanced heavy duty trucks with load of 15 tons and above and relevant parts, is improving increasingly, and thus the profit margin of vehicles will maintain constant.

Jiangling Motors Corp's (JMC) major business revenue in 2006 was RMB7.368 billion yuan. The growth areas for sales volume include the industrial growth and the launch of new models. The aggregate sales volumes for complete vehicles were 85,214 units, increased by 16 percent year-on-year. The company will launch the fifth generation of Quanshun series, namely V348, in the second half of this year; with advanced engine performance and improved comfort, the positioning of V348 will be extended to commercial vehicle filed and light passenger vehicles used for middle and short term trips in cities. It is predicted that V348 might become the future growth point of the company's performance. Some analysts consider that the core advantage of JMC relies on better cost control than that of rivals, and this kind of advantage will go on; plus the launch of new models, the company will grow steadily in future.

Anhui Jianghuai Automobile Co., Ltd (JAC) has realized a major business revenue of RMB10.29 billion yuan in 2006, up 9.54 percent year-on-year; but net profits realized decreased by 17.3 percent year on year to RMB410 million yuan. The passenger car project of the company was officially approved in January this year. At the same time, JAC has built a passenger car manufacturing base in Hefei development zone, which was designed for an output of 200,000 units per year; the construction of R&D and product line of matching equipments has been basically completed. It is predicted that JAC will launch the first C-class vehicle in the third quarter of this year and A-class vehicle at the end of this year or at the beginning of next year. According to professional analysis, the transition of car business of JAC is worth expecting.

The performance of Kunming Yunei Power Co., Ltd. grew by 358.55 percent in the first quarter. The main reasons include: adjustment of product structure, bigger proportion of high-end products, effective control of expenses, as well as certain investment income. In early April, the company announced that it would offer not more than 80 million shares publicly; the capital raised should be used in production capacity expansion project of diesel passenger cars. After the project is put into production, the newly increased sales revenue per year will be RMB5.7 billion yuan, and newly increased profit will be RMB0.4 billion yuan. The company's performance in the first half of this year is forecasted to go up by 100 to 150 percent.

Shuguang Automotive's main business includes passenger vehicle, SUV and the production and sales of auto parts like vehicle-bridge and differentials. Shuguang Automotive ranks No. 3 in the production and sales of large and medium sized passenger vehicles, and No. 1 in the manufacturing of vehicle-bridge, especially light vehicle-bridge. In the first quarter of 2007, Shuguang Automotive, as a main manufacturer of light vehicle-bridge, obtained an increase in vehicle-bridge business thanks to the relatively strong growth of light vehicle. However, the average profitability of the company went down slightly on the contrary due to the characteristics of parts and accessories.

Economy fuels M&As in China

China remains Asia's top market for financial services mergers and acquisitions (M&A ) because of underlying economic growth conditions, an annual survey by PricewaterhouseCoopers (PwC) suggests.

The opening of the financial sector late last year has also contributed to the faster pace of restructuring among domestic financial institutions and has prompted foreign banks to acquire stakes in domestic firms to gain a foothold in the Chinese market, PwC analysts said.

M&A activities are expected to expand from the banking and insurance sectors to stock broking and asset management, said the survey of 230 senior financial services executives across Asia.

At a press conference to introduce the report, PwC analysts warned that the fierce competition for assets in China requires discipline in pricing deals as China's financial services market becomes increasingly complex.

According to the survey, 47 percent of respondents said they will be involved in M&A activities in China either as principals or intermediaries in the next five years, down from 52 percent in 2005, said Matthew Phillips, PwC Transactions partner in Shanghai .

Ten percent of respondents said they would engage in M&A activity in Japan and 28 percent in Hong Kong .

In the commercial banking sector, corporate banking will continue to be the primary profit driver and opportunities include note financing, trade finance, treasury and cash management. Retail banking is possibly the most attractive banking segment in the medium term, the study said.

City commercial banks will be major targets of M&As, said Andrew Li, a transaction services partner of PwC in Shanghai. In the past few years, Huishang Bank and the Bank of Jiangsu have combined a number of city commercial banks with provincial banks, and foreign lenders are showing increased interest to own stakes in these smaller Chinese banks.

In a separate PwC poll of 40 overseas banks actively engaged in the Chinese banking market - including HSBC, Citibank and Standard Chartered Bank - respondents envision growing opportunities in China, and only a third said the market is overcrowded.

The 40 banks surveyed employ more than 16,700 people, and the number will surge 113 percent to about 35,700 by 2010, with 25 banks more than doubling in size.

