Orange Growers on Both Sides Get Squeezed
Brad Stark strolls down Nanjing Road looking for what he loves. He doesn’t have far to go. There, in a small fruit stall are boxes of sweet, juicy, ripe oranges--probably smuggled in from Hong Kong.
China and the third-generation farmer from the San Joaquin Valley share a passion for fruit. Stark grows lots of oranges and the Chinese are eager to eat them. Yet official barriers such as tariffs and banking rules encourage a gray market that costs Stark money.
China’s entry into the World Trade Organization is supposed to change all that by opening the door wider for foreigners. That’s why Stark is working so hard to make sure he gets a spot at the front of the line.
“The guys who got into Hong Kong early dominated the market because their brand was known,” said Stark, president of Stark Packing Corp. in Strathmore, Calif., distributor of the Merry J and Indian Belle labels. “We want to do that in China.”
Back home in the fertile citrus belt west of the Sierra Nevada, Stark has a reputation as something of a cowboy. It’s not just the way he looks, though he fits the profile with his imposing 6-foot-5-inch frame, deep gravelly voice and love of fast cars. Nor is it the way he eats, though he demonstrates a Wild West bravado for consuming exotic species more commonly found in American zoos than on restaurant menus.
It is the way Stark is willing to take a chance.
In the world of agriculture, selling abroad is one of the biggest gambles, so it comes with some of the most lucrative jackpots. As one of the largest members of the giant Sunkist Growers marketing cooperative, Stark has led the charge into promising territory such as South Korea, Sunkist’s largest foreign market after Japan and Hong Kong.
Stark is no starry-eyed WTO optimist. He knows business people often bargain away their livelihoods while chasing the mirage of 1.3 billion eager Chinese consumers. He knows competitors who have lost hundreds of thousands of dollars on aborted deals that left containers of citrus rotting on the docks. He has heard about the corrupt border guards, the shortage of refrigerated trucks and the widespread use of counterfeit packaging designed to trick consumers into paying more for domestic fruit labeled as imports.
“When we went to the Longwu fruit market, there was a guy selling sheets of Sunkist labels that looked just like the real thing,” he said. “You could buy any name you wanted.”
A lot can go wrong in this nominally Communist, quasi-capitalist country. But with the right partner and a few lucky breaks, Stark remains convinced Sunkist’s business in China easily could “expand by 10 or 20 times” within a couple of years. Creating new export markets is critical to California’s citrus producers because foreign buyers will pay a premium for their high-quality fruit. And U.S. growers face increased pressure from suppliers in Australia, South Africa and Chile.
American citrus growers long have viewed China with a mixture of lust and trepidation. By the time Stark’s grandfather left New York in 1928 and moved to Central California, where he eventually took over five fruit-packing houses, American traders already were shipping California citrus to Shanghai.
Americans’ early success in China ended when the Communists wrested control in 1949 and pronounced capitalism a class crime. But Mao Tse-tung’s Red Army wasn’t able to squelch the Chinese love of California’s juicy navels.
The Shanghai traders who fled to Hong Kong resumed business from their new home, importing fresh fruit from the U.S. and smuggling it into China.
Over the years, this illicit trade was allowed to flourish because it benefited everyone: The foreign growers were able to get their goods into a restricted market, the Chinese got their forbidden fruit and the Hong Kong middlemen got a cut of the action.
By the 1990s, Sunkist Growers counted Hong Kong as one of its top export markets though everyone knew most of those oranges were finding their way into China.
When Hong Kong returned to China’s control in 1997, Stark knew it was only a matter of time before the mainland would open to foreign fruit. He feared U.S. competitors would get there first. South African fruit already was in China and other producers were lobbying hard to get their citrus in the door. Sunkist’s board was reluctant to spend more money developing a China market still officially off-limits to Americans.
So the California cowboy struck out on his own. In 1998, Stark hired Sharon Zhang, who was working in the wine-importing business in Beijing, as his representative. It was a risky move. Stark wasn’t supposed to have his own marketing staff because Sunkist is the exclusive sales arm for its members. But customers are allowed to specify a label preference and aggressive packing houses or growers find creative ways to promote their own labels.
Stark, who packs about 4 million cartons of fruit a year, urged his 200 growers to produce the sweet navels and Valencias for which the Chinese would pay a premium of as much as $2 a box. Then he started racking up frequent-flier miles.
“We felt if we got a head start and went there early, we would be in the catbird seat,” he said. “It doesn’t happen all at once, but if they keep seeing you every year, they know you’re interested.”
His timing was good. After years of negotiations, China finally agreed last year to lower the tariff on imported fresh citrus from 40% to 35% and to lift a long-standing pest restriction that kept U.S. fruit out of the market. The government also said it would drop the tariff to 12% by 2004 if China is allowed into the WTO. Shutting off the gray market trade also became a priority for the Chinese government, as it looked for ways to stamp out corruption and raise its tax revenue.
The first containers of Sunkist navel oranges arrived in Dalian and Shanghai last year. Like a nervous father-to-be, Stark was there to greet his fruit when it was unloaded in China almost three weeks after it had left Port Hueneme.
“It looked like it had just been picked off the tree,” he said.
