New China hand plants seeds in fertile ground

By PAM GRAHAM

Here we go, another story about China and how big it is and how you just have to, absolutely have to, be there.

Well, Peter Springford has been there for the past four years presenting a business card that reads President, International Paper, Asia. IP is the world's biggest paper company and North America's biggest maker of boxes for home-entertainment products such as DVD players.

IP, which owns 50.4 per cent of Carter Holt Harvey, now sources 3 per cent of its revenue from Asia where it either owns, or is a partner in, nine packaging plants in China and is clearly thinking about how to take the next step of building a mill.

So how do you do business in China? Springford, who takes over the leadership of Carter Holt from Chris Liddell in December, says he started by getting on a plane to convince his bosses that they should be there. He did that by being honest about the difficulties and presenting examples of how it could work.

It helped to have Carol Cheng, an IP executive from the US who moved to China and knocked on the doors of juice and milk companies. That was what getting to know the customer and building demand meant in practical terms. Then you build a plant, sometimes with a partner, and usually with an option to buy them out.

So today when a wealthy Shanghai family sits down to a breakfast that includes fresh juice in a branded pack with an attractive design on it, the pack may well have been be made by IP.

The businesses in China include a beverage packaging plant in Shanghai, a folding box plant in Guangzhou, brown box plants in Chengdu and Guangzhou, a plant in Hong Kong and plants in northern China.

Four were built by International Paper Pacific Millennium, a joint venture 25 per cent owned by International Paper, 25 per cent by Carter Holt and 50 per cent by Pacific Millennium, a private firm owned by the Tan family. Three plants were built by International Paper or affiliates.

Of the total, three plants were in start-up phase, one was extremely profitable - he wouldn't say which one - and the others were "averagely" profitable.

"One segment we're in is growing at 30 per cent a year and we're one of the few players in it," Springford said.

Overall, the strategy was to develop the market first then build the plant. "We've had some ups and downs with our partners early on, which we weren't happy with, but we tended to buy those partners out and move on."

Springford now believes that you can go it alone in China. "I absolutely believe it. We've done well with the partner we have in International Paper Pacific Millennium but some of the others haven't been as successful."

Chinese staff have been recruited - one of the Shanghai-based businesses employs 180 with an average age of about 29. That team was as qualified and as good as you would get anywhere in the world, he said.

Now, "There are a couple of parts of the business where we are ready to consider vertical integration".

That means buying or building a mill in a country that historically had 10,000 small mills making pulp and paper from straw, wheat and recycled paper as well as wood fibre. About half have closed and large mills have been built.

A company such as IP would either buy or build a larger mill using wood fibre and new technology. "We're talking theoretically," he said.

He agreed with the proposition from a conference in Chicago this month that there was a looming oversupply of containerboard in China.

The US has cut exports of such products to China, though New Zealand has fared better because it uses virgin wood fibre which is stronger.

"It is not our current plan to build linerboard capacity in China because that is a commodity-type segment, we would be looking at a high-end product we have developed markets in," Springford said.

Moving to logs, it is not hard to see the link between rising demand in China and New Zealand's looming "wall of wood".

Carter Holt Harvey sells about 400,000 to 500,000 tonnes of softwood logs to China a year, which was "fantastic". Springford said.

He said he wanted to "encourage the forest guys" trying to find the right position for pine in China. "We have guys on the ground now who are trying to do that and we acknowledge they are under-resourced."

More than half the logs the company sells to China are going through wholesalers, or traders. "It is very hard to get a hold on where they are going and what they are being used for.

"The idea is to get to know who the end customers are, so we can match their need closer to what is in the forest.

"We have a team working right at the moment on a particular area of China we have nutted out as an appropriate place for our own log distribution."

The other strategy is to find out what the Russian far east is capable of supplying to China.

"We are trying very hard to understand the competition."

Springford said China imported 16 to 17 million tonnes of logs a year, about half of which was softwood, and about 7 million tonnes came from Russia. In about eight years China would need 7 million tonnes a year more of softwood but he did not know if Russia was capable of supplying it.

And that is why China is exciting.

Springford is willing to work with other New Zealand companies "to make sure we do the right things in the marketplace", though he is not signing up to the idea of a "Fonterra" or single-seller-type model for forestry.

He says he doesn't know what Chinese investment company Citic will do in New Zealand. Citic was a partner with Fletcher Forests in the Central North Island Forest Partnership, now in receivership. It was part of a bid with Fletcher Forests to buy the business back that failed to gain shareholder approval in August.

The Herald has reported that Citic is trying to make an offer alone for the forests using its Hong Kong associate but has not yet got all the banks it needs on board.