China's retail sales of hotel, catering sectors up 18% in 1st 4 months

China's retail sales in the hotel and catering sectors jumped 17.6 percent year-on-year in the first four months of 2007, the Ministry of Commerce (MOC) said on Wednesday.

Retail sales in these sectors rose to 388.01 billion yuan (50.7billion U.S. dollars) in the first four months, accounting for 13.9 percent of total retail sales in China in this period, a MOC report said.

Sales increases in the hotel and catering sector contributed to15.9 percent of the total retail sales growth over the past four months, the ministry stated.

Analysts said the high sales growth came as higher incomes in the world's fastest-growing major economy prompted more people to travel and eat at restaurants.

The average disposable income of urban Chinese rose 19.5 percent to 3,935 yuan in the first quarter, while the cash income of rural population jumped 15.2 percent to 1,260 yuan, the highest increase in a decade, according to the National Bureau of Statistics.

The Ministry of Commerce also said the number of newly-approved foreign-funded hotels and catering projects in the first four months of this year dropped 26 percent year-on-year to 248.

It added the contracted foreign investments dropped 28.2 percent year-on-year to 650 million U.S. dollars, while the actually used foreign funds climbed 5.6 percent to 240 million U.S. dollars.

625%: LENOVO'S PROFITS SOAR IN FIRST SIGN OF PC TURNROUND

Lenovo yesterday said net profit rocketed for the full year, in the first sign that the Chinese computer group has begun to turn round the PC unit it acquired from IBM two years ago. Full-year profit increased 625 per cent to $161m, compared with $22m the previous year.

Lenovo completed its $1.75bn acquisition of IBM's struggling PC business in May 2005 and moved its headquarters to Raleigh, North Carolina.

"It was a solid [final] quarter and strong fiscal year by any number of measures," said Yang Yuanqing, Lenovo chairman. "Our performance confirms we have stabilised our business worldwide."

China adopts global 3G standards

China's Ministry of Information Industry approved Wednesday the use of European and American standards for 3G mobile phones, Chinese news agency Xinhua reported on Thursday.

The European WCDMA (Wideband Code Division Multiple Access) and American CDMA2000 join the previously approved Chinese TD-SCDMA (Time Division-Synchronous Code Division Multiple Access) standard as legal options for China's nascent 3G industry, with the government promising deployment in time for next year's Beijing Olympics. All four major Chinese operators--China Netcom, China Telecom, China Mobile and China Unicom--have said they are investing in 3G.


"We will let operators choose which standard they want to use. But the government will decide how many 3G licences are issued," said Xi Guohua, vice minister of information industry, according to Xinhua.


No 3G licences have been awarded as yet. Although TD-SCDMA had been approved in 2006, global manufacturers have been reluctant to produce handsets for the standard, with only Samsung and Motorola developing products.

Last year, China failed in an attempt to get international acceptance for its locally developed WAPI (WLAN Authentication and Privacy Infrastructure) wireless encryption standards, leading to accusations of conspiracy and unethical behavior within the IEEE standardization committee, and counter-claims that details of WAPI had been kept secret from standards organizations.

Chinese officials have insisted that the country will have a third-generation mobile network up and running by the 2008 Beijing Olympics.

According to the Xinhua news agency, Xu Qin of the National Development and Reform Commission's hi-tech industrial department said late last week that the country would "observe our commitment to the International Olympic Committee and provide 3G service in cities where Olympic games are held".

The country is currently trialing its own variant of 3G, a standard called TD-SCDMA, among 20,000 users across several Chinese cities. However, the most common incarnation of 3G in the rest of the world is WCDMA, and analysts say China's potential adoption of a national standard could hamper mobile users who visit the country.

"From a practical point of view, right now the big question is roaming," said Freeform Dynamics' Dale Vile on Monday. "How much roaming is there into and out of China? There's a significant amount of that around the edges but in terms of the core market it's probably less of a factor than for users in Western Europe and the USA, where people are roaming across borders on a continuous basis."

The Chinese market is so huge that it does not need to think beyond itself, Vile suggested, but handset manufacturers outside China would have to start making provisions for TD-SCDMA interoperability now if there was any chance of devices supporting the standard by 2008.

Last Wednesday, TD-SCDMA Forum secretary general Dr Jin Wang said TD-SCDMA development was "at the final preparatory stage prior to commercial deployment".

"Experiences and lessons from [the WCDMA-based UMTS standard used in Europe] will further shorten the learning curve of TD-SCDMA, enabling both technologies to address the Chinese market demand simultaneously with respective advantages after licenses are granted," Dr Jin continued, before predicting that, "as both TD-SCDMA and UMTS will evolve to the LTE (Long Term Evolution) platform, the key technologies in both standards will converge."

