Dancing with the dragon
Fonterra is heading back for another crack at China. What's it doing differently this time?
Tuesday, March 02 2010 || Investment || BY Andrea Fox - The Independent
It also said it was relaunching its premium global Anlene and Anmum milk-powder brands in China and ultimately wants to manufacture them there.
Clearly, even three high production farms won’t produce enough milk to fuel Fonterra’s next factory – but Ferrier is saying no more about his plans for now. He says there are “great opportunities” and a need for caution in China. It is “naive” to think a Western company can go it alone without Chinese partners.
New Zealand’s 2008 Free Trade Agreement (FTA) with China was by all accounts a great achievement – we are the only country to have an FTA with China – but its significance has been muted by the global economic downturn and New Zealanders’ inclination to first trade somewhere “safe” such as Europe, Australia or the United States.
New Zealanders working in China are calling on companies here to get up to speed on China and for Chinese to be promoted in schools.
China, they say, is not only a desirable market, but it is also essential and the sooner we wake up to that the better for our economy.
Kiwi expatriate David Mahon, of Mahon China Investment Management, who has lived and worked in China for 25 years, suggests that despite our self-image as bold global adventurers, we tend to be pussies rather than panthers in our business explorations (see side story).
However, a recent Asia New Zealand Foundation survey shows 81% of respondents believe the Asian region is important for our economy, and 78% believe FTAs will prove positive, up from 74% in 2008.
Readers with a bit of grey in their hair will quickly remind Mahon of some spectacular New Zealand casualties – Lion Breweries, Affco, and, of course, Fonterra. But they made headlines because they were big businesses. Mahon believes dozens of small Kiwi companies are successfully operating in China.
As long ago as 1994, a report in the Journal of Small Business Management identified 13 joint ventures involving Kiwis. But as Fonterra learned to its cost, with the enormous opportunities to serve new markets or achieve cost savings in China come daunting challenges.
One recurring issue has been “quality fade”, says Peter Enderwick, of Auckland University of Technology’s international business department. He defines this as “unexpected deteriorations in agreed quality levels” in a recent paper on managing quality failure in China in the International Journal of Emerging Markets.
The deteriorations have been an issue in China’s domestic and overseas markets, involving milk powders, phony plasma, toys, car tyres, toothpaste, seafood, pharmaceuticals and pet food, Enderwick says.
The problems are not confined to China, but appear in emerging markets with low-cost or plentiful resources, which may lack the institutional and regulatory capacity to ensure high and continuing quality levels, he says.
Quality failure, particularly when it threatens consumer health, carries considerable costs for buyers, sellers, consumers and governments, he says. Brand equity could deteriorate and it may take years to recover a lost market position. “At first glance, quality failure might appear to be a random event, something which falls clearly into the arena of business uncertainty. If it stems from a deliberate criminal action, it would appear to be a problem that might occur in almost any market, to almost any product, at any time.
“However, if it is a result of defective technical processes, poor design, inadequate co-ordination of the supply chain, cost cutting, insufficient testing or regulatory oversight, then it appears more as a genuine risk – something that can be at least anticipated.”
