Case study: No guarantees of success in China

By LIAM DANN

In Chengdu City in the central Chinese province of Sichuan sits a disused meat processing plant - a $20 million testament to the fact that China is not a guaranteed goldmine for New Zealand companies

Founded on the accurate belief that Chinese beef consumption was about to soar, the Wuliangye Affco Golden Ox joint-venture was supposed to herald a new era of international expansion for Waikato meat company Affco.

Four years after the grand opening, the company technically remains a shareholder, but is now negotiating a careful exit.

"With hindsight it isn't difficult to see where it went wrong," says Affco chairman Sam Lewis.

"Basically there wasn't enough livestock available to make it work."

The huge local demand for beef turned out to be one of the biggest problems.

Affco started investigating a China deal as early as 1997.

After originally planning to take a majority stake in the venture, it eventually opted to go with two partners.

Local liquor company Wuliangye and land-owning company Jinli Industrial were the other parties.

Affco was to provide the expertise, Wuliangye the capital and Jinli the livestock procurement, Lewis says.

"Perfect in theory."

But from day one there were difficulties getting stock.

With demand for beef strong, farmers could command good prices for their animals.

Meanwhile, the joint venture could not compete with the traditional old-world slaughter operations.

"The margins just weren't there," Lewis says.

With hindsight, he believes the problem may have been caused by an even more fundamental issue - it was probably located too far west, he says.

New Zealand businesses need to recognise that China's incredible growth statistics do not spread evenly across the giant nation.

There are the urbanised, wealthy regions of the eastern coast and Beijing, says Lewis, "but the further you go west the more difficult it gets."

Ultimately, he now questions the whole logic of New Zealand agricultural companies becoming involved in processing in China.

"One thing people tend to forget in New Zealand is that while the growth numbers look great, it's off a very low base," he says.

"The opportunities are very big there but you just have to remember that everyone is a trader there.

"Everybody's got to make a living. And there is rapid social and economic change."

Affco does not plan to get involved in processing in China again but it remains excited about the potential of increasing sales in the urbanised markets of Southeast China.

Free trade access will be good for New Zealand and it is still an area of major growth, says Lewis.

"For some reason New Zealanders seem to appeal to the Chinese. We're not quite as aggressive as the Americans and we don't have a history of colonisation."

While he will not reveal the final cost of the Chengdu venture, it was ultimately not significant to Affco's balance sheet, Lewis says.

But it was disappointing and there were costs in terms of the time and energy the company put into it.

On the plus side, lessons had been learned.

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