LTE is the upgrade path that is intended to evolve existing 3G technology into 4G, although exactly what 4G might be is not yet clearly defined.

3G is not the only technology to be corralled into a proprietary standard in China. At the end of October, the nascent mobile broadcast TV industry there was ordered by the Chinese Government to adopt the STiMi standard, developed by researchers at the State Administration of Radio, Film and Television. The rest of the world is busy developing other technologies, such as DAB-IP, DVB-H and MediaFLO.

Interestingly, Xinhua reports Xu as saying 4G would face stiff competition in the audiovisual market from mobile broadcast TV — presumably STiMi-based.

China's approach to technological standards does have several advantages. It would not have to pay out billions in royalties, and would be providing significant support to its own industries.Chinese officials have insisted that the country will have a third-generation mobile network up and running by the 2008 Beijing Olympics.

According to the Xinhua news agency, Xu Qin of the National Development and Reform Commission's hi-tech industrial department said late last week that the country would "observe our commitment to the International Olympic Committee and provide 3G service in cities where Olympic games are held".

China Carmakers Go Upscale in Shanghai

At the Shanghai Auto Show, local manufacturers are putting their own stamp on higher-end vehicles
There are the leggy models, the concept cars, and the hordes of automotive journalists. There are the latest vehicular offerings from General Motors (GM), Toyota ( TM), DaimlerChrysler (DCX), and Rolls-Royce. So, just another auto show, like the annual confabs of Detroit, Geneva, and Tokyo? Not quite.

Instead, at the Shanghai Auto Show, which opened Apr. 22 and will run for one week, much of the attention is focused on an unprecedented lineup of higher-end Chinese-branded autos. Xian-based BYD Auto, which got its start as a cell-phone battery maker, showed off its F6, a 2.4-liter-engine luxury sedan. Geely had its Mybo sports car as well as its MVP 2.4-liter, Shanghai-manufactured version of a London black cab, which it is producing with Manganese Bronze Holdings.

Shanghai-based local champion SAIC Motor is showing off eight vehicles, including its Roewe W2 concept car, complete with models attired as English dressage-style equestrians. That W2 showcases the design and style of the next Roewe model, to be released at the end of this year. SAIC also showcased a fuel-cell car called the "Shanghai," resurrecting a brand it first launched in 1964 but then shuttered 16 years ago.

Plenty of Potholes Ahead

Meanwhile, China's most successful domestic brand, Chery (which beat out GM in March, coming in first place in domestic sales with 44,000 vehicles), showed an astonishing 40 models, including the A6 Coupe (designed with Italian company Bertone), the Shooting Sport recreational roadster, the Tiggo6 sport-utility vehicle, and several concept cars in its sprawling 2,200-square-meter booth.

Chinese-branded high-end cars? Hard to believe, but they have arrived, albeit perhaps with plenty of potholes on the road ahead. To date, Chinese carmakers have found their niche either by helping the big brands from abroad make their cars, or producing ultra-low-cost cars like Chery's QQ and Geely's Haoqing. Those cheap vehicles, aimed to appeal to lower-income first-time buyers outside China's first-tier cities of Beijing, Shanghai, Guangzhou, and Shenzhen, have been known as much for their low quality and shoddy design as for their rock-bottom price. Nevertheless, that focus has worked well so far, with Chinese self-branded autos holding close to 30% of the domestic market today, compared to 10% five years ago, say auto market watchers. (The overall sedan market grew 30%, to 5.18 million vehicles last year.)

Now that's changing, particularly as Chinese makers face new competition from the likes of GM's Chevrolet brand, including the $6,500 Spark, Volkswagen's Golf, and Hyundai's Elantra, all vying for the low end of the China market. "Foreign automakers are starting to produce low-price cars, which is a very dangerous signal for the Chinese auto industry, and is driving the move towards higher end," says Beijing-based auto analyst Jia Xinguang. So "Chinese automakers are experiencing an upward trend on pricing. Geely used to produce cars priced from $2,600 to $3,900, while now they enjoy producing cars from $5,200 to $6,500. The same trend can also be seen in Chery."

From Imitation to Innovation

Geely knows all about managing on razor-thin margins. It has outsourced services like its company cafeterias to cut costs. And it has founded three universities, including Geely University in Beijing, which together enroll 30,000 students and provide the company both income from tuition and a ready source of affordable and well-trained graduates to staff its engineering, design and marketing ranks. But with average auto prices declining some 7% a year in China, moving up the quality ladder is another important way to protect margins.

