China Business Wednesday, April 16, 2014 Section F Fonterra On the waterfront shake-up in China Fran O’Sullivan and Alexander Speirs

onterra CEO Theo Spierings has centralised control of the company’s Chinese farming hubs into a new standalone Fbusiness unit to make faster progress growing its milk pools in China. The move comes as the Beijing-led consolidation of the Chinese dairy sector ramps up, making the competi- tive environment in China much Fonterra’s Theo Spierings chats to more difficult for international firms. Chinese consumers. Spierings has catapulted highly ex- perienced international dairy execu- mula manufacturers — are pushed tive Henk Bles into the newly-created from the market in favour of major role of Managing Director Interna- players with robust, integrated tional Farming Ventures reporting supply chains. directly to him. Sarah Kennedy — The Herald visited the two largest vice-president International Farming dairy players at their headquarters in — leaves Fonterra this month. Inner Mongolia. Mengniu and Yili The management changes follow each have substantial investments in astrategicreviewofFonterra’sChina New Zealand. They share their views business dubbed Operation Friesian. on why the consolidation is neces- In a note to staff, Spierings said sary to sustain the future of Chinese work was under way to make sure dairy and what is required to make Fonterra has the structure, capital the industry overhaul a success. and resources needed to accelerate In Shanghai, Kelvin Wickham its strategy. explains how Fonterra is having to Spierings revealed to the Herald adapt to the new market and the that Fonterra is setting up a holding moves it took to cleanse its brand company (‘‘Farm Co’’) in China and following last year’s botulism scare, will also appoint a Chinese advisory which initially frightened off Chinese board within the next year. consumers from New Zealand milk The Herald travelled to China to products. explore the major changes ahead as The Herald also travelled up to the Chinese Government pushes out Heihe in Heilongjiang, close to the Above is an artist’s impression of a The development agreement was terminating leasehold interest on the cowboy operators and creates a new Russian border, to inspect a major 200-room hotel on the western edge signed with Fu Wah in Beijing late last site and will remain the landowner. landscape which will be dominated dairy farm where Kiwi entrepreneur of Viaduct Harbour, which a Beijing month. Fu Wah will open an office in by‘‘NationalChampions’’likeMeng- Howard Moore is looking to partner developer will build by late 2016. The hotel, on the site of the former Auckland soon and is already in the niu and Yili. up with major international players The $200 million investment is Team New Zealand HQ, will be a five process of appointing local consul- Araftofnewregulationsimposed like Nestle, private equity participants being touted as one of the biggest to six star building with a world-class tants with specialist skills. byBeijingarehavingasubstantial and local government. foreign investments in public signature design, a premium This is believed to be the first impact on domestic and international infrastructure in New Zealand and international hotel brand, and will be Chinese-built premium hotel in producers alike, as small and difficult G F12-18 China’s dairy consolidation the first major deal to come out of built to the highest sustainability Australasia and is expected to help to regulate players — including some changes the competitive landscape the mayoral taskforce visit to China standards. maximise the likely benefits to Auck- of New Zealand’s smaller infant for- G F18 Michael Barnett in 2012. Waterfront Auckland is granting a land of the new convention centre.

Karen Silk, Westpac David Green, ANZ Mark Heer, ASB Paul Gestro, BNZ

For New Zealand to Being one of the first We’re seeing a much We want to see how continue to benefit nations to secure a greater awareness of we can create a from trade with direct currency New Zealand and pathway into China China focus needs trading deal with what it has to offer — for SMEs by using to remain on China says a lot we need to see that partnerships. ensuring the about New Zealand’s as a compliment. Page 22 economy is as close and growing Page 21 productive as it can ties with China. be. Page 6 Page 8 F2 nzherald.co.nz The New Zealand Herald | Wednesday, April 16, 2014

China Business Inside

It is our dependence on too few sectors of the economy, not on China, which needs to be addressed. says David Mahon Page 7

The design of New Zealand’s stunning the right) is the Chancery, accommo- the left) is integrated with the to celebrate 40 years of diplomatic new ‘‘embassy’’ — now under dating the majority of the NZ Inc Chancery at the ground floor and will relations. He said ait would cost in construction in Beijing — is intended agencies including the Ministry of house the NZ Inc representational excess of $40 million. ‘‘The current to represent an enduring image of New Foreign Affairs and Trade, NZ Trade centre and the Official Residence on chancery has served us well since 1973, Zealand (including our bi-cultural and Enterprise, Ministry of Primary the upper floors. Prime Minister John but it is now time for it to reflect the heritage). Industries, Customs, Police and Key announced plans for the chancery status and importance of New Adrian Littlewood is creating The larger of the two buildings (on Immigration. The smaller building (on during an official visit to China last year Zealand’s relationship with China.’’ an ‘‘Aeropolis’’ at Auckland International Airport that will service growing numbers of Chinese tourists Our China footprint Page 9

et’s try to agree on one simple But when it comes to real estate, point: making sure we have The showpiece of the NZ the showpiece of the NZ presence in the right people in the right China will be the new NZ Embassy places overseas to advance presence in China will be the in Beijing. This is a $40 million project, NewL Zealand’s external economic, being built on the site of the existing political, development assistance and new embassy being built in Embassy and Ambassadorial Resi- other interests is a classic example of dence. It will be built fit-for purpose. a‘‘workinprogress’’. Beijing, says Tim Groser As you can see from the repre- By definition, we will never settle sentation above, it will be a distinc- this ‘‘once and for all’’. Power — poli- tive, modern building conveying the tical, cultural and economic — is right message to all our Chinese visi- always changing. NZ’s interests and date. Last year our exports increased China operations, and has recently tors about the NZ brand. our view of the world also change. by a phenomenal 45 per cent. The beefed up the number of Wellington- It is not just a numbers game. The New Zealand’s shift to China is the If someone had told me in the mid- annual increment alone of our based policy officers working full quality of staff needs to be most fundamental change to our 1970s that in a few decades hence we exports ($3.1 billion) was roughly time on the China relationship. maintained at a high level and lan- external relations for at least two would be exporting more than twice equivalent to adding ‘‘two Koreas’’ The commitment of NZ Trade and guage skills are essential. generations, says Sir Don as much to Africa and the Middle East (our total exports to South Korea Enterprise (NZTE) to the China re- MFAT and NZTE have always had McKinnon than the UK (which then took some around $1.6 billion) in one year, and lationship is similarly being Chinese speakers in their teams and Page 19 50 per cent of NZ exports) I would we regard our economic relationship upgraded. IamdelightedthatMPIarenow never have believed them. I would with South Korea as very important. The context here is a bit broader committed to having in any one year have been flat out wrong. As this phenomenal growth has than China alone. The Prime Minister two to three expert staff in language The big story of our age is the shift occurred, we should hardly be sur- recently announced a funding boost training. in relative power to the emerging prised that we have encountered a for NZTE of an additional $69 million Finally, we are talking here about economies. It is not just a China story, few severe speed bumps. I would, of over the next four years to enhance atrueNZInc.approachandthis but that is by far the largest part of course, rather be dealing with the our capacity to drive further the cannot be a matter for Government the emerging economies story. We price of success than the cost of Government’s strategic objective of alone. It is, in my view, essential that are seeing the fastest process of failure. But when in August 2013 increasing by 10 percentage points NZ businesses with a strong interest urbanisation and wealth creation on Ministers reviewed our ‘‘NZ Inc.’’ the share of GDP in exports (from 30 in the China market think carefully aglobalscaletheworldhasever China strategy, we decided on heavy- per cent to 40 per cent by 2025). and strategically about their own witnessed. It still has a long way to duty upgrades of our China footprint. There is a domestic component to business plans and the quantity and go. We needed to lift our game just to this too: given the strong demand for quality of the human resources they It has been estimated that as re- keep up. NZTE services, the number of are assembling to meet the immense cently as 2000 only about 4 per cent There is a wide range of NZ exporting companies to receive in- opportunity we have. of Chinese households were defined agencies with China representation — tensive advice and help (the 500 This is not an easy market and as ‘‘middle income’’ (ie potential cus- Customs, Police, Education NZ and companies NZTE works with one-on- requires a strategic approach. If you Brierley Penn talks to tomers for NZ); by 2025 this is pro- others. But three agencies form the one, seeking to double the portfolio’s are running one of those businesses Auckland University’s Jenny jected to increase to a staggering 75 backbone to our China effort — Min- international revenue by 2025) will be and are in doubt about the right way Dixon about what universities per cent of households. The dramatic istry of Primary Industries (MPI), Min- expanded over the next two years to forward, come in and talk to our are doing to build relationships changes this has wrought on our istry of Foreign Affairs and Trade, and around 700. China experts in MFAT and NZTE. with China. export economy may simply be the NZ Trade and Enterprise. Part of that additional funding will They have their own experts, clusters Page 20 beginning. In the view of ministers, the most definitely be allocated to upgrading of mentors and advisers that can help This is the background to the de- obvious need was to increase the NZTE’s footprint in China. NZTE you at least start to ask the right cision taken by the Prime Minister number of experts from the Ministry already has 62 staff in China, the large questions. and President Xi Jinping in Beijing a of Primary Industries since they are majority of which are of course New Zealand has the right suite of China Business 2014 few weeks ago to raise the bar once crucial to keeping markets open for locally employed. But we will be goods and services to offer the Chin- again in terms of the level of our New Zealand. adding seven new positions to this ese people. ambition. It will take a little time to have all total. We have the best possible political Executive Editor: Fran When the Prime Minister and for- the right people in place, but by 2015 NZ business visitors to Shanghai relationship and the platform of a O’Sullivan mer Premier Wen Jiabao agreed in we will have gone from literally one will already be familiar with ‘‘NZ comprehensive FTA that other Writers: Bill Bennett, Brierley 2010 on a doubling of two-way trade MPI professional in China in 2013 to Central’’, a facility in Shanghai that is countries would love to emulate. It Penn and Alexander Speirs by2015to$20billion,Ithoughtthat seven. available for NZ companies to utilise. is now up to all of us involved in this Subeditor: Isobel Marriner was a bit of stretch, though possible The Ministry of Foreign Affairs and Since the Prime Minister opened NZ extraordinary venture to make things Graphics: Isobel Marriner as long as China continued its strong Trade (MFAT), the key co-ordinating Central in 2009, more than 30,000 happen. Advertising: Sandra Evans, growth. In fact, we are almost certain Ministry in the relationship, will be guests have visited the centre for Nancy Dudley to reach that figure before the target adding seven new positions to its almost 1400 events. G Tim Groser is the Minister of Trade. The New Zealand Herald | Wednesday, April 16, 2014 nzherald.co.nz F3

China Business

Top CEOs talk about what’s necessary to reach $30 billion goal

Theo Spierings took his ‘‘top 150 people’’ from Fonterra’s Air New Zealand’s Christopher Luxon says it’s all about Mainfreight group managing director Don Braid reckons global operations to Beijing last week for their annual recognising the shift in power when it comes to leveraging there is nothing wrong with the Government setting goals international forum and ‘‘dinner on the Great Wall’’. the Chinese opportunity. —liketheambitionfortwo-waytradewithChinatoreach ‘‘There are a lot of people in our business who need to ‘‘The Chinese opportunity is immense. I think we are very $30 billion by 2020. have exposure to what we are doing in China,’’ says Spierings. well positioned for it and are moving ourselves out of a mind- ‘‘They have done a good job at that over the past few years ‘‘It is our number one market.’’ set — we can actually be at the centre of this new world particularly around overseas trade.’’ He’s confident the Government’s two-way trade goals can rather than at the periphery.’’ But says Braid ‘‘the key is for business to become motivated be achieved. ‘‘People are speculating about possibly lower Air NZ’s revenue is up almost 70 per cent since 2009 in to achieve those goals not only for themselves but also for demand (for dairy). I can’t see that to be honest. China. Capacity on the Shanghai route has more than doubled. New Zealand.’’ ‘‘I still believe that parents want to feed their children with AfragmentedNZtourismindustryhasgotitsacttogether Now that the reputational concerns over the ‘milk fiasco’’ the right products, so I think demand will stay pretty strong.’’ and is collaborating to do business with China. have been put to bed, Braid believes it is ‘‘time for all exporters China will be 20 per cent of Fonterra’s turnover this year The Chinese business is so critical to the airline’s future to view the opportunities and take advantage of them’’. with exports of 550,000-600,000 tonnes. ‘‘That’s a massive prospects that Luxon is making it clear to high potential Mainfreight initially entered the Chinese market to service step-up.’’ leaders they ‘‘should go and have a high quality three-year its New Zealand and Australia customers. However, it very Fonterra is also NZ’s largest exporter to China so its success assignment in China’’ if they want to move up the company quickly saw the opportunity for trading around the world is critical to New Zealand meeting the $30 billion target. ladder at Air New Zealand. from its base in China. Spierings is building alliances to stay in the China game ‘‘We try to send a very strong signal to the management ‘‘Certainly the USA/China/USA trade lane has become one by exploring partnerships with big Chinese dairy and food team, that world famous in New Zealand won’t cut it. What of our biggest,’’ says Braid. players who have connections to national Government. we are looking for is a Pacific Rim mindset, and as a great ‘‘As China looks to free up trade barriers with other He expects China’s new ‘‘national champions’’ will each leader, a future leader of Air NZ, you need to have your head countries, Mainfreight would expect those trade lanes to grow link up with ‘‘co-ops’’ with access to global milk pools to secure very clearly in the game about what’s going on in China.’’ for us as well. their own long-term supply arrangements. ‘‘The development Case in point Nick Judd, who has just been appointed ‘‘We are there for our global footprint, not just New of the local milk pool can’t stay up with demand. The gap general manager in China. ‘‘We have made it very clear to Zealand.’’ right now is about 10 billion litres. him, that your career cannot move forward unless you go He believes that if companies get involved in the China ‘‘Over time the gap will be similar to the New Zealand milk and get a very good experience and understanding of life market they will all benefit from the business experience of pool — that offers big opportunities.’’ and business in China.’’ dealing in Asia and working within large markets. Connecting New Zealand to China When doing business with greater China, local expertise This now includes ANZ’s capability to directly convert between and connections are vital. ANZ has a long history of the New Zealand dollar and the renminbi, making it easier for helping New Zealand companies do business in China. you to do business between New Zealand and China. Our cross-border specialists can provide tailored trade, If you’d like to talk to one of our specialists about how we can help transaction and FX solutions in all major currencies your business achieve success in China, talk to Gavin Haworth including RMB. on 09 252 3458, or Penny Ford on 0800 269 439.

