For Fonterra, the rationale for investing in Beingmate Baby & Child in 2015 is as valid now as it was then, despite the company's latest troubles, the co-operative's top executive in China, Christina Zhu says.
It's been a rocky road for Beingmate over the the last year or so. In January, Shenzhen-listed Beingmate said it its loss for the year was now expected to come in at 750-800 million yuan ($155.6m to $166m) because of accounting adjustments and provisions for bad debt arising from its subsidiaries.
Beingmate last year said it faced a fake infant formula scandal after nine people were arrested in China in April after more than 22,000 cans of counterfeit infant formula were found being sold under the brands of Beingmate and Abbot Laboratories.
Its shares last traded at 13.78 renminbi - down from the 18 RMB paid by Fonterra back in early 2015, after peaking at nearly 30 RMB midway through 2015.
Fonterra's investment has, from time to time, drawn criticism from fund managers, who have said the co-op paid too much ($755 million) for the 18.8 per cent stake, and that the holding needed to bigger in order for Fonterra to have some influence over Beingmate's direction.
But for Zhu, who is president of the co-op's Greater China operations, the logic of the investment still stands; Beingmate is a strategic investment and not a financial one.
"We have all seen the numbers," Zhu said. "It's a fact that the business, like all the other infant formula businesses in China, is going through a very interesting and dynamic period," she said.
China's attempts to formalise regulations around infant formula - known as Article 81 - has dragged on. It now appears that some time in 2018 all infant formula providers shrink radically, and all will need to be registered.
This has brought uncertainty to the market and as a result, all the major majors - the multinationals but particularly the local players -- have suffered because of that, Zhu says.
But Zhu said there was an obvious need for the government to regulate the market.
"The direction is very clear," she said. "The Chinese government just could not deliver a food safety and quality promise to their people with the thousands of brands in the Chinese market place, so that just had to change," she said.
"Consolidation just had to happen," she said.
"There will be a much smaller number (of players)," she said. "Over the long term, the bigger brands will benefit."
Beingmate, as well as Fonterra's main infant formula brand - Anmum - were among the first to put in their applications in to get registered.
In the big picture, the reasoning behind Fonterra's move on to Beingmate's share register still holds, she says.
"If you step back, China is still the biggest infant formula market, and the fastest growing, in the world," she said.
"If you are serious about the paediatric market, you need to win in China, so the strategic rationale for that investment still holds. "It holds for us and it holds for Beingmate," she said.
"It holds for us because it is still the largest growth market and we know we need a partner.
"For Beingmate, the rationale holds as well, but there is no doubt that we are in very challenging period," she said.
"They (Beingmate) are not alone with that. They are well aware of it and they are working through it," she said.
Zhu says the infant formula market has proven to be more challenging and more uncertain than a lot of people anticipated - including the Chinese government.
Fonterra's tie-up with Beingmate, which operates four plants and 80,000 retail outlets across China, includes a distribution deal for Fonterra's Anmum infant formula brand and a joint venture manufacturing operation at Darnum, in Victoria.
Forsyth Barr analyst James Bascand that the Beingmate move had drawn some flak from Fonterra critics.
"The long term strategic rationale behind the investment - direct market access for the distribution of infant formal products - remains sound," Bascand said. "There is still a good opportunity there."
As Zhu sees it, Fonterra tripled its EBIT last year in greater China and it was one of the EBIT-contributing regions for the co-op globally.
"It's been a phenomenal growth trajectory," she said. Beingmate - as important as it is - is only a part of that."
Fonterra is plays the long game in China and the fact that the co-op has set up three huge farming hubs - milking 31,500 cows, has not gone unnoticed by the Chinese community and the Government.
"China is still the biggest infant formula market, and the fastest growing, in the world."
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"We are not someone who has come here to make a quick buck. We are here for the long term," Zhu says.
"Our roots are in New Zealand - and we are proud of that - but to really sustain success in China, and to leverage off that, we really need to be 'local' at the same time," she said.
Zhu noted that many companies have risen to prominence through the unofficial parallel import "daigou" channels.
"Some companies have chosen the easy way - through the daigou channels - but the easy way is not always the most sustainable way," she said.
"We did not take any short cuts. We invested in local knowledge and in building a team, but we are the only one who has made that commitment and we are the only one that has the advantage of a local milk pool, as well as a New Zealand milk pool.
The co-op has invested heavily in food service - setting up big demonstration kitchens to teach local chefs.
Fonterra's mozzarella is a huge seller in China and it's estimated that half the pizzas sold in China have Fonterra cheese on top. It's also big in cream cheese and in teh UHT market.
For some, Fonterra doesn't move quickly enough, but Zhu says it's a matter of balancing up the short term with the long term.
"It is no use telling a long term story without generating cash and a return because at some point credibility comes into question, and so it should be.
"Our farmer shareholders are people - they are not Wall Street fund managers. These are people whose livelihood depends on the payout that they get from fonterra, so its our job to balance the short term with the long term."
Fonterra's focus has been us has been getting the farms up and running and now in process of integrating or "synching" them into the Fonterra's wider operations.
Unsurprisingly, Zhu is enthusiastic about dairy's potential in China.
"For Fonterra, Greater China is very different now from the Greater China of three or four years ago," she says.
"And we are only at the beginning of it."
Our woman in China
Christina Zhu first came into contact with New Zealand when she became a member of the advisory board for NZ Trade and Enterprise "beachhead" scheme. She joined Fonterra in 2011.
Describing herself as "Chinese Chinese", Zhu gained an MBA at Columbia University in New York.
In the US, she worked for the worldwide consultancy McKinsey and Co and has worked with a number of large US companies in the US and China.
As head of Fonterra in Greater China, Zhu is in a market that is expected to see demand for dairy double in the next 10 years.
Fonterra's brands are in about 13,000 stores nationwide and the company is one of the leading suppliers of dairy ingredients and foodservice products in the People's Republic, where its main brands are Anchor, Anlene and Anmum. Fonterra's farms in China produce more than 300 million litres of milk a year.