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Current as of 26/05/17 07:40PM NZST
The Business Herald’s markets and banking reporter.

Chinese look at own industry

Chinese consumers haven't been mincing their words over the Fonterra botulism debacle this week.

Take one Chinese mother who told the state-run CCTV network, bluntly, that "imported milk products are not safe any more".

She then adds, "Maybe this is a chance for Chinese dairy companies to improve quality and win back market share."

Her comments echo the aspirations of the Chinese Government.

It desperately wants to rebuild the country's domestic infant formula industry, which was decimated by the country's 2008 melamine scandal, when at least six babies were killed and thousands more made sick by dairy products tainted with the toxic industrial chemical.

In June Chinese Premier Li Keqiang acknowledged there was a crisis in consumer confidence over Chinese-made infant formula and nurturing Chinese brands was an urgent task.

The Chinese Government plans to increase the scale of its domestic formula industry through restructuring dairy corporations and tightening regulations.

One Mandarin-speaking source said a question that would have seemed unthinkable two weeks ago was now being asked in the Chinese media: How can the world's second-biggest economy reorganise its dairy industry in order to operate without Fonterra?

While that's an unlikely outcome of the current crisis - the Chinese rely on the New Zealand dairy giant for a very large portion of their milk imports - the scare has dealt a blow to this country's burgeoning branded infant formula industry in China, whose exports are now worth close to $200 million a year.

Chris Claridge, of the New Zealand Infant Formula Exporters Association, said the group's members were having orders cancelled in China and contract negotiations with Chinese customers terminated following the botulism scare.

That's despite the fact that none of the group's members used the 38 tonnes of potentially contaminated whey protein, which was used by eight Fonterra customers, in the making of their products.

Kiwis, Claridge said, were yet to realise how much of a big deal the crisis was for local exporters operating in the Chinese market.

"This is reputation and in China reputation is everything and trust is based on your reputation," he said.

"Our ability to maintain trust levels in China dictates our success as an economy. Failure to manage the relationship [with China] will cause irreparable damage to this economy."

Local infant formula exporters would probably spend the rest of this year dealing with the fallout from Fonterra's contamination crisis, Claridge said, and a combined approach between business and Government would be required to restore this country's reputation for high quality food.

Fonterra is yet to enter the branded formula market but said the launch of its Anmum infant nutrition product would go ahead this year as planned.

The Chinese infant formula market is predicted to double to US$25 billion by 2017, partly from reduced breastfeeding as increasing numbers of mothers enter the workforce, according to market research firm Euromonitor.

Gregg Wycherley, managing director of Fresco Nutrition, which sells a goat milk formula product in the New Zealand market and is negotiating distribution deals in China, said there needed to be fundamental changes in the way the Government oversees Fonterra.

"The Ministry for Primary Industries is just too reactive," Wycherley said. "They only react after there's a problem but they need to be proactive."

He said the days of blind faith by Chinese consumers in the safety of New Zealand dairy products were over. "We have to work to get that back."

Simon Page, of Auckland-based BioPure Health, which sells its Infapure formula brand through its own retail stores in China's Sichuan province, said the contamination scare lifted sales for his firm's products as loyal customers stocked up in case the Chinese Government moved to restrict New Zealand dairy imports.

"It's encouraging, especially after this latest scare," Page said.

"Chinese consumers are on edge so I think we've proved that a direct-to-consumer model is more important than ever to help restore consumer confidence in New Zealand milk."

He said this country still had a strong political relationship with the Chinese Government, which had in the past nurtured the "Brand NZ" image in China.

"This latest issue has hurt, but we should be confident New Zealand can build upon our strong foundation and continue to grow with China well into the future."

Meanwhile, other business sectors are also concerned about the reputational impact of the botulism crisis.

An editorial by China's state-run Xinhua news agency said New Zealand's 100% Pure tourism campaign had become a "festering sore" and suggested the nation would be abandoned by its major trading partners if "systemic" food safety issues were not fixed.

China is New Zealand's second biggest source of overseas visitors and one inbound operators' group said the botulism scare was a bad look for the country but did not appear to have had any affect on tourism so far.

Tourism Export Council chief executive Lesley Immink said she spoke to Chinese members at a function on Thursday who said the perception was that there was a strong commitment to health and safety in this country and the issue had been handled transparently.

"All our exporters and the reputation of the country does get affected when anything like this happens but anecdotally people are quite impressed with how it has been handled," she said.

"Even if there's a few niggles behind the scenes - I haven't heard of anything negative."

Danger to the 100% Pure message needs to be kept in perspective, she said. "It's a branding message, it's not literal [but] we have to be seen to be living up to it the best we possibly can."

The word "pure" is not restricted to this country's tourism marketing.

The wine industry's export slogan is "New Zealand Wine - Pure Discovery".

Winegrowers NZ chief executive Philip Gregan said time would tell whether the word "pure" could keep being used in China. "We're in wait- and-see mode."

New Zealand mussels are exported to China under the Pure New Zealand Greenshell Mussel brand, a joint venture between Sanford, Sealord, Kono NZ and Greenshell New Zealand.

Sanford managing director Eric Barratt said the potential for reputational damage in the Chinese market was a concern.

"It's a concern that it will impact on New Zealand's image. Whether that translates into trade remains to be seen," he said.

- Additional reporting: Grant Bradley

- NZ Herald

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