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China Business A political hot potato . . .

rime Minister John Key enthuses about how many of Is big end of China town’s NZ investment a political issue, asks Fran O’Sullivan the seriously ‘‘big guys’’ turned up for a private investors’ Pluncheon he hosted in Beijing during his recent trip to China. But closer to Chinese PRC FDI in NZ by sector home as the September 20 election nears, foreign investment, particularly Primary industry and food $884m from China, is poised to be a political Forestry $135m hot potato. Manufacturing $848m Labour has pledged a foreign invest- Financial services $130m ment ‘‘shakeup’’, the Greens want a ‘‘buy Infrastructure/utilities $2223m Kiwi’’ approach and Winston Peters has Hotel/commercial $556m slammed the Overseas Investment Office as a ‘‘rubber stamp’’. Such political realities would not investing in farmland. Not out of any have been up for discussion at Key’s bias against Chinese (US Harvard Funds luncheon. Management has a larger footprint) but Around Ambassador Carl Worker’s because it is likely to create opportun- table at the temporary NZ Official Resi- ities for China’s dairy companies to dence in Sanlitun were the top players vertically integrate and take supply from the Industrial and Commercial away from Fonterra. Bank of China (ICBC) — the world’s It’s a complex situation as, in China, largest bank, which recently opened a Fonterra is seeking to take part in branch in downtown Auckland; China Prime Minister alliances that will also result in vertical Construction Bank (CCB) which will John Key (with integration of supply chains — some- also set up operations here after the Xi Jinping) has thing the Chinese Government believes Reserve Bank approves its banking gone out of his essential if their dairy industry is to licence; Chinese sovereign wealth fund way to steer move to a safe high-quality platform, (Citic) and senior commercial players Chinese When Key made his first official visit that have acquired stakes in New Zea- investors away to China in May 2009 the only substan- land companies since the Global Fin- from farmland. tial Chinese investment in New Zea- ancial Crisis alerted them to a pressing land was Sinotran’s 60 per cent holding need for capital Down Under and put in Wenita Forest Products which NZ on their investment radar screens. China’s Growing NZ investment Footprint owned and managed over 28,000 ha Major construction players have taken Chinese Investor Investment $ Ownership % of forestry estate. a look at opportunities for the Christ- Haier F&P Appliances $65m 20% (initial) now 100% Five years on, Greater China’s in- church Rebuild and other infra- Agria PGG Wrightson $50m 50.1% (initial) vestment footprint in New Zealand has structure projects, but have so far shied Shanghai Bright Dairy Synlait Milk $82m 39% grown to about $4.8 billion (Mainland away because the projects are too Shanghai Pengxin Crafar Farms $220m 100% China and Hong Kong) according to a small. Put that to one side. Yili Industrial Group Oceania Dairy $214m 100% running tally key by NZ officials in Not only are China’s major banks Yashili (now Mengniu) Yashili NZ $214m 100% China. setting up operations here (Bank of China Nat. Forest Prod. China Forestry Gp NZ $8m (est) 100% Bilateral investment was also on the China is expected to follow ICBC and Rainbow Holdings Fisher Finance $6m 100% radar when Key met Chinese president CCB in ultimately seeking Reserve Bank Shanghai CRED Carrington Farms $28m 100% Xi Jinping last month. approval), but also the largest Chinese ICBC ICBC NZ $60m 100% The Key trip — dubbed the ‘‘milk run’’ dairy companies — Yili and Mengniu — Pengxin Synlait Farms $63m 73.9% — was presented as an opportunity for which have invested in new processing Fu Wah International Auckland Hotel $200m 100% New Zealand to redress any lingering facilities joining Bright Dairy and New Development Group Hotel $350m 100% ill-feeling on the Chinese side as a result Pengxin in introducing competition to Beijing Capital Group Transpacific $950m 100% of last year’s botulism scare. Key told Fonterra from its home market. the Herald China sees a place for Then there are commercial property companies like Fonterra within its own investors like Fu Wah and the NZ versial appetite Chinese investors are New Zealand is not high — roughly $5 Winston Peters is against foreigners investment landscape — particularly Development Group, set to build new now showing for NZ’s housing market billion out of $101 billion, or 5 per cent (not just from China) buying farmland. when they bring to the table vital know- five star hotels in Auckland; Haier with (particularly in Auckland) and our of NZ’s FDI stock. Key’s Government has ruled out how that China needs. its acquisition of Fisher & Paykel prime farmland and add to that the But Chinese investment in residen- strictures on foreign investment in resi- The reality is that investing within Appliances, Agria’s investment in PGG investment by Beijing in NZ Govern- tial housing and farmland is attracting dential housing, saying it will not follow China is essential to secure export Wrightson and China Southern Airlines’ ment bonds — and it is obvious the attention in an election year. Labour’s Australia and ban foreigners from trade. daily flights to Auckland. integration of the two economies is now David Cunliffe has pledged a ‘‘foreign investing in existing stock. So too, treating Chinese investment Couple the investment from the ‘‘big in full swing. The level of overall Chin- investment shakeup’’ if his party gets But Key has gone out of his way to here on the same platform as other end of China town’’ with the contro- ese foreign direct investment (FDI) in to lead the Government. NZ First’s steer Chinese investors away from foreign players. No danger of unwanted invasion

It’s election year and once again the consent are of good character. So we our largest export market. That issue of foreign direct investment has should not fear an invasion of those reflects the desire by China for the been raised by various politicians. with doubtful links. Should New Zealanders be products New Zealand excels at pro- The focus of attention is unquestion- Investments by overseas persons ducing. As the Chinese economy ably on investment by Chinese in- in land-based transactions requiring fearful of Chinese investment in grows and the wealth of its people vestors. approval must meet additional rises this should increase demand for There are New Zealanders con- criteria; in particular, they must show this country, asks Cathy Quinn New Zealand products and services. cerned about the impact of significant that their investment can add to the Encouraging investment in addi- investment by Chinese in New Zea- New Zealand economy, over and tional production capacity in New land. Should they be? In my view, above that which a New Zealand Zealand by Chinese investors can be they should not. investor can show — there needs to ally has a reputation for being trans- ordinary hardworking Kiwi that you awin-win. New Zealand has long had foreign be a real benefit to New Zealand from parent, its government agencies free cannot sell your business or property The Bright Dairy investment in investment. In the early days it was the investment. from political interference and not to Mr or Ms X from China who offers Synlait Milk during the global finan- from Britain. At different times we We should be cautious about racist. Changing foreign investment you $1 million more than someone cial crisis is a good example of this. have had significant investment from changing our regulatory environ- rules to make it more difficult for else because of the country of origin Synlait Milk needed additional capital Europe, the United States, Japan, and ment in relation to foreign investment Chinese enterprises to invest here of the buyer? But it would be fine if to continue to grow and Bright Dairy of course Australia. — particularly where that change is would be a backward step in New they came from England or Europe? provided it. As a result Synlait Milk The level of investment has ten- politically driven. In attracting inter- Zealand’s standing in the interna- New Zealanders should not panic was able to execute on its plans. This ded to follow the relative strengths national investment generally it is tional investment community. about the level of Chinese investment then assisted Synlait Milk in achiev- of different countries’ global econom- important to be seen as a country That would be the case however here. In the year ending March 31 ing a successful listing on NZX and ic power at different times, and their with transparent, clear rules. we dress it up — if a change to the 2013, total investment from China providing the opportunity for more connection to New Zealand. So it is Changing the rules on interna- rules is seen as a response to limiting (including Hong Kong) only repre- New Zealanders to invest in a fast no surprise that as China’s global tional investors can be damaging investment by Chinese investors sented 2 per cent of all investment growing company. economic power rises — as does the reputationally for us and have long (even if it is written in neutral lan- in New Zealand for that year. Given the integrity of New Zeal- level of trade between our two lasting effects. Most international in- guage), we run the risk of being seen If we look just at foreign direct and’s regulatory framework and the countries — more Chinese enterprises vestors have choices about where as racist. investment from China, including re- opportunity China represents to New have sought to invest here. they apply their capital. There are We should also reflect on the fact cently announced projects that are Zealand I do not think New Zea- In my view, the current regulatory countries other than New Zealand that making it harder for Chinese still undergoing regulatory approvals, landers have anything to fear from framework for foreign investment wishing to attract foreign capital to enterprises to invest in New Zealand the total of Chinese investment further investment by Chinese enter- adequately protects New Zealanders grow their productive base. may well impact negatively on New would still be less than 5 per cent. prises in New Zealand. from inappropriate foreign invest- It is a detriment to investment if Zealanders seeking to obtain the best That does not suggest a flood of ment. a country is seen as fickle in its price for the business they have Chinese investors buying up New G Cathy Quinn is the Chair of Minter The Overseas Investment Office approach to foreign investment — grown or property they own. Zealand businesses and property. Ellison Rudd Watts and a senior requires that any overseas persons especially if that fickleness is seen as Here is a question to think about China is New Zealand’s largest corporate and commercial lawyer who behind an investment needing its politically based. New Zealand gener- — would it really be fair to say to an trading partner and has just become leads the firm’s China team. The New Zealand Herald | Wednesday, April 16, 2014 nzherald.co.nz F5

China Business Chinese investors’ inbound challenge

nbound Chinese investors face any business dealing, a understand- the same key issue all foreign ing of these is important. It takes investors face (whether into Cultural differences are becoming a longer to get transactional momen- New Zealand or abroad): under- tum and certainty, change is challeng- Istanding the destination’s business dynamic of the marketplace, ing — particularly when it means culture and adapting to it. Chinese needing to contradict a senior person; investment is topical, but their need explains Michael Pollard vigorous debate may be replaced by to understand and adapt to the cul- an absence of contradiction coupled ture is no different to other foreign with what appear to be incremental investors. and time-consuming changes in posi- What is different, generally speak- tion. ing, is the level of culture-shift faced One challenge is getting the bymanyChineseinvestors.Withthe inbound investor up to speed and huge growth of inbound Asian, and confident in New Zealand market particularly Chinese, investment, and norms. It is obvious that these should the increasing number of Chinese be challenged — there are different investors doing their first deal outside (often better) norms elsewhere. It is their home country, this dynamic is natural to come at these with a degree becoming a feature of our market- of scepticism until they are under- place. The need to understand the stood as rational. cultural differences and drivers is Perhaps the greatest impact then important. is the time it takes to get the deal done. An excellent adviser will be adept Precedent is also critical. Much Chin- at understanding the impact of the ese inbound investment is state client’s culture on the transaction, money. taking advantage of the strengths, and There is a real sensitivity to doing educating and managing the client abaddeal,orsettingprecedent through the challenges of working in around approach or terms that might the different New Zealand business be considered to apply to future culture. The adviser will also be adept investment by others. at managing the expectations of the All of these factors, coupled with business counterparty. a lack of familiarity with (or sense of Acriticalfirstfocusisunderstand- obligation to) typical New Zealand ing hierarchy and its impact. It is not business norms, results in frustration merely organisational hierarchy that on all sides, and sometimes means is important. An individual’s political that good deals will not be done. and personal connections are often However, as we see more deals by unexpectedly relevant. These influ- son might expect a business meeting portant that who is communicating. faster — with the detail receiving less Chinese investors, they will become ences, including the ‘‘concept of to be very results-oriented. In most Most debate is welcomed and it’s hard focus. Hierarchy plays a more sig- more experienced and confident saving face‘‘, can be difficult to discern cases, the opportunity has already to offend. In contrast, with many nificant role. This extends to the operating in New Zealand business but have significant impact on both been identified and the focus is rela- Asian dealings, the interpersonal ele- formality with which introductions culture and their own norms will process and outcome. Without under- tively granular. Developing a strong ments are more critical. The gestation are made, the speaking order, the become increasingly understood and standing these, it is challenging to find relationship is important, but it is of a business relationship seems to manner in which ideas are debated accepted by the locals. out real deal drivers and get results often a by-product of the opportunity take longer to develop, as trust is and perhaps most importantly, a sen- efficiently. and developed alongside it. What is formed, but once it has, movement sitivity to not undermining ‘‘face’’. G Michael Pollard is a specialist The typical Western business per- communicated is relatively more im- to execution of the transaction is For the adviser or counterpart to corporate partner at Simpson Grierson

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China Business Classic case of free trade gains

NZ well positioned to benefit as long as we do not fool ourselves into believing we are unique, says Karen Silk

he Prime Minister’s recently tional value creation could include: announced target of $30 Demand for NZ commodities is G Alackofcapitalgainstaxwhich billion two-way trade with when combined with the existence of China by 2020 might be seen positively out of step with the income tax results in the situation asT aspirational. Back in 2010 when the where land-intensive forms of original target was set — to double broader global commodity economic activity, such as farming or trade with China (to $20 billion) in five rental property ownership, may be years — the goal might also have been story. taxed more lightly than other types viewed as a bit of a stretch. Karen Silk of economic activity, such as manu- But move forward a few years: facturing or earning a wage. New Zealand’s trade with China has ment undertaken over prior decades When you combine this with the grown to around $18 billion and to build the NZ relationship with natural climatic and environmental targeting a 66 per cent increase over China through the 2008 Free Trade advantages supporting food pro- the next six years now looks a lot less Agreement has offered a preferential duction in New Zealand it is daunting. advantage that has directly led to an unsurprising that New Zealanders The increase in recent years has increase in volume and value that tend to opt for the land-intensive largely been driven by strong growth can be ascribed to exports between types of production over more labour in exports. Exports now comprise our two nations. intensive industries carrying a higher more than half of our trade with Looking forward, global demand resultant cost. China, and this trend is likely to and supply dynamics are likely to G Our very high exchange rate which remain a feature of future trade result in increased competition from negatively impacts on industries growth between the two countries. alternate sources of supply meeting offering services domiciled in NZ The steep rise in export growth Chinese demand (including the de- such as tourism, education, health etc over the past few years has been velopment of their own domestic to offshore purchasers. However, in- largely driven by the emergence of food production practices). tervention to manage down the industrial Asia and the resultant rise For New Zealand to continue to exchange rate would require the im- in demand for raw materials. benefit from trade with China focus plementation of capital controls, With demand outstripping global needs to remain on ensuring the which could have very high supply, the world is now paying top economy is as productive as it can unintended costs for the broader NZ dollar for raw materials NZ produces be to maximise the value derived economy. And of course, a lower competitively, and very little for from increasing trade flow that exchange rate would reduce the transformation of those raw materials carries heavy commodity character- wealth and income of anybody who into finished goods. istics. owns or earns New Zealand dollars. New Zealand has adapted well to This will require continuing invest- This may not be something we want these global price signals over the ment in R&D driving production ef- —countriesthatartificiallyunder- past decade with migration towards ficiency and quality gains across all value their exchange rates are essen- the production and export of raw parts of the commodity supply chain. tially subsidising foreign consumers materials that also meet an increasing Any inefficiencies and excess cap- at the expense of their own. requirement for higher and safer acity within domestic manufacturing, New Zealand is well-positioned to standards in production. transport and the broader services benefit from increasing trade with In the year to December 2013, New value processing onshore is likely to classic example of free trade gains sector will need to be addressed as China as long as we ensure that we Zealand exports to China were result in the export of higher volumes resulting from activity between well as the development of a broad do not fall in to the trap of believing dominated by soft commodities (73 of less-processed product (e.g. slaugh- trading partners reflecting the rela- based ethos of continuous improve- that the products and services, in- per cent of total export volumes) that tered carcasses). tive strengths of each — and this has ment in efficient and sustainable cluding quality, we offer are not easily left these shores with limited value The weighting towards raw mater- to date been positive for the NZ farming practices that support the replicated by others also seeking to addition. As an example, of the $2.8 ials reflects China’s relative efficiency economy. current value ascribed to NZ’s repu- participate in the economic boom billion of forestry products exported in the execution of transforming raw Demand for NZ commodities is tation as a source of ‘‘safe‘‘food pro- created from the industrialisation of to China over that period, rough materials in to finished goods, and as positively out of step with the broader ducts. one of the world’s largest economies. wood exports equated to $1.7 billion, aconsequencetheydonotneedto global commodity story and you With the above points in mind the Sustained benefit will come from with prepared wood (timber, wood pay a large margin for transformed could argue we have in part been able argument that we should be adding ensuring we continue to focus on pulp and paper) comprising almost goods. With the key driver of ef- to ‘‘capture’’ the value of Chinese more value to exports domestically both sustainable and efficient pro- 100 per cent of the residual. ficiency being lower labour costs, the productivity and cheap labour as a in our trade with China becomes duction of those goods and services In the short to medium term New options to make the cost-benefit result of our ability to meet both the defendable, if we can point to some currently in demand and, import- Zealand is likely to travel further equation work in favour of trans- rising demand for protein flowing distortion that impedes the efficient antly, investment in R&D to identify down this path and we can expect formed goods from NZ can only lie from increasing Asian urbanisation functioning of the economy i.e. and commercialise offerings that to see more milk powder and log with further productivity improve- and the requirement for higher stand- features that distort the true cost of meet the next wave of global con- exports, fewer sawmills, more wool ment, maintenance of quality and / ards of food safety, in particular from production and therefore provide sumer demand. and fewer carpets. For meat or new innovation not easily China. preferential advantage or disadvan- exporters, the increasing appetite of replicated in the short term. We would also propose that the tage between industries. In NZ’s case, G Karen Silk is General Manager Chinese processors to complete The current position represents a formalisation of the significant invest- possible distortions impeding addi- Corporate & Institutional, Westpac Direct convertibility will catch on: bankers

Institutional trades have predom- over time. Silk says most of the inated since the historic move to Currency facts inquiries are coming from smaller direct convertibility of the New Zea- clients and from more importers land and Chinese currencies began G NZ dollar — 6th currency to be rather than exporters. last month. directly traded with RMB ‘‘This reflects the fact that what’s But that will change if the pricing G Cuts out need to convert via US being exported from New Zealand by of the global commodity trade dollar the big guys is largely in US dollar- ultimately moves away from a singu- G RMB — 2nd most used currency denominated commodities. lar reliance on the US dollar. in trade finance ‘‘If you start to see a significant Trading figures show that $60 weighting of soft commodities glob- million of ‘‘Kiwi’’ was converted ally heading to Asia and China — and directly into RMB during March — more flexibility about the RMB — then with an average of 20 deals across Market Makers that is when we would expect to see all 10 price makers. more flow build.’’ This replicates the pattern in the G Industrial and Commercial Bank Prime Minister John Key and Chin- Australian market after direct of China ese Premier Li Keqiang launched the convertibility of the Aussie dollar into G Bank Of China direct convertibility of the currencies RMB was launched a year ago. G China Construction Bank at the Great Hall of the People on Westpac’s Karen Silk is confident Direct G China CITIC Bank March 18. Key said then that the that though institutional trades have Convertibility: G HSBC Bank (China) agreement ‘‘will make doing business dominated since ‘‘direct converti- John Key and Li G CitiBank (China) with China easier by reducing the bility’’ began on March 19, significant Keqiang ‘‘trade G Bank of Montreal (China) costs of converting between the two client trade will build. currencies’’ at G China Guangfa Bank currencies, and will stimulate trade ‘‘What has happened is there is the G ANZ (China) and investment. significant client inquiry coming Great Hall of the G Westpac Shanghai ‘‘Direct trading will also increase through,’’ says Silk. People. the integration between the New Zea- ‘‘People trying to understand how land and Chinese financial systems, it works.’’ on the China Foreign Exchange trading partners. based engineering firm tells us this and deepen the economic relation- Westpac, ANZ, HSBC and ICBC are Trading System. The market maker ANZ’s David Green believes open- new capability has helped give him ship between the two countries.’’ among the banks represented in New licence allows direct interbank ing up the RMB for direct trade with the impetus to grow his business, HSBC notes that around 12 per cent Zealand that have received approval trading of the New Zealand dollar and other currencies ‘‘reflects a desire to explore new opportunities in China of China’s total foreign trade is cur- from the People’s Bank of China to Chinese yuan, meaning reduced internationalise the renminbi and and deal with a wider range of Chin- rently settled in RMB. act as ‘‘market makers‘‘or inter- transactional costs and, over time, speed up reform of China’s financial ese suppliers and customers,’’ he says. HSBC expects this to rise to around mediaries for direct trading of the increased liquidity to currency deals markets. Both Green and Silk expect the 30 per cent by 2015. New Zealand dollar and the renminbi between New Zealand and Chinese ‘‘The owner of one New Zealand- trading volumes to build up gradually — Fran O’Sullivan The New Zealand Herald | Wednesday, April 16, 2014 nzherald.co.nz F7

