Fran O'Sullivan on business

Business analysis and comment from Herald columnist Fran O'Sullivan

Fran O'Sullivan: Chinese eager to milk brand NZ

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Number of firms seeking to build infant formula plants here suggests Fonterra missing major opportunity.

The Chinese companies coming into the New Zealand market clearly want to ensure their products are made from safe milk supplies. Photo / NZ Herald
The Chinese companies coming into the New Zealand market clearly want to ensure their products are made from safe milk supplies. Photo / NZ Herald

More major Chinese dairy companies are looking to build infant milk formula plants in New Zealand to leverage the country's reputation for safe milk-sourced foods.

The galloping trend poses issues for New Zealand's political leaders and policy-makers - as well as NZ's own dairy giant Fonterra, which is required to provide capped supplies of milk to competitors for up to three years to help them get started.

At issue is whether the Government needs to take clear steps to ensure the Chinese companies do live up to the powerful New Zealand brand image and make abundantly sure that their infant formula products are kept free from contamination at all steps in the supply chain from the milk supply through to the factory then on to the supermarket shelves, and whether they also need to place clear strictures on just which companies can use the attributes of the New Zealand brand in China.

This is also needed for the Chinese firms' protection given the disturbing advent of small suspect operators who have been using false fronts to boost their "New Zealand" brand attributes.

If the 2008 Sanlu melamine disaster taught New Zealand officials one thing it should have been the need to ensure risk management to protect our major exporting sector.

Fonterra's investment in Sanlu turned sour when the Chinese company was found to have produced infant formula from suppliers who deliberately put melamine into the milk to falsify protein levels.

Many Chinese children were affected. Sanlu's chairwoman was thrown into jail with a life sentence and Fonterra forfeited its investment.

The Chinese companies coming into the New Zealand market clearly want to ensure their products are made from safe milk supplies - something which still cannot be taken for granted within China.

There is another commercial imperative: NZ sourced product sells at a premium to safety-conscious Chinese consumers, retailing at upwards of $80 a can for infant formula.

But from a Fonterra perspective, the already public proposals by three more Chinese companies to invest in milk formula plants in New Zealand raises questions as to why NZ's own dairy giant has not developed its own major infant milk formula brand to export directly from NZ to the Chinese market.

The Chinese companies clearly see a major market opportunity. But Fonterra is not moving swiftly to build its own market position.

The big question is: Why not?

To recap: In the past month alone, Yashili International Holdings and China's biggest dairy company, Yili, have unveiled plans to invest in building processing plants in NZ. Guangdong-based Yashili plans to build a $210 million processing plant and Yili will spend $214 million in establishing an infant formula plant in South Canterbury as a result of its planned takeover of Oceania Dairy group.

Oceania had been in relative hibernation since it failed to get a $74.5 million capital raising away in the wake of the global financial crisis.

Synlait subsequently bought Oceania's supply contracts.

Oceania director Don Brash said New Zealand clearly needed foreign investment citing Yili's willingness to invest where New Zealand investors would not go.

Both companies' applications are now in front of the Overseas Investment Office which has to weigh up if it is in New Zealand's interest for the investments to proceed.

This is an area where the OIO will tread carefully.

On the face of it, both Yashili and Yili will increase jobs in New Zealand through their value-added processing.

Neither has announced plans to invest directly in farms thus avoiding the political controversy which surrounded Shanghai Pengxin's acquisition of the 16 Crafar farms.

But the OIO could go further and suggest the companies appoint New Zealand directors and take other steps to ensure more value accrues to this country.

Right now Shanghai Bright is the only Chinese company manufacturing infant formula in NZ.

The Shanghai Bright Dairy/Synlait venture was first out of the blocks.

Bright Dairy provided expansion capital to Synlait after NZ investors shunned a capital raising programme after the global financial crisis. It is working well for both parties.

Shanghai Pengxin is expected to invest in processing facilities in the Taupo region after its supply contract with Fonterra runs out.

But Yili and Yashili are not the only Chinese companies which are aiming to join Shanghai Bright Dairy and Shanghai Pengxin to manufacture infant milk formula in New Zealand.

Wahaha Group - owned by China's richest man Zong Qinghou - is also circling.

Kelly Zong, who is in charge of developing new food brands for Wahaha, has renewed her interest in New Zealand.

In 2011, Zong's plans were knocked back when she could not persuade Fonterra, which is a major supplier to Wahaha, to forge a joint-venture in this area.

Wahaha plans to spend $276 million on Australian and New Zealand dairy investments in the coming year.

New Hope, which is a significant investor in PGG Wrightson, is also understood to be looking at opportunities to manufacture infant formula in New Zealand.

There is another factor which underlies the Chinese interest.

The New Zealand dairy industry is set to benefit by China's decision to drastically slash the tariff on infant milk formula to bring down prices and secure supplies for its fast-growing middle class.

The move was announced in mid-December just one day after China's biggest dairy company Yili announced its interest in Oceania.

China's Ministry of Finance announced it would impose temporary annual tariff rates below the MFN (most favoured nation) rate of duty on more than 780 imported products in 2013.

Particularly, the tariff on special formula baby milk powder and baby retail food will be reduced to 5 per cent, much lower than the 15 per cent MFN rate.

The move is the biggest fillip to the dairy industry worldwide.

New Zealand is the second largest offshore provider of infant milk for the Chinese market with an 18 per cent share, Singapore has 37 per cent and Australia 15 per cent.

The move is also expected to stimulate local demand in China for imported infant milk powder which is currently three times the price of local products.

It's not hard to see why Chinese companies are so keen to leverage New Zealand's "pure" branding after spending a couple of days in Beijing this week.

The city has been bathed in an unusually acrid smog.

Images of New Zealand with its clear blue skies (used to attract Chinese tourists) certainly resonate here.

New Zealand-sourced infant formula - packed in cans complete with pictures of pure snowy-clad mountains or green rolling plains under clear blue skies - are already sold in Shanghai supermarkets courtesy of the Shanghai Bright Dairy joint-venture with Canterbury's Synlait.

The NZ brand imagery is set to be rolled out across China as more Chinese dairy companies reveal plans to build processing facilities in New Zealand.

Surely Fonterra should have pride of place rather than the Chinese brands?

- NZ Herald

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