"When most Chinese companies start, whether in service or manufacturing, they tend to copy. That is the easy way to start. But if you stay with this strategy, sooner or later you will die," says Lawrence Ang, executive director of Zhejiang Geely Holding.

Big Numbers Give Baidu a Bump

Impressive earnings are sending the stock of China's leading search engine into orbit. Google and Yahoo need to move fast to share the space.

Can anything stop Robin Li? A lot of people in China are probably asking themselves that question today, following news that Baidu.com (BIDU), the country's No. 1 search engine, reported impressive earnings growth for the first quarter. Li, Baidu's founder and chairman, predicted more good times to come, helping to fuel a 23% rise in the company's stock price.

Baidu's good news comes at a time when its two main rivals, the Chinese versions of Google (GOOG) and Yahoo ( YHOO), are struggling to keep up with their high-powered local competition. Baidu commands over half (57%) of the Chinese search market, with Google controlling 18.7% and Yahoo 13.6%.

That dominance helped Baidu increase its profit for the three months through March by 143%, to $11.1 million, compared with the same quarter in 2006. Quarterly revenue also grew well, doubling to $35.7 million.

China, the world's second-largest Internet market after the U.S., provides Li and his team with plenty more room to grow. While there are more than 130 million Chinese online, that's still only 10% of the country's population. In the U.S., Japan, and South Korea, about 60% to 70% of the people are online, says Richard Ji, an analyst in Hong Kong with Morgan Stanley (MS).

'Better in Chinese'

Even more promising for Baidu, the untapped pool of potential advertisers is deep. China has about 30 million small and midsized enterprises, but fewer than 0.5% of them are Baidu customers.

That number is likely to increase at the same time that the percentage of Chinese using the Internet rises. "If you combine these, it is not difficult to see enormous growth potential in the Chinese Internet market," says Ji, who estimates that the total market for online search last year amounted to $260 million and is likely to grow by 50% to 60% compounded annually over the next three years.

Numbers like that mean companies like Google and Yahoo have to find ways to make inroads into China, despite the clear advantage Li has. But Baidu has been able to maintain its big lead thanks to its well-established brand and superior search technology, says Duncan Clark, managing director of Beijing-based consulting firm BDA China. "Baidu is just better in Chinese," he says.

The company does face some big challenges. On Wednesday, for instance, Google announced it had reached a deal with state-owned operator China Telecom to share revenue from online ads. Last month, Google announced a similar partnership with China Mobile, the dominant cellular operator, to collaborate on mobile search.

Taking a Chance on Japan

Such deals provide some hope for Baidu's rivals that Li won't be able to gobble up the whole market. "There's still a lot of potential there," says Clark.

Adds Morgan Stanley's Ji: "If you look at the U.S. market, there are two or three other search players [besides Google]. In China, there is a chance for coexistence of two or three of the major search players."

Another concern is Baidu's recent expansion into the Japanese market, its first foray beyond China. Although Google and Yahoo Japan dominate the Japanese search market (with a combined market share of over 80%), Li has launched Baidu Japan. The idea is to provide a way for Chinese businesses to reach potential customers in Japan who are interested in purchasing lower-cost, made-in-China goods (see BusinessWeek.com, 2/16/07, "Baidu Thinks It Can Play Japan").

It won't be easy for Baidu to pull this off, cautions Ji. A big problem will be costs. "Japan is expensive," he says. "Labor costs are typically 10 times higher than in China." Still, as long as business keeps booming back in its home market, Baidu is reckoning it can afford to take a chance.

Einhorn is a correspondent in BusinessWeek's Hong Kong bureau .

Lenovo: Down So Long, It Looks Like Up

Integrating IBM's PC division continues to tax China's No. 1 computer maker, but growth is up, and more job cuts are cheering investors

The cost cutting continues at Lenovo (LNVGY), China's top PC company. As part of its effort to integrate the money-losing PC division of IBM ( IBM) that it acquired two years ago, Lenovo President and Chief Executive Officer William J. Amelio said yesterday that the company is cutting 5% of its work force. This follows a round of layoffs last year.

The cuts are just the latest in a long list of changes that Lenovo has gone through since it took over the old IBM division in 2005. There's been a major overhaul of management, with the departure of old IBMers like then-President Stephen Ward in late 2005 and the arrival of a team of former Dell (DELL) executives like Amelio. The company has also launched a new line of PCs in the U.S. in an attempt to win over consumers and small-business customers and promote awareness of the Lenovo brand name.