China Business It’s a case of misplaced anxiety

David Mahon It is our dependence on too few sectors marketed funds could develop the necessary capital. The Government s the Chinese Government of the economy, not on China, which could also do more than back the tries to slow its economy to needs to be addressed. stronger companies in traditional in- amanageablerateofgrowth, dustries, but take a more entrepre- it is understandable trading David Mahon neurial approach, supporting com- partnersA such as New Zealand are panies with potential that will not only becoming concerned China may stall economy do not offer many obvious bring more diversity to our core or experience a ‘‘shadow-banking’’ alternative growth markets for New sectors, but develop new areas of crisis. But the underlying economic Zealand exporters; some of the more growth in sectors such as technology drivers of urbanisation and domestic accessible markets — such as Australia and services. The conservative politi- consumption are too strong for China —aremoredependentonChinathan cal principle that government must to stall. New Zealand should be more we are. Due to the sheer scale of stay out of the market because market concerned with diversifying its own Chinese demand and the marginal forces will always self-correct econom- economy than reducing its depend- growth of the US and Europe, New ic imbalances does not work in an eco- ence on China. Zealand has increased trade with nomy as small, isolated and narrow as China’s shadow-banking sector (the China by more than 460 per cent since ours. unofficial financial market) has its 2000, rising 190 per cent since 2008 Emerging markets alternative to flaws, with some usurious interest rates alone. China’s meat consumption China are Indonesia and India. Both and poorly structured bonds, but for doubled between 1990 and 2010 and share China’s strengths in that they are private businesses it is also a source has continued to grow at over 10 per driven by large domestic economies of much-needed capital the state- cent a year to more than 60 million and demand quality food, technology owned banks will not provide. It is tonnes in 2013. and services. They are less dependent unlikely to trigger a succession of New Zealand has reacted well to on Chinese economic growth than defaults causing a financial crisis such in the economy, 2013’s 7.7 per cent botulinum false alarm has not been too Chinese demand, but as a trader and New Zealand’s other regional partners. as the United States suffered in 2008. growth reflected a much larger absol- severe, although our dairy industry still price taker, not as an active strategic Indonesia and India are perhaps even In China’s closed domestic financial ute increase — some RMB 5 trillion. needs to assess how the disclosures player. more difficult markets than China in system, within which well-funded China will need lower growth rates as were so poorly managed, and there is Comparisons between our depend- which to operate but, like China, are state-owned banks dominate, shadow its economy becomes increasingly de- more work to be done to recover the ence on Britain in the 1970s — when keys to our economic future. Diversi- banks are not highly leveraged and the veloped; it is rising incomes and living trust of millions of Chinese parents and Britain made the political decision to fication in trading partners will allow securitisation of debt is almost non- standards that New Zealand should be grandparents. join the European market — and our New Zealand to continue to benefit existent. more concerned about. The risk to our reputation as a clean current dependence on China are mis- from Chinese growth while negotiating As the Chinese middle class gets New Zealand need not fear its cur- source of food would be extended leading. Our political relationship with best prices and long-term contracts wealthier and hundreds of millions of rent dependence on the Chinese econ- beyond China to all its major trading China is excellent and there are no from a position of strength. peasant farmers move to work in in- omy. Reductions in infrastructure partners in the event of another ‘‘scare’’. signs China will turn away from New New Zealand has shown in the past dustrial and service-sector jobs, growth spending, restraints in the Chinese A genuine contamination crisis or an Zealand or block access systematically that it can adapt and innovate. If we will remain strong. In the coming two housing sector and higher interest outbreak of foot and mouth disease to New Zealand goods for its own can think beyond short-term trading to three years China’s GDP growth may rates will not reduce Chinese demand could cripple the New Zealand econ- domestic purposes. gains measured over a few years, work slow to closer to 6 per cent, but over for quality food. omy. We will be vulnerable globally as New Zealand is a flexible trading through its propensity to commercial the next 10 years Chinese incomes are As long as New Zealand can main- long as we rely too much on an image nation, quick to match domestic complacency and resist irrational anxi- forecast to double. tain the quality and supply of its goods of the absolute purity of food and supply to meet shifts in global demand, ety in respect of its growing economic The economy doubled in size over and services to China and continue to beverage products while failing to but it lacks the capital resources to relationship with China, it will build a the past eight years when it was grow- earn the trust of Chinese consumers, diversify. It is our dependence on too develop processing capacity at home more enduring and dynamic economy. ing in excess of 10 per cent. While it may expect to enjoy at least a decade few sectors of the economy, not on or to invest in processing or distri- growth of 9.2 per cent in 2009 repre- of strong growth. The damage to New China, which needs to be addressed. bution in its export markets. G David Mahon is managing director sented an increase of RMB 2.7 trillion Zealand’s reputation from last year’s C. The developed parts of the global Government-seeded, globally Mahon China Investment Management.

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China Business Benefits in currency deal

Direct currency trading with China will help to further open that market for businesses and position this country to benefit from the potentially dramatic rise of China as a global financial centre, writes David Green

ew Zealand joined a priv- New Zealand’s largest trading partner important role in this. ileged few nations when it The ability to pay and is a key market for many of our If China continues to pursue these won an agreement with major export industries, such as dairy, reforms, ANZ forecasts that its financial China last month allowing suppliers in China forestry, meat, seafood and wool. It is system will be more than twice as big Nbanks to directly trade the two national also a major source of migrants, as the US system by 2030. By the currencies. The deal carries with it the directly in RMB has students and tourists, meaning Chinese middle of this century, China will ac- potential of greater economic, trade culture now makes up an important count for half of Asia’s financial assets. and investment benefits, building on made those part of the fabric of our community; Shanghai will grow to rival New York the success of the past five years. a further advantage supporting busi- as a global financial centre and RMB The new arrangement recognises companies easier to ness connectivity with Asia. will dominate in Asia as a regional the scale and expected growth in trade, On China’s part, opening up RMB for funding currency and as a genuine capital and immigration flows between do business with, direct trade with other currencies rival to the US dollar as a global reserve New Zealand and China and demon- reflects a desire to internationalise the currency. strates the strong relationship between and many have renminbi and speed up reform of For the wider region, including Aus- the two countries. China’s financial markets. tralia and New Zealand, this rise of New Zealand companies have been benefited from ArecentstudypublishedbyANZ China as a financial power points to a able to convert China’s currency, the places China at the heart of ongoing dramatic increase in cross-border in- renminbi (RMB), into New Zealand improved terms or economic growth underpinned by a vestment, a growing supply of both dollars (NZD) via other currencies for potential ‘‘revolution’’ in the develop- equity and debt assets and the emerg- the past two years. Aside from allowing new business. ment of Asian financial markets. ence of a new investor base. them to better manage currency The report, Caged Tiger: The Trans- This means it is more important exposures, the ability to pay suppliers new opportunities in China and deal velopment of associated hedging formation of the Asian Financial System, than ever to be closely engaged with in China directly in RMB has made with a wider range of Chinese suppliers solutions for New Zealand businesses tips Asia’s share of global economic China’s financial markets. The new those companies easier to do business and customers. dealing with China, and support a output to soar, from 17 per cent two currency trading deal, along with our with, and many have benefited from As more businesses move to cap- reduction in the associated transaction decades ago to 35 per cent by 2030 FTA and wider relationship with China, improved pricing terms or new busi- ture these advantages, direct costs. and over half by the middle of this means New Zealand and its businesses ness. convertibility will continue to play a Being one of the first nations to century. have a head start on most countries As the largest bank in New Zealand, key role in improving trade flows secure a direct currency trading deal In China’s case it notes that rapid in capturing the benefits. with the largest presence in China, ANZ between the two countries. with China says a lot about New industrialisation has until recently not But in many ways the race is only has been connecting many New Zea- The new arrangement announced Zealand’s close and growing ties with been matched by extensive develop- just beginning. land businesses with China and help- last month resulted in ANZ, as part of China. ment of its financial system. Such de- As the pace of change and China’s ing manage their RMB cashflows and a select group of banks, being granted The currency deal builds on a num- velopment is expected to support and financial development accelerates we exposures. We are already seeing di- a market maker licence for direct RMB/ ber of other significant successes. In underpin the next phase of economic will need to be adaptable and redouble rect convertibility increase the confid- NZD trading by the People’s Bank of 2008, New Zealand was the first devel- growth. our efforts to retain our early advan- ence of companies here about doing China. It will allow those banks addi- oped country to enter into a Free Trade The Chinese Government has now tage and capitalise on the growing business in China. tional flexibility in how they hedge Agreement with China, which has recognised the urgency of reform and opportunities in our region that will be The owner of one New Zealand- RMB/NZD flows in the international helped to remove barriers to trade and is fast-tracking financial liberalisation increasingly attractive to others. based engineering firm tells us this new currency markets, which will help add deliver significant gains for this and the opening up of the domestic capability has helped give him the to the growing liquidity in RMB country and its businesses. financial system to international capi- G David Green is Managing Director, impetus to grow his business, explore convertibility, aid the continuing de- China has since grown to become tal flows. RMB convertibility plays an Institutional, ANZ New Zealand

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China Business

The planned new Auckland Airport, pictured above, will feature a combined domestic and international terminal. Shared vision takes flight

families and groups self-driving Tourism industry through the South Island — that’s a very different place to where we were players are seeing with the shopping cartel with visits for 2-3 days,’’ says Luxon. Air NZ is the benefits of also marketing New Zealand as a romance destination (‘‘a really inter- joining forces for the esting marketing platform to play with’’) including through game shows. China market, writes But much more has to be done to meet the needs of the future market. The tourism industry concedes it’s Fran O’Sullivan not tailoring its products well (there still needs to be more signage in hinese ‘‘premium’’ visitors Mandarin). travelling in spanking new And more of those servicing the 787s, entering New Zealand industry should speak Chinese. through an ‘‘Aeropolis’’, stay- Luxon says it should be taught more Cing in the best 5-star hotels and in our schools. enjoying a superlative experience — Chinese premium visitors also ex- all part of the future face of NZ pect a better class of hotel than they tourism. currently get. Waterfront Auckland’s It’s also an integral part of an John Dalzell reckons the new hotel increasingly shared long-term indus- Fu Wah will build on Team NZ’s try vision that has driven new plans existing site at Auckland’s Viaduct for Auckland Airport and Air New Basin is a step in the right direction. Zealand alike. But that’s just one hotel when many Auckland Airport CEO Adrian more will be needed if the rosy Littlewood is upbeat about the future tourism number scenario bears fruit. ‘‘Aeropolis’’ which will evolve at his Visa simplification is another bug- airport (in effect an aviation city) and bear. bebothagatewaytoNZandservice Luxon wants double entry visas so growing numbers of tourists, particu- Chinese visitors can take a side trip larly from China. to somewhere like the Cook Islands. Littlewood says emerging He is also pushing for more outbound economies such as China are chang- travel to China. ‘‘I think we have had ing the dynamics of global air travel. Industry strategists such as Auck- 74,000 Kiwis go to China in the last About 80 per cent of the world’s land Airport’s Glenn Wedlock, say the year, and had 250,000 plus come middle class will soon be one flight Chinese tourists are attracted by New here. It’s a very compelling tourism away from Auckland. Zealand’s natural environment, proposition, there’s great shopping in In 2013, 229,000 travellers arrived beauty and fresh climate. These are Shanghai and great history that NZ at Auckland Airport from China — up all valuable attributes, but ones that families would enjoy.’’ 16.2 per cent from 2012. could do with some refining to ‘‘paint China Southern is understood to That’s good business for the airport Auckland the picture of an amazing, culturally- be exploring additional services. And company and the two airlines that Airport’s rich destination that will improve the China Eastern representatives spoke run direct services to China: Air New Adrian lives of Chinese visitors and their recently with the Prime Minister in Zealand with its daily flights to Shang- Littlewood families and friends’’. China about a potential link to Christ- hai and China Southern with a similar (left) and Wedlock says the industry is work- church starting with charter flights. service to Guangzhou. Air NZ’s ing on new marketing strategies, like Chinese holiday periods are great In one scenario, the number of Christopher a‘‘tasteofNewZealand’’with money spinners for the industry. Chinese travellers is projected to Luxon. campaigns (still under wraps) to edu- For instance, 34,500 Chinese pas- swell to 897,000 in 2025 — nearly cate travellers about NZ’s diverse sengers arrived in New Zealand over quadrupling the 2013 figure. Those Luxon and Littlewood are working place here in NZ, up working together food and wine experiences and beau- Chinese New Year. numbers would have been daunting ‘‘very purposefully’’ along with gov- in China doing trade calls together tiful scenery as well as cultural ‘‘With the average Chinese travel- when the industry was in a ‘‘hope- ernment agencies to drive the China which is really encouraging,’’ says offerings. ler spending $3,400 per visit, that lessly fragmented state with a lot of business. Luxon. ‘‘So the opportunity is there Air NZ is targeting Chinese means around $117 million was spent stubborn individualism’’ says Air NZ’s ‘‘I have seen players and partners and real, and hasn’t diminished over premium visitors who stay for 7-10 during Chinese New Year,’’ says Wed- chief executive, Christopher Luxon. who are competitive in the market- the last year or so.’’ days. ‘‘We are hearing of Chinese lock. F10 nzherald.co.nz The New Zealand Herald | Wednesday, April 16, 2014

