Fran O'Sullivan: Ex-Fonterra exec leads China firm

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Gary Romano resigned after botulism scare but is taking up reigns as CEO of fast-growing Pengxin International.

Gary Romano. Photo / Dean Purcell
Gary Romano. Photo / Dean Purcell

Head-hunting former Fonterra executive Gary Romano as chief executive of Pengxin International is a coup for the rapidly expanding Chinese company.

The long-time dairy executive resigned from his high-flying executive role at Fonterra after the botulism scare erupted at New Zealand's largest dairy co-operative. Romano took the fall for the botch-up which occurred on his watch.

It was obvious he would be unlikely to find another major dairy gig with a New Zealand company in the short-term and would probably have to head overseas to stay in the international dairy game.

Romano will be saddling a much smaller horse as he takes up the reins at Pengxin International.

Don't read from this that Pengxin is about to rapidly ramp up its operations in New Zealand anytime soon to form itself into a vertically integrated competitor to Fonterra.

The company is more likely to look across the Tasman where Chinese investment in the sector is stepping up in advance of expectations that a bilateral free trade agreement will be notched between Australia and China.

Terry Lee - who has been appointed president of overseas M&A of Pengxin Group - confirms that the company faces difficulties expanding in New Zealand because Overseas Investment Office restrictions prevent it from acquiring more than a 50 per cent interest in a processing operation.

Behind the scenes - and at an investor meeting on the Prime Minister's China visit - Pengxin has been questioning why it has been prevented from owning outright dairy processing plants in New Zealand when other Chinese companies like Yili and Yashili have not had to take on board local partners to build plants.

There is a point to the company's complaints.

But the Government is very alert to the competitive risk to Fonterra if it allows major Chinese companies to build vertical integration in the New Zealand dairy industry.

As John Key told TVNZ's Q&A programme last Sunday, his Government wouldn't want our industry to be dominated by large foreign players.

"I don't think we want to get to a point where we're effectively having a Chinese replica of Fonterra or any other country having a replica of Fonterra in New Zealand on that scale. I think it's okay when you've got some - in fact it's quite healthy when you've got a little bit of competition happening there - but ..." he said.

That "but" is a question of size.

Australia has not placed the same strictures on vertical integration of the dairy industry.

The Australian notes that state-owned Chinese businesses currently cannot invest in Australia without approval from the Foreign Investment Review Board and private Chinese companies require approval before acquiring a substantial or controlling interest in a business worth more than $248 million.

"In theory, any loosening of those rules under a free trade agreement would allow the Chinese to acquire large chunks of Australia's dairy industry," the Australian said.

If the bilateral FTA proceeds, the Chinese will lower dairy tariffs on Australian product putting that country's producers on an equal footing with New Zealand.

Within New Zealand, Pengxin is known for its 2012 acquisition of the 16 Crafar dairy farms and its more recent acquisition of a 74 per cent stake in Synlait Farm Holdings.

It's fair to say though that like other Chinese companies entering the New Zealand market, Pengxin has experienced difficulties bedding in its new assets due to differences at both the business model and cultural level.

Those difficulties should subside after Romano becomes chief executive of NZ Milk Management and a director of Pengxin's two farm groups in the North Island and South Island.

But the more interesting aspect is the Pengxin Group's international ambitions.

The company that Romano will head will be responsible for all operations of the group's overseas assets, including New Zealand and Australia.

Those assets range from dairy investments in New Zealand, through to a majority interest in a soybean and corn farm of 12,500ha in Santa Cruz, Bolivia. The company is also understood to either have or be looking to make investments in agricultural interests in Cambodia, Argentina and Brazil.

Pengxin's biggest mining venture is in the Democratic Republic of Congo, where it has invested more than US$50 million ($58.5 million) in a majority share of a copper deposit estimated to contain 350,000 tonnes. It is also moving to invest in South Africa.

Lee reckons having Romano on board will accelerate the development of the Pengxin businesses.

Pengxin's footprint in the local dairy sector has grown since its controversial acquisition of the Crafar dairy farms in late 2012.

During the Prime Minister's official visit to China, the majority Maori-owned milk processing company, Miraka, entered into a milk supply agreement with Shanghai Pengxin Group.

Shanghai Pengxin, the owner of the former Crafar dairy farms, will supply milk to Miraka once a new UHT-milk processing plant is completed in Mokai.

Romano will have to rebuild his reputation to some degree. As the Australian article noted, the botulism "incident rocked New Zealand's dairy industry - China suspended imports and Fonterra's milk division head, Gary Romano, resigned. One customer, the French company Danone, says it is planning to sue the company for 350 million in lost sales."

The New Zealand Government is yet to fully front up to the inadequacies in AgResearch's testing process where a false positive test result gave rise to the food scare. But that's not likely to deter Romano from rebuilding his career and Pengxin's business.

- NZ Herald

Fran O'Sullivan

A columnist for the NZ Herald

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