This opinion piece is written by Bits x Bites, a Chinese agrifood tech VC. Bits x Bites is founded by Matilda Ho, who will be speaking during the Asia-Pacific Agri-Food Innovation Summit on the panel “Fermentation: Kickstarting the Engine for Market Share Capitalisation in Asia.”
Agriculture and food are responsible for 31% of total greenhouse gas emissions. With growing population and wealth, so will the demand for more and better quality food. But making more food and nutrition available doesn’t necessarily have to drive up the pressure on the environment. This is where biotechnology comes in—to rewrite this script by changing how food is produced and processed.
From proteins to biofertilizers and other feed and food nutrients, biotechnology is driving disruptions in traditional ingredient production. Many of these products historically come from animal and fossil fuel sources. With new biological production routes and improved fermentation capabilities, ingredients are replaced by bio-based sources that use less water, emit less greenhouse gas, and prevent deforestation.
Southeast Asia and China’s end-use market for all these ingredients has been decades in the making. The growing demand for processed foods and animal feed makes the region an important commercial target for bringing these solutions to customers at scale. While these territories are not generally considered bio innovation hubs, we believe dynamics are at play to reshape their role in the global bioeconomy.
In this article, we look closely at how China and SEA are becoming a force in the agrifood biotech evolution. We examine supply chain, cost structure, policy, and capital drivers, as well as development areas that can accelerate the sector.
Industrial fermentation infrastructure as an asset
Fermentation capacity is a requirement in the bioeconomy. Fermentation-derived products are driving a global shift from traditional animal and fossil fuel sources, from meat and dairy to bioactive ingredients to farm inputs and packaging materials. All these products have to be manufactured somewhere and China in particular is a natural base. Organic acids, amino acids, vitamins, and industrial enzymes are the main four ingredient categories bio-manufactured in fermentors today. And a lot of them are produced in China. Take amino acids as an example, China ferments four million tons a year, roughly equal to 66% of the world’s production capacity. In vitamins, China has 349,000 tons of capacity, accounting for 77% of the global production.
Supporting this abundance of capacity is China’s cost advantage in building the equipment. Down to the basics, fermentors are containers with pH and temperature control and mixing capabilities. These tanks can range from 250 ML to 150,000 L and more. China’s cost advantage is no surprise given its history as the world’s factory.
Hao Jian Ming of China Fermentation Industry Association adds: “Fermentation tanks have different levels of complexity depending on the application requirements. But in general, equipment produced in China costs just a third of those made abroad. There is a high concentration of both fermentation equipment producers and operators locally. This helped tool manufacturers advance quickly in building cost advantage and quality.”
Ye Xiao Feng, Novozymes‘ Vice President, Agricultural and Industrial Bio Solutions, China adds: “Chinese fermentation equipment manufacturers are extremely price competitive and a lot of it is exported to Thailand and other places. This is a strong advantage unlikely to shift.”
On the OPEX front, SEA offers feedstock cost advantages that make them viable candidates. After Brazil, Thailand is the second largest producer of raw sugar feedstock. “Some companies will choose to ferment close to feedstock sources,” says Oscar Liu, Adisseo’s China Strategy Development Director. “However, the warm climate in SEA implies a high energy cost for temperature control during fermentation. Some of them may choose not to run until after September for that reason.”
John Eng, Director, Food at A*STAR Biomedical Research Council adds: “More new-generation leaders of SEA food companies are taking steps to participate in the bioeconomy and bringing their traditional food businesses to the future. Thai Wah—one of the leaders in tapioca starch in Thailand—is valorizing its starches for bioplastics. Mitr Phol Group—Asia’s largest sugar producer—has set their eyes on bioplastics as well as refining biofuel.”
“Agrifood MNCs are also reassessing their SEA supply chain for value-creation opportunities. Dole is using its fruit side-streams to develop enzymes and other specialty ingredients for pharma, nutraceuticals, and F&B markets. We expect these activities in SEA will grow as the global demand for bio-based ingredients soars.”
Cost-driven biotech innovations honed by a cutthroat chemical industry
China has a large petrochemical synthesis industry producing everything from packaging to antibiotics and other agricultural inputs. Focusing mainly on synthesizing commodities, China sold $1.5 trillion of chemicals in 2017, representing nearly 40% of global chemical industry revenue. When environmental regulations tightened in recent years, production cleanup costs surged and these companies took a hit. Between 30-40% of non-compliant MSG production shut down in 2017-18.
