The Crafar Farms, Shanghai Pengxin & New Zealands Growth Strategy

Fonterra is investing heavily in farms in China (that is, if you call 6,500 cows in a big barn, a farm).

We New Zealanders think we are the experts in low cost profitable farming and we think we are spreading our farming knowledge around the world. We may be some of the best farmers in the world, but we are not the best at making the most money from our farming skills.

For a lesson on how to set up a truly integrated high value dairy business we need to look to Shanghai Pengxin. They have just completed the purchase of the 16 Crafar farms which total 7,892 hectares in the North Island.

Shanghai Pengxin now own the farms where the milk is produced, they are going to build a factory to process their milk, which they will sell into the Chinese super markets, that they also happen to own and they will do so using the trade marks "Nature Pure" and "Pure 100" which they have recently trade marked.

I have a big issue with this. This is not about the Chinese buying some of our farm land.

Shanghai Pengxin buying the Crafar farms is different to Shania Twain buying a hill country station or James Cameron buying a farm, its not the same as the Harvard Universities endowment fund buying farm land and its also different to the German investors buying dairy farms.

That's because these high profile international farm buyers are not planning to process their farm produce and sell it onto the international market using New Zealand's 100% Pure branding.

If Shanghai Pengxin were going to buy the farms and supply Fonterra or some other New Zealand milk processor then I wouldn't have a problem with it.

The government have a food and beverage project which is designed to increase the export value of New Zealand's food and beverage sector, which accounts for 53% of our exports. In a report called "Moving to the Centre" the goal of doubling the food and beverage sector is outlined. In order to achieve this goal  the food and beverage sector will need to earn an extra $40 billion dollars.

The Ministry of Business, Innovation & Employment has set up its Food Innovation Network which is designed to help the sector to develop new products in which they can export.

So it would appear that there is a strategy that the government is working to.

So I wonder how selling 7,800 hectares of dairy land to a foreign company, that will process that milk and market it to Chinese consumers using trademarks that allude to New Zealand's 100% Pure branding, is helping New Zealand double our exports?

It doesn't.

It's not like Shanghai Pengxin were going to partner with Fonterra or any other New Zealand exporter and help us access the Chinese market or anything.

You have to wonder what was being discussed by the two ministers in charge of this issue, Muarice Williamson and Jonathan Coleman.

For the record; I have a problem with any foreign company using the New Zealand brand. I'm unapologetically patriotic in this regard.

Meadow fresh is owned by the Australian company Goodman Fielder and sells UHT milk into China.

I'm not comfortable with that either. I'm not sure we can do anything about it though.

But this is not a anti Chinese issue. I just think we need to protect our "New Zealand" brand much like the French protect the region of Champagne.

I want to stress that I'm not anti Chinese, my wife and I began the process to adopt a child from China, but we decided to adopt from another Asian country as the wait times for China were very long. So as the farther of an Asian son I can say with certainty that I'm not racist.

Its acknowledged that Shanghai Pengxin is essentially part of the Chinese government, although its not officially written anywhere.

I think its important to note that the Chinese government is a communist regime and history gives us a clear picture of what communism is. They don't have elections, they control and censor the internet. Chinese citizens can't attend church unless it is a state sanctioned church and if you publicly disagree with the government you risk getting locked up on obscure chargers or you simply disappear. Many people under 35 have never heard of Tiananmen Square because it is censored out of history and it is thought that many cyber attacks on foreign governments and organisations originate from the Chinese government.

I think it is important to note these things about China, its not an indication of individual Chinese people. But their government is a less than desirable entity. Would you be happy living under that regime?

We seem to get all carried away with the massive opportunities that China offers. I'm happy to do business with the Chinese and I'm comfortable with us passing on our farming knowledge and genetics to their farmers, but we must not forget who we are dealing with.

The people who say that opposition to the Chinese purchase of the Crafar farms is a case of xenophobia are missing the point. Its not the land that is the issue. It's that a foreign firm is using our brand and creating a vertically integrated business out of it.

That is a poor strategy for New Zealand to take. I have only heard one person speak out about it and that is Rod Oram on Radio NZ.

What about Fisher & Paykel?

Fisher & Paykel are a iconic New Zealand whiteware manufacturer that has recently been sold to Haier, the Chinese whiteware maker.

I think it is sad that we have "lost" an iconic New Zealand brand and the dividends will now flow off shore, but it's very different to what Shanghai Pengxin are doing. 

The Fisher & Paykel brand relates to a range of whiteware the only people who benefited from that brand are the shareholders of Fisher & Paykel. Much of the manufacturing takes place in Thailand anyway.

The 100% Pure branding in which New Zealand promotes it self, can be used by any New Zealand company from tourism operators to clothing companies to food businesses. It is our identity and we need to collectively protect it. That means not ruining our environment and it also means protecting the misuse of our brand.

The precedent has now been set. It has been shown that the government of New Zealand is quite happy for foreign companies to set up in New Zealand, use our brand and compete directly with New Zealand businesses in the international market place. So its quite conceivable that a number of other Chinese companies can come in and do the same thing as Shanghai Pengxin. Before you know it, all the massive growth in China that the dairy industry are betting on may be met by Chinese firms based here in NZ. It may even be a multinational firm like Nestle who start marketing NZ milk in China next.

Its probably not a big deal having one company doing it, but how are we able to stop the next foreign company doing what Shanghai Pengxin have done? Or the next company. All new comers will simple point to Shanghai Pengxin and say "you let them do it, why not us".

Is it only a matter of time before international companies hungry for continued growth, identify the potential that "Brand New Zealand" has and act on it?

We risk becoming the low paid peasants in our own country, not because we don't own our own land but because we don't own our brand.

This is where strategic leadership from the government is required. But I doubt anything will change based on Muarice Williamson and Jonathan Coleman's attitude towards the Crafar farms.

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?