Keith Woodford explain how New Zealand exporters went to China because that was where the markets were. In many cases, it was the Chinese who came to us seeking our products
It is just four weeks since I wrote how China was going to become even more important as a market for New Zealand’s exports as we work our way through COVID-19. I subsequently took some flak from a few keyboard warriors, on the grounds that I was supposedly ignoring both human-rights issues and also the blame for COVID-19, both of which it was said, should preclude New Zealand trading with China.
My response is that I have not taken a public stance on those other matters and I do not intend to. Whether or not we should trade with China is something for others to debate. I prefer to focus here on how it occurred that we have become so dependent on China, together with what the future might hold and where alternative markets might lie.
In this article, my focus is predominantly on how we got into our current situation. Detailed analysis of alternative markets and the future will have to wait for another time. However, I do observe here that New Zealand marketers went to China because it became the easiest place to sell food and fibre products. In many cases, that situation still applies.
Alternatively stated, it was predominantly the Chinese who came searching to New Zealand wanting our products, rather than us developing markets in China. When we did go there and tried to engage in market-supply work closer to the consumers, we often messed up.
The evidence shows that in general we are very good at processing products and getting them on a ship, and most of the time we are reliable people with whom others like doing business. But we struggle greatly when we try and operate further down the supply chain in foreign business cultures. That applies not only in China but elsewhere.
Two big exceptions are The a2 Milk Company (ATM) with its ‘a2 Platinum’ infant formula and Zespri. Both situations are where there is a differentiated product that others cannot easily replicate. For most other products, we remain sellers of commodities and ingredients, with the final consumers unaware as to where the product components come from.
Things really started to happen for New Zealand in China with the signing of the Free Trade Agreement in 2008. China chose New Zealand for its first developed-country free trade agreement for both pragmatic and ideological reasons. There was a synergy of trading interests. Also, we had strong relationships with China going back to the Kirk Government that was elected in 1972, and even before that some might say with foundations built by Rewi Alley.
Since the signing of the Free Trade Agreement in 2008, we have seen a remarkable increase in exports to China. I recall in that same year of 2008, together with a colleague from Otago University, I spent three weeks in China with the CEO and Chair of the Board of a New Zealand meat processing and export company. Our aim was to introduce the company leaders to relevant Chinese companies, together with exposure to Chinese food-culture, so that this company would better understand the market opportunities.
At that time very little New Zealand meat was being exported to China. The company’s key markets were in Europe, including Britain, and the concern was that they needed to diversify.
The Chairman of the company had a five-year goal that China might be able to take 15 percent of the company’s product at prices equivalent to European prices. It wasn’t so much about wanting to make super-profits, but to reduce risk associated with high dependence on those European markets.
We travelled widely around China in those three weeks, from south to north, and east to west. At the conclusion of the visit, the company was convinced that there was potential to build markets in China. However, any notion that China would become the dominant market, with risk thereby moving from being Europe-dominant to China-dominant, was not even vaguely on the horizon.
It had been 15 years earlier in 1993 while living in Australia that I first led a meat-industry market research trip to China, accompanied by five undergraduate students from University of Queensland. I was a little nervous about letting these students loose, but it was remarkable how well they scrubbed up when given some responsibility.
We did have some excitement early on. We split into two groups while still in Hong Kong and travelled separately up to Shenzhen on the Pearl Delta mainland. We planned to meet again that night after completing some interviews. In the meantime, a typhoon struck and Shenzhen was under water. Much of the city was flooded. Eventually, after declining the offer of an entrepreneurial local person who offered a ride on an upturned wardrobe, which for a fee he would push through the waist-deep waters, we managed to hire a boat with an outboard motor to get to our hotel.
It was with relief that we eventually found the rest of our group, as these were the days when mobile phones were a rarity. Reporting back to my University that I had lost three of my students somewhere in China would not have been easy.
When I first travelled through the Pearl Delta in 1973, I recall Shenzhen as a sleepy fishing village of around 6000 people. By 1993, Shenzhen was a city of several million people, but the Pearl Delta still had broad expanses of rice fields. By 2008, the Pearl Delta was essentially an urban conurbation with around 50 million people.
On that 1993 trip with my Queensland students, we spent considerable shoe leather, visiting wet-markets at dawn and then meeting up with companies later in the day. The key message we brought back to the Australian company sponsoring the research was that we could immediately obtain markets for many thousands of tonnes of offal meats as long as the company could manage the logistics of market entry. However, they should for the foreseeable future forget about the so-called prime cuts. The markets were not ready for that. As for the offals, the Australian meat company responded back to us that the quantities of offal we were talking about were more than the total Australian supply.
I tell those stories here to depict something of the dynamic nature and excitement of Chinese markets. Things change so quickly. As one Kiwi resident in Shanghai said to me more recently, I will come back to New Zealand when I have my first boring day here in China.
As for that New Zealand meat company, with its 2008 goal of 15 percent of product going to China within five years, that was easily surpassed. Then, in 2014 or thereