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Current as of 19/09/14 07:40PM NZST

Fran O'Sullivan

A columnist for the NZ Herald

China Business 2012: Fonterra boss woos Chinese

Theo Spierings is driving Fonterra ahead in China. Photo / Dean Purcell
Theo Spierings is driving Fonterra ahead in China. Photo / Dean Purcell

Fonterra chief executive Theo Spierings has floated the prospect of going into partnership with Shanghai Pengxin to develop dairy farms in China.

Spierings reveals he invited Shanghai Pengxin chairman Jiang Zhaobai to dinner in Shanghai just after Justice Forrie Miller controversially over-turned the Ministerial approval to buy the 16 Crafar dairy farms.

Cabinet Ministers were this week expected to make a decision to approve the Overseas Investment Commission's latest recommendation on Shanghai Pengxin's refashioned application for Overseas Investment Office approval to acquire the farms.

The Chinese company has already invested in sheep farming options in China - but not dairy farms.

Spierings jests, "I would rather he was invested in dairy farms in China than here."

But there is an underlying business rationale for his move.

The Fonterra boss's decision to open communications with Chinese competitors who are invested in New Zealand is refreshing. It marks a clear departure point from the vitriol that elements of the NZ dairy industry have expressed against offshore investors, particularly those from China - an unfortunate aspect, which has deeply concerned Chinese Authorities given Fonterra's own lucrative dairy footprint in China.

Spierings has also spoken to Synlait Milk chief executive John Penno about the potential for co-operation in offshore markets where their respective business strengths are complementary. Synlait is 51 per cent owned by Shanghai's Bright Dairy. Bright Dairy is not among Fonterra's Chinese customers, which already include many major industry players.

He says Bright's people have been invited to the opening of Fonterra's third Chinese farm.

"We've got to leverage off the strength of New Zealand out there," says Spierings.

As acting chief executive of Royal Friesland Foods, Spierings led that company into a merger with Campina, creating Royal FrieslandCampina - the world's fifth biggest milk processor. Prior to taking up the Fonterra role, he ran his own company spending 50 per cent of his time in China.

He instituted a strategic review of Fonterra's direction on being appointed CEO last year. The upshot is Fonterra plans to expand its farming base in China to 25-30 farms in a series of five-farm hubs.

This will require significant investment capital approaching the $1 billion mark over the six-year development period. The goal is to produce half a billion litres of milk from Fonterra farms by 2105 rising to 1 billion litres by 2018.

But the main game is to start now by integrating the 170 million litres of milk it now produces from its two Chinese farms with production facilities, which it will manage. Hence Fonterra's decision to talk to China-based companies about potential partnership opportunities to build processing and branding capability and distribution lines.

Fonterra China head Phil Turner has already had the first round of discussions with a shortlist of potential partners.

Fonterra's first farming hub is being built around Yutian, which is close to the Beijing market. Spierings says the ideal would be to combine with an infant formula player, which would allow the fat to be stripped out (it is replaced with vegetable fat) so that Fonterra can use the fat.

"We really need to do it fast as we have milk available," says Spierings. He says 170 million litres is a lot of milk. But Fonterra has to respect its current contract with Danone. It is possible a deal could be struck with Danone, as it is China's number one infant formula maker.

Spierings says the pressure will go on once Fonterra enters its next financial year on August 1. The "trading among farmers" platform also has to be established. For technical reasons, no deals are expected to be struck before then because Fonterra has to issue a prospectus for the unit fund through which trading will take place. Spierings says while this makes partnerships and acquisitions very difficult, if the company prepares now it will be able to start quickly doing deals. "The Chinese don't wait and it's all about speed."

Fonterra is also talking with Chinese food giant COFCO which is "very interested" in talking about becoming a financial partner in the milk pools (farms). "Food security is an issue," says Spierings. "They have China Modern Dairies but are very interested to talk and do business downstream."

He says either New Zealand brands or their own brands or both could be produced. "It could be their brand endorsed by New Zealand which I think is good. We have a safe supply chain and IP - they know we are world-class."

Fonterra also plans to package Anlene and Anmum in China, though the bone-maintenance and maternal nutrition products will still be produced from New Zealand because "food safety and nutrition for the vulnerable people is very crucial".

Spierings says the biggest challenge is to connect the local milk play to "our branded proposition. We want to connect the farm, our brands and food service products. At the moment we're shipping cream in UHT cartons over the ocean. Transporting it over the sea is not the best-value creation."

Fonterra's biggest China play is its exports of whole milk powder from New Zealand. This is worth about $1.8 billion annually and will remain a key priority.

- NZ Herald

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