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Spotlight: Fonterra in China

China General Interest

Fonterra is a New Zealand icon and the company been operating in China for two decades. NZCTA talks to Bob Major, Managing Director of Fonterra China, to find out more about Fonterra's Chinese operations and aspirations.

Can you explain the extent of your interests in China? When did you first enter the China market?

Fonterra began operating in China more than 20 years ago, largely as an importer of dairy ingredients. Today, there are main four main pillars to our China business, including:

a.    A joint venture partnership in China dairy company Shijiazhuang San Lu Group

b.    A dairy farm operation that milks 3000 cows, producing high-quality local milk

c.    A Foodservices operation providing dairy products to quick-serve food and bakery outlets, and:

d.    An ingredients business that utilizes both local and imported products

Can you give us an idea of the dimensions of your activities (numbers/volumes/$$s etc)

China is one of Fonterra’s largest off-shore markets and generated more than NZ $700m in revenues in the last financial year.

Did you enter China progressively i.e. segment and target one or a small number of provinces (or products) or did you start with an intention to enter the market on a comprehensive basis?

Fonterra’s legacy company, the New Zealand Dairy Board, initially began selling ingredients to government buyers, then when the economic reforms began, to private customers mainly in the eastern seaboard. The objective of the business, which is consistent with our current strategy, was to grow the business in tandem with our customers. Since those early beginnings, we built a capability in the consumer brands and foodservices sector, and recently we have expanded the business by taking a 43% stake in San Lu in 2005, and this year setting up and operating a farm.

Which of your products and brands do you offer in China?

Fonterra imports a range of dairy ingredients into China, with milk powders making up more than half of total imports. Additionally, Fonterra sells bulk butter, cheeses, and creams, among others, as part of its Foodservices business, and a range of infant and growing up milk powders under its Anmum brand.

It is currently your fourth largest market. Will its ranking improve vis a vis other markets?

China is one of our fastest growing international markets, driven by an increasingly westernized diet, growing wealth, and demand for wholesome nutritional products. Given dairy consumption is at a low base compared to other markets, particularly western countries, we believe there are still significant opportunities for growth.

What proportion of your sales in China now comes from your alliance with Shijiazhuang versus shipments from factories in NZ?

Our San Lu joint venture now generates about 50% of our business in China. In the past financial year, revenues from the joint venture have grown by more than 27%.

What has been the value of utilising Chinese networks in the pursuit of your interests there? What advice can you offer other NZ businesses planning to enter the China market?

Our long-term relationships with our customers and obviously the joint venture with San Lu have been key factors in growing the business in China. For example, San Lu was a long-term customer and we knew the business very well before we took a 43% stake. We have seen examples of other multi-national companies entering the market by taking stakes in local companies without forming strong relationships, and subsequently those partnerships have encountered difficulties. Business in China is, as everywhere, focused on commercial success but the building of long term trust-based relationships is essential. Getting to know the business and the people running the business is still very important in the China context. Those relationships can’t be built purely by taking a stake in a company.

You appeared to be a strong supporter of the recent FTA process. How do you consider the outcome of the FTA negotiations to have been?

The most pleasing aspect of the FTA for Fonterra was the fact it opened doors to our business within the various levels of the China Government. The FTA essentially elevated New Zealand’s business dealings with China to a new level, and gave us unprecedented access to influential people. In financial terms the benefits from the reduction in tariffs and quotas is not major and will not be seen for some time, however, New Zealand’s standing in the eyes of China has been elevated significantly.