As it turned out, these chaos provided the spark for bio innovators to engineer alternative production approaches. Working up close with low-cost chemical giants, a product- and cost-first mindset is grilled into these entrepreneurs. While their western counterparts focus on building intellectual property around proprietary technology stacks, in contrast Chinese firms start off with a laser focus on outcompeting conventional processes on efficiency and cost.
“It is difficult if not downright impossible to disrupt agrifood without being cost-competitive,” says Joseph Zhou, Managing Partner, Bits x Bites. “Novel ingredient or compound producers that have strong strain engineering and processing R&D are certainly attractive for investors. But it’ll be those with the full breadth of industrial experience including production scale-up, downstream processing, and commercialization and branding to unlock the competitive advantage to build a world-class company on.”
Market proximity ranks high in supply chain considerations
Besides cost analyses, staying close to their customers is a crucial reason for some companies choosing to produce in Asia. Today, Asia is the largest buyer for fermented organic acids and vitamins used for animal feed and food preservation in processed foods.
“Some companies will simply choose to ferment in China because of the size of the market. Even if cost savings alone aren’t convincing, producing where your customers are could give you an advantage in registration time and customer distribution. That is plenty of justification,” says Liu of Adisseo.
TC Tan, former Novozymes Global Vice President, Food & Beverages and Regional President for Asia-Pacific, Middle-East & Africa, adds that some fermentation in SEA will grow faster in certain sectors compared to others. “In the next 10 years, Singapore, Indonesia and Thailand are likely to see more regional protein-based food and beverages, as well as fermented agricultural biomass for animal feed to meet local demands. These producers will take advantage of the proximity of customer demand and the regionally available and low-cost feedstock of sugar, cassava, as well as the byproducts from palm oil processing and aquaculture.”
“We see Singapore taking the lead in R&D and industrial production of enzymes and bioactive ingredients as compared to other countries in SEA,” Tan continues. “Building large-scale fermentation facilities for high-value ingredients requires intensive capital commitment and we hope to see more support from the government bodies from other Southeast Asian countries in the coming years.”
Policies and initiatives give fuel to biotech founders
In China, decarbonization is higher on the agenda than ever. The state government has set goals for carbon emissions to peak by 2030 and to reach carbon neutrality by 2060. This pledge shaped a series of policy changes. In 2016, China announced goals to limit animal antibiotics to only veterinary purposes. It dictated zero chemical input increase on the farm. In spring 2021, to reduce reliance on agricultural imports, new guidelines instructed the animal feed industry to reduce reliance on corn and soybean in feed formulations. Taking heed of these policy changes, innovators were encouraged to develop solutions from phages to probiotics to novel growth enhancers.
“Until recently, China’s agricultural developments were squarely focused on tackling food security by using more input, more labor, higher density,” says Ye Xiao Feng, Novozymes. “The recent wave of policies demonstrate a commitment to change course, through investment in technology for more efficient use of resources and higher conversion of input. This is why we saw Sinochem’s acquisition of Syngenta, more GM products being approved, more biofertilizers getting into the supply chain.”
Singapore has aggressively accelerated the pace of innovation in the agri-food landscape through policy. While global regulators were hung up on how to police cell-based foods, Singapore Food Agency (SFA) broke the standstill and became first to give regulatory approval for cell-based meat in spring 2021. In summer 2021, it granted a food processing license to Esco Aster for cell-based manufacturing. Cell-based tech companies can now leverage Esco’s approved platform to get to market more quickly without building and certifying their own pilot plants. These regulatory milestones are in line with Singapore’s 30-by-30 vision—whereby 30% of its nutritional needs will be produced within the borders of the city state by 2030, up from less than 10% today. This also sent a powerful statement welcoming global food tech entrepreneurs to bring their R&D and production to Asia.
“We see much potential in this space as Singapore moves towards its 30-by-30 goal, and are keen to support and create value for high potential agrifood companies who are intending to expand in the region,” says Basil Lui, Managing Partner of EDBI, a venture capital arm of Singapore Economic Development Board.
For US fungi protein company Nature’s Fynd, Singapore’s support for the sector was essential for its Asian plans. “As we expand into Asia, we’re finding Singapore to be an ideal base from both operational and business development standpoints, with its forward-looking regulatory environment and food security goals,” says Thomas Jonas, founder of Nature’s Fynd. “There is a strong interest in Singapore to take the lead in food tech, and that is why we’re also planning to build our first Asian manufacturing facility here in 2023.”