China Business Bringing paua to the people

Online move into China is a success for a local seafood firm, writes Bill Bennett

tarting this month fresh, wild New Zealand paua is on the menu at Shanghai’s smartest restaurants. Chinese diners Swill be able to eat the delicacy as little as 40 hours after the fish is lifted from the waters off the Kaikoura Coast. Iain Miller, chief executive of Christchurch-based PauaCo says in the right restaurant each fish will sell for as much as $100. PauaCo is one of the first fresh seafood exporters to take advantage of a deal struck between New Zealand Trade and Enterprise (NZTE) and Alibaba, China’s largest online re- tailer. Until now, reaching China’s 500 million or so middle-income earners has proved difficult for many of New Zealand’s smaller food and beverage exporters, but the deal should change that. Earlier this month Alibaba’s Tmall business-to-consumer online market New Zealand paua from China for the products New ran a week-long campaign promoting and other seafood Zealand can supply, such as safe food New Zealand seafood. Paua featured for sale is now Unlocking the B2C and niche services’’, he says. alongside greenshell mussels and featured on the puzzle for NZ Groser also points to the recent oysters. TMall website agreement allowing direct trading of In China paua, known as abalone, (above), as is Tim the New Zealand dollar against the is considered special. It’s a must-have Groser (video inset). Chinese currency, which also cuts the dish to impress banquet guests. cost, risk and complexity of doing Until now most commercial paua business in China. fished in New Zealand waters has ‘‘The winners will be companies been canned. Miller says that has that evolve their business models traditionally been the most practical from exporters to in-market player. way of exporting the shellfish. ‘‘Businesses should take advantage However, he says by doing less to of efficiencies in freight logistics, the fish: simply catching it, chilling it labour and tax, while also optimising and flying it direct to market, there’s their business to take advantage of ahithertounrealisedopportunityto the free trade agreement.’’ add considerable value. Black aba- Trade Minister Tim Groser and Joyce says Alibaba provides the lone is rare. There are only two agoodstart,Arandsaysinthefirst purchases delivered to their work- Alibaba CEO Jonathan Lu means for smaller New Zealand fisheries in the world, in New Zealand 12 hours there were 157 purchases of place. (pictured above) ‘‘cooked up the exporters to reach a huge market: and in Australia. Quotas are tight, so pacific oysters. Chinese online retailers sold goods idea’’ of using T-Mall as a platform ‘‘Chinese distribution is complex and available quantities are limited — The world has never seen any- worth 36 billion Renminbi on Single’s for selling New Zealand food and there are many risks. Alibaba Miller says the demand has always thing quite like Alibaba. The organ- Day. Joyce says the virtual tills rang beverage in China. succeeds because it does an end run outstripped demand. isation was originally set up for busi- up the first billion around 45 minutes Groser stopped off in Shanghai around these problems. It’s not the Yet until now it hasn’t be easy nesses to sell to each other, but it has after midnight. during the Prime Minister’s recent whole answer and it may not be for turning New Zealand’s catch into a since moved way beyond its original Joyce says New Zealand is ‘‘very visit to make an ‘‘impromptu everyone, but it is an option.’’ premium product with a suitably purpose. As well as the business-to- much on the radar at Alibaba and it launch’’ of the seafood platform. Arand says reducing the com- premium price. consumer Tmall site there’s TaoBao, is certain they are clear to help us ‘‘Jonathan is a huge fan of New plexity is essential for smaller Fishermen and private investors where consumers can sell to each realise the trade potential of the op- Zealand,’’ says Groser. ‘‘My instinct exporters: ‘‘There are a lot of steps in formed PauaCo 18 months ago with other. Alibaba now handles half of portunity’’. Joyce says it helps that is this could be huge for NZ and the traditional distribution process the goal of moving paua up-market. China’s online and mobile payments. Alibaba CEO Jonathan Lu is a fre- help many of our smaller and each one introduces risk.’’ Miller says the Tmall seafood pro- Recently it has begun operating an quent visitor to New Zealand. exporters. He says Tmall is just the con- motion makes that job easier. The online bank. Relationships are central to doing Alibaba will launch on the New nection, but it gives access to nearly challenge now is to raise brand Alibaba had a humble start. It business in China. Joyce says the York and Shanghai stock 600 million consumers. Companies awareness. PauaCo is just one of a began in founder Jack Ma’s apart- relationship is good on a number of exchanges later this year in what need to develop their own shopfronts number of New Zealand seafood ment in 1999. Today it has 24,000 levels and has been for a long time: is expected to be the biggest PO on the site to do the actual selling, exporters using Tmall to reach Chin- employees and makes a profit of ‘‘We were one of the first Western in US history, smashing but he says the cost of setting up is ese consumers. around NZ$500 million on a turnover countries to recognise China and the Facebook’s debut. relatively small — there are no Mike Arand, New Zealand Trade of more than NZ$4 billion a year. first to have a free trade deal. That ongoing payments. He says for and Enterprise Commissioner in Economic development minister matters to the Chinese.’’ exporters: ‘‘it is compelling to at least Shanghai, says Alibaba dominates Steven Joyce had a first-hand taste He says the Asian opportunity is lenge is going to be in gearing up to try something with Tmall’’. internet retailing in China. If China of the company’s scale and the poten- huge. ‘‘The Chinese middle class is meet the opportunity: ‘‘It’s all so mass- Buying fresh food online is already isn’t already the world’s largest tial for online retail in China when he growing rapidly and Southeast Asia ive compared with the scale New well-established with China’s middle e-commerce market, it soon will be. visited Alibaba in November. Joyce is going through the same process. At Zealand companies are used to deal- classes. Arand says the people work- Last year the number of Chinese says he arrived at the company’s the moment there are around half a ing with.’’ ing for NZTE in Shanghai are typical online shoppers passed the 300 Hangzhou headquarters the day after billion middle-income people in Asia, That’s where government fits into of the target market; they frequently million mark. Consequently the Single’s Day — the local equivalent of that’s comparable with Europe or the picture. Joyce says there are four buy food online: ‘‘It’s much easier online companies servicing Chinese Valentine’s Day. It’s a day when North America. However, by 2030 government resources exporters can than jumping on a bike and heading consumers operate on a massive online retailers traditionally hold there will be 3.2 billion middle- use to help when doing business in to a market.’’ He says it isn’t neces- scale. The privately owned but soon sales with sizeable discounts. income people in Asia while the China. sarily cheap, but the quality of food to go public online trader is already He says on the morning he arrived numbers in Europe and North ‘‘NZTE can help make up for lack purchased that way is stunning. bigger than Amazon and eBay at Alibaba there was a huge stack of America will be the same as today.’’ of scale on the ground in overseas Though many retailers offer a 100 per combined. parcels on the ground outside the Those growing incomes mean markets. It’s below the radar, but the cent money back guarantee, the re- ‘‘NZTE is dipping a toe in the water building. At first he though that meant changes in consumer preferences NZ export credit office is important. turn rate is lower than 0.5 per cent with the seafood promotion. It puts there was an office move under way, and changes in food preferences; MFAT (Ministry of Foreign Affairs and because they are shipping on quality. us in touch with millions of consu- but he was told the parcels belonged changes that New Zealand is well Trade) has a significant role He says: ‘‘That’s something New Zea- mers and gives us a chance to learn to staff members who had their online placed to meet. Joyce says the chal- conducting the orchestra and there’s land exporters can build on’’. how to use Tmall,’’ says Arand. Callaghan Innovation to handle mat- Arand says the seafood promotion He says seafood is today’s focus: ters at home in New Zealand.’’ gives NZTE a baseline to judge the ‘‘Few people know you can get live Trade Minister Tim Groser gave his likely response to future projects. He New Zealand seafood here in China.’’ NZTE is dipping a toe in the water with the support to the Alibaba project while says there are already talks under However, he says there’s a bigger in China with the Prime Minister last way for a fruit push and his organ- picture: getting to tell New Zealand’s seafood promotion. It puts us in touch month. He says New Zealand’s free isation is discussing potential projects food and beverage story. ‘‘There is trade agreement with China has with meat producers. some knowledge of our food in China, with millions of consumers and gives us a already led to an explosive growth in And it isn’t just China, Alibaba is some already might know a little trade. ‘‘The ability of New Zealand breaking into other Asian markets. about our lamb or our wine — now chance to learn how to use Tmall. businesses to produce the type of Arand says if we can get it right, Tmall we have the opportunity to tell them Mike Arand, New Zealand Trade and Enterprise Commissioner in Shanghai high- quality goods and services the could put our food and beverage more.’’ Chinese want is key to our export exporters in touch with a billion well- The seafood promotion got off to growth, and there is growing demand heeled consumers. The New Zealand Herald | Wednesday, April 16, 2014 nzherald.co.nz F11

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China Business China’s dairy revolution

A Government-imposed shakeout on China’s dairy industry will radically alter the way both its domestic firms and international competitors — like Fonterra — operate in the world’s second largest economy, writes Alexander Speirs.

eijing is anointing National Dairy — China’s largest dairy firm and Champions as it sponsors a one of the six selected National Cham- reform wave to consolidate pions. ‘‘With consolidation, there is an industry cluttered with going to be a larger resource pool, Btoo many players into a stronger with higher efficiency and an dairy sector with fewer and higher increased ability to invest in quality, quality firms. traceability and monitoring. It makes The changes will drastically re- the process more transparent to duce the number of market players consumers and helps to build confid- as the Chinese Government leads the ence in our domestic product. introduction of new efficiencies to ‘‘The Government is actively en- restore confidence in the scandal- couraging major dairy companies to plagued dairy sector. build their own dairy farms, because The National Champions ident- your own farm is very controllable ified (so far) are six of China’s strong- and the requirements in terms of est dairy businesses, singled out by quality can happen from the farm to the Ministry of Industry and Informa- the factory to the market. tion Technology to spearhead the ‘‘They are trying to show the con- consolidation. Some of the details still sumer that we have very high and remain as ‘‘opaque as milk’’ as re- strict quality controls for our pro- spected Chinese financial magazine ducts’’. Caixin points out. But it appears the Major dairy processors will look to national champions will be able to take control of their entire value access funds worth as much as $5.65 chains, not only improving the over- billion earmarked for the acquisition all efficiency of an industry pre- of smaller firms and the creation of viously ridden with surplus players, transparent supply chains. but also introducing traceability and This new-look industry has the accountability from ‘‘grass to glass’’. potential to radically alter the oppor- Mergers and acquisitions in the dairy tunities available for New Zealand sector have increased significantly as with our largest trading partner. competition for high quality targets Already foreign firms face a slew of intensifies. new import regulations as China Fitch Ratings reports 2012 saw 44 looks to wipe from the supermarket IPO’s/M&A deals take place and 39 shelves some hundreds of brands completed in the first half of 2013, as which have dubious credentials and firms prepare to stake their claim on lack traceability. Overseas firms asked to play their part newly opening segments of the mar- The new policies followed a ket. crackdown by the National Develop- China has given foreign dairy the dairy industry,’’ says Wickham. ‘‘This is the first time there has been ment and Reform Commission — a top companies the message that if they ‘‘We bring our farming upstream anationalpushforthedairysector,’’ economic regulator — which levied want to be a part of the new industry technology, we invest and we’ve got says Li Ke, vice-president and head fines of nearly 670 million RMB landscape they will have do to their arelationshipwiththeMinistryof of marketing at Bright Dairy. (NZ$124.2 million) on six foreign milk part in helping to improve it. Agriculture. ‘‘The purpose of this consolidation powder companies (including ‘‘You see a number of international ‘‘They arrange for us to do farmer is to raise the standard of the dairy Fonterra) after it investigated them farming operations setting up here training in different venues sector and also raise the difficulty for for price-fixing and anti-competitive now and they can provide great throughout the year’’. new companies looking to enter the practices. support to our dairy industry,’’ says Fonterra launched the China-New market.’’ Chinese consumers lost confid- Professor Li Shengli from China Zealand Dairy Exchange Centre in Rehabilitating the domestic indus- ence in their own domestic dairy Agriculture University. Prime Minister John Key and a Beijing during the Prime Minister’s visit try is a step towards ensuring China products — particularly infant milk ‘‘We have many many dairy farms delegation toast the opening of the to Beijing last month. retains a larger share of the profits formula — after the 2008 melamine in China and we need to be able to China-New Zealand Dairy Exchange A joint initiative between Fonterra generated by rapidly increasing de- scandal which resulted in six babies rely on the experts to help us with farm Centre (with milk). and China’s National Dairy Industry mand for dairy products, while simul- dying and more than 300,000 being training and raising our standards. and Technology system, the venture taneously trying to reduce its reliance made sick. The crisis of confidence ‘‘They can share their valuable development in China. will support the sustainable on foreign products to meet demand sharpened as, one-by-one, even the experiences and expertise to help us But the crucial partnership is the development of the dairy industry. It shortfalls. Despite the surging de- most reputable domestic players improve Chinese dairy.’’ one that the big dairy companies have will feature policy development in the mand for dairy products, China re- such as Mengniu, Yili and Yashili were Fonterra’s Kelvin Wickham stresses with the Chinese Government to China and New Zealand dairy sectors, mains well below the global average implicated. the pivotal role that business transfer vital ‘‘know-how’’. academic exchanges, industry in terms of consumption on a per The upshot was a ‘‘White Gold partnerships with Chinese players will ‘‘It’s very important that we look at promotion, dairy technology research capita basis. Rush’’ as foreign companies — includ- play in the future of Fonterra’s the role we can play to help support and personnel training. There is a direct correlation bet- ing Fonterra and myriad small New ween increases in income and de- Zealand firms — filled market gaps, cent drop in domestic milk pro- mand for high quality, nutritionally and domestic producers began taking What’s the Chinese Dairy Market Consolidation About? duction. rich foods. China’s middle class is some processing offshore to rebuild The need for cattle feed as indus- predicted to grow substantially over their tainted reputations. What: 10 National Champions by 2015 each with sales exceeding trial scale farming ramps up will the coming years off the back of social Restoring confidence in Chinese RMB 2 billion. continue to escalate. The Chinese changes and wage increases, with 75 milk starts at the source. The Chinese Government is aiming for 95 per cent per cent of families expected to sur- authorities are prioritising large-scale Why: Chinese consumers have little confidence in their domestic industry self-sufficiency in overall grain pro- pass the income threshold by 2022, farm developments to reduce the and pay heavy premiums for international products. This over-reliance is duction but output is struggling to up from only 6 per cent in 2002 reliance on small-time farmers who unsustainable in the face of surging demand. catch up and China continues to look according to McKinseys. are difficult to regulate. These, often overseas to meet the shortfall. Further spurring on that growth is family-run, farms with fewer than five Who: Six National Champions (so far) — dairy giants Yili and Mengniu, In 2012, more than 460,000 tonnes the Government’s recent relaxation cattle are a weakness in the current Heilongjiang Wondersun, Feihe International, Wissun International and of alfalfa was imported to China — 95 of the one-child policy, allowing fam- supply chain. Treasure of Plateau Yak Dairy. per cent from the United States at a ilies to have a second child if one of At the time of the melamine crisis, cost of $200 billion. the parents is an only child. it was common practise to water How: RMB 30 billion Government support package to foster consolidation. For a sense of scale, China’s largest Macquarie Group are forecasting down milk (milk is priced on the basis dairy feed company Wellhope Rumi- an overall growth rate in total dairy of volume in China). Eventually mela- government will provide land, grant dairy companies running own dairy nant produces 96,000 tonnes per consumption of 13 per cent per an- mine was added to ‘‘artificially inflate direct subsidies from high-value farms the standard of practice will year. There is a shortage of arable num over the next five years and protein levels’’. imports and reimburse loan interest. rise, industry-wide. land suitable for growing crops and most importantly for New Zealand, a In the wake of the crisis demand ‘‘There are a lot of incentives avail- For a sector, which is still plagued a looming water crisis further 20 per cent growth rate at the for domestic dairy plunged, dimin- able’’. by biosecurity threats including foot compounds matters. premium end of the market. ishing prices and sending demand for The policy is already proving ef- and mouth disease, that is a definite Four hundred cities in China face New Zealand businesses have foreign dairy products skyrocketing. fective. JP Morgan research reveals need. water shortages, 100 of which are already started to feel the impact of The lower prices for domestic milk scaleable farms with a herd size of There was a major outbreak in facing serious scarcity. Rampant the changing market dynamics. made smaller-scale Chinese farms at least 1000 cattle now account for 2005 as the disease spread through economic growth has driven water Synlait Milk, in which Bright Dairy unviable and resulted in many send- 16 per cent of all dairy cattle in China; eastern China, including to Beijing requirements, with agriculture ac- is a major shareholder, is poised to ing their cows to the slaughterhouse. up from only 9 per cent in 2008. and Hebei where Fonterra’s first farm- counting for 62 per cent of demand miss its export target of 10,000 tonnes Herald inquiries in Beijing confirm ‘‘The government would like all ing hub has recently been completed. for water resources. of infant formula to China this year. there is strong government support downstream dairy processors to Dairy herd numbers collapsed last An increase in scaleable farming Uncertainty around the tighter con- for major processors to invest in their have 70 per cent of their milk coming year, as the population dropped from should at least see a more efficient trols on foreign products has also own farms to force vertical integra- from big dairy farms, which they a high of 8-10 million in 2012, down use of scarce local resources while a prompted Chinese customers to halt tion of supply chains. control. Realistically, that’s difficult to to 6-8 million in 2013. long-term solution is sought. orders of New Zealand dairy products Fei Pei, who is Senior Investment do as it is an extremely capital- The plunge in livestock numbers ‘‘The purpose of the industry con- as clarification is sought on what was Officer at IFC World Bank based in intensive business and will take time,’’ has been attributed to high feed solidation is to maximise the permitted to be sold. Beijing, says for industrialised farms says Pei. prices and further outbreaks of foot resources we have here,’’ says Paul with at least 1000-2000 cattle, the The hope is that by having major and mouth and has caused a 20 per Wang, vice-president at Mengniu continued on F13 The New Zealand Herald | Wednesday, April 16, 2014 nzherald.co.nz F13

