Photos courtesy of OSI Group

In 1982, Sheldon Lavin, current chairman and CEO of OSI Group, embarked upon a trip to China to test the waters for possible business opportunities. Inspired by what he saw there, several weeks later, he would begin down the road on a strategic, long-term journey that would change not only the future of the Aurora, Ill.-based protein processor, but also eventually would have a hand in slowly altering the culture and societal norms of the historically isolated, but gargantuan Asian nation.

The Chinese themselves, along with the sheer size of the population within the fast-growing country, first sold Lavin.

“I fell in love with the people of China,” Lavin says. “The people are what make a business work, and the Chinese people have a work ethic par excellence.”

Secondly, Lavin says, he saw a different dynamic in Communist-ruled China than he had witnessed in visits to the then-Soviet Union, also under Communist rule.

“Communism [in China] was very, very different than in Russia,” he explains. “The Chinese were well-fed, and I got a really good picture of the [day-to-day] situation. There wasn’t one Chinese person I spoke to that was unhappy.”

Lavin saw the potential for business success on a grand scale, well before many in the United States considered China a truly viable emerging market for Western-style consumer goods and services. When Lavin returned to the U.S., excited about the opportunity he’d discovered, he made a statement that has become infamous throughout the halls of OSI Group: “I said that I don’t care if we sell the erasers off pencils, we are going to China,” he recounts.

Thus, the groundwork for OSI China was laid — one decade later, McDonald’s Corp. expanded into China, and OSI was ready to serve the restaurant chain’s protein needs. In 1992, OSI’s Beijing plant opened, and the company hasn’t looked back since, blazing a trail through an extremely challenging business frontier to position itself as a leading supplier of protein and other foods in this now-trendy emerging market.

The decision to begin operations in China has given OSI Group a virtual head start over other food-processing businesses who look to expand into the Far East marketplace — a head start that is backed by long-term relationships, trust and partnerships that continue to expand and grow.

In September 2012, OSI Group celebrated the 20th anniversary of its China operations with pomp and grace during several ceremonies throughout the country, but it mixed in a clear message that 20 years has simply been a starting point. During the weeklong “road show” of celebrations, OSI broke ground on a new, “mega” further-processing plant in Xihua, and signed a new joint venture to create OSI’s third fully vertically integrated poultry operation.

Watch an Exclusive Interview with Dave McDonald, President & COO, OSI Group

The new frontier                                                                                

In today’s interconnected, global world, in which cuisines and concepts hop quickly from nation to nation, it seems unfathomable that something as ubiquitous as the hamburger patty or chicken nugget would bring about puzzlement from anyone. Yet, when OSI Group started its operations in China in 1992, those two products were more than a simple foreign concept to the Chinese people.

“To Chinese people, a beef patty looked very strange, because if you look at Chinese food, it’s very different,” explains Dennis Zhang, general manager of Husi Foods (the name OSI operates under in China). “We had to invite technical consultants from the U.S. to explain to us how to make this Western-style food, from grinding size to fat content, and forming machines to spiral freezers.”

The product line now reflects major additions in the last 20 years, to where Husi now produces beef, chicken, seafood and produce, among other products, for its customers. As McDonald’s has expanded, its needs changed as well, and Husi modified its product line to match those needs. Zhang says the company makes more than 100 protein SKUs now — much more than the single beef patty it started with 20 years ago.

Additionally, Husi experienced a significant change in its customer base roughly five years ago, Zhang says. For the first 15 years, Husi supplied only McDonald’s restaurants in China. Over the last five years, however — in similar fashion to the changes instituted in OSI’s U.S. operations — Husi has diversified itself to serve additional customers. From other large Western quick-service chains that have expanded into the country — such as YUM! Brands, with whom OSI now has a substantial commercial partnership — to Chinese national restaurant chains that demand the type of quality control Husi can provide, this diversification is clearly evident.

“If you look at the customers today, they’re not only in China,” Zhang adds. “We are also exporting to Hong Kong, Japan and Pakistan.”

As the product line and customer base expanded, so too did the company’s operations. Today, OSI operates eight facilities across China and employs more than 4,000 people — a far cry from the 20 to 30 employees the company had in 1992. OSI has made it a priority to employ — and empower — knowledgeable local qualified people throughout its China operations, rather than send over U.S. employees and force a Western mentality and approach upon its Asian division.

In the early years of OSI’s China operations, when the company was still small, finding the right, local people wasn’t as much of a challenge as it is today, says Bill Weimer, OSI Group executive vice president and CFO.

“As we look into the next three to five years, finding the right people is going to be the hard part of the business, and it’s not so much labor, it’s managers and above,” he explains. “The skill sets we’re looking for are very different from what they’ve historically had here. And it’s not that they’re not educated — it’s breaking old habits and building the trust that this actually will work.

“We’re trying to blend the bestof China and the best of the West. We don’t want to be all American in our operations here,” Weimer adds.

Watch an Exclusive Interview with Dave McDonald, President & COO, OSI Group

Controlling the chain

Initially, OSI China focused predominantly on the further-processing side of the equation, but recent moves in the last few years demonstrate the company’s strategy to become a vertically integrated supplier of products to its customers.

“There was a time when it was very difficult to source enough safe raw material, so our company has invested in that side,” Zhang says. Investments in the agricultural production side of the business have allowed Husi to control the quality and amount of supply in a nation still growing its infrastructure, particularly in the underdeveloped regions further inland from the eastern coast.

