China Business: Fonterra shake up in China

Fonterra's Theo Spierings chats to Chinese consumers.

Fonterra CEO Theo Spierings has centralised control of the company's Chinese farming hubs into a new standalone business 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 competitive environment in China much more difficult for international firms.

Spierings has catapulted highly experienced international dairy executive Henk Bles into the newly-created role of Managing Director International Farming Ventures reporting directly to him. Sarah Kennedy - vice-president International Farming - leaves Fonterra this month.

The management changes follow a strategic review of Fonterra's China business dubbed Operation Friesian.

In a note to staff, Spierings said work was under way to make sure Fonterra has the structure, capital and resources needed to accelerate its strategy.

Spierings revealed to the Herald that Fonterra is setting up a holding company ("Farm Co") in China and will also appoint a Chinese advisory board within the next year.

The Herald travelled to China to explore the major changes ahead as the Chinese Government pushes out cowboy operators and creates a new landscape which will be dominated by "National Champions" like Mengniu and Yili.

A raft of new regulations imposed by Beijing are having a substantial impact on domestic and international producers alike, as small and difficult to regulate players - including some of New Zealand's smaller infant formula manufacturers - are pushed from the market in favour of major players with robust, integrated supply chains.

The Herald visited the two largest dairy players at their headquarters in Inner Mongolia. Mengniu and Yili each have substantial investments in New Zealand. They share their views on why the consolidation is necessary to sustain the future of Chinese dairy and what is required to make the industry overhaul a success.

In Shanghai, Kelvin Wickham explains how Fonterra is having to adapt to the new market and the moves it took to cleanse its brand following last year's botulism scare, which initially frightened off Chinese consumers from New Zealand milk products.

The Herald also travelled up to Heihe in Heilongjiang, close to the Russian border, to inspect a major dairy farm where Kiwi entrepreneur Howard Moore is looking to partner up with major international players like Nestle, private equity participants and local government.