Fran O'Sullivan: Zespri in bind following Chinese verdict

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There are big lessons in the kiwifruit decision about where responsibility lies for firm and other exporters.

Zespri says the case is not expected to impact on its sales of kiwifruit in China in the current season. Photo / Supplied
Zespri says the case is not expected to impact on its sales of kiwifruit in China in the current season. Photo / Supplied

Zespri chairman-designate Peter McBride will be relieved the Chinese court decision on the "cargo smuggling" case is finally out. But McBride will be upset that Zespri's China-based subsidiary has been ordered to pay a $960,000 fine and make reparations for "illegal gains".

In a statement, Zespri said: "It appears the court is referring to the amount of money paid by the former importer to Zespri Management Consulting Company for marketing services, which were offset against the importer's fruit account. Under this ruling, the illegal gains could amount to around $10 million."

Trouble is, Zespri pleaded not guilty to the charges at a court appearance on January 17, "on the basis that the legal obligation to meet all customs requirements sat with its former importer and that it had no intent to facilitate or engage in the evasion of customs duties."

While the court rejected Zespri's argument, the former importer has already paid back about $7 million.

So does Zespri have to find the difference or pay the $10 million?

These are the questions which are bedevilling the company.

McBride has been on tenterhooks while the Chinese court deliberated on a case which has stunned the kiwifruit industry. In less than a fortnight he will accompany Prime Minister John Key to China as a member of a major trade delegation.

From McBride's perspective it is good that the court judgment is out.

It would have been embarrassing for him to be chased up by the travelling media pack (with its attendant television cameras), if the judgement had been delayed until the Key mission was wending its way from Guangzhou to Shanghai and then on to Beijing.

McBride had been concerned that might be the case.

But the real issue - which he will have to contend with as the incoming chairman - is the added impetus the criminal case has given to the politicians and potential competitors who want to bust Zespri's export monopoly.

McBride will take up the main governance role when long-time chairman John Loughlin steps down.

He is one of five grower-directors on Zespri's eight-member board, a director since 2002 and deputy chairman of the board since 2008.

So, it's fair to say he is right across the major issues which have affected Zespri in recent years: The Psa-V strike which has afflicted and killed off many kiwifruit vines (McBride chairs Kiwifruit Vine Health - the pan-industry body which was established to manage the response to Psa) and devastated growers' incomes at hip-pocket level.

And, of course, the drama over the way in which an employee at its subsidiary, Zespri Management Consulting Company, effectively connived with one of its former independent importers, Liu Xiongjie, to enable the latter to rort the Chinese authorities by under-declaring customs duties.

Yesterday, Zespri was considering whether to launch an appeal against the Shanghai Court's decision.

Fundamentally, Zespri needs to make this decision fast.

When the court decision was announced, Zespri chief executive Lain Jager said the company was limited in what it could say, as it was still considering whether to appeal against the ruling.

This is fundamentally the same response Jager gave when news broke earlier this year over Liu's own predicament. The court rejected Liu's mitigating defence that he was not responsible for meeting customs obligations on the importation of NZ kiwifruit. He is appealing his 13-year sentence and has since repaid 37 million RMB (about $7 million), which Zespri said at the time was the amount of the underpaid customs duties.

The issues are complex, but with NZ First leader Winston Peters on Zespri's tail (he opened an attack in Parliament yesterday) and Act's Don Nicholson opportunistically opening a front on Zespri's export monopoly, Zespri's silence at the top governance and management levels is not a long-term option.

From a New Zealand public relations perspective, Zespri has managed the issue relatively well.

Zespri has had considerable help from the Ministry of Foreign Affairs. Two of its key personnel - Government relations official Matt Crawford and Communications specialist David Courtney - are former Mfat staff.

In January, Zespri said it was committed to acting within China's laws and regulations. Zespri has co-operated with China Customs throughout its investigation, including providing key information and face-to-face meetings between senior executives and authorities.

"China is a valuable market for New Zealand kiwifruit, and Zespri remains committed to its China business. This case is not expected to impact on Zespri's sales in China in the 2013 season."

So far, Zespri has been correct.

But at the brand level it has some work to do. It cannot really confront the challenges to its status - and the clear management failure at its China subsidiary - while it hides behind a legal cloak (no matter how justified).

The company says it has learnt lessons from this affair and tightened up its invoicing monitoring procedures.

In a background paper earlier this year, it explained: "As a continuation of the China Customs investigation into the undervaluation of New Zealand kiwifruit imported into China, Zespri's China-based subsidiary - Zespri Management Consulting Corporation (ZMCC) - was charged with Customs offences alleged to have occurred between 2008 and 2010.

The allegations against ZMCC relate largely to the invoicing practices and the manner in which the pro-forma invoice price was reached by the importers.

"The legal obligation to meet all customs requirements sits with the importer. Zespri has always acted at the direction of the importer and in good faith, believing its processes were in accordance with Chinese law and regulations. There is no evidence that Zespri or New Zealand kiwifruit growers benefited from the customs under-declaration.

Problem is, the Chinese court disagrees on where all the responsibility lies.

There are big lessons in this affair - not just for Zespri but also for other New Zealand businesses exporting to China.

- NZ Herald

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