So far, Lenovo has not enjoyed much success from its global push. The stock price dropped 25% last year, and in September, Lenovo's falling market capitalization cost the company its place on the elite Hang Seng Index. The stock price is down about 12% so far this year. The company has not seen significant improvement in U.S. market share and has also struggled in Japan.

Promising a Payoff

Although the IBM deal catapulted Lenovo into the top tier of PC makers globally, the company has been losing market share. On Friday, market research firm International Data Corp. announced its numbers for the first quarter, showing that Taiwanese rival Acer had climbed into a tie with Lenovo at 6.7%.

The Taiwanese have the wind at their backs: While Lenovo's sales climbed 17.4%, Acer's jumped 41.4% (see BusinessWeek.com, 1/07, "Acer Closes in on Lenovo").

Still, Amelio promises the payoff is coming. Lenovo's first-quarter sales growth wasn't as sizzling as Acer's, but it still topped the 10.9% growth of the overall market and certainly outshone the 6.9% slide that Dell suffered. Moreover, the newest cutbacks will cost the company between $50 million and $60 million (to be charged this quarter), but management believes Lenovo will see $100 million in savings for the year.

Are there more cuts to come? Maybe, but Amelio says the shrinking at Lenovo might be over.

"We believe the 'tipping point' is within reach," the executive said in a statement released by the company as it announced the layoffs. "If we can combine optimal cost competitiveness and efficient delivery capabilities with innovative, best-engineered products, we can generate more profitable growth, gain market share, and make further reinvestments into the business, fueling more growth."

Moving Up in the World

Investors were cheered by the news of the layoffs. Lenovo's stock price rose 2.1% in Hong Kong trading on Friday. Some other good news for Lenovo came on Friday with the announcement by IDC that the company had expanded its lead in Asia Pacific (excluding Japan) in the first quarter.

While the market as a whole grew 17.6% year-on-year in the first three months of 2007, Lenovo enjoyed 24.3% growth. Lenovo is tops in the region, with 17.8% of the market, compared to No. 2 Hewlett Packard's (HPQ) 15.4%. And this progress came at a time when sales in China slumped because of the weeklong Chinese New Year holiday; that's a sign Lenovo is becoming more of a player in other countries around the region.

Talks to Follow

Kathy Sin, an analyst in Hong Kong with IDC, attributes the strong Asia-Pacific growth to Lenovo's push to build awareness of its brand among consumers. "They are targeting the retail market," she says. "In the past, the IBM ThinkPad was targeted at the commercial market only; they had limited presence [among consumers]."

Lenovo has not said where the cuts will fall, but positions in Europe are likely to be on the chopping block. The company's statement yesterday said: "In Europe, Lenovo will immediately launch the process of consultation with workforce representatives, as appropriate, regarding the plan's intended efficiency gains and cost structure reductions."

Einhorn is a correspondent in BusinessWeek's Hong Kong bureau .

China's carmakers grab local sales, vie with partners

SHANGHAI (Reuters) - China's unsung home-grown car makers could capture 40 percent of their domestic market, the world's second biggest, within 3-4 years, industry executives say, as they roll out own-brand models using both their own and acquired technology.

But the major global automakers scrapping for market share in the world's fourth-biggest economy should still have room to grow as the local brands target the cheaper end of the market.

Chinese car firms such as state-controlled SAIC Motor Corp. and privately-run Geely Automobile Holdings Ltd. are ramping up their R&D investment, hoping to emulate at home the success of Japanese and South Korean rivals such as Toyota Motor Corp. across global markets.

Local brands already account for around a quarter of China's car sales -- a market that roared ahead at 30 percent last year.

Ziliang Wang, vice president of Geely, which makes cars aimed at the lower-end of China's market but which aims to be selling 1 million cars a year, matching General Motors' local venture's output target, says local firms could be selling four cars in every 10 by 2010.

"We're seeing incredible growth from the locals. Will they start to pose a problem for the foreign brands? They already are," said Ashvin Chotai, director of Asian Automotive Industry Research at Global Insight.

Ambitious Chinese carmakers, who have been turning out Buicks and Santanas with foreign partners for years, are working harder than ever to develop own-brand models to compete head-on with cars made at the joint ventures.

Some are already dipping a toe in overseas markets, too.

SAIC, China's biggest car maker with tie-ups with both GM and Volkswagen, last year introduced its first own-brand sedan, the Roewe 750, based on technology acquired from the now-defunct MG Rover and priced to compete with Toyota Motor Corp.'s locally-made Camry.

