Capitalising on progress

NZ enjoys a rare relationship with China, says David Mahon. Photo / Supplied

Despite problems with its Chinese importers, Zespri has established a strong position in China's competitive produce sector, enjoying some of the highest margins for its kiwifruit in any market. Over the next 18 months, with supply of gold kiwifruit falling due to PSA, scarcity will deepen the impression that Zespri fruit is a rare product worthy of its high price.

Fonterra continues to build farms in China, making it the leading foreign company in the dairy sector. Manuka honey is not easy for consumers to procure in China, but its scarcity is helping sustain product desirability and high prices. With a unified campaign, New Zealand honey producers could consolidate an unassailable position in this sector.

New Zealand has gradually improved its position in China over the past five years. The next phase of our regional economic development is to reform the way we trade with China, reviewing the product mix, and where we choose to position ourselves in key supply and distribution chains. The trade is still largely raw material and commodity-based, providing Chinese importers and distributors with significant value that should remain in New Zealand, or at least on the balance sheets of New Zealand-owned companies.

Opportunities need to be recognised and acted on with more speed and innovation.

Despite the virtual collapse of the domestic Chinese infant formula industry in 2008, the New Zealand dairy industry has yet to develop its own infant formula brands for China. Chinese demand is so high its companies are now buying or planning to build dairy processing plants here. Our economy is paying the price for the commercial passivity of many of its key sectors. New Zealand companies in China need to establish a stronger presence and be careful not to repeat the ad-hoc approaches and hubris of the past.

Given the undeniable success of companies such as Fonterra and Zespri, it is perhaps time for other key sectors such as forestry, honey, meat, wine and, of equal importance, technology, film and specialised manufacturing, to consider co-operative structures. It may be ideological anathema to some in New Zealand business and politics, but we need to use any method that works to sustain an evolving commercial relationship with China. Other sectors can replicate the common wealth created through the unity of its kiwifruit and dairy. This cannot be achieved by government fiat but rather made attractive through considered regulation. The principles of free markets and individual choice and responsibility are some of the greatest strengths of our commercial culture. Co-operatives are, at their best, collaborations of mavericks.

New Zealand needs a clear, collectively-held economic and social vision for its future in Asia and particularly China. To date, the deeper and more complex our commercial ties with China have been, the more fragmented its institutional interface has become. The China Council, created by the Ministry of Foreign Affairs and Trade, has provided a forum with the potential to bring some consistency, integration and insight to the relationship. But it will need time to earn the respect of New Zealand companies and the Chinese Government, and to become an objective and challenging resource for its own government.

The fact than many New Zealand companies have failed or made crucial mistakes in their attempts to establish positions in China provides a wealth of useful case studies - much more may be learned from those who had the courage to try and faltered than examples of easy successes.

Although New Zealand needs to maintain a sense of scale in its international endeavours, it does enjoy a rare relationship with China. It is still the only developed country to have signed a free trade agreement and is perceived by the Chinese Government as uniquely independent in a world where most small countries are politically subservient to larger neighbours and trading partners.

If we can resist being drawn into coalitions intended to contain China and, at the same time, avoid sycophancy toward such a crucial trading partner, this political relationship may be harnessed as the key agent in our own economic transformation.

David Mahon is managing director and chief investment officer of Mahon China.