Stark knew he had to move quickly,because the prospect of direct trade had sparked an explosion in China’s fresh fruit business. In Shanghai alone, the fruit market grew from a few government-backed traders to dozens of firms including Hong Kong companies hoping to transplant their expertise to the mainland.
In this frenetic climate, foreigners became easy targets for Chinese claiming to have connections, or guangzhi.
Stark depended on Zhang, 34, who speaks fluent English, to negotiate the hazardous Chinese business maze. She met with the local fruit traders, visited the giant Guangzhou fruit market and drank tea with the customs officers at the main southern ports.
At every stop, she collected snippets of information: which firms had a track record, who had enough cash to pay their bills, who had connections to the government.
“Sharon constantly has the radar going,” Stark said. “She knows who the players are, their financial stability, she knows how the game is played. I couldn’t have done it without this intelligence.”
Pan Guo Hua and her husband, Zhu Ya Juan, owners of the Shanghai Ze Chen Fruit Co., passed the test. After 20 years in the fruit trade in Guangzhou and Shanghai, the couple had snagged a lucrative contract supplying the giant Metro membership-only stores and the RT Mart chain in Shanghai.
In January alone, just before the Chinese New Year holiday, the Shanghai couple imported 40 containers of California citrus. But this surge in business wasn’t all good news. In a meeting with Stark, Pan complained that Sunkist’s fruit didn’t always live up to its high price. “We need consistent quality and sizes,” she told the California grower.
Even more worrisome, she said, was Sunkist’s requirement that its Chinese buyers pay 100% upfront for their fruit.
Credit was the biggest concern of every fruit importer Stark met during a weeklong scouting mission this spring. China’s economy still operates largely on cash, sometimes by the bagful. Unlike their Hong Kong counterparts, these Chinese businesspeople can’t go to a bank and get a loan or letter of credit. That makes it difficult for them to tie up hundreds of thousands of dollars in perishable fruit and not get paid until the cargo is delivered and sold a month later.
Pan warned Stark that smaller California competitors like Tri Citrus were offering good oranges at cheaper prices, sometimes 50 cents less a box. More important, they were willing to sell on much better terms: 20% down and the rest within three weeks.
Out of Stark’s hearing, Pan’s husband, Zhu, said he hoped to visit California soon to check out Sunkist’s competition. “I think many U.S. companies will want to work with us,” he said confidently.
Jerry Havel, sales manager for Porterville, Calif.-based Tri Citrus, said his company was allowing its biggest customers in China to buy fruit on credit, sometimes with no down payment. “Somewhere along the line in this world, you’ve got to trust people,” he said.
Before leaving Pan’s office, Stark urged his Chinese partner-to-be not to lose patience. “Please remind her that Sunkist is owned by 6,500 very conservatives farmers and that’s the reason it takes so long for things to happen,” he told his assistant.
Stark was getting squeezed in a vise of fear and unrealistic expectations on both sides of the Pacific. The Chinese buyers thought Sunkist was playing the heavy by refusing to share more of the financing risk, while American growers feared they were going to be fleeced by unscrupulous or inexperienced Chinese traders.
Sunkist’s members also didn’t want to anger their longtime Hong Kong trading partners, who were still the main conduit for fruit into China. Between November and May of this year, Sunkist had shipped just 300,000 cartons of citrus to the mainland compared with 3 million cartons into Hong Kong.
“It’s a new market,” Stark said. “Everybody’s a little bit leery about getting too far out there.”
Caution is in order, said LaVerne Brabant, an agriculture consul at the U.S. Consulate in Shanghai. He gets regular visits from unhappy American exporters seeking help in collecting unpaid debts. “Unfortunately, for people in the commodity business there is a fairly high rate of failure,” he said.
The latest debacle involved Guangdong Fully, a highflying Hong Kong fruit wholesaler that went out of business after importing dozens of containers of fruit last fall. U.S. fruit wholesalers were left with more than $1 million in unpaid bills, according to industry sources in the U.S. and China. Officials of the Chinese firm could not be located.
Stories like that make Sunkist officials uneasy. “When you go into China, there’s no shortage of people who want to buy your product,” said Russell Hanlin, director of international sales for Sunkist. “It’s when you talk about collateralizing the sale, that it gets dicey.”
By the time Stark returned from his China scouting trip, nature had turned against the Chinese, resulting in a smaller-than-expected orange crop. In April, orange export prices were $16 a box, up from $9.50 just three months earlier. At that price, China couldn’t compete with its wealthier neighbors in Japan and South Korea.
“We priced ourselves out of China,” Stark said.
Given the shortage of export-quality fruit and the tension with Sunkist over his China marketing efforts, the California grower decided to let Zhang go. Though difficult, the decision was made easier because Sunkist had agreed to add a second person to its marketing staff in China.
But people who make their living at the behest of Mother Nature know they always are just one crop away from feast or famine. A few miles away from Stark’s office, acres of citrus trees nourished by a light rainfall and moderate temperatures are starting to ripen. If the weather is kind, next year’s orange harvest will be a large one and he already has plans to be back in China sipping tea with the Pans.
“We should have a good crop next year,” he said. “We’ll need all our friends in China again.”