China Business Champions of the dairy boom

G Alexander Speirs was supported Inner Mongolia is by the Asia:NZ Foundation for his research trip to China with a home to two of journalism travel grant and received assistance from Air New Zealand China’s rising dairy and NZ Inc Ltd. stars who are also By far the largest source of milk investing in New comes from farms in which Mengniu has become a shareholder to secure Zealand to secure long-term supply. Last year Mengniu increased its quality supplies, stake in China Modern Dairy from 1 per cent to 28 per cent at a cost of writes $468 million. Modern Dairy is China’s largest milk producer by sales vol- Alexander Speirs ume and had previously agreed in 2008 to sell all of its raw milk to Mengniu at a pre-negotiated price as wo of China’s National part of a ten-year deal. By upping its Champions are quickly stake in Modern Dairy, Mengniu rising up the ranks of the secured a ten year extension on their world’s dairy companies. existing deal — locking in the entirety RidingT China’s dairy boom, Yili and of Modern Dairy’s milk supply Mengniu now rank as the 12th and through to 2028. 15th biggest earners in the dairy sec- Yili uses the same three channels tor respectively after turning over a as Mengniu to secure its milk supply. combined $12.2 billion in 2012. 20 per cent of that is from Yili’s own It’s been a swift rise for the pair, farms and the remainder from arms- neither of which figured on the length suppliers and co-operatives Rabobank Global Dairy Top 20 formed by Yili and third party pro- rankings in 2008. Their rise up the ducers. rankings is set to continue as the Both companies are also investing Chinese Central Government-led con- industrial sized scalable farming.’’ offshore to develop quality milk solidation programme gets into full Name Yili Mengniu Fonterra At present, 94 per cent of supplies. In New Zealand, Yili has swing. Based Hohhot Hohhot Auckland Mengniu’s milk is sourced from invested $214 million in building an Just over an hour’s flight from Ownership SOE Private Co-operative industrialised scaleable farms. That infant formula plant in South Canter- Beijing is Hohhot, the capital city of Listed HKEX HKEX NZSX number is set to change to 100 per bury in a deal that saw it agree to Inner Mongolia — an autonomous 2012 Turnover (USD) $6.5 billion $5.7 billion $16 billion cent by the end of next year as purchase Oceania Dairy Group in region in the north of China. Both Yili World Rank 12 15 4 investment in local milk pools 2012. Yili took control in 2013 follow- and Mengniu have their headquar- CEO Zhang Jianqiu Sun Yiping Theo Spierings escalates. ing approval from the Overseas In- ters here in a region which contri- Says Wang: ‘‘The biggest growth vestment Office. butes a substantial proportion of will be in our own farms, which are ‘‘The reason we chose to invest in China’s dairy production. producer Danone and European food than three million dairy cows. When growing very quickly By next year we New Zealand is for the natural endow- Inner Mongolia is also set for a group Arla are the company’s second the policy implementation began are aiming to have an additional ment and trade policy,’’ explains Liu. fiscal boost as the Government- and third-largest shareholders. It’s a more than 90 per cent of the region’s 100,000 milking cows on our own ‘‘New Zealand has an abundance of sponsored dairy consolidation comes mutually beneficial arrangement cows were being raised by farmers farms. It’s a major part of our plan, milk resources and China has such into full effect, with substantial invest- with Mengniu looking to leverage the in their backyards. and there is a significant budget for abigmarket,it’snaturallyagoodfit. ment in the capabilities and capacity experience and technical capabilities Anational-levellaboratorywas farm construction.’’ The main factors concerning interna- of the two firms now under way. of Danone and Arla while they stake also setup to monitor products being Farms owned and operated by tional investment are natural endow- ‘‘For so many years, the only op- their claim on the second wave of the produced by Mengniu and Yili. Mengniu constitute the second larg- ment and international trade policy. position that we have had is our- ‘‘White Gold Rush’’. Access to raw milk supply is an est supply of raw milk for the com- ‘‘In order to transform China’s selves. In our 30-year history, we ‘‘In China the farming business issue for the two champions as pany. Milk continues to be sourced dairy industry into a more normal have tried everything we can to go does not have the benefit of a long growth continues to be curtailed by from suppliers in an arms-length busi- and professionally oriented sector beyond our self and to satisfy the history, but in Europe they have done the lack of sufficient domestic milk ness relationship, however the pro- which produces high quality dairy needs of our customers, ‘‘says Liu it for more than 150 years,’’ says Wang. pools. Substantial investment has portion acquired from these farms is products, that’s a very important fac- Chun Hai, Vice-President of Yili ‘‘They have a lot of experience been earmarked to address this by dropping. tor.’’ Group. accumulated, so we try to bring in the two companies, and the central ‘‘For farms where we just have a Mengniu followed suit, securing its ‘‘Our core value is quality. Quality those good ideas and experience to and local governments. supplier arrangement, we try to assist own New Zealand resource base talks and that will never change. help us become a better company ‘‘We have a dual strategy [for ad- them on the technical supply and through its acquisition of fellow Chin- ‘‘For Yili Group, we [look at consoli- and build a better industry. dressing milk supply]. In the domestic look to raise their standards and unify ese dairy firm Yashili. At the time of dation] this way; as the leading enter- ‘‘Mengniu is making every effort to market, we are consolidating our raw their supplies with those from our the acquisition, Yashili was already prise of the China dairy industry, increase our capability through co- milk bases. We now have more than own suppliers,’’ says Wang. ‘‘All of the well under way with its investment what matters most is the well-being operation with major international 2200 farms and large scale, intensity farms who have a business relation- at Pokeno, south of Auckland where and development of the industry. We companies. They have very good farming is at over 90 per cent,’’ says ship with Mengniu use raw materials it is building an infant formula plant support every policy so long as it is experience and long histories in the Liu. from our recommended suppliers, to produce 52,000 tonnes of product apositiveforthewell-beingofthe dairy industry. We are very inter- ‘‘Our strategy at Mengniu is very ensuring that the best quality is avail- for export to China. industry.’’ ested in co-operating with them and similar to Yili. We are expanding our able for those farms which aren’t yet The significant international Paul Wang, vice-president of they are very open with us in terms farm base as large as possible to better scalable sized farms. investments should go a long way to Mengniu Dairy Group adds: ‘‘The con- of sharing their technology, food control costs across the supply chain. ‘‘The supplies including feed and rehabilitating the reputations of the solidation I think is going to be very safety capability, new product de- The best way to ensure a consistent medicine are extremely important for brands. Both Yili and Mengniu were good for dairy companies who have velopment and advanced technical supply of quality milk is to expand food safety. Once the feed is con- front and centre when the 2008 acertainskilllevelandcapabilityto skill.’’ our own farm base,’’ adds Wang. trolled and their medical needs are melamine crisis decimated local invest on the quality side, the system The Inner Mongolian Government ‘‘Once we attain the right scope — taken care of, the food safety issues processors. Both were implicated side and to benefit the government has signalled its support of one of the quality comes first and foremost as for the cow diminish substantially. when their infant formula products monitoring. There’s so many small region’s most important economic well as the ability to control that There are also significant cost advan- tested positive for the industrial companies at present and it’s not drivers. In 2009, 8 billion RMB was quality through continuous invest- tages as we are able to negotiate as chemical and suffered considerable good for overall industry quality.’’ set aside to invest in the integration ment — then we can pay attention to agroupandsecurebulksupply damage to their reputations. Already Mengniu has been of the fragmented approach to dairy scale. Instead of family farms which arrangements. It’s one way we are proactive in bringing international farming throughout the region. are very small and may have ques- using our scalable policies to improve investors into its fold. French dairy Inner Mongolia is home to more tionable quality, we are looking at smaller farming operations.’’ continued on F15 Government rolls out dairy revolution

continued from F12 government crackdown on the num- and quality for Chinese milk do come The 2008 China New Zealand Free year. ber of dairy brands available on the with an increased price tag — an Trade Agreement gradually lowered China is due to eradicate all tariffs ‘‘It is going to be harder for interna- shelf, the prospects for small-scale NZ important factor New Zealand can dairy tariffs to prevent New Zealand on New Zealand dairy products by tional firms to compete here,’’ producers are dimming. look to exploit says Wickham. products from flooding the market 2019, when the full potential of NZ’s concedes Kelvin Wickham, For the lucrative infant formula ‘‘You find that as you do improve, and negatively impacting Chinese cost efficiencies should be able to be Fonterra’s Managing Director for market, speculation suggests China your cost structure increases. producers. realized. In the interim though, pro- China and India. may allow a maximum of 10 New ‘‘To produce high-quality milk and Apreferentialratewasintroduced tecting the New Zealand brand and ‘‘The big dairy companies here are Zealand brands, a far cry from current to have all the controls in place, it’s in the interim, with that rate leveraging the reputation of NZ’s already highly credible businesses. levels which exceed 100 brands. not cheap. We can do that more cost- decreasing from 5 per cent to 4.2 per ‘‘safe’’ products remains critical to It’s competitive, they’re growing fast New Zealand exports of infant for- effectively in New Zealand and pro- cent in 2014. That rate applies to a ensuring the NZ price premium re- and they’ve got big funds to invest mula boomed in the aftermath of the duce milk cheaper than you can in set quota of imported products each mains sustainable. in A&P (agriculture and pasture).’’ melamine crisis, growing from China.’’ year, before a full 10 per cent charge Says Wickham: ‘‘You’ve got to have The consolidation seems set to $515,000 worth in 2003 before Those advantages are mitigated by is imposed. The growth in exports has areasonwhyyouwouldbuyNew force some of New Zealand’s minor reaching $107 million in 2012 and the import tariffs China continues to seen that quota reached faster and Zealand milk over Chinese milk and players out of the market. With costs $200 million in 2013. impose on New Zealand dairy pro- faster each year, and the preferential our branded proposition and differ- of compliance set to intensify and a The improvements in regulations ducts. limit was drained by January 17 this entiation justifies that.’’ F14 nzherald.co.nz The New Zealand Herald | Wednesday, April 16, 2014

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www.fonterra.com The New Zealand Herald | Wednesday, April 16, 2014 nzherald.co.nz F15

China Business Popping round to the dairy

he Herald opted to take the same tours that more than Yili and Mengniu have opened their farms and factories to help restore Chinese a quarter of a million locals took last year. consumers’ confidence in their domestic dairy products, reports Alexander Speirs TAt Mengniu, a plethora of foreign flags line the entrance with New Zealand’s flag firmly in the centre as the virtues of foreign partnerships are extolled in perfect English by our guide. After signing a safety waiver, we are quickly whisked off to the factory. Head-to-toe protective gear is manda- tory. But the one size fits all approach doesn’t work for all foreigners. After four sets of shoe covers were ruined trying to accommodate my size 12 feet and a pair of overalls torn, we were finally off along an elevated platform above the factory. On one side is the factory oper- ations. On the other, an array of dioramas and exhibits detailing the virtues of dairy nutrition and the history of Mengniu and its partners. The entire dairy production pro- cess is exhibited and detailed, from Alexander when the tankers deliver the raw milk Speirs visited through to packaging and processing. the factory at It’s difficult not to be impressed by Yili and met the factory. It’s clean, modern and the some of the closed system throughout the plant producers at is on full display for consumers to see. Mengniu. There’s a definite effort to highlight and detail the testing and safety pro- dairy practices are discussed in detail cedures place, both internally and throughout, with a plethora of mater- through the verifications carried out ials given out at the end of the tour bythirdpartylaboratories. for audiences of all ages. It’s a vital ‘‘This is all about making sure we part of all major dairy producers have an open and transparent line of communication strategy for engaging communication between us and our consumers, Fonterra included — as customers,’’ says Mengniu’s Paul the benefits of dairy remain a rela- Wang. ‘‘We still commonly get tively unknown commodity among questions asking us whether we will some consumers. drink our own milk and that shows and viewing platforms throughout One area of focus for Mengniu is areallackofcommunication. the plant. teaching consumers about what their ‘‘We’ve tried traditional ways of It’s the biggest facility of its kind different products do and how they getting our message across and now in Asia and features a plethora of work to make up nutritional deficits we’re looking at more interesting and world-class technology. The in an average Chinese diet. creative ways in which consumers innovations and efficiencies devel- ‘‘Some areas of our standards are can engage us. oped are on full display, and as it’s more tailored to Chinese consumers ‘‘We invite any of our customers explained, I’m finding myself a quick and they are a better fit than inter- to come to any of the Mengniu plants convert to Chinese dairy gospel. national products because the infra- —anyofour29productionbasesor Both tours ended with a tasting test structure of food is different from 50 plants all over China — and come of the factories’ products. It’s defin- other countries,’’ says Wang. ‘‘With to visit us.’’ itely an only-in-China experience as our infant formula for example, there Yili’s tour is similar to Mengniu’s gorgeous girls produce trays of flav- are different nutritional requirements —thistimehoweverIhavethebenefit oured milk, ice creams and yoghurt. dependent on areas of food shortages of being the guest of honour and For the record, yoghurt — brilliant, ice in China — making sure they get the personally guided through the facili- cream — delicious, flavoured milk — right nutrition can be very different. ties. never again. The food is different, the mothers Again the factory is designed to be Education makes up a significant milk is different and the babies nu- open and accessible, with walkways part of the tour. Nutrition and safe tritional needs are different’’. China’s champions of the boom

continued from F13 strict than it was previously, it’s just People here are that some standards in the market If the new look Chinese dairy indus- haven’t been followed. The standard try is to become the success that the really sensitive of manufacturing will be imple- government envisions, getting mented and monitored in major fac- consumers and the public behind about food safety tories and the overall industry stand- their national champions and gener- ard will rise across the board.’’ ating confidence in domestically pro- and the Ahostofnewrequirementsare duced products is essential. being introduced to raise standards ‘‘People here are really sensitive government have of process industry wide. Mengniu about food safety and the govern- will need to integrate its powder ment have issued many policies ad- issued many production facilities so that it all takes dressing this,’’ says Liu. ‘‘When Chair- place at a single site, as transporting man Xi Jinping visited Yili in Febru- policies addressing raw product is seen as exposing it to ary, he emphasized that ‘food safety undue risk of contamination. is on the tip of the tongue,’’’ this, When ‘‘The government has given us Chinese parents are among the three years to change this, to ensure world’s most informed when it comes Chairman Xi Jinping that there is no transport and our milk to dairy products — the upshot of the powder is produced as an integrated scandal-plagued industry and the visited Yili in processes. There’s just too many one-child policy. They are familiar worries about pollutants during the with the ingredients, quality and February, he transport process’’. standards and have a deep-seated Securing the supply chain and distrust of Chinese dairy. emphasized that cutting the middlemen from the sys- ‘‘China’s standard is already tem, which helped sow the seeds for matching up with those inter- ‘food safety is on the consolidation in the first place, will go nationally,’’ says Wang. ‘‘I think the a long way towards restoring the government is trying to be very clear tip of the tongue’. integrity of the Chinese dairy indus- about what is required from try. Such a dramatic change must processors and manufacturers.’’ really good product, high in quality inevitably be led from the top, and ‘‘They’re defining very clearly and produced under a transparent with the Government’s resources what is required and expected when process to build up consumer confid- helping support the National Cham- it comes to processing. They want to ence for Chinese dairy products’’. pions, Yili and Mengniu are well on deliver the Chinese consumers a ‘‘It is not that the standard is more track. F16 nzherald.co.nz The New Zealand Herald | Wednesday, April 16, 2014

China Business Dairy consolidation

Fonterra’s China boss Kelvin Wickham talks to Alexander Speirs about how New Zealand’s largest company plans to navigate the changes to the Chinese dairy market

ike all players here, we’re going to have to adapt to Already the new market,’’ says Kelvin Wickham, who is multinationals of all ‘LFonterra’s Managing Director for China and India. persuasions here ‘‘My view has always been that you have to retain relevancy. You must be are finding it harder relevant to your consumers and cus- tomers, to the Government and to to compete, other stakeholders here so that you’re able to make a valuable contribution because the and be a key cog in the industry.’’ The dairy consolidation hasn’t competition doesn’t come as a huge surprise to experi- enced industry players like Fonterra. go backwards. The Netherlands and France have re- cently been down this track. It’s not an Fonterra makes the right steps to re- uncommon trend in immature dairy main competitive. markets. Despite the botulism scare, 2013 ‘‘When we did our strategic review represented a strong financial year for and produced our China plan through Fonterra, which generated six-month to 2020, one of the key components revenues of $3.15 billion (July was that we expected consolidation to 2013-January 2014) up from $1.28 occur and we expected that some billion in the same period a year earlier. players may be more favoured than Growth of $1.87 billion from China others,’’ says Wickham. ‘‘That’s just part period contributed the vast majority of of the landscape here in China. growth in Fonterra group as a whole, ‘‘It’s a really good thing that the which saw total cumulative revenue Government is supportive of the dairy growth of $1.96 billion year-on-year industry here. Some people raise con- Kelvin Wickham (centre) proudly promoting health and safety at a Fonterra farm in Hebei. over that six-month period. cerns that there seems to be a visible With China contributing almost 28 influence from the Government who to attain a degree of self sufficiency in The post-consolidation landscape finding it harder to compete, because per cent of the co-operative’s total are definitely keen to see consolidation China — there’s still going to be a place will see fewer, higher quality players the competition doesn’t go backwards, earnings, consolidating its own market take place. for imports but they want to make sure — including foreign dairy companies — cost structures are getting higher and position is essential to grasp the oppor- ‘‘They’re keen to see better regula- that what’s produced domestically is competing for market share. overall it’s becoming a more difficult tunity as new demand arises. tory controls and standards, but we see going to be sufficient and of the quality Says Wickham: ‘‘Already multi- market to remain competitive in.’’ that as a positive thing. They’re looking the Chinese consumers deserve.’’ nationals of all persuasions here are In this environment it is vital that continued on F17

