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
One is its “considerable complexity”, a reflection of several transitions occurring in China: from rural to urban, planned to market, agricultural to manufacturing and closed (economy) to open.
The diversity of business forms – state, private, collective and foreigninvested – immense regional diversity and autonomy, rapidly evolving regulations, imposition of external requirements from trade and international agreements, and industry fragmentation, all contribute to the complexity, he says.
Then there is the “pervasive” influence of government officials on business decisions, low levels of transparency and accountability in political and legal affairs, variability in the autonomy of managerial discretion, and the “considerable” independence enjoyed by local officials in interpreting and implementing regulations.
Another feature is China’s relationship-based business system, which creates difficulties for “outsiders” gaining access to information and in the enforcement of terms. A relationship-based system results in significant monitoring costs, Enderwick says.
Other features are the subjugation of an effective independent media and non-governmental organisations, and the fact that China provides few incentives to economic agents to adopt a high-quality culture, says Enderwick.
Companies trying to gauge the probability of quality failure need to factor in the high levels of competition, he says.
The primary form of competition in many industries is price based, so suppliers often work on tiny profit margins, raising the incentive for opportunistic behaviour.
New Zealand exporter Westland Milk Products has had a taste of this behaviour. Chief executive Rod Quin says a Chinese party replicated Westland’s branding and packaging, but “the product in the bag certainly wasn’t from Westland”.
The con was quickly flagged by a customer, ring-fenced and shut down by legal means, Quin says.
Westland has a small office in Shanghai, but relies on trusted agents and business partners.
But Westland hasn’t backed off. In fact, its sales to China have increased significantly this season as part of its greater focus on Asian markets, with the company expecting to do up to NZ$60 million of sales, Quin says.
Ngai Tahu Seafoods has exported lobster and paua directly and indirectly to China for several years without a food-safety incident. Having said that, the South Island exporter relies on trusted Hong Kong middleparty agents and is very aware of the possibility “that something could go wrong”, says Alex McKinnon investment analyst with the tribe’s commercial arm, Ngai Tahu Holdings.
He says Ngai Tahu is closely monitoring opportunities under the FTA to export live seafood directly to China, but declined to elaborate.
Zespri chairman John Loughlin has no intention of rushing into China with New Zealand’s premium kiwifruit brand. The risks of compromising the brand are too great for his comfort. “There are a number of normal practices in the [Chinese] fruit industry we would find unacceptable. It is very common to see fruit with white powder – insecticides or fungicides used to prevent deterioration on the way to market.
“Accepted practices there are not accepted in other parts of the world.
“There is a tendency to cut corners and save money, a la the Fonterra experience,” says Loughlin.
“It’s a market where the risk profile is becoming high, simply because of people issues.” Owned by 2700 New Zealand growers, Zespri, with an annual revenue of $1.4 billion, exports 100 million trays of kiwifruit worldwide. It aspires to double the New Zealand industry within 10 years and intends to increase sales to China – original home of the fruit once known as the Chinese gooseberry – by two million trays a year, Loughlin says.
“If we said we wanted to do something in China, it would be under a different label than Zespri to ensure protection of the brand of New Zealand growers. We wouldn’t have the confidence [to apply the Zespri brand] in China.” Zespri’s plans for it are “at a very formative stage”, he says. “We are very conscious of the behavioural risk in China.”