At this week's Shanghai Auto Show, SAIC is unveiling a mid-range Roewe W2 concept car as well as a new fuel-cell car, and plans another 30 or so models over the next few years.

Nanjing Automotive Group, based in a gritty industrial suburb in east China, last month produced its first China-made MG cars aimed at the home and export markets. Nanjing stunned the automotive industry in 2005 by snapping up assets of failed British car make MG Rover for little more than $100 million.

FAW Car Co. Ltd. has revamped its "Red Flag" sedan, reviving China's first own-brand car that used to be reserved for state leaders and distinguished foreign guests.

Others such as Chery Automobile Co., which partners DaimlerChrysler in China, and Geely, are quietly adding medium and higher-end models while building volume at the lower end of the market.

Chery outsold Shanghai-GM in March, the first Chinese firm to overtake the Detroit giant's flagship venture in a month's sales.

"Chinese carmakers have good reason to take pride in the achievement as they are gaining strength in the domestic market," said Matthew Kong, associate director with Fitch's corporate team in Beijing.

MULTINATIONALS UNFAZED

The big global players, seeing a squeeze at the bottom of the market and limited by law to producing for China's market only in partnership with a local firm, in which they cannot own more than 50 percent, are mostly focusing on the more lucrative luxury and super-luxury cars sought by China's newly affluent.

And industry experts say the fast-expanding market is big enough for everyone -- as long as the market keeps growing at double-digit rates.

"With a market this big, it's only natural for at least a few national brands to rise up and be competitive and strong. That's the way it should be," said Toyota executive vice president Yoshimi Inaba.

"For us to thrive here, it's much better to have strong local competitors."

Car-buying trends show that as household incomes grow faster than ever, consumers are willing to pay a premium for quality and style, which gives the edge to foreign marques.

Most sales of Chinese compacts such as the Chery QQ are in China's vast inland provinces, while foreign models such as the Honda Accord and VW Passat are more popular in the wealthier coastal regions.

But GM's Asia Pacific President Nick Reilly noted consumers were still buying GM's entry-level Chevrolet Spark despite a price tag $1,000-$1,500 higher than the equivalent Chery, because of quality and brand image.

And local firms' profits remain small.

Honda Motor's southern China venture posted a 2005 profit of almost $600 million, 60 times that of Chery.

"Local brands are growing in volume, but that has not been matched by earnings," said Chen Guangzhu, a member of China's state-backed auto industry consulting committee.

"When they will catch up with foreign brands in profitability, I really don't know."

China's Emerging Car Industry

 Less than 10 years ago, China's annual car production did not match the output of a single large auto company in a developed country, but recent years have seen quite a transformation. Domestic companies like Geely, Chery and Changfeng have learned quickly, expanding production capacity and developing new models.

Yet China is home to almost as many automakers as the United States, Japan and Europe combined. Like so many industries here, the fat needs trimming.

It seems clear which companies will lead the way. Chery Automobile, based in Wuhu, Anhui province, now exports cars to 29 countries. Last year the company produced 305,000 cars and exported 50,000. Chery cars are expected to hit the European market later this year.

Geely Autos is another company looking to export to Europe as soon as this year. The firm was the first from China to appear at the Frankfurt Motor Show (in September 2005) and is now re-engineering its cars to comply with EU auto import regulations. Brilliance Auto, which is collaborating with BMW, also made an impressive display at the Geneva Auto Show earlier this year. Its BS6 model is already being sold in Germany.

Foreign challenge

The domestic players also have competition from abroad as foreign automakers are starting to export cars from China through their joint ventures. Volkswagen plans to export its China-made vehicles to 84 countries by 2009 and Honda is already exporting to Europe from China.

The government has made it an official goal to compete as a global auto player, even enshrining it in the 11th Five-Year Plan. A quality-control licensing system is in its initial stages, though details are scarce as of yet.

Eight auto export manufacturing bases have been established to help automakers expand globally. They include Shanghai, where both GM and VW have joint ventures; the northeastern city of Changchun, headquarters for major automaker FAW; Chongqing (Chang'an Auto); Wuhan (Dong Feng Group); Xiamen (Golden Dragon); Wuhu, (Chery); Taizhou (Geely); and Tianjin, where Toyota has a joint venture with FAW.

It isn't just exports that have a promising future. Last year China overtook Japan as the world's number two market for automobiles, with total vehicle sales rising 25% in 2005 to 7.2 million. The number of cars in Shanghai reached the previous 2020 estimate by the beginning of 2005. Beijing had over 22,000 new car registrations in the first 18 days of 2007, total hit almost 2.9 million. All of these vehicles are clogging the roads and polluting the air, and yet only a tiny fraction of the population is on the road.

