KEY POINTS:
Fonterra China managing director Bob Major likes the dynamism, sheer rate of growth and the bold decisions people make in China.
"The rest of the world is very static by comparison," he says.
Individuals, companies and the Government can make an impact far beyond what would be possible
in other countries.
"It's governed by a Communist party but that's quite a different thing to being a Communist country," Major says. "It's raw capitalism."
China is the world's fastest growing dairy market and the fourth biggest for Fonterra, with revenue for the year ending July 31 of $401 million - an increase of 31 per cent on the previous year.
Fonterra's imports, including milk powders and specialised protein products, account for about 80 per cent of the company's business in China.
However, Fonterra's strategy is to become a greater participant in the local dairy market. Most of the growth during the next three years is expected to be from local products.
"It's growing so quickly internally that the supply is struggling to keep up with the growth in demand," Major says. "The biggest constraint of growth there is milk and quality milk."
In 2006, Fonterra bought a 43 per cent stake in Chinese dairy company San Lu for US$107 million. The joint venture has 21 sites making ultra-heat treated milk, yoghurt and milk powder products. Fonterra will use a 3000-cow pilot dairy farm set up in Tangshan to test how to apply New Zealand expert knowledge.
"Our history's been very much one of importing New Zealand products into China. That's what's established our position.
"But as the Chinese market grows so much domestically it becomes more and more like the United States, so imports are becoming a very small sector of the overall Chinese market." If Fonterra stayed as an importer it would become marginalised, he says.
Dairy farming in China is not pastoral-based and the skills Fonterra could apply included animal husbandry, management, nutrition and genetics.
"So the whole thing's about bringing that knowledge together and determining what works."
The foundation of success is good relationships and the free trade agreement signed with China in April demonstrates a tight relationship between the two countries, Major says. Chinese people generally give more recognition to government statements than is often the case in other countries.
"It's not only government," Major says. "A lot of the commercial people as well recognise that because there is a [free trade agreement] with New Zealand then New Zealand is an important country in Chinese eyes."
Direct commercial benefit from the agreement is "not massive" because Chinese duties are generally lower than in other countries and the reduction for dairy products is spread across 15 years.
Meanwhile, any debate about human rights in China did not affect business, Major says.
"We've all got our own individual views around the aspects of life in China and human rights is certainly one of them but the way we operate from a business point of view ... business is business."
Major was based in Hong Kong looking after China for the Dairy Board in the 1990s - a period when sales negotiations took place with two government agencies every six months. He said the change in China during the past 10 to 15 years has been unbelievable and he would hate to predict what the country will look like in another 10 years.
"Logic would tell you and charts would tell you that in 10 years' time it is going to have plateaued off," he says.
"It's going to be far more at that stage around sophisticated products, segmenting the market, delivering these particular niches in the same way that you would in Australia or the United States."
GROWING FAST
* Fonterra's revenue in China was $401 million for the year ending July 31, up 31 per cent.
* China is the fastest growing dairy market in the world, fourth biggest for Fonterra.
* Chinese market could be worth US$24 billion by 2011.
* 80 per cent of Fonterra's Chinese business comes from imports.
* Growth during the next three years will be mostly from local produce.
* Pilot farm with 3000 cows is being used to test how to apply New Zealand knowledge.