During the 20th anniversary celebration, OSI Group communicated its strategy of vertical integration clearly to the world, hosting an event in the city of Zhengzhou to announce the creation of DaOSI — a joint venture with poultry producer DOYOO Group.

DaOSI is OSI’s third fully vertically integrated poultry operation in China, joining OSI Group (Weihai) Poultry Development Co., a wholly-owned operation which opened in 2009, and Fujian SunOSI Poultry Development Co., a joint venture signed in 2011 between OSI and Fujian Sunner Development Corporation.

This new joint venture stands as the latest testament to OSI’s efforts in this realm, capping a busy year that started with the grand opening in January 2012 of a new, modern poultry feed mill in Rushan, Shandong province. At the time, the mill was one of the largest in operation in China, and Stefan Chen, general manager of OSI’s Poultry Vertical Integration division, said in a company release that it allowed OSI “to develop a sustainable business model for the future through efficiencies of scale and best practices, along with significant biosecurity and food-safety measures.”

It is for these reasons that OSI owns its own farms. Additionally, the investments have helped OSI to stay ahead of the competition by offering customers a much better value proposition, says Zhang.

“The Chinese market is still an emerging, large market, and it’s fiercely competitive,” Zhang says. “Companies compete using different angles, and one of those is food safety. The consumer is very sensitive to food-safety issues today, and because of that environment, customers consider food safety much more than they may have in the past.

“For companies that have absolute raw-material control, they get top priority and have a selling point around food safety — and, if you’re more efficient and have the scale to meet high volume requirements, you get more priority,” he adds.

Watch an Exclusive Interview with Dave McDonald, President & COO, OSI Group

Increasing volume, efficiency and speed

Without a doubt, there is plenty of interest from Western companies who want to start business in China, but OSI believes it has an excellent head start based on the 20 years it has spent building and cultivating its operations and partnerships. Now, Weimer says, OSI is working diligently to keep that advantage in place as competition increases.

During the 20th anniversary festivities, OSI China broke ground on a new “mega” further-processing plant in Xihua, Henan province, that is expected to help the company stay ahead of the pack. Weimer believes this new plant can do for OSI China what the Oakland, Iowa, facility did for OSI Group when it opened in 1996.

“One of my first projects was Oakland, and based on what OSI had historically done, it was a massive plant we built in 1996,” he recalls. “The Oakland plant allowed the U.S. business to really take a big leap forward, and I think the Xihua plant will give our China operations a big boost forward too.”

Brent Afman, senior vice president & general manager for OSI’s Asia Pacific, Middle East and Africa (APMEA) Further Processing Facilities, explains that Xihua, which is scheduled to be up and running by September 2013, truly represents a step forward in the company’s capabilities.

“We looked at what our business would require in the next 10 to 20 years, and it wasn’t that we were just going to duplicate what we were doing in Beijing or Shanghai,” Afman states. “We looked at specialized areas we believe we’ll need to focus on: high-capacity, high-throughput, high-efficiency manufacturing. That will be the platform.”

Phase One of the project features construction of the structure itself and three processing lines, all expected to be finished in 2013. Afman states that these lines will be focused predominantly on production of fully cooked or par-fried chicken product. Phase Two — an additional line that could produce high-volume beef or pork, though that has yet to be finalized — is scheduled to be finished by 2014, and the final four production lines will be installed and operational by 2015.

When all is said and done, the Xihua “mega” plant will feature eight processing lines covering approximately 55,000 square meters — or  600,000 square feet. Afman appreciates the fact that OSI Group is willing to invest in a big way in the China operations.

“You can tell our leadership is quite enthusiastic about the opportunities that exist in China and north Asia,” he says. “The opportunities are big in this market, and you can take a bit of a toe-in-the-water approach, but you have to figure out how to get to them in a big way as well.”

As proof of that, OSI has another further-processing plant under construction in Weihai province. This plant will measure approximately 10,000 square meters, or 108,000 square feet, and will produce a multitude of items that appear more often in typical Chinese cuisine, as opposed to the Western-style items made in other facilities here.

OSI is taking the steps to be very relevant in the long term in China by investing downstream in the supply chain, as well as ensuring the food safety of its products by controlling the supply chain all the way from the feed mill.

“Companies that don’t or aren’t able to make those types of moves will find themselves significantly challenged as the years go by,” Afman explains. Despite the investment in the Xihua “mega” plant and its high-volume, high-speed focus, OSI China reiterates that it will maintain its ability to custom-process products for its smaller customers at its other facilities.

The first 20 years of OSI’s business in China have set the foundation for a strong, vertically integrated protein-supply system in which OSI can control the quality, safety and consistency of the products it produces in a country that, overall, is still learning the ropes of supply-chain infrastructure and quality control. OSI has patiently constructed its strategy and the infrastructure needed to support its plans, and thus far it has paid off.

“Our infrastructure has the capability of providing unique supply-chain solutions for many customers,” Lavin explains. “We can offer scale, supply-chain integrity and nimble, niche solutions to new partnerships such as the one we have with YUM! Brands. We believe our infrastructure will allow us to continue to invest in our partnership with McDonald’s and create a very substantial and long-term partnership with the likes of YUM! as well.”

As the Chinese economy develops further and grows faster, OSI Group will continue to grow along with it, fully expecting to be the primary trailblazer of innovative food production in the country.