International essence giants have participated in the layout of the Chinese market, and local enterprises face opportunities and challenges

In October 2020, Qihuadun set up the world's largest factory in Changzhou, Jiangsu Province, with an annual production capacity of 38000 tons of essence and spices and an investment amount of 100 million Swiss francs (about 730 million yuan).

Previously, Qihuadun had acquired the Dele Man Chuang Fragrance Center and production plant in Guangzhou in July 2019. At the end of the same year, it officially announced the expansion of its edible essence factory in Nantong, Jiangsu Province, rapidly expanding its strategic territory in the Chinese market.

At the same time, in 2018, Symrise officially capped its essence and spice production base in Nantong with an investment of about $100 million, and in 2019, Fanmi Italy officially opened its world's largest edible essence manufacturing plant in Zhangjiagang, Jiangsu

International flavor giants have extended their tentacles to China, and have invested and set up factories in China, further boosting the growth of domestic flavor essence market scale. Chinese local essence and fragrance enterprises are facing opportunities, competition and challenges.

At present, China's flavor products have more export competitive advantages than essence products

At present, there are nearly 6000 actual spice varieties in the world, most of which have an annual output of less than 100 tons. Therefore, low production, diverse varieties, and competition between natural and synthetic products are important characteristics of the spice industry. Essence is a product formulated from a variety of spices, which is the downstream of the spice industry. It can be divided into food essence, daily essence and other essence according to the use.

China's bulk synthetic and natural flavors have export advantages

In synthetic fragrances, the commonly used fragrances are those with an annual global consumption of over 5000 tons, including linalool, geraniol, vanillin, linalool, maltol, etc.

China's bulk synthetic spices have production advantages, such as vanillin accounting for about 60% of the global total production, and maltol and linalool accounting for about 50% of the global total production.

In terms of import and export, about 1/3 of China's essence and spice products are used for export every year, of which about 2/3 are used for export. China's natural spice category is unique and has a large export volume, such as the unique spice Shan Cangzi oil, which is rich in citral and is the main raw material for producing violet ketone and vitamins A and E. The annual export volume is about 400 tons, ranking first in the world in terms of annual output.

※ China's essence manufacturing industry is still in the development stage, and further efforts are needed

From 2011 to 2019, the output of essence in China accounted for 58% of the total output of essence and flavor, while the output of essence and flavor in Japan accounted for 75% to 85% of the total output of essence and flavor. China's essence industry was lagging behind some developed countries.

The competition pattern of China's essence industry is decentralized, with SMEs as the main players. Limited by barriers such as technology, talent, capital and raw materials, China's small and medium-sized essence enterprises are prone to fall into a price war, which is not conducive to innovation and development of the industry.

Therefore, China's essence industry is still in the development stage at this stage, and the leading enterprises need to increase brand value, reduce costs and improve competitiveness through R&D innovation, attracting talents, vertical layout of the industrial chain and other ways.

※ In 2020, China's essence and fragrance market will exceed 50 billion yuan, and it is expected to develop steadily in the next five years

From 2015 to 2019, the development of China's essence and fragrance industry mainly depends on the growth of food essence and fragrance sales.

In 2019, China's food essence and fragrances have basically met domestic demand, and it is difficult to grow explosively. From 2020 to 2025, China's essence and fragrance industry will mainly rely on heated non combustible tobacco products (HNB) to drive the industry's continued development.

International giants of essence and fragrance have come to China in succession. Can Chinese local enterprises break through the tight encirclement?

Essence manufacturing is the highest part of gross profit in China's essence and fragrance industry chain, and China's essence manufacturing faces many pain points

The upstream industrial chain of China's essence and spice industry is spice planting and production, the midstream is essence production, and the downstream is application industries such as daily chemicals, food and tobacco. Among them, the output of spices and essence is at the same level, but the profit rate of essence is far higher than that of spices, and the production is more difficult.

In the middle reaches of China's essence and fragrance industry, essence production links have extremely high added value, with gross profit levels as high as 60% to 180%. Among them, the gross profit level of tobacco essence is the highest. The spice planting and spice production processes belong to the processing and production stages, with low added value and gross profit levels of about 30% and 50%, respectively. Compared with the production chain of essence and fragrance in developed countries, the planting and production of spices in China have not been large-scale and standardized, so the gross profit level is relatively low.

At the same time, because essence enterprises in developed countries also layout fragrance business, they have stronger synergy, thus raising the technical barriers of the fragrance industry. In addition, the integrated layout of essence and fragrances makes it unnecessary for the enterprise to purchase fragrances, which can further improve the gross profit level of essence products.

The production chain of essence and fragrance in China has not yet formed synergy, and it needs to develop towards the direction of industrial chain integration in the future. China's essence and fragrance industry has low added value and serious homogenization, and is still in the stage of exporting to foreign countries relying on raw material processing. This is mainly because the technology and formula of the essence and fragrance industry are monopolized by foreign leading enterprises, the pattern of local enterprises is scattered, and the leading blockade is difficult to break.

Although developed countries continue to transfer essence and fragrance industries to China, at present, the production links undertaken by China are mainly raw material intensive, resource consuming and environmental polluting. Developed countries still firmly grasp the R&D and matching links with the highest added value in the industrial chain.

Therefore, at this stage, essence products exported from China are mainly flavor products, and essence products are not internationally competitive. At the same time, there are about 1000 essence and fragrance enterprises in China, and about 40 enterprises with annual revenue of more than 100 million yuan. There are a large number of small and medium-sized enterprises, scattered market pattern, low concentration, and lack of scale effect. From this, it can be seen that Chinese domestic enterprises find it difficult to catch up with overseas leading enterprises in a short period of time.

