De-risking the China market

[This post was first published in the New Zealand Sunday Star Times on 22 December 2013]

Growth of agribusiness and food exports to China has been so rapid that firms are now asking ‘do we have too many eggs in the one basket?’ What happens if the China market goes sour?

I expect that there will be further large increases in exports to China over the next few years.  Comparison of month by month figures suggests the growth of exports to China is still accelerating, driven by the demand for protein-based foods. In particular, this will affect  milk powder, sheep meats and beef. There is no point in fighting this trend, because product will always flow to whoever is willing to pay the highest price. 

There is only one way to de-risk the China market and that is to learn more about it. That way the risks can be better managed. There is certainly a lot more to learn. Most agribusiness and food companies are now visiting China on a regular basis, but much of the knowledge is superficial. Only a few companies have Chinese speaking staff.

Often our companies do not use the expertise that is available.  Recently, I met a Chinese person, with many years of commercial experience in Asia, who had come to New Zealand and studied for Masters and PhD degrees in meat science and animal genetics. I thought she had a fantastic skill set, both technical and multicultural, and so I tried to get her a job with a New Zealand meat company. But I failed. She did get one interview, but the post-interview advice was that she would need to adapt more to New Zealand culture. She now works in Australia.

Over the last year there have been a number of hiccups in the New Zealand China trade. In all cases it has been New Zealand that has apparently messed up. As well as the botulism shambles, the Ministry of Primary industries used the wrong documentation on a range of products,  Zespri have been caught trying to avoid customs duty, Fonterra has been fined for illegal price setting, and one of our meat companies supplied meat from a non-registered processing plant.

When things do go wrong it is important to recognise that the bureaucracy in China is huge. And it is wrong to think that a politician in Beijing can, with a single phone call, reverse a specific decision by a particular ministry in a distant province. It does not work that way.

In the case of the botulism scare, the Chinese Government does not want any further apologies. Both Fonterra and the Government have already apologised and that was indeed necessary. But now the Chinese would prefer that New Zealand just quietly gets its house in order to ensure there are no more mistakes. From their perspective, further apologies are simply embarrassing. Of course, they would be even more embarrassed and also angry if New Zealand firms keep messing up. They simply want a trade that is orderly.

In politics, nothing is ever certain. However, unless we really mess things up then the Chinese have no reason to suddenly change the rules.  Our fear of the Chinese might be less if we recognised that they actually need us just as much as we need them.

The costs of both dairy and meat products have been increasing rapidly in Chinese supermarkets.  In both cases this is because local production is either static or declining.  Consumers are not at all happy about rising food prices. Given this situation, we can be confident that the Chinese Government has no wish to disrupt the trade and make the situation worse. This is the reason that milk powder kept flowing into China despite the botulism scare. It was only infant formula that was affected.

Although we can be confident of continuing trade growth, there are pitfalls for the unwary. A lack of appreciation of the nuances of Chinese cuisine, lifestyles and politics often leads New Zealand companies to misjudge where the opportunities lie.

For example, in the last six months some very cold political winds have been blowing through China’s top-end restaurants and five-star hotels. An anti-corruption campaign is being led from the highest levels of Government, and official entertainment has been heavily curtailed.  There are about 10 million ‘high benefit’ officials in China and it was largely their banquets that kept these high-end restaurants and hotels in business. At least in the meantime, that business has all gone.

I saw a direct effect of the clamp down following a recent trip to China, when one of our hosts emailed asking for scans of our passports showing our entry and exit dates. He needed to convince the authorities that he really had been entertaining foreign guests, and he had to show precisely how many of us there were. The number of foreign guests would then determine how many local Chinese were allowed to have been at the banquet.

With these changes, it is not only expensive wines and exotic foods that have been hit hard. The local flower market in China has also suffered badly in recent months. This is because even if an official dinner is approved, there are no longer massive floral arrangements.

Despite all of the above, our trading future in China is strong because most of our products are purchased by upper middle class people rather than the truly rich. It is the middle class of China which the government has to keep happy. And a reliable and plentiful supply of safe food is of utmost importance.  The protein business is where the opportunities lie.

[Other posts relevant to China-NZ opportunities are here, here, and here.]

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About Keith Woodford

Keith Woodford is an independent consultant, based in New Zealand, who works internationally on agri-food systems and rural development projects. He holds honorary positions as Professor of Agri-Food Systems at Lincoln University, New Zealand, and as Senior Research Fellow at the Contemporary China Research Centre at Victoria University, Wellington.
This entry was posted in Agribusiness, China, The Fairfax SST Articles. Bookmark the permalink.

One Response to De-risking the China market

  1. Quan says:

    I agree with you Keith. You deeply understand Chinese business culture.

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