China's growing NZ footprint raises big questions

Inside Westland Milk's Hokitika factory. Chinese giant Yili has made an offer for the firm.

Westland takeover brings into focus the footprint of Chinese Government-backed companies, writes Fran O'Sullivan.

A national strategy needs to be formed to ensure New Zealand does thrive and prosper in sectors where it is considered to have a comparative advantage.

The proposed takeover of failing Westland Milk by Chinese dairy giant Yili has provoked an angry backlash from NZ First, which has warned about the "erosion of New Zealand control" in a prime export facing industry.

The Chinese state-owned dairy company has offered $588 million to purchase New Zealand's Westland Milk Products, a 125-year old independent co-operative, owned by over 429 farmer shareholders.

NZ First Primary Industries spokesperson Mark Patterson warns by selling their co-op for short-term gain the shareholders need to be particularly concerned for the more isolated farmers who risk being dropped when the 10-year guaranteed supply period ends."

"There could be long-term consequences of becoming price-takers at the end of a supply chain controlled by a foreign multinational," he says.

The Yili deal has to pass through two hoops: It must be approved by 75 per cent or more of the votes of shareholders who vote and more than 50 per cent of the votes of all shareholders entitled to vote — and be ticked by the Overseas Investment Office.

The takeover brings into sharp focus the increasing footprint by large Chinese Government-backed companies in New Zealand's prime export industry. In the dairy sector alone, Chinese investors have significant stakes in Synlait Milk (Bright Dairy), Oceania Dairy (Yili), Yashili NZ (Mengniu) and the Synlait and Crafar farms (Pengxin).

Bright Dairy, Yili and Mengniu are all substantially Chinese state-owned enterprises which have created considerable jobs — and in NZ-listed Synlait's case a dividend stream — through their New Zealand investments and vital connections and know-how on the Chinese market.

Cabinet Minister David Parker would not comment on the Yili takeover offer for NZ's second largest dairy co-operative, except to say, "we welcome high-quality investment into New Zealand".

But Parker says, for example, if there was a takeover offer made for Fonterra — "it's unimaginable, but let's say that there was, then you would want the Government to be able to intervene and say 'look, we're not sure whether this is in the national interest'."

"At the moment our rules don't allow us to do this," adds Parker. "The only thing that the rules would allow us to do is address whether the purchaser was of good character and able to manage the business. Well, that feels like New Zealand is a bit underdone in that area."

It is, in fact, unfathomable that New Zealand remains so under-cooked when it comes to determining our national interest — who gets to play from offshore, and under what playing field conditions in our primary sector — that there is still yet to be a "national interest" test.

Couple that with the abysmal financial performance of not just Westland Milk but also the meat processing company Silver Fern Farms which was snapped up by Shanghai Maling — two New Zealand co-operatives which should have been able to thrive through access to burgeoning Asian consumer markets like China's without having to pass into offshore control — and it is obvious that there needs to be a major investigation into why so many key NZ primary sector firms continue to fail to manage themselves profitably. A national strategy needs to be formed to ensure New Zealand does thrive and prosper in sectors where it is considered to have a comparative advantage and continues to capture the value-added dividend here.

In China, the National Development and Commission (NDRC) — which is in charge of national economic planning — does just that. It was the NDRC that ordered a sweeping review of China's dairy sector, which had fallen into disrepute after the 2008 melamine disaster where babies were seriously affected through drinking poisoned infant formula.

China had since become reliant on offshore players like Fonterra — New Zealand was for a time known as the "Saudi Arabia of Milk" — for imported "safe" milk powders, particularly infant formula.

The upshot of the NDRC review was a consolidation of the Chinese dairy industry and the boosting of national champions like Yili, which swept up smaller competitors.

New rules for access to the lucrative Chinese infant formula markets followed and China went on an offshore buying spree to not only buy up land and water resources worldwide, but also dairy farms and processing factories to ensure its long-term food security.

At the recent Fonterra interim results, chairman John Monaghan confirmed it had approached the Westland board before it began its formal capital search. "We approached the board directly to try to find a co-operative solution for West Coast farmers but we were unable to participate."

Monaghan reckons it is not in the long-term interests of this country's dairy farmers for the value of New Zealand milk to go overseas. He points out that farming is a long-term, intergenerational business and Yili's 10-year milk price commitment "is a relatively short time in farming".