The formula of daily chemical essence is complex, and Chinese enterprises mostly use essence products from overseas companies. Because Chinese food and tobacco enterprises pay more attention to localization, they mostly use local essence products. At this stage, the output of essence products of China's daily chemical industry is low. Due to the low downstream demand, large daily chemical companies use essence from overseas companies, and local essence is mainly supplied to local small and medium-sized enterprises.

Among food enterprises, about 70% to 90% of multinational enterprises use overseas essence, while most Chinese food enterprises use local essence products to meet the tastes of local consumers. The tobacco industry is monopolized by state-owned enterprises, which mostly use local tobacco essence products to adapt to the habits of local consumers, while also obtaining higher profit levels.

International giants of essence and fragrance have come to China in succession. Can Chinese local enterprises break through the tight encirclement?

Technology, talent and tax are the three major pain points for Chinese essence manufacturing enterprises. The Chinese spice industry enjoys a 9% export tax rebate rate and a policy of exempting value-added tax output tax, which will encourage Chinese spice enterprises to be more inclined towards exporting products and reduce the cost of importing Chinese spice products overseas. When it comes to essence production, the cost of raw materials of Chinese essence enterprises will be higher than that of overseas essence enterprises, and they will be at a disadvantage in international competition.

At the same time, compared with foreign essence and spice leading enterprises, China's essence and spice enterprises have a large gap in R&D investment. In terms of talent supply, there are only three universities in China with essence and fragrance majors, which is far from meeting the industry's demand for high-end talents.

The downstream demand of China's essence and fragrance industry is relatively stable, and HNB may bring explosive opportunities

The downstream of China's essence and fragrance industry mainly includes the daily chemical, food and tobacco industries. The daily chemical and food industries are relatively stable, and the tobacco industry is greatly affected by policies and new products, with certain volatility.

※ China's food essence consumption demand is stable, but there is still room for improvement

China's food industry has a large market scale and stable demand for essence. With the upgrading of consumption and the development of localization, China's local new consumer brands have risen, injecting power into the development of beverage, dairy products, convenience food, snacks and other categories, and promoting the growth of demand for upstream edible essence.

From the perspective of regional distribution of global essence and fragrance market consumption, Asia has the highest proportion of consumption, 34%, while China's per capita consumption of essence is low, only 28% of the per capita consumption of essence in the United States. With the development of food processing industry becoming mature in the future, China's edible essence market will have more potential for growth, and the demand of residents for essence will further increase.

※ China's daily chemical industry essence market demand is stable but difficult to break through

China's daily chemical industry is dominated by personal care products, while personal care products are dominated by overseas brands, and overseas brands all use overseas essence products. Therefore, about 80% of the essence demand in the personal care product market is overseas essence products. Household chemical products are mainly Chinese local brands, and about 60% of essence demand is Chinese essence products.

Overall, China's essence products account for less than 30% of the downstream China's daily chemical industry. Due to the complexity of daily chemical essence matching, it is difficult for Chinese essence and fragrance enterprises to break through the technical blockade of international leaders in the short term, and the demand in the field of daily chemical essence will be relatively stable in the next five years.

※ China's tobacco industry is greatly affected by industry regulation, and HNB drives the demand for tobacco essence to rise

Although the traditional cigarette industry in China has a trillion dollar market, its market size growth rate is relatively slow due to tax policies.

At present, there are two main types of new tobacco products, atomized electronic cigarettes and heated non combustible tobacco products (HNB), of which the unit use of HNB for tobacco essence is 10 to 20 times that of traditional cigarettes. Since 2015, the annual compound growth rate of HNB has reached 106%, and in 2019, the global market penetration rate reached 2.8%.

At this stage, HNB products have not been approved for sale in China, but can be produced by China Tobacco Corporation and sold overseas. If HNB products are approved for sale in China in the future, the demand for tobacco essence will increase sharply.

International giants of essence and fragrance have come to China in succession. Can Chinese local enterprises break through the tight encirclement?

Deep insight: China's essence and fragrance enterprises are difficult to break through the leading technology blockade in a short time, but they can give play to their own unique advantages from subdividing fields, and may achieve curve overtaking in the future

※ China essence&Fragrance Company can give play to its own unique advantages in combination with local culture

For example, in the field of daily chemical essence, China's unique products such as osmanthus essence are explored, and in the field of food essence, salt flavor essence is explored. Chinese essence and flavor enterprises lead the world in salt flavor essence, mainly due to the large gap between Chinese consumers' eating habits and overseas ones. Chinese enterprises should seize these characteristics, keenly explore China's unique culture and lifestyle habits, create more localized products, break through the encirclement with the advantage of localization, and achieve overtaking on the bend.

※ Chinese essence manufacturing enterprises can arrange in advance in the field of tobacco essence

Compared with overseas leaders, China's local essence and fragrance enterprises have the advantage in the market share of China's tobacco essence, or they can arrange in advance in this field, such as HNB essence related products.

However, HNB has its own heating and non combustion property, which makes the corresponding essence products unable to be released through combustion, thus requiring higher technical requirements. Chinese enterprises need to increase relevant R&D investment for advance layout.

In the long run, Chinese essence and fragrance enterprises need to get through their production chain through technology research and development, industrial chain integration and other ways to improve their product innovation ability, so as to have higher investment value in the fierce market competition.