Initiatives continue to expand technology research and commercialization. In 2021, Singapore Food Agency and Nanyang Technological University and research agency A*STAR launched the Future Ready Food Safety Hub (FRESH) to improve regulatory responsiveness and food safety validation. A*STAR also established the Singapore Institute of Food and Biotechnology Innovation (SIFBI) to strengthen public sector protein research. “SIFBI’s focus areas include discovery, strain engineering, bioprocess development and fermentation, food process engineering, nutrition studies and analytics,” says Wong Min Hao, Strategy & Business Development Group Leader, SIFBI.
Sovereign fund Temasek launched the Asia Sustainable Foods Platform to extend R&D advisory and pilot-scale manufacturing facilities to help food tech companies commercialize. Through the support of Singapore Economic Development Board (EDB), Asia Sustainable Foods Platform partnered with ADM to help small companies scale fermentation.
Biotech in China is pumped with investor enthusiasm; now it needs patient capital
Chinese biotech firms have been gradually integrating into the global biopharma in recent years, with more companies entering international licensing deals and public markets. In China, on HKEX, STAR, or NASDAQ, the cumulative market value of Chinese biotech companies rose from $1 billion in 2016 to $180 billion as of May 2021.
And while global biotech stocks tumbled in recent months, Chinese companies continue their strong performances. In the US, leading synbio company Ginkgo Bioworks (DNA) shares dropped 80.3% from its 52 week high of $15.86. Zymergen (ZY) once fell to $1.1 from $39.88 (IPO day) before it was eventually acquired by Ginkgo for $300M. In contrast, Chinese companies Cathay (688065) and Huaheng (688639) maintain their strong showing with PE ratios of over 70x and respective market cap of $7.0B and $2.1B, delivering $90.7M and $25.1M in net profit in 2021.
And the public market performance will continue to have a domino effect on increased VC commitments. In 2021, over 50 generalist investors in China backed 40 biotech agrifood investments. Sector-targeted funds were formed. Xingbo Shenghui was established as China’s first synbio fund to invest in companies advancing agriculture and applications. This risk capital and investor optimism are vital for the ecosystem. However, funding a new sector is a marathon and not a sprint.
“China’s technology is entering its prime time, with more successful IPOs, which leads to more funding support across stages. This is because technology development is aligned with the government agenda, and you can’t overlook the power of this. It will be vital to follow these trends and see if these investors show continued commitment to the sector in the long term,” says Ye Xiao Feng of Novozymes.
Develop talent, build multidisciplinary enterprises, and unlock the sector’s full potential
Despite strong fundamentals, challenges remain for Asia to grow into a convincing presence in the global map for agrifood biotech. Talent is a good example. China has no shortage of workers technicians in fermentation production and scale-up, mainly from experience accumulation. What it lacks is bioengineering talent to discover and optimize strains and design production pathways. This void is gradually being filled by an influx of overseas talent returning to China. “Returning scientists will need to adapt to China’s realities and embrace a cost-first mentality to compete,” says Tang Xun, Partner at HosenCare Brothers.
The industry will only grow as rapidly as the sector’s talent. But having specialized scientific expertise is one thing. Coordinating these skill sets and demonstrating executional excellence for full product life cycles repeatedly is another. Some of the leading global biotech companies active in agrifood applications are built over the course of over 100 years.
“The gap in Asia is a lack of century-old biotechnology companies like those in Europe—large organizations with rich data and vertically integrated capabilities incorporating strain, fermentation, scale-up, empirical adjustment, commercialization including curating new pipelines. All of this takes time to develop and is crucial to create and sustain a competitive edge. Without this, it’s a race to the bottom,” says Ye Xiao Feng of Novozymes.
Visionary founders that can amass these business and technology capabilities will build category-defining companies that turn the page for the region’s bioengineering industry.
It’s time to pay attention to bio ingredient innovations from China and SEA
In his book How to Avoid a Climate Disaster, Bill Gates advocates the need to remove the “green premiums.” “Green premiums” are the cost difference between doing something in a way that produces greenhouse gas and doing the same thing without the emissions.
This means enabling processes to produce food and feed ingredients in sustainable, biological ways and doing so at the same price points as incumbent processes or less. From what we have seen, China and SEA can play a meaningful role to help bio-based ingredient production cross the cost parity line. Scientists reiterated at the UN’s COP26 climate talks that a 55% cut in GHG emission is needed to meet the goal of containing warming to 1.5 degrees. Historically, no major country has successfully turned down the dial on emissions. With agrifood accounting for 31% of the 51 billion tons of GHG emitted to the atmosphere each year, we need everyone doing their part to bring those “green premiums” to zero.
From the growing innovation dynamics to supply chain to risk capital to regulatory policies, elements in the agrifood ecosystem are coming together. There has never been a timelier moment to invent and invest than now.