"The question is what happens to farmers at that point?"

An NDRC approach would likely have resulted in Westland Milk being nudged into Fonterra's arms.

Intriguingly, while New Zealand interprets Chinese President Xi Jinping's Belt and Road Initiative as an infrastructure play — think roads, rail, undersea cables, and ports — to link China to the world, it is, as Yili told the Guardian newspaper, also about food security.

Through Yili's eyes, the acquisition of first, the Oceania dairy processing capacity in New Zealand and now, Westland, is part of a Belt and Road dairy alliance; what their executives told the newspaper was a new "China-led milk road" across the continents.

The implications of this new "milk road" do not appear to feature at a granular level in the NZ Government's thinking on the Belt and Road Initiative; nor within the various strategic reports that have been commissioned — though Australian entrepreneurs captured the slogan and promoted it to venture capitalists at last year's Asian Financial Forum in Hong Kong; with the "milk road" leading from Australia to China and totally bypassing New Zealand.

In March 2017, New Zealand and China signed a non-binding Memorandum of Arrangement (MoA) where they agreed to work together in specified areas including upgrading the 2008 China-New Zealand free trade agreement, expanding trade and investment and developing a pathway for co-operation and exchanges to support the Belt and Road Initiative (BRI).

In February 2018, Deputy Prime Minister and Foreign Minister Winston Peters questioned the approach the prior National Government had taken to the BRI. It was on the agenda this week for Prime Minister Jacinda Ardern's talks with China's leadership in Beijing. Ardern was expected to take a more emollient stance compared to Peters, and, Parker has been deputed to go to China later this month for the second BRI forum.

The Coalition Government is still evolving its view, according to Parker. But the indications are that New Zealand thinking remains siloistic, not strategic, and does not capture the implications of China's strategic drivers.

The Government is continuing with the DIRA (Dairy Industry Restructuring Act) review which was begun by its predecessors. But, that is a narrow-cast approach which focuses on whether, when, and, at what volume and price, Fonterra should have to make supply available to its competitors. It does not take into account the reality of the global strategic play that lies behind the New Zealand investments by Fonterra's new Chinese competitors.

When former Chinese Premier Wen Jiabao visited New Zealand during negotiations on the 2008 FTA he laid out his ambition for every Chinese child to drink a cup of milk a day. But, as the Guardian notes, the Chinese Government-encouraged thirst for milk has created such demand that China — suffering from water scarcity and environmental degradation — cannot meet that demand from within its own borders.

New Zealand has available land and water resources. But dairy farming — it takes an estimated 1020 litres of water to make one litre of milk — also imposes environmental costs here, a reality that Parker is endeavouring to address through the upcoming national water strategy.

These issues should be to the fore during the OIO's consideration of foreign investment applications. But they are not.

In Australia — which has a more muscular view of its own national interest and also suffers from water scarcity — the Treasurer has released the first Register of Foreign Ownership of Water Entitlements, established to provide greater transparency about the level of foreign ownership of Australia's water entitlements.

Australia's standalone Foreign Investment Review Board (FIRB) has well-defined national interest considerations. The Treasurer also steps in when major national interest issues arise and makes a determination.

Parker, who holds both the trade and economic development portfolios, notes New Zealand already has a screening regime for investments that sit outside sensitive land. "We're about to put out a discussion paper on that, but we've already signalled there are a couple of things that we're trying to do there.

"We're trying to improve the process. For example, when Apple purchased PowerbyProxy, Tim Cook (Apple CEO) had to prove his identity to New Zealand to prove that Apple was a company that should be able to invest in PowerbyProxy — really.

"At the same time, many countries have a national interest test which enables them to consider more than just whether the purchaser is a fit and proper person and has financial acumen, which is usually proven by the size of the investment."

Parker says one of the issues is whether New Zealand should also have a national interest test "which would be rarely used but might on occasion be used.

"For example, if a purchase was being made of infrastructure with monopoly characteristics, should the Government have the ability to intervene in the national interest? So that would be consulted on."

The Government is also considering a land register; given Parker's focus on water it would seem logical that too will ultimately be chartered through a similar register.

This is not a time for pussy-footing and soft-pedalling. There are existential issues facing dairy; an NDRC-type body which evolves a strategy to protect and advance NZ's national interests is long overdue; so too a New Zealand version of the FIRB which fully considers the ramifications of substantial foreign investment.