Fran O'Sullivan: Time for China boot camp

One of the issues around Chinese capital bailing out New Zealand businesses is our protectionist response, as demonstrated with the May Wang-fronted bid to buy Crafar Farms last year. Photo / Natalie Slade

Nine months ago I wrote that "New Zealand may find itself economic toast" if it doesn't get a comprehensive China strategy together - and fast.

After a decade traipsing after various New Zealand political leaders in China, their constant refrain that the larger "developing nation" would be grateful for a little of New Zealand's help with technical expertise and intellectual property to further its economic miracle was starting to sound rather incongruous.

This after all was a Communist country that had already fired a man into space, built the world's most architecturally challenging bridge and roading networks, leap-frogged Western nations with its mobile cellular technology, and was building the world's fastest high-speed rail network.

Was it sheer vanity to believe China was in any way dependent on New Zealand for other than raw commodities?

The article created a stir in some circles.

But while the Government's NZ Inc China strategy has finally been completed (at that level), Foreign Affairs Minister Murray McCully passed up a golden opportunity to engage an influential audience on the underlying plans at the Victoria University symposium "New Zealand, Australia and the Rise of China" which took place in Wellington last Thursday.

Elements of the strategy were "socialised" within the senior business community by Ministry of Foreign Affairs & Trade chief executive John Allen at the annual World Class New Zealanders' summit last week.

But it has yet to get any real public traction.

The Government's 2015 vision is to retain and build a strong and resilient economic, political and people to people relationship with China.

Five goals have been agreed. In essence, these are to form a strong, resilient political relationship with China, double two-way goods trade to $20 billion by 2015, boost services trade for big money spinners like tourism, increase bilateral investment, and grow high-quality science and technology collaborations.

But the critical question - why have we waited until years after the China/New Zealand free trade deal was signed to form an NZ Inc strategy? - should have been addressed earlier.

Said one senior banker, it was like George Bush and Iraq - "no post-invasion implementation plan".

New Zealand did score a valuable first mover advantage through the FTA.

It is notable that our CER partner, Australia, has yet to seal a similar trade deal. This has led to some Australian companies setting up subsidiary businesses in New Zealand to take advantage of our better market access in a number of sectors. But New Zealand has not marketed that opportunity aggressively in Australia.

New Zealand's tectonic plate has shifted, as will be made clear over coming days in the Herald series "China and us".

It is clear that China's demand for our resources - particularly milk powder - has under-pinned our economic future at a time when older trading partners like the EU and the United States have been moribund. This is not purely the result of an FTA play.

While dairy tariffs are coming down over a long phase-out period, other factors predominate - particularly the soaring demand by Chinese consumers for safe, foreign-sourced dairy products in the wake of the melamine tampering scandal.

But there is much to do.

Government agencies like MFAT, New Zealand Trade & Enterprise and the Ministry of Economic Development have consulted business on the underlying actions to support the China strategy.

On the top tier consultation list are Fletcher Building chairman Ralph Waters, who is also a director of dairy giant Fonterra; Solid Energy chief executive Don Elder, David Mahon who heads Mahon China and chairs NZTE's China Beachheads advisory board, Beca's managing director (international) Paul White and former prime minister Dame Jenny Shipley who is a director of the China Construction Bank. Others involved include: Dim Ramsteijn (NZ Post), Ann Verboeket (Sister Cities), Dave Gibson (Gibson Group), David Percy (Pertronic Industries). Catherine Beard (Export NZ), Arthur Zhang (Huawei Technologies), Mark Lunt (Pingar) and Richard Hansen (Navman Wireless).

The strategy will gradually unfold.

But there are three prime issues that New Zealand should address.

* The impact of Chinese capital.

* Why our free-marketeer farmers turn protectionist when China comes callin'.

* Why we don't "attach importance" to the messages Chinese investors convey to us.

It was Chinese capital that came to the rescue of many of our companies after the global financial crisis.

The three main Chinese investments were Haier's $82 million injection into Fisher & Paykel Appliances, Agria's investment in PGG Wrightson (which has since led to a partial takeover bid), and Bright Dairy's acquisition of a controlling stake in Synlait's processing company.

Unlike New Zealand's last major slump (1989-1992) it is Chinese capital that is coming to the rescue of our over-leveraged companies - not US capital.

New Zealand's commercial sector understands the US business model where firms mainly live in corporate structures, are (or should be) transparent, have quality IP protection rules and use markets for capital raising.

The Chinese model is different - there are more family dynasties controlling major companies.

Many factories have party bosses on the shop floor, governments at both central and provincial level exert considerable influence and frequently fund the companies with soft loans.

Another big issue around capital is what the Government's response should be when a major player like the Chinese Capital Development Bank proposes development funding for New Zealand's infrastructure programme, or a fund using a leasing model for temporary housing for Christchurch's earthquake victims.

The second key issue is the protectionist response New Zealand - not just the farming sector - exhibits when Chinese firms want to buy New Zealand farms.

The May Wang-fronted bid for the 20 Crafar farms excited plenty of xenophobia when Natural Dairy announced it wanted to build a milk processing plant here and export products to China. As a front-person Wang was not credible. Her business record was erratic. Her backers were opaque.

The bid could have been bounced very quickly by the Overseas Investment Commission on legitimate grounds.

But the absurd pantomime went right up until Christmas it when it was scuttled by cabinet ministers.

This lead to the unedifying sight of local dairy industry leaders publicly opposing the notion that Chinese firms might buy our arms, set up factories here, and use vertical integration to compete against New Zealand's own quasi "monopoly", Fonterra, oblivious to the notion that was exactly what the dairy giant wanted to do elsewhere.

So the rules were changed.

There is no longer any real clarity.

But the game is also changing in China.

The Chinese Government is evolving an FDI screening regime of its own. European and US business lobbies claim they have strong evidence that China is favouring its own home-grown dragons over the foreign firms operating there.

The third issue is whether we take note of China's desire to be taken seriously. And that we might be deaf to Chinese hopes for the business relationship.

Take Richard Yan's big dream to host a New Zealand House in downtown Shanghai where major New Zealand government agencies could be housed along with prime companies like Fonterra and Solid Energy.

There would be plenty of display space for New Zealand products. And somewhere for press conferences.

No takers.

Or Agria's Xie (XT) Tao who proposes to build the Kiwi brand by setting up a model farm outside Beijing to show sheep and cows grazing on New Zealand-style pasture, which is not the norm in China .

Or Kelly Zong - daughter of China's richest man - who wanted to build new herbal and healthy brands from here to distribute in China and globally.

Local industry would not share her dream. But she is the face of the changing Chinese consumer - urban, smart, professional.

These were signs that Chinese executives wanted to engage. But there is no regular forum for business to get to know each other.

Some suggest a China-New Zealand Business Council could work to build stronger business relationships; a "partnership" forum similar to those New Zealand regularly has with Australia, the US and Japan would help to build mutual understanding.

Officials and business will wrangle over whether the NZ Inc China drive should be led by a new PPP with strong business leadership and direct support from NZTE's top China staff. Or whether the government agencies should take the lead.

What is not debatable is the primary challenge is to get out companies "match-fit" for China - time for boot camp.