Agribusiness: Co-op makes its own destiny

Photo / Alan Gibson

Tatua opened its own office in Shanghai, imported its own dairy products and is now achieving strong growth in a lucrative market, writes James Penn

In the aftermath of the 2013 Fonterra botulism scare, New Zealand dairy companies might have been forgiven for reducing their focus on the Chinese market. But in the boardroom of Tatua in February 2014, proposals to do the exact opposite were being considered.

Far from being a reason to turn away from the Chinese market, the New Zealand co-operative decided a Shanghai office was necessary to respond to the subsequent changed regulatory landscape.

Now, Tatua's Shanghai office is fully operational and the co-op is at ease with the challenges of the Chinese market.

"As a result of these food scares, the regulatory environment has got much tougher -- for everybody," explains Tatua chief executive Paul McGilvary. "But with people on the ground, importing product day by day and having relationships up there, we certainly monitor the requirements much better than we used to be able to."

Though Tatua Shanghai has enabled the company to get a better grip on the daily regulatory burden, the company also has an eye on damage limitation if recalls should ever be required for their own products. Tatua previously used agents to sell into the Chinese market, which limited traceability of their products -- agents tend to withhold information about the final purchaser in order to protect the value of their role.

This also had the potential to hamper sales growth.

With their own office handling these sales, Tatua has comprehensive information about where each of their products has gone, and what it is being used for.

Further, the elimination of agency fees and their margins was sufficient to offset much of the cost of establishing a presence in the market.

The decision to open a Shanghai office was also a product of the company's unique focus on SAV (specialised added value) products. There were consistent requests from customers for more technical support for products, on the ground and in the Chinese language.

For example, if a customer wants to create an infant formula that is particularly gentle on a baby's stomach, they would need to incorporate a hydrolysate to make it easier for the baby to absorb the protein, which Tatua can provide.

However, the degree of hydrolysis and the substrate used in creating that product are critical to its functionality.

As a result of these food scares, the regulatory environment has got much tougher -- for everybody.

"Customers can't just take our product off the shelf in many cases, and just guess and throw it in," says McGilvary. "They need very specific parameters in those products, and they need to have people in the market from our side who can help them with that."

The move hasn't all been plain sailing, though. "If you want to set yourself up to actually import into China, and then do the logistics and distribution to your customers, it's a lot more complex and there are more risks that you have to take on," outlines McGilvary.

Those risks and complexities include foreign exchange (agents previously bought Tatua's product at the border in US dollars), navigation of China Inspection and Quarantine (CIQ), payment of duties, and variations in practices between the various entry points.

"It was a much simpler business model to just supply it to the border," admits McGilvary. "But we think those risks are worth taking on to be able to have full control of our supply chain."

The process of taking back control of that supply chain presented hurdles in itself. To get out of existing agency arrangements and commitments, Tatua had to undertake negotiations with those parties. New relationships had to be formed with regulatory authorities and CIQ, followed by securing the necessary documentation and compliance.

It was a simpler business model to just supply it to the border.

Such processes would be a challenge in any market, but companies have to deal with a "changeable" regulatory landscape in China. "On the ground in China, regulations can change very quickly," says McGilvary.

To compare the scale of the operation required to open the Shanghai office, consider Tatua's United States branch. Within a week of sending over a team, Tatua USA was set up as a company and operating. Tatua Shanghai has taken "at least two years" to reach the same point.

To help with the transition, James Gordon has been appointed Tatua Shanghai President, with Jacky Chen the Board Advisor. Both appointments were made on the basis of understanding of the Chinese market. Gordon has been based in Shanghai as regional manager for the dairy products sector of an ingredients multi-national, while Chen is currently chief executive of a global flavour house in China.

With five staff on the ground, Tatua Shanghai has generated some NZ$12.8 million in sales in the last financial year. However, this figure doesn't include Chinese sales still taking place through agencies as those arrangements are phased out and customers are transferred to the new office. Sales into China are around 20 per cent of Tatua's total group revenue of NZ$286 million.

The 87 farming families who make up the company will hope that the long process, from early 2014, of establishing Tatua Shanghai will be yet another successful move in the co-op's SAV-centric story.

That story has delivered impressive payouts to date: $7.10kg milk- solids cash in the 2014-2015 year, compared with Fonterra's $4.65kg.

Though figures for the 2015-2016 year are still undergoing audit, McGilvary says "we remain on track" for the $6kg payout forecast at the outset of the financial year.

Indications for the year ahead -- though still highly tentative due to the 2016/2017 season having only just started -- are somewhere between $5.50kg and $6kg.