When the New Zealand Infant Milk Formula Exporters needed assistance in New Zealand They chose

When they needed help in China They did the same

Auckland Chamber of Commerce supporting businesses locally and internationally.

www.aucklandchamber.co.nz The New Zealand Herald | Wednesday, April 16, 2014 nzherald.co.nz F17

China Business no surprise: Fonterra

continued from F16 until we get more supply.’’ Anlene is Fonterra’s powdered ‘‘First and foremost for us we need milk brand in China — especially to strengthen our current position,’’ formulated for adult consumers to says Wickham. ‘‘How do we push promote bone health. Anlene was harder on our domestic brands, how relaunched in China four years ago. do we continue our rollout of food The brand was in China prior to the services and how do we continue to 2008 melamine crisis in the industry, make sure our core ingredients busi- which saw it withdrawn from the ness is the preferred choice for cus- market. tomers here?’’ ‘‘The rollout has been very The ingredients business con- structured, launching in 15 cities in- tinues to be at the core of Fonterra’s cluding Shanghai and Guangzhou. business operations in China. ‘‘We’ve taken the model that has In 2013, Fonterra exported 110,000 worked very well for us in Southeast metric tonnes of milk powder to Asia — Malaysia in particular being a China, representing year-on-year very good example — and are growth of 10 per cent, which adapting it to China. The environ- Wickham expects to continue. ‘‘That ment is different so we’re having to number is off a huge base already and adapt, the price of television time in will keep growing at that sort of rate China in particular is incredibly ex- which becomes a positive underlying pensive.’’ base for the rest of the business to Instead of spending money on TV grow from. The ingredients business commercials and other conventional more and more will be entering into marketing approaches, Fonterra has bilateral agreements with big cus- focused on trade marketing activities tomers in China.’’ to help educate consumers about the Fonterra is now looking to form benefits of dairy for bone health and long-term partnerships in China. The mobility. deals will include technical support, ‘‘One of the challenges you have product development and branding with mobility and bone health is that assistance as the company moves it’s a creeping disease. To educate beyond arms-length commodity consumers about that we’ve invested trading and enters more comprehen- Consumers get taste of the future in bone density scanning machines sive arrangements. and we take them out to shopping ‘‘I think if you look past 2020, it’s malls and supermarkets,’’ explains going to be absolutely necessary to ‘‘Primarily what we are trying to do in and how to use dairy products.’’ ‘‘In China, cheese is very new to the Wickham. have strong partnerships here. They China is drive demand, build our brand Fonterra uses their executive chefs average consumer,’’ says Bu. Anmum Materno produces milk can be anything from small partner- name and build our customer base to work with customers to help with ‘‘More and more Chinese people are powders for mothers and children ships all the way through to equity domestically,’’ says Bu Kefei, General product development and learning to getting used to it and its popularity is alike, performing most strongly in shares, there’s a huge range — but I Manager of Marketing & Business use dairy in cooking. growing.’’ Hong Kong and Guangzhou. The think you will have to have that to Development for China Foodservices. Those customers range from small After conducting consumer range of products expanded to in- beastrongplayerinthefutureChin- Foodservices is part of Fonterra’s restaurants through to mass- research, Fonterra launched two clude the Anmum child nutrition ese market. It will be difficult to stand strategy to move up the value chain production recipes. recipes in six cities as a pilot, with 200 range, with a pilot phase launching alone and succeed. in China, working with customers to ‘‘The key is that we have to develop outlets selling the product to verify the at the end of 2013. ‘‘Over time it makes sense to have integrate dairy products into their recipes which are standardised, research on a larger scale and prove ‘‘We are looking for a different partners in China, to be part of one foods. welcoming to consumers and they can produced on a technical level. model because it’s so highly competi- of the winning amalgamations that ‘‘We have a real opportunity here relatively simple to produce.’’ That quickly expanded to 1800 outlets, tive. The market is extremely frag- will inevitably emerge here. in China to get new businesses using The baked goods sector present with Fonterra now aiming to have the mented and to go head to head with ‘‘The time frame on that is not so dairy in their product line. Dairy is not substantial opportunity for the recipes in 5000 outlets by July. the big players is just not going to clear, but be very clear that the big apartoftraditionalChinesefood introduction of dairy products. For the ‘‘That will increase demand for happen. We believe we have a very dairy companies here are in the top habits. As the market grows and as past 18 months the focus has been on cream cheese by 1000 tonnes. We are good product, which has a point of 20 today already and it’s only a household income continues to cream cheese, as Food Services helps aiming to increase that demand by differentiation from the market. We matter of time until they’re in the top quickly grow, we see a lot of Chinese drive demand for the new Te Rapa 1500 tonnes by year’s end, which are still piloting how to make that 10.’’ families starting to learn the value of factory. would account for 30 per cent growth.’’ work in a couple of locations, but it’s Wickham says Fonterra’s interest very early days. is aligned with a number of big ‘‘We can produce milk in New players in China. ‘‘We want to see a consolidation is only going to in- chain from New Zealand,’’ says graphic rollouts, key cities within Zealand cheaper than in China or bigger pool of high quality milk that crease that.’’ Wickham. ‘‘We now just need the next chosen geographies and then Europe, which has a similar cost can be used for downstream Anchor is the newest Fonterra plant to come on stream at Waitoa targeting the local key accounts — the structure to New Zealand. You’ve got applications to sell to consumers. brand to launch in China, hitting the because we’re effectively having cap- big supermarkets and modern trade. the reasons why you would buy New ‘‘They’re very credible players market in September 2013. It’s the acity constraints. Then we follow up with an online Zealand milk over Chinese milk, and they have high quality products, they same Anchor brand used in New ‘‘It’s been a great starting launch, campaign that works alongside that, you have a branded proposition, have state-of-the-art production facili- Zealand and 70 other countries we’re meeting our distribution targets as we aim for 20-25 per cent online which justifies that. You want to have ties and they have scale. around the world, where its 127-year and we’re selling more than 20 per sales. good consumer branded positions in ‘‘You can’t just turn up here, bring heritage is vaunted as a measure of cent. We’re in the big supermarkets, ‘‘Once we get distribution up to 95 addition to ingredients from New in a foreign brand and expect it to be trust and experience. it’s all about getting that supply now. per cent on those key accounts, we Zealand and you need to be in local the winning product off the shelf. This ‘‘The brand has great positioning ‘‘We started in the Yangtze River go to the next geography. That’s the milk supply — either yourself or work- is a very competitive market and and backs up that integrity of supply Delta. We’re going to just do geo- plan but we can’t do anything more ing with local partners.’’ Social media has answer for ‘Ask Me’

Fonterra turned to Chinese social the uncertainty of our consumers,’’ concerned customers, the ‘‘Ask are still people that are confused media — particularly Weibo — to adds Wickham. Fonterra’’ and ‘‘Ask Me’’ campaigns though and that is something that will cleanse its brand in the wake of the Fonterra spent a significant proved a great success on Chinese just take time. You can never reach botulism scare. amount of time investing in direct social media platform Weibo. all of your consumers, It’s an enorm- ‘‘It was a serious event and there’s channels of communication with ‘‘Instead of trying to push facts out ous and highly fragmented market. no going away from it,’’ said Kelvin consumers, looking to increase the there in a very analytical way, we ‘‘We have now recovered in terms Wickham, Managing Director China transparency of its grass to glass We had directors up wanted to talk with consumers and of sales and the consumer business and India at Fonterra. ‘‘We suffered model and restore lost confidence. have them ask questions. has overcome that after the first aseriousimpacthere,particularly Consumer research showed that a here to visit the ‘‘We had directors up here to visit quarter, partly because of the ongoing reputation-wise and with consumers, serious cleansing of the brand was the market following the incident. campaigns we’ve used. but also with our sales in the con- required in the public domain. market following ‘‘We sent them to the super- ‘‘We’re no back ahead of last year sumer area.’’ ‘‘We had to do quite a lot of work markets with Ask Fonterra T-shirts and continue to grow and roll-out’’. The botulism scare proved to be moving through that phase into re- the incident. We on. What we found was that The ingredients business — the afalsealarm.Butitwasthelatestin covery and rebuild. consumers asked simple questions — core of Fonterra’s operation in China aseriesofincidentsinChinawhich ‘‘It’s very important to acknow- sent them to the ‘are these products safe?’. A simple held steady in the wake of the crisis, our biggest company has had to ledge that we still have to continue reassurance goes a long way.’’ with major manufacturers an easier address to protect its reputation. to work at the improvements supermarkets with From post-campaign surveys, proposition to deal with than end- ‘‘We found that a lot of consumers highlighted from the reviews. Chinese consumers appeared to ap- consumers of Fonterra’s branded were confused, because New Zealand ‘‘We need to demonstrate what we ‘Ask Fonterra’ preciate the openness of Fonterra goods. does have a very good reputation have learned from this and make sure and understand that it was a pre- ‘‘It’s necessary for us that we keep here. We found Fonterra wasn’t that we communicate that to our T-shirts on. cautionary measure. investing in stakeholder manage- well known, but New Zealand was. consumers and stakeholders here so ‘‘Consumers gave us support for ment and continue to invest time ‘‘On the business side the con- that we can come out in a stronger the fact that we were upfront and spent talking to consumers to ensure sumer branded business was hit in position.’’ honest and the did the right thing with the message gets out there. We call the first couple of months because of Looking to engage directly with that regard,’’ says Wickham. ‘‘There it the ongoing rebuild.’’ F18 nzherald.co.nz The New Zealand Herald | Wednesday, April 16, 2014

China Business Reduced Cleaning up after the milk cream for minor spillover vital for Brand NZ players

We need to raise the New Zealand’s smaller infant formula players are looking less likely to re- value of what tain their share of the creamy top as the industry consolidates. we export, and not More than 100 infant formula brands emerged in New Zealand in play a commodity the wake of the 2008 melamine scan- dal — many created purely for export game, says to China as savvy entrepreneurs captured a substantial price premium with effectively infinite demand. Michael Barnett Infant formula exports to China grew from only $515,000 in 2003 he March ‘‘milk run’’ into through to $200 million last year. China was initiated by the As retail infant formula sales are New Zealand Government forecast to reach $US25 billion by and was fundamental to the 2017, there’s a lot at stake for pro- restorationT of reputation and its credi- ducers of all sizes. bility of the New Zealand brand. The prospects of minor infant for- It was a response by Government mula producers surviving the con- to business and in particular to small solidation though appear slim, as the and medium exporters of not only Chinese government looks likely to infant milk formula but also any regulate them out of the market. product that had a New Zealand The Herald reported last month brand on it. that China may restrict the number For infant formula exporters the of New Zealand formula brands for scandal was especially damaging. sale in the market to 10. That same Many of these were small report suggested an alternate strategy entrepreneurs who have spent years could be to prohibit sales to those developing product designed for the without a sales presence in the Chinese market and investing in dif- domestic market — cutting marketing- ficult distribution networks. They only brands out of the market. have achieved market presence that if ever we needed a message to brand. open hearts being open to people and The push for integrated supply through visits and costly marketing restore brand reputation in China, This has been a positive for the difference they can contribute to chains and producers controlling and competed for shelf space against Key certainly delivered on this. Fonterra exports. But in recent times our nation. their own milk supply back in China the international brands from Aus- The fact is that while Key made it has not been so positive for New It is a brand story we cannot afford would appear to further fan the tralia, Switzerland and France. the right contact and delivered an Zealand. to have taken by a single corporate flames. The restrictions are not so These exporters became the col- excellent message, the problem he In saying this we should consider entity but it is a story that our people, much an indictment on the quality lateral damage of the quality prob- was correcting was not just the dam- dairy brands that New Zealand our cities, our regions and our busi- or processes of these small com- lems associated with our dairy indus- age done to major exporters of dairy competes with in China such as nesses can collectively take to the panies. Rather, for a market the size try. When the news of the issues was products. It was the collateral damage Danone and Nestle. world and make a difference. of China, sweeping regulations are the announced in the Chinese media the done to small and medium exporters When issues arise with products In future when we look at China only realistic way the government tap to this lucrative market was and also the reputational damage from Nestle, all products from Switz- or any future partner and the impact can monitor all players and keep turned off and they quickly saw other done to the New Zealand brand — a erland are not adversely affected. they may have on our exports and cowboys off supermarket shelves. international brands replace them on brand all NZ exporters depend on. And if there are issues with Danone, as a result the creation of employ- Those who do make the cut will shop shelves. The powerful social Key’s visit made headlines in Chinese media do not link that to all ment or investment in New Zealand, find compliance a more stringent and media in China went viral and these China media. Gathered in one room products from France. we should not lose sight of our own complicated process. Four officials small exporters began losing up to a at a NZ Government-sponsored func- But more recently when Fonterra’s values and brand. from China’s Certification and Ac- million dollars a week . tion in Beijing were NZ exporters — botulism scare occurred, the media On one hand we should optimise creditation Administration carried The call they made was to Govern- many who have been in China for in China reported it in a way that the the relationship based on our brand out audits of seven local baby for- ment and that was for our NZ official decades and had made larger NZ brand suffered along with all food values, and on the other not lose sight mula and dairy manufacturing facili- presence in China to be lifted and for investments than recent arrivals — products from New Zealand. of the fact that we are a nation of ties earlier this year. Rising costs of some ministerial visits to provide a but all of whom had been tainted by This is the issue we need to limited resources and production. compliance will naturally force some more comprehensive message about the product safety performance of address. And there is a response. So the objective of our export players from the market, as ticking the wider commitment NZ has to food Fonterra over the past 12 months. The new brand story from NZ strategy should be to raise the value the boxes will quickly erode profit safety and quality processes. If we look back, history will remind Trade and Enterprise is brilliant. It of what we export and not play a bases in the absence of sufficient NZ business can be grateful that us that over a decade ago the Gov- talks of ‘‘open spaces, open minds, commodity game that dilutes our scale. Prime Minister John Key has such ernment of the day gave Fonterra a open hearts.’’ brand and offers little future to New Anumberofquestionsremain pulling power in markets such as quasi-monopoly for dairy product It is a story of our land and the Zealanders. unanswered for minor-league infant China. When you look at the high exports from New Zealand and inad- guardianship we have over it; our formula producers, but regaining a level of political contact he achieved vertently provided the company with minds and how we are open to G Michael Barnett is Chairman NZ foothold in the Chinese market is set on the visit, NZ should feel assured a brand monopoly linked to the NZ diversity of ideas and innovation and Infant Formula Exporters Association. to become a much tougher prospect. Kiwi entrepreneur’s sustainable approach

