China Business 2012: 'Real camaraderie' in joint venture dairy project

Pure Canterbury formula is marketed with images of the Souther Alps. Photo / Supplied

Former National Finance Minister Ruth Richardson is one of a select number of Kiwis to sit on the board of a Chinese-controlled NZ-based company.

As a director of Synlait Milk - 51 per cent owned by Shanghai's Bright Dairy - Richardson has gained a unique insight into the "DNA" of the company's prime shareholder.

The Shanghai-listed company is currently ranked third largest dairy company in China, and last year had operating revenue of $2.4 billion. The Synlait acquisition was the first offshore investment by a major Chinese dairy company. Other Chinese food giants like Wahaha Group and COFCO are now on the international M&A trail.

Richardson says the four board meetings, which happen each year range over two days. The first day features a seminar on a strategic issue like foreign exchange management, milk prices or board governance. Decisions are made on the second day.

New Zealander Graeme Milne is chairman. The two other Kiwi directors are Richardson and Ben Dingle. Bright has four directors: Ke Li who is Bright Dairy's head of marketing and a fluent English speaker, David Zheng, Zongbo Dong and Bright's strategy head Sihang Yang.

At their first board meetings, the directors had duplicate papers in English and Mandarin. The resulting confusion soon led to them issuing papers where each paragraph was written in both English then Mandarin.

"Getting the model to work took time. While they were listed on the Shanghai stock exchange we brought best practice governance to the table."

But Richardson says real camaraderie is now building, pointing to the shopping expedition she enjoyed with Ke Li after a board meeting in Manila.

She credits Bright Dairy president Guo Benheng as being the "Godfather of the project".

Guo's own DNA includes a strong insistence on profits. Informed sources suggest he may want to expand Bright Dairy's commercial relationship with New Zealand. As the Herald revealed today, Fonterra chief executive Theo Spierings is inviting Bright personnel to the opening of the New Zealand dairy giant's third farm in China.

Bright Dairy wasn't happy when Fonterra plonked a "dryer" in Darfield, which it regarded as its territory. There are also concerns whether the current high margins for New Zealand infant formula will continue in China.

Bright launched "Pure Canterbury" in Shanghai in mid-December. Cans of Pure Canterbury infant formula - complete with their image of the snow-clad Southern Alps rising out of the fertile green Canterbury Plains - are on Shanghai supermarket shelves. According to John Penno, 900g cans retail from between $92 for stage one infant formula, to $84 for stage three infant formula. This is clearly significant when compared to formula on New Zealand supermarket shelves priced between $15 and $30.

Says Penno "it typifies the value consumers in China are willing to pay for formula produced and packaged in New Zealand. It is little wonder Bright Dairy is investing 20 million yuan on the advertising and promotion of Pure Canterbury over the next 12 months."

Guo expects Pure Canterbury to achieve revenues of 3-4 billion yuan in the next three to five years through direct sales, e-commerce and traditional offline sales channels. On current exchange rates that is $570 million - $760 million revenue.

For Penno, communication is the "absolute key" to making the JV work. He says the Synlait team has gained an "enormous insight" into one of New Zealand's most important markets - particularly into how the Government drives industry there and the dynamics of local competition. "As we begin to understand the Chinese market we can see the impact of Government directives."

The Synlait team is also fast learning about consumer brands, which "was not part of our story".

Penno says there are about 40 dairy brands in China claiming to be of New Zealand origin - a "plethora of small brands".

The Synlait CEO maintains it's too early to know whether the New Zealand side has got the China relationship right. "We're 18 months into a long-term relationship. But we spent a lot of time learning about China before entering our relationship with Bright."