Same old game

Copyright infringement has become as endemic in the auto industry as it is throughout China's export economy. There have been multiple suits brought by American and European automakers against Chinese companies - often their own joint-venture partners.

In addition, the hand of the state is ever-present. The US is considering a suit against China at the WTO for, among other things, subsidizing its auto parts industry.

Regardless of whether the US claims are justified, China has become a major global auto parts supplier and this trade will continue to grow. Of the world's top 100 auto parts suppliers, 70% have a presence in China. There are about 1,200 foreign-funded or jointly-invested parts manufacturers in China holding 50% the market. Among them are brands such as Delphi, Bosch, Visteon and Wanxiang, China's largest maker of auto parts. There are about 5,000 domestic spare parts manufacturers.

Factor in the positive prospects of other auto-related industries - repair, road transportation, insurance, finance and rental - and it becomes clear why the expectations, and the stakes, for this industry have soared so high.

 

FOOD FROM CHINA POSES THREAT

Like so many of the other products sold in its stores, Wal-Mart imports much of its food from overseas, including China. As this Wall Street Journal article explains, China has different, often lax food inspection policies. The recent pet food recall is just one example of how importing poorly-regulated food can harm consumers.

Who’s Monitoring Chinese Food Exports?

Tainted foods from China are becoming a growing problem as the country plays a greater part in the global food chain. Chemical use is high, regulations are lax, and while the U.S. Food and Drug Administration has the authority to check imports for contaminants that are in violation of U.S. law, it is able to physically inspect only a small fraction of them.

Late last month, the FDA said it had traced the culprit in the deaths of more than a dozen cats and dogs in the U.S. to contaminated wheat gluten produced thousands of miles away in Jiangsu province, China. The wheat gluten ended up in pet foods sold in stores across America run by Kroger Co., Safeway Inc., Wal-Mart Stores Inc. and others. It is far from clear how many pets have been affected, but the number could rise. The FDA says it has received more than 10,000 complaints.

The Chinese wheat gluten was contaminated by an industrial chemical called melamine, which is used to make plastics, glue and fire retardants but is also used as a fertilizer in Asia, according to the FDA. It may have led to kidney failure in the animals, although the FDA says it isn’t yet certain how exactly the pets died. The Chinese company, Xuzhou Anying Biologic Technology Development Co., has denied shipping wheat gluten to the U.S.

Contaminated foods from China have shown up overseas before. In 2002, frozen spinach shipped to Japan was found to have high levels of the pesticide chlorpyrifos. Late last year, Hong Kong health officials halted imports of turbot from mainland China that contained a banned substance called malachite green, an antifungal agent that may cause cancer.

Over the years, foreign governments have also found and rejected Chinese exports of honey containing the antibiotic chloramphenicol, crushed peppers with pesticides and seafood contaminated with veterinary drugs, to name only a few examples, according to Helen Jensen, professor of economics who works on food safety issues and international trade at Iowa State University. The pet-food case, she says, shows how, as the food system has become global in sourcing, “we’re vulnerable to what goes on throughout the world.”

China’s contamination problems stem in large part from its loose regulations and highly fragmented food production. Hundreds of millions of small farmers grow its food, and they rely heavily on chemicals to coax production out of intensively cultivated soils and to fight pests.

The result: “China has one of the world’s highest rates of chemical fertilizer use per hectare, and Chinese farmers use many highly toxic pesticides, including some that are banned in the United States,” according to a report published last November by the economic-research service of the U.S. Department of Agriculture.

More than a dozen government agencies are responsible for ensuring the safety of China’s food supply, and coordination and communication among them is a often a problem, notes Henk Bekedam, the World Health Organization’s chief representative in China. “Despite many efforts, food regulations and standards have been developed in an ad hoc way without the benefit of a basic food law,” he adds.

The FDA has the power to stop shipments at the border and collect samples and test for certain contaminants that may be in violation of U.S. regulations. Last month, it refused 215 shipments from mainland China for various reasons. A shipment of dried red dates from Chongqing was considered filthy, frozen swordfish from Shandong contained a poisonous substance and ginseng from Changsha had unsafe pesticides.