Kiwi entrepreneur Howard Moore is think will serve as a model project for ‘‘Fonterra have very high feed costs costs of effluent disposal. By taking New Zealand-style dairying to China and Heilongjiang in particular,’’ as well, they might be able to justify it establishing farms in the grasslands, The benefits China’s far north. Bucking the trend of says Moore. ‘‘It’s going to demonstrate because they can charge a premium for effluent is dumped directly on the grass procurement farming in China, Moore that the grasslands in Heilongjiang have their milk, but the fact is they are high,’’ as a natural fertiliser for the forage. Government incentives make is banking on his cost-effective and a lot of potential for dairy farming. The says Moore. Moore started his first venture in farming a lucrative business in sustainable approach taking off in the significant cost advantages we will Compared with New Zealand’s aver- China, Taranaki Dairy Technologies, Heilongjiang. northern natural grasslands. have and higher profit margins will put age cost of 15 cents per litre, it’s easy after Fonterra turned the opportunity G Farming businesses do not pay Less than three years on from the us ahead of other farms in China.’’ to see why selling milk to China can down. Investors from Fortune Link income tax in China — only when successful launch of his first venture in The biggest decision for the new be so profitable. Moore’s system for his came from China to pitch a plan to start milk is processed are companies Heilongjiang, Moore now has the ex- venture is what form the investment new venture will integrate forage and industrial farming in Heihe — a city subject to tax on their profits. perience that comes with completing model will take. Moore says food giants milk production — similar to what is sitting on the Russian border in the far G Cows which produce more than two farms in the region. He is in the Nestle & Bright had both indicated that done in New Zealand. Moore estimates north of China. 20kg of milk/day are eligible for a final stages of launching his newest they are interested in investing to the feed costs will be 30 cents per litre ‘‘Fonterra wasn’t interested because one off payment of 3000 RMB farming venture. With a plan for 45,000 secure long-term supply arrangements. — a steal by Chinese standards. they were already committed in Hebei,’’ (NZ$556) New Zealand-sourced cows across nine ‘‘The approach we had been taking was ‘‘It’s a problem widespread in China, says Moore. ‘‘The investment opportun- G For farms larger than 300 cows farms, the scope is sizeable. Construc- to bring in partners as strategic in- going down the wrong path,’’ says ity was dairy farming and processing —theGovernmentwillprovide tion is planned in Jiamusi Province, vestors, but the lead investor we’re Moore. ‘‘Building very large farms and in Heihe, because the government was land for crops and farm buildings. Heilongjiang in China’s far northeast, currently working with doesn’t want to not associating them with large areas prepared to provide cheap land for the G For farms between 300 and bordering Russia. bring in Bright or Nestle, so the market of suitable land. It has to be grasslands venture. 2000 cows, the government will The region has been a hot spot for can dictate the price of milk and we for disposal of effluent. By September 2011, Fortune Link had subsidise 10 per cent of farm dairy farming since the World Bank remain totally free to sell to whoever.’’ ‘‘Under the procurement model you raised the capital and Moore’s Taranaki construction costs. completed a five-year investment pro- Shortages of suitable cattle feed in have very high feed costs and also very Dairy Technology formulated the busi- G For farms with more than 2000 gramme improving the financial viabil- China have led to steep price hikes for high effluent costs. That’s a problem for ness plan. The first farm was developed cows, incentives are considered by ity of dairying. Local government has imported alfalfa, 95 per cent of which Fonterra. They’ve gone down the and Moore appointed Chief Techno- the government on a case-by-case played its part, offering cut price access comes from the United States. Feed wrong path by locating farms in areas logy Officer. With two farms now and basis, but stand to be no less to high quality land and a resource rich costs are 70 to 80 per cent of total farm where effluent costs are very high. It more in the pipeline, the venture con- favourable than those on offer to area — particularly when it comes to costs and on large farms in China can has to be treated to a very high stand- tinues to grow while operating under smaller farms. water access. ‘‘We’re close to getting the run as high as 50 cents per litre of milk ard.’’ a traditional Chinese procurement- Tangyuan project under way, which I produced. The integrated model reduces the farming model. The New Zealand Herald | Wednesday, April 16, 2014 nzherald.co.nz F19

China Business New Zealand’s Chinese century Our prosperity, our Giving New Zealanders access to New Zealand’s shift to China is the most fundamental clear, objective and non-politicised social cohesiveness, information about the relationship is change to our external relations for at least two essential to balancing debate at home. our sense of who generations, writes Sir Don McKinnon. Investment The third pillar is maximising value we are as a nation is from investment. China’s investment his is the start of New in New Zealand while growing is very Zealand’s China century. increasingly low relative to our trade in goods and Economically, China’s rapid services — both in absolute terms and emergence as our largest dependent on how relative to the size of the relationship. tradingT partner is equally significant New Zealand’s investment in China to Britain’s decline as our economic well we integrate is similarly low. lifeline in the 1970s. What makes our Increasing capital flows between shift to China even more profound is this new Chinese our two countries is good business. the cultural dimension that it brings. It strengthens two-way trade connec- China is our largest trading partner, dimension into New tivity and ensures better access for our fastest growing source of tourists, New Zealand products and services our largest source of overseas Zealand’s economic to new and existing markets in China, students, and our greatest source of and delivers much needed financial net migration. and cultural life. investment. Our prosperity, our social cohes- The council is currently develop- iveness, our sense of who we are as ing the first bilingual guide for in- anationisincreasinglydependenton Chinese speakers. The China Council vestors in both countries looking for how well we integrate this new Chin- strongly advocates the need to in- the right connections and expertise. ese dimension into New Zealand’s crease the numbers studying Chinese The council also conducts skills train- economic and cultural life. in schools and universities, get more ing for New Zealand companies That integration is going on every native speaking Chinese teachers into investing in China. day. It’s occurring in the work of our classrooms, and we’re advocating Personally, I’m hugely optimistic private companies trading with for Chinese to be seen as a priority about the future of New Zealand’s China, in our boardrooms, scientists language; also for companies to em- relationship with China. Our initial collaborating, students studying, gov- phasise the employment of Chinese success at the export and ernment officials making our A Mandarin language class at Westlake Boys’ High School. speakers in a wide range of positions. Government-to-Government levels interactions easier, and the cultural shows the potential for increasing dynamic helping us understand each In 2012 the New Zealand China tists, parliamentarians, Maori leaders Debate economic interdependence and cul- other better. Council was established by Prime and Chinese-Kiwis. The China Council’s second pillar is tural synergy. With so many threads now Minister John Key as an umbrella Language the need for well-informed public And I’m optimistic that my grand- connecting New Zealand with China, organisation to co-ordinate leader- There are three pillars to the China debate. The speed with which the children will be living in a more who leads the relationship — govern- ship of the relationship. Council’s advocacy work, alongside China relationship is growing brings prosperous and more cohesive New ment or the private sector? We do this by bringing together our ongoing focus on trade advocacy. with it the potential for misunder- Zealand as our China century ad- The answer is that neither is New Zealanders who are at the fore- The first is Chinese language. For so standing. Though China and New vances. wholly responsible. Each provides an front of our developing relationship long New Zealand has been comfort- Zealand have many shared interests, aspect of leadership that is interde- with China — businesspeople, ably monolingual — but to integrate they also have vast differences in G Sir Don McKinnon is Chairman, New pendent on the other. academics, bankers, lawyers, scien- better with China, we need more culture, business, and politics. Zealand China Council What wall? Over 20 years ago the Westpac group started doing business in Beijing. Now, with over two decades under our belt we know what it takes to help our clients succeed in China. We’ve built capability, connections and experience that we’re using to take our New Zealand clients onto a global stage. So whether you need trade finance or risk management advice, or want to talk to the bank that is at the leading edge of RMB convertibility - you’ll find it’s well worth connecting with NZ’s No.1 Foreign Exchange1 and Trade Finance2 Bank.

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1.Euromoney FX Poll 2013. Measure of market share from 16,298 FX industry votes. 2.GTR Asian Leaders in Trade Poll 2013. Westpac in this document referstothetotalworldwidebusinessofWestpacBankingCorporationincludingitscontrolledentities. Westpac Banking Corporation ABN 33 007 457 141 (New Zealand Division) and Westpac New Zealand Limited is the provider of trade nance and risk management advice and is responsible for the provision of those services. Westpac New Zealand Limited. F20 nzherald.co.nz The New Zealand Herald | Wednesday, April 16, 2014

China Business Student A broader education trends Brierley Penn looks at what universities are doing to build relationships with China Of the international students at the ew Zealand’s interaction been some positive response among University of Auckland, 40 per cent with China has up to now the prospective sponsors they have are from Mainland China, and the focused mainly on the approached.. ‘‘ numbers are likely to go up. benefits of trade and ‘‘Particularly if you think about According to Education NZ economicN co-operation. NZ’s major exporters with big inter- forecasts, the number of Chinese To build a deeper and more en- ests in China, universities have a lot students in New Zealand will increase gaged relationship with China it is of researchers who are doing China by approximately 6 per cent a year, crucial to take a wider view. relevant research. And so that’s the and double by 2025. The University of Auckland recog- greater opportunity because this is However, there are signs the trend nised this in 2006, opening the New where you see business and aca- may be beginning to reverse, as Chin- Zealand Centre at Peking University, demic and government interests ese families begin to consider local alongside a range of other projects in aligning.’’ institutions. order to broaden New Zealand’s aca- As well as the New Zealand Centre, Traditionally, international educa- demic and research relations within the University of Auckland has tion has been held in much higher China. employed wider measures to take esteem, however as local institutions The New Zealand Centre began as advantage of the China opportunity. are improving in quality, and are seen aflagshipUniversityofAuckland In 2006, it was invited by the Chinese as having a more direct study-to- project, but has since morphed to Ministry of Education to become part work pathway, the boom of students operate as a partnership between of the Three Brothers trilateral part- leaving China may drop off. Victoria, Waikato, Canterbury, Otago nership, with Tsinghua University Internationally educated students and Auckland universities. The and Qinghai University. are increasingly finding they are com- Centre runs a New Zealand studies This was intended to encourage peting with locally-educated job- undergraduate course at Peking in co-operation and co-development, seekers on their return home. one semester every year, drawing on more specifically draw on the experi- Chinese students are also becom- New Zealand professors and interns ences of Auckland and Tsinghua uni- ing more interested in online study. operating out of Beijing. It focuses on versities to assist the development of The United States offers the ‘‘gold many aspects of New Zealand cul- Qinghai. Since the original MOU was standard’’ in online education ture, environment, economics, and signed, other top Chinese institutions courses, a potential threat to New this year, film, and is taught in a very We decided we didn’t want to put all our eggs in one with which Auckland has strong re- Zealand’s traditional appeal. ‘‘New Zealand’’ style, embracing lationships, including the China Uni- However, the Chinese Govern- student engagement and feedback in disciplinary basket, because across the universities in versity of Geosciences and Chinese ment’s forecast increase in graduates contrast to the more traditional Chin- NZ there are a number of academics who are Academy of Sciences, have come on studying towards vocational degrees ese method of teaching. board. and diplomas offers potential for New ‘‘What we really want to do is to working in China or working on projects that are Auckland has also partnered with Zealand, which has expertise in the take it to a new level and to really particularly relevant for China. the Fudan University in Shanghai and vocational training sector. look at how we can engage more the Office of Chinese Language Coun- An Education NZ initiative, aiming closely with business; really thinking Jenny Dixon cil International (Hanban) based in to raise the profile of New Zealand about New Zealand Inc and how we Beijing, to establish the New Zealand education in China, has involved four can align university and business Dixon hopes the initiative will be of disciplines and interests in China. Confucius Institute. New Zealand universities — Auck- interests,’’ says Professor Jenny up and running by the end of the year, ‘‘This is a different model from The Chinese Government has land, AUT, Massey and Victoria — in Dixon, Deputy Vice-Chancellor at the and envisages three-way financing what is often established, where you established Confucius Institutes aTVseries,All About Going Abroad, University of Auckland. ‘‘But also of from corporate sponsors, govern- might just have one person going up around the world, as non-profit public for a Shanghai channel, which will course, give NZ researchers at the ment and contributions from the part- there for a number of years as a initiatives aiming to promote learning showcase aspects of student and aca- respective universities a much higher ner universities. Professor. The Australian Centre has Chinese language and culture in New demic life in New Zealand. profile in China.’’ The Centre is looking for corporate that. Zealand schools, the business com- Education NZ is confident the The university is planning to intro- sponsorship, and considering ‘‘We decided we didn’t want to put munity and the community at large. series will increase global awareness. duce a Fellowship position for New whether to invite other New Zealand all our eggs in one disciplinary basket, Its aims include increasing the num- ‘‘China is New Zealand’s leading Zealand professors based out of the universities to join the initiative. because across the universities in NZ ber of schools teaching Chinese to source country for international Beijing centre. ‘‘We’ll take several ‘‘We see this as very aligned with there are a number of academics who 120, and the number of qualified students but, despite this, New Zea- senior professors from NZ universi- the Government’s China strategy and are working in China or working on teachers by 40 per cent. land is still quite poorly understood ties up to China for a short period of the NZ Inc approach, which is why projects that are particularly relevant ‘‘We are deeply engaged with as an education destination,’’ says time, engaging with their research we’ve structured the fellowship in for China. We thought that we’d much China on a relationship level and we Alex Grace, ENZ’s Regional Director and stakeholder communities in this way,’’ said Dixon. rather have a series of people going know the government’s preparing for greater China. China, talking about their research ‘‘So it’s available to anybody who’s up and visiting and engaging with this strategy for China, 2030. My ‘‘We’re delighted our institutions and its relevance to China, and then engaged with us at the Centre, includ- their various communities.’’ understanding is that in that there is were able to take up this opportunity bringing back what they learn back ing from different universities, be- The potential payoff for corporates reference to having stronger research to introduce themselves and their to NZ.’’ cause we know there’s a real diversity is clear, and Dixon says there has relationships with China.’’ offering in much greater depth.’’ Case for investing in China is still solid

ew Zealand organisations intention — and this can vary accord- wanting to be successful in New Zealand businesses wanting to ing to local practices. China’s ju- China must improve their diciary system is steadily developing, productivity. The message survive in China must focus on however it is still a relatively protrac- fromN the Chinese Government is ted and unpredictable means for dis- clear: become more productive and productivity gains and risk minimisation, pute resolution. receive government-funded incen- There is a trend towards greater tives, or be penalised for unproduc- write Joanna Doolan and Florence Wong openness and deregulation but that tive and wasteful business practices. does not mean the environment is This productivity imperative is open-book. To succeed you must deal consistent with the Chinese Govern- are profitable, despite falling margins, G Improving the return on invest- needed to translate this strategy into with those with the right links to the ment’s 12th five-year plan, outlining though their revenue growth is ment. Over-investment in China is a actual change. Government and ensure what you its targets to lift average incomes and slowing and they are experiencing a challenge and the use of low interest Replacing multiple planning are doing continues to support the increase the efficiency of its painful profit squeeze. Respondents loans and foreign direct investments models, enabling direct linkages Government’s objectives. resources. It is also driven from the said there was little or no scope for as an easy source of finance is reduc- between long-range planning, annual This may mean repositioning your reality that China’s previous growth their customers to absorb cost in- ing. planning, forecasting and manage- business to providing technology, engines are running out of steam. creases. The consistent message G Ensuring quality and safety. As ment reporting, is just the start to all process know-how, capital or bran- Exports are declining and this, along across all industry sectors was that Chinese consumers grow wealthier, this. The more detailed areas to focus ding a favoured sector or region. with environment concerns, is slow- driving productivity improvements they are demanding global standards on include: strategic direction, cus- The official stance on intellectual ing growth. has never been more critical. of quality and safety. tomers, execution, people and organ- property and corruption is improving But the case for investing in China Statements like this can be No one area of operations is para- isation, risk and control and techno- but the culture may not yet have remains solid. China as we know is nauseating and self-evident: if you mount; most profitable companies logy and data. moved to fully recognising a corpor- now the world’s second biggest econ- cannot increase prices or reduce strike the right balance across a sig- These factors are not unique to ation’s right to own an idea (leading omy and, based on its forecasts of costs, the only options are boosting nificant number of competencies China. But in China it is imperative to patent or process theft). GDP, is expected to rank as number productivity or closing down. such as effective strategic planning, not only to understand your competi- China is experiencing an era of one in the next 10 to 15 years. The Improving productivity in this con- organisational alignment, and in de- tors but also to develop a deep insight competitive upheaval, with the en- sheer size of China’s domestic market text means changing the way busi- veloping solid foundations to support into the government’s objectives and vironment moving to potential alone is enough. It is predicted the ness is done by building capabilities business performance and growth in the likely impact on the regulatory overcapacity. New Zealand busi- middle class in mainland China will that address three key issues: the areas of business process, internal climate. Consider that issues like cul- nesses wanting to survive must focus increase from 150 million to one G Raising labour productivity. controls, workforce planning and tural risks, unequivocal co-operation on productivity gains, risk minimis- billion by 2030, making it about 70 Labour costs are increasing, so com- technology infrastructure. and buy-in can be very challenging ation and be responsive to the unique per cent of the population. And China panies must upgrade their techno- Long-range strategic planning suc- in China, where resistance is often risk profile of China. is an ideal location for exporting to logy and maximise the efficiency of cess is based on companies under- more subtle than overt. The enforce- the rest of the world. their operations across their entire standing the capabilities they must ability of contract provisions are G Joanna Doolan is the Chairperson A recent EY survey of more than supply chain, and provide incentives build to create a competitive advan- often subject to cultural interpreta- and Florence Wong is the Leader of 1700 domestic and international to motivate their employees to be tage in their sector and the need to tion — it is not only the literal inter- EY’s New Zealand China Business companies in China found businesses engaged. define the priorities and actions pretation that is important, it is the Group The New Zealand Herald | Wednesday, April 16, 2014 nzherald.co.nz F21

China Business Asia firmly on the rural map

We need to add to the quantity and quality of our exports, the ASB’s Mark Heer tells Bill Bennett

hirty years ago China and other New Zealand banks. In part it Asia simply weren’t on the piggybacks off its Australian parent map for New Zealand’s rural The Commonwealth Bank of Aus- economy. Today, ASB gen- tralia, which has a sizeable footprint eralT manager for rural banking Mark in the country. Heer says the group Heer says, they are in everyone’s also has shareholdings in a couple of sights. Chinese banks: ‘‘China is a big country. Heer says this reflects changes in It isn’t really a single market, lan- New Zealand’s export markets. Today guage, customs and even the way of his rural customers are focused on doing business can be different in China. different regions. ‘‘It’s across the board for our retail ‘‘We don’t have an on-the-ground industries: meat, horticulture, fores- presence everywhere, so we also try, wine, seafood and, most of all partner with a number of correspond- dairy. Within that, the really big pro- ent banks.’’ duct is milk powder, but the others Rural exporters dealing with any are growing fast.’’ overseas market are concerned with New Zealand creates a significant much the same things: when are they agricultural surplus. ‘‘Our farmers paid, how are they paid and what produce enough food to feed about We are able to currency is the transaction conduc- 45 million people. Nearly five million ted in. This has become much easier of people at home eat the food, the produce the highest with direct conversion between the other 40 million plus are overseas. New Zealand dollar and renminbi: ‘‘In round numbers we export ten quality food and ‘‘Dealing with China used to mean two times as much as we eat. That’s a huge currency transactions, converting amount in New Zealand terms, but customers are into US dollars along the way this relatively small in Chinese terms. meant two transaction costs and two ‘‘One challenge for our farmers is willing to pay sets of currency risk’’. to sustainably increase the number. Heer says ASB offers a complete The other is to add value. We are able premiums for high suite of banking products to smooth to produce the highest quality food the way for exporters including the and customers are willing to pay quality. ability to hedge currency to guard premiums for high quality.’’ against fluctuation risks. Gearing up for higher volumes and those in China who want to invest in awareness of New Zealand and what in Chinese migrants in recent years. In recent years Heer has been higher quality production requires the same areas. it has to offer — we need to see that The bank has worked with the Chin- taking some ASB rural customers investment. Heer says the bank is This has been controversial in as a compliment.’’ ese community and has a high profile with him on visits to China. He says: seeing a lot of interest in investing in some circles, but Heer says the num- ASB sees inbound Chinese in- with Auckland immigrants through ‘‘It’s one thing to tell them about the agriculture from China. He says Chin- ber of agricultural transactions in- vestors through the bank’s migrant its sponsorship of the annual New scale of the Chinese market, it’s an- ese investors fall into two camps; volving overseas investors is still banking business. Heer says this has Year Lantern Festival. other to take them so they can get those who come here as residents small, although there is growing in- been operating for 20 years now and Heer says the ASB’s strategy in a feel for it. We’re now doing the same looking to invest in agriculture and terest. ‘‘We’re seeing a much greater there has been a noticeable increase China is twofold and distinct from thing in Singapore and Indonesia’’.

