Case study: Fonterra 'in play' with Sanlu deal

By LIAM DANN



For Fonterra and the New Zealand dairy industry the Chinese market is not a prospect for the future - it is already the industry's fourth largest market.

But selling an ever-increasing mountain of milk powder to China won't maximise New Zealand's opportunities with the emerging economic giant.

With that in mind Fonterra is on the brink of making a big move into the fast-growing market through a joint-venture deal with top-10 consumer dairy company Sanlu.

"What Sanlu is, is mass-market penetration across a very big expanse of Chinese geography," Fonterra chief executive Andrew Ferrier told the Herald earlier this year.

Sanlu would provide a distribution network and Fonterra branding expertise and experience in the fast-moving consumer goods category, he said.

"The wealth in China is going to continue to grow and those companies that have substantial distribution networks will grow and will be successful," he said.

"It's not a get-rich-quick scheme - this is a longer-term investment for Fonterra."

The deal, which will see Fonterra take a 30 per cent stake in Sanlu, has been flagged as imminent for six months now. But Fonterra isn't about to rush things.

The company's trade strategy co-ordinator, Fiona Cooper, said investing in China is a massive undertaking.

"There have been many examples of companies that have come to grief in China because they didn't align themselves at the beginning. So it is worth taking that extra time," she says.

It is a large and complex market with an unfamiliar regulatory regime, she said.

New Zealand companies wanting to do business there could be helped by a free-trade agreement. But by the time one is in place, Fonterra should have completed the Sanlu deal, and will have done it the hard way.

Yet the deal could help create a climate for future investment.

"Anything the FTA can do to add clarity to the regulatory environment and assist with the complex process of investing in China will be a good thing."

China has been identified as the key focus of Fonterra's growth strategy, Cooper said.

"It has the potential to become one of the top two markets for the company."

In terms of market access China is already a step ahead of developed nations, she said.

"It has no quantitative restrictions; no quotas."

Its tariffs are also at the moderate end of the international scale, Cooper said.

They currently sit at 10 per cent for everything except cheese, which is 12 per cent, and whey powder, which is 6 per cent. The hope is those tariffs will be readily reduced or removed, she said.

Demand for dairy products is growing so fast that the domestic industry - also growing rapidly - will not come close to keeping pace, she said.

"There's no real need to protect themselves. So that's an obvious focus for the FTA."

Based on current sales, removing tariffs would give Fonterra an instant annual boost of about $30 million.

Handy, but not that significant in the context of its multibillion-dollar revenue.

It is access to the value-added consumer market that is vital to Fonterra's future.

The growth can be attributed to China's rapid urbanisation, Cooper said.

That brings with it growing consumer sophistication and demand for convenience foods - like the milk drinks and yoghurts that Fonterra's NZ Milk consumer division sells.

There's also growing awareness of the health benefits of dairy products.

If that's been drilled into New Zealand over generations so that we take it for granted, it's only recently become the official line in China - the State Commission for Food has put dairy foods on its healthy list.

CHINA FACTS

Fonterra's fourth largest market by volume and fifth largest by value.

Sales of more than 100,000 tonnes of product (mostly milk powder) worth more than $300 million.

Dairy consumption growing at more than 10 per cent a year.

Fonterra has offices in Hong Kong, Beijing, Shanghai and Guangzhou.

Fonterra is finalising a joint venture with a top Chinese dairy company.

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