Thursday, May 31, 2012

The real problem with the Crafar farm deal

I didn't really mind if the Crafar farms were sold to the Chinese. I would prefer they were not, but at the end of the day they can't take the land away with them.  As an immigrant my self I don't mind that people can come from overseas and buy land in NZ.

But I have changed my mind on Shanghai Pengxin.  What concerns me is that Shanghai Pengxin have stated that they may process the milk from the farms.  They have made this sound like it is an advantage of their application to purchase the Crafar farms as it will create jobs etc.

Now I read this article.  
 The Chinese buyers of the Crafar farms have registered two brands – Nature Pure and Pure 100 – to cash in on New Zealand's 100% Pure marketing. 
Hang about, I'm not so sure about this at all.  Shanghai Pengxin are now going to process and market the milk into China as "New Zealand Milk" with the trade names "Nature Pure" and "Pure 100"!

This changes everything for me.  We now have a Chinese company which owns NZ land and the processing facility and the distribution networks in China but they will be marketing the milk essentially as 'New Zealand milk".  They own the whole value chain.  They own our brand!

Then I then read this.
Mr Kelly said while he wasn't speaking for Shanghai Pengxin, it had paid a premium for the farms because it wanted to secure the raw milk and add significant value in China.
By way of example he said when he visited China recently he saw a litre of UHT milk sourced from New Zealand that cost 28 RMB ($5.60) and the same litre of milk sourced from China was 6 RMB ($1.20.
"They believe they can capture that top 28 vs 6 part of the market which will then create enough money for it to be a successful enterprise and therefore they are prepared to pay a premium in their view for the farms back in New Zealand."
New Zealand milk gets a premium in China because it is safe and it can be trusted.  The Chinese don't trust their own dairy companies, and for good reason too.  New Zealand has a true competitive advantage and a strong brand, this is what we need more of, this is what is the key to our success in the future.

We have this reputation for a reason, it has been forged by generations of good ethical food safety and business practices by New Zealand farmers.  

I am against anything that can damage our reputation and brand.

It is one thing to own NZ land, it is a totally different thing to own the supply chain and branding.  The value of our branding to NZ dairy farmers internationally, is massive.  The $210M paid for the Crafar farms are dwarfed by the value of our brand.

Lets get some things straight here,  

  • Shanghai Pengxin will be taking milk that would have gone to Fonterra.
  • Shanghai Pengxin are taking the margin from processing that milk.
  • Shanghai Pengxin are taking the margin from distributing and wholesaling the milk.
  • Shanghai Pengxin are using our branding
  • In short  Shanghai Pengxin are taking milk from New Zealand farmers and competing against New Zealand.
The only way New Zealand benefits from this deal is via landcorp and the money they get for managing the farms.  Which is a tiny amount in the whole shceme of things.

I don't mind competing in China with other global brands including Chinese brands.  Because each brand has its point of difference.  NZ point of difference is very valuable.  I don't see any advantage to New Zealand in allowing other companies (of any nationality) to essentially take our unique selling point and compete against us.

And this raises the point; what about Bright Dairy and Synlait?  Well this is slightly different in my opinion, as this example is essentially a 50-50 (well 51-49) joint venture between a NZ company and a Chinese partner. Both these companies are bringing different skills and advantages to the table, to build a brand in China. The milk suppliers are from NZ, the brand (Canterbury Pure) is owned by New Zealanders, well 49% at least.  Bright Dairy provided the capital to fund the infant formula plant and also provides the supply chain and contacts in China.

I would prefer that New Zealanders owned all of Synlait, but they had their chance and NZ decided that it didn't want to invest with Synlait when they tried to raise the funds for expansion via an IPO in 2009

I have no problem with foreign people or companies buying land in New Zealand, farming the land and integrating into New Zealand's supply chains by suppyling Fonterra, Open Country or Silver Fern Farms.  But I think it is a loss to New Zealand to allow foreign firms to come in and use our brand and our uniqueness and compete with New Zealand companies in international markets.

The Shanghai Pengxin deal is bad for our companies forging markets in China, because the very people who the Chinese public don't trust enough to produce their milk products, are here in NZ producing milk products but under a different guise. 

As a nation, we are selling our selves short.  We have no real plan or strategy for how we integrate into the world or what our goal is or what is important to our growth.  The OIO has criteria to meet but that criteria is not matched to a clear plan.  With a clear plan and strategy in place, the bureaucrats in the Overseas Investment Office could ask, "does this fit our international Brand/strategy?

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