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DLA Phillips Fox is a member of DLA Piper Group, an alliance of independent legal practices. F22 nzherald.co.nz The New Zealand Herald | Wednesday, April 16, 2014

China Business A pathway to partnership You don’t see them when you’re BNZ is looking to walking down the main street — until partner The until you go to some of the networking Icehouse to help events that are very Chinese-focused, you don’t actually realise the extent of SMEs find a foothold entrepreneurs that there are. in China. Brierley Paul Gestro Penn reports from its traditional reliance on gov- ernment and public enterprises. NZ is developing a partner- As an example, Gestro says a num- ship strategy with key New ber of the tech parks they have Zealand stakeholders to cre- engaged with are being financed by ate a pathway for smaller private individuals from China. BKiwi businesses to make successful ‘‘The interesting thing for me, and inroads into the Chinese market. Ithinkit’sabitofachange,isthat ‘‘We want to have a pathway for they’re not relying on government so our customers, particularly into much any more — they’re relying on China,’’ says Paul Gestro, Head of Asia private sector investment. My view Desk, Institutional Banking at BNZ. is that the government in China is ‘‘Globalisation is a big thing, and China realising they can’t just take, they obviously is where a lot of this will need to invent and innovate them- head so we want to have some kind selves for the long-term. of presence there. ‘‘The SME space is interesting. One ‘‘What we want to do is see how thing I’ve noticed on recent trips to we can create that pathway by using China is that the SME market is huge. partnerships that we already have in a physical presence on the ground in encing and similar technology allows The amount of entrepreneurs — you the market.’’ China. It is hoped The Icehouse’s for engagement and support to be don’t see them when you’re walking The project is still very much in relationships with a number of tech provided across borders. Through down the main street — until you go the planning stage, with discussions parks in China will be able to add Untapped potential engaging with multiple clients at vari- to these things like tech parks, until among potential partners focusing on value to the project, perhaps by pro- ous stages of their market entry into you go to some of the networking how to build a concept which will viding some desk space for New The Government’s $30 billion China, they plan to connect these events that are very Chinese-focused, optimise value to New Zealand busi- Zealand businesses to base them- target for bilateral trade with China businesses in a way that will deliver you don’t actually realise the extent nesses. This is vitally important to selves out of these incubation hubs. cannot be achieved solely on the mutual value. of entrepreneurs there are.’’ BNZ, which has more than 100,000 ‘‘To be virtual, you’ve still got to back of our largest companies and Says Gestro: ‘‘Some companies Another macro trend is the Chin- SME clients on its books. submerse yourself somewhere,’’ adds traditional export industries. who are based in China, for example, ese Government’s focus on IP regu- Gestro says The Icehouse was a Gestro. ‘‘And that’s why we thought Hitting those targets will require may have a spare desk in the corner lation, and a move to become more natural partner in their efforts to with tech parks and NZTE, there’s concerted participation from a of their office, and the companies sophisticated in the way that intellec- support customer growth into China. options for those SMEs.’’ range of businesses, regardless of engaged on a consultancy basis, and tual property is protected in China. ‘‘With our extensive relationship with Placing New Zealand companies in size and industry area. we’ll then say: ‘look if you want to New laws coming into play in China The Icehouse and being a founding co-sharing environments does more The greatest untapped potential stick around for three months, take seek to make it more transparent for partner of that, that was the obvious than just provide the back-end ser- lies among SMEs, who make up 97 that desk and then pay a small fee businesses to register IP and trade- first port of call. vice space and facilities essential for per cent of New Zealand and away you go’.’’ marks, and impose sterner fines, and ‘‘With their view on having that building an in-market presence. enterprises and contribute 40 per Finally, a ‘‘concierge’’ service, simi- possible jail time for theft of intellec- kind of pathway into China and that The more intangible benefits of cent of the economy’s output on a lar to that which already operates in tual property. validation for companies going into working in these hub-like environ- value-added basis. While these the San Francisco Landing Pad, is also ‘‘They’re trying to encourage peo- China, then it just made it obvious ments can be crucial when starting smaller businesses can contribute envisaged. This will allow companies ple to share ideas and innovation by that we should partner with the out in a unique and highly network- all-important value to New to access ‘‘on the ground support’’ in introducing laws and rules around it. Icehouse to do something very simi- dependent country. Zealand’s trade relationship with everything from finding accommo- The environment for an international lar.’’ ‘‘Plonk a New Zealand company in China, they also experience unique dation or back-end service providers, SME, or particularly a New Zealand ‘‘[With] lots of people doing lots of the middle of that, and all of a sudden scaleability c to making connections with stake- company who has to export earlier different things you end up just get- they’re talking to Chinese companies hallenges when attempting to holders in China. is that they are a little bit more ting mass confusion in the market, so in the same boat as them, kicking off, break into new markets. BNZ hopes to be able to make a protected in the China market.’’ having something that we can work but they’ve got some connections BNZ’s partnership and more concrete announcement about This is good news for New Zealand together with the Icehouse on just that you’ve never even dreamed collaboration approach draws on their plans in China early in June, SMEs. made a lot of sense.’’ about tapping into,’’ adds Gestro. ‘‘So the idea that, with New Zealand’s when they will run a ‘‘Port to Plate’’ As the Chinese market becomes The idea is to emulate something Ithinkthatco-hostingiswhereChina size and scale, tackling the Chinese mission for some of the bank’s cus- safer, and the risk of entry decreases, similar to the Kiwi Landing Pad con- wants to get to. You see them trying market is impossible without the tomers. The tour will end in Xian from more businesses are likely to con- cept in San Francisco, recognising the to develop these kind of models.’’ support of both public and private June 13-15, where NZTE has a desk at sider international expansion. unique challenges and points of dif- BNZ is able to draw on parent partners. the World Dairy Expo. From BNZ’s perspective, this re- ference in the Chinese market. The company NAB’s resource team on the The environment for SMEs in duction in risk is crucial to the level concept will be more of a virtual one, ground in China to support its SME China is said to be improving dram- of support they can give to SME rather than focusing on establishing customers’ needs. Video confer- atically, as the market shifts away customers seeking to enter China. $30 billion game-changer for Auckland

Auckland and its economy will be Chinese interests are fuelling New Zealand’s lationships between Auckland and transformed by New Zealand’s am- China not only benefit corporate in- bitious new goal for two-way trade economy, and increasingly becoming crucial for vestment’’, says Caselli. ‘‘There are with China of $30 billion by 2020. Auckland’s accelerating economic growth. follow-on benefits such as sig- Over the past year Auckland has nificantly increased Chinese interna- benefited from significant Chinese David Caselli tional student and visitor numbers. investment in diverse sectors, includ- This interest will support Auckland’s ing food and beverage, dairy and wider Auckland Council organisation to seek to understand and support the growth, with an increasing capacity banking. or central government. growth aspirations of diverse multi- of new hotels, the airport extension ‘‘Chinese interests are fuelling New Caselli points out that delegations national companies invested in Auck- and the proposed New Zealand Inter- Zealand’s economy, and increasingly from China are among those coming land. national Convention Centre.’’ becoming crucial for Auckland’s ac- to Auckland to consider investment Ateed’s international aftercare pro- Caselli says the region’s importers, celerating economic growth,’’ says in infrastructure and businesses. gramme ‘‘Aroha Auckland’’ follows exporters, port and airport should David Caselli, who is General Mana- ‘‘Auckland’s plans around the City up with companies that have made look to benefit from the Govern- ger Business Attraction and Invest- Rail Link, the Puhoi-Wellsford high- significant recent investments in ment’s target of New Zealand’s two- ment for Auckland Tourism, Events way, Penlink and the build-out of the Auckland. way trade with China doubling to $30 and Economic Development (Ateed). Wynyard Quarter point to more and There are ongoing negotiations to billion by 2020. Auckland’s economy grew 3.3 per more opportunities for international finalise several film co-productions — Auckland already contributes 34 cent in the year to March 31 2013, investment, and all of these are of part of Ateed’s film agreements with per cent of the national GDP, and second to Christchurch’s unique post- interest to Chinese investors.’’ the governments of Shenzhen and Caselli says the council is aware of quake recovery growth of 6 per cent, Chinese interests have already Qingdao — and work on the attraction increasing pressure for business land and Caselli says a key factor in Auck- of Foreign Direct Investment (FDI) made strategic investments in key of hotel developers to Auckland. and infrastructure, and the need to land’s growth is the continued emerg- and trade with China. commercial and residential sites Ateed recently extended its part- grow the city in a fiscally prudent ence Chinese trade and investment. This group provides valuable ad- across Auckland — most notably the nership with China Southern Airlines, manner. Caselli used his four years’ experi- vice on areas from trade and invest- Elliot Towers site owned by CNP which is aimed at bringing high-value ‘‘The region’s GDP growth target of ence doing business in Shanghai to ment to screen attraction, student Investments, and the Whangaparaoa visitors from China; its sponsorship of 6percentperannum,andcouncil’s help establish Ateed’s China Business attraction and high-value tourism. residential development by Top the China Cup yacht regatta are focus on controlling debt levels, Advisory group. Its members are in- The group has also been able to raise Harbour. expected to have significant benefits attracting and retaining offshore part- fluential Auckland-based Chinese wider issues the Chinese business Caselli says though Auckland can for Auckland’s tourism and marine ners and investors is increasingly business people who support Ateed’s community is experiencing. Ateed expect to see more Chinese invest- sectors. important — and China has a major strategic approach to seeking sources does its best to help, or engages the ment, the council and Ateed continue ‘‘The broadening interests and re- role to play.’’ The New Zealand Herald | Wednesday, April 16, 2014 nzherald.co.nz F23

China Business A tool for contractual disputes

ew Zealand companies with assets. At the completion of criminal business interests in China A reciprocal arrangement allows common proceedings (2012), enforcement be- often lack the skills and gan again. The judicial review was knowledge to deal with law courts in China to enforce overseas defeated in late 2012, and the debt disputesN under that jurisdiction. Yet finally paid.’’ disputes do arise. The question is how court rulings, as The REJA in Real Life to deal with them? There are limits to the REJA. It Litigation in China may be becom- Martin Thomson and Terence Ng explain applies only to commercial contracts ing increasingly prevalent, both for (not consumer or employment). The Chinese companies in dispute with contract must be subject to the ex- other Chinese companies, and for vention on international arbitration. subject to judicial review, the judg- Hong Kong High Court issued a clusive jurisdiction of Hong Kong overseas companies in dispute with Therefore, international disputes re- ment was upheld and enforced. summons through the Shanghai High courts. If the contract has an arbi- Chinese companies. For Kiwi and ferred to arbitration can in theory, be ACaseundertheREJA Court. We knew the debtor would try tration clause, the REJA cannot be overseas companies, even if arbi- enforced in China under Chinese DLA Piper China partner Nicolas to prove service of the summons had invoked. If enforcement would go tration or court judgment is obtained legislation. DLA Piper says that has Groffman takes up the story: ‘‘The been ineffective, but there had been against mainland China public policy, in their favour, enforcement in China not been the case for court case turned around a promissory a recent ruling from the Supreme it may be difficult. is difficult. judgments. ‘‘China has no such treaty note related to a debt owed by a People’s Court recognising service on The burden is on the party that lost Now, DLA Piper, the global law firm with any common law country.’’ Chinese entity to an international housemaids or other people at the in the Hong Kong court to show why with which DLA Phillips Fox is an In that respect, Hong Kong has an company. The international com- recipient’s address. The legal team the mainland court should not en- alliance partner, suggests there may advantage. Its independent legal sys- pany believed the debt would be used this ruling. We proceeded to force the judgement. To do so, that beanoptionundersomecircum- tem has fair courts. Foreign parties unenforceable in China, and thought court in Hong Kong on behalf of the party can use the points above to stances. The roots of success in a often use Hong Kong as the default the Chinese company was unlikely to client. The defendant did not attend, form an argument, or else argue that contractual dispute lie in the way the jurisdiction for contracts involving pay. So we provided for exclusive and the client won. procedure was not followed correctly contract is conceived and developed, mainland Chinese organisations. The jurisdiction of the Hong Kong courts. ‘‘In 2010, I attended two hearings (e.g. the serving of the summons). and by which jurisdiction’s law it is REJA means that Hong Kong The Chinese entity believed that as at the Shanghai No 1 Intermediate The experience of DLA Piper, and governed. judgments are enforceable in China. it had no assets in Hong Kong, it could Court to argue for China to recognise others, using the REJA shows that DLA Piper cites the REJA, or more The enforcement has been shown simply ignore the promissory note — the judgment under the REJA. Both both the REJA and arbitration are accurately the ‘‘Arrangement on Re- to work. In November 2010, a Shang- and indeed it did so. hearings were contested by the de- useful tools. The REJA’s great advan- ciprocal Recognition and Enforce- hai Court recognised a Hong Kong ‘‘In 2009, we served a summons fendant. tage is that the local court cannot ment of Judgments in Civil and Com- judgment for the first time. Later, on the debtor in China. To do this, the ‘‘Later in 2010, the Shanghai No 1 ignore the judgment. mercial Matters’’, which was signed Intermediate Court issued a decision So if you are a New Zealand com- between the Supreme People’s Court to acknowledge and enforce the pany, seeking a way to enter into of the People’s Republic of China and award. Despite a judicial review commercial contracts in China, con- the Hong Kong Special Administrat- prompted by the defendant and there sider expert legal advice direct from ive Region’s Government in 2006 The roots of success in a contractual being no right of appeal, the the region on the kinds of contracts (effective August 2008), as providing judgment’s enforcement began. En- which may bind. There are ways to a legal basis for People’s Republic of dispute lie in the way the contract is forcement was delayed because make legal agreements work, but China courts to enforce judgments there were criminal charges against inside knowledge is the best avenue from Hong Kong. conceived and developed, and by which the defendant’s entity and its man- for success. Described as ‘‘extremely sig- agement. The police seized relevant nificant’’ by DLA Piper, this arrange- jurisdiction’s law it is governed. assets. We argued that ‘seizure by G Martin Thomson and Terence Ng ment allows common law courts in turn’ provisions should be applied to are partners in DLA Phillips Fox China to enforce overseas court rul- criminal seizure. Thus, when the (Contributions to this article were also ings. criminal process was completed, the from Nicolas Groffman, DLA Piper China signed the New York Con- client had its turn at the remaining (China))

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minterellison.co.nz F24 nzherald.co.nz The New Zealand Herald | Wednesday, April 16, 2014

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