Dairy giant re-thinks approach to the rapidly consolidating key market responsible for 20% of its revenue.
Fonterra has come to a compelling realisation it will need to develop "Chinese feet" (that is move faster) and keep its nose clean if it seriously wants to play in the top division of China's rapidly consolidating dairy market.
Fonterra chief executive Theo Spierings concedes the company is "pretty late" in getting itself fully involved in the consolidation and has to "remain on it toes" to be successful.
The Chinese Government's game plan - aspects of which still remain as opaque as milk - comes down to underwriting national champions like Yili and Mengniu so they can go on acquisition sprees and putting the squeeze on the smaller - hard-to-regulate cowboys to force them out of the market.
Essentially, China is reclaiming its own domestic dairy market after outsourcing much of the cream, like infant formula product, to foreigners with reputations for safe, high-quality food production.
Large foreign companies - like Fonterra - who want to play big-time in the domestic market will have to partner up with one of China's national champions and give a bit of a hand-up to the industry on the know-how side, such as in developing first-class farming operations.
It's a frank example of Chinese President Xi Jinping's "visible hand" of the Government at work in constraining the "invisible hand" of the market.
Fonterra's top brass led by chairman John Wilson and Spierings get the strategic imperative. China is after all responsible for 20 per cent of the company's revenues.
So does the Fonterra board which took a close look at the company's China operations during a week-long visit last October and requested a rethink.
The upshot was a strategic review dubbed variously Mission or Operation Friesian and a management shakeout which resulted in Spierings bringing in Dutch industry veteran Hank Bles to run Fonterra's China farm operations on a six-month contract replacing Sarah Kennedy who had just taken up her role in September.
Spierings has also centralised the China farm operations in a standalone business unit reporting directly to himself.
Fonterra has pressed on with its plans for five farming hubs geared to produce 1 billion litres of milk annually. Spierings says his own target is 2 billion litres.
But Fonterra wants to involve equity partners and other partners who can bring downstream benefits like distribution into the mix so it can move faster, produce milk for its own brands in market as well as sell to processing partners.
Spierings says he wasn't side-tracked by last year's WPC80 incident or botulism scare. "Even after the WPC80 crisis we launched UHT into China at a super premium of 20 per cent above anyone else."
But Herald inquiries confirm at least one key potential partner for Fonterra in China slowed discussions until the all-clear was sounded and the New Zealand company's safety reputation was affirmed.
Last week Spierings took 150 of Fonterra's top players to China for their annual international forum. They were asked for their feedback on the China strategy. It was a timely visit given Fonterra's exposure to China.
To Spierings' mind there are four strategic elements to Fonterra's China business. The base layer is business to business (B2B) - where Fonterra is strong. Then there is the business to consumer (B2C) platform where the company needs to form partnerships so it can aggressively build the downstream business.
Then comes Business to Government (B2G) where Spierings is establishing a 4 to 5 strong advisory board in China with very strong and influential leaders. He will have a seat on the board himself. It will meet four times a year and be chaired by a Chinese leader. It will focus on business performance, strategy and the big capital expenditures with potential big partnerships.
The Fonterra board read the Chinese Government's semaphore a year ago and began talks with major players like Cofco chairman Frank Ning.
Finally, the Government to Government (G2G) platform which Spierings maintains is in the wake of John Key's recent visit a very strong relationship, but needs to stay strong.
The prize in China is big - high-quality milk in China commands the best farm-gate price in the world, even a 50 per cent premium over the New Zealand price.
But there are risks.
Not only does Fonterra have to spend its farmers shareholders' money prudently. But it doesn't want to over-reach itself too soon.
This is a conundrum when the market consolidation is moving so fast and other international competitors like Arla and Danone have already taken stakes in Mengniu.
Other issues which worry the Fonterra board - particularly the farmer shareholders - are biosecurity risks, effluent management and feed costs.
"If you don't have your feed sorted and ... good effluent solutions on farm and you are not protected sufficiently for biosecurity then the exposure is massive," says Spierings - a pointer to why the China farms business unit now reports directly to him.