But the food shipments that get tested are the exception, not the rule. “The volume of food imports from overseas is approaching 10 million per year, and the number that FDA inspectors physically examine is in the single digit thousands—making it virtually certain that any given food shipment will enter the United States with no FDA inspection,” William Hubbard, a retired associate commissioner of the FDA, said in Senate testimony in July 2006. “I could provide many more similar statistics, all of which paint a picture of an FDA regulatory structure that is under-resourced, understaffed and essentially incapable of meeting” many of its responsibilities on ensuring food safety.

In many cases, the burden of ensuring that food shipped out of China is safe falls on the foreign buyers, who negotiate with Chinese producers over what quality standards the food must meet.

A spate of poisoning cases in China has forced the government to publicly address the problem at home, even though it is unclear how much progress has been made towards improving safety. One of the most high-profile incidents occurred in 2004, when more than a dozen infants died after their mothers unknowingly fed them fake milk powder that had little or no nutritional value. Chinese television stations broadcast images of sick and dead babies that were fed the counterfeit formula.

Last November, Chinese authorities found that poultry farmers in Hebei province were adding Sudan B, a cancer-causing red dye used in industrial manufacturing, to the feed of their ducks. The dye caused the ducks to lay eggs with a reddish yolks instead of yellow ones, fetching a higher price.

“Food safety is a problem for China,” says Mao Qunan, spokesman for China’s Ministry of Health in Beijing. However, he adds that “So many times the media says the problem is so big, so huge. But I don’t agree with these comments on the safety of the food.”

In 2005, the Ministry of Health reported that 9,021 people were stricken by food poisoning, according to the state-run Xinhua news agency. Of the 235 deaths that year, around half were caused by poisonous chemicals in the food. The rest were from bacterial contamination and other causes.

But those numbers may understate the problem because it is often difficult to pinpoint the cause of such illnesses in rural China. At least 300 million people are estimated to be affected by food-borne disease in China each year, according to Mr. Bekedam of the WHO. The WHO estimates that food-borne disease costs China between $4.7 billion and $14.0 billion a year in medical-care expenses and loss of productivity.

Meanwhile, China’s food problems are becoming the world’s problems, as agriculture exports surge. As of last year, China accounted for about 12% of global trade in fruits and vegetables, challenging U.S. producers in three main areas, including apple juice, fresh apples and fresh vegetables, according to a USDA report published last year. The U.S. is China’s largest market for exports of apple juice. China’s agricultural exports to the U.S. have soared over the past three decades, rising to $2.26 billion in 2006 from $133 million in 1980, according to the USDA.

The current problems with pet foods began in mid-March. Ontario-based Menu Foods Inc., which produces major brands like Eukanuba and Iams, recalled its “cuts and gravy” style pet food in cans and pouches after receiving information that pets that ate the product had fallen ill. The recall was later extended to more products. Within nearly a week of the recall, the company received complaints or expressions of concern from about 200,000 consumers.

The FDA suggested that ChemNutra Inc., a Las Vegas-based supplier of wheat gluten to Menu Foods, had received contaminated gluten from Xuzhou Anying Biologic Technology Development Co. in Jiangsu. The U.S. government halted shipments of wheat gluten to ChemNutra and is now requiring that all shipments of wheat gluten from China be scrutinized.

China is carrying out a nationwide inspection on the quality of its wheat gluten, a report from state-run Xinhua news agency said Friday.

A manager of Xuzhou Anying, surnamed Mao, told Reuters last week that his company never sold any wheat gluten to the U.S. “I don’t understand how come they are blaming us,” he said. But when representatives from ChemNutra met with Mr. Mao on March 31 in China to discuss the alleged contamination, he “was apologetic and embarrassed and promised to do an investigation,” said a person familiar with the matter. This person said that the wheat gluten was shipped through an intermediary before arriving in the U.S.

Reached at the company on Friday, a manager who gave his name as Mao Lijun, who may or may not have been the same Mr. Mao, said that he was busy and hung up his phone when asked about the allegations.

Wheat gluten—a mixture to two proteins—is used as a thickening agent in pet food gravy and is in many products for humans, from cereals to pasta. Exports from China have been brisk, with demand exceeding supply this year, according to Li Wenxin, sales manager at Qingdao Wansheng Chemical Co., a trading company in Shandong province that exports wheat gluten to several countries, including Australia, India, Italy and Russia. The FDA says there is no evidence that any of the wheat gluten imported from Xuzhou Anying Biologic has entered the human food supply.

Marc Ullman, a lawyer for ChemNutra, said that at this point, it is still not completely clear how the wheat gluten became contaminated. The wheat gluten that was imported from China wasn’t tested for melamine, and testing for the chemical isn’t routinely done in the industry, he said. “There’s no way to test every container of food for every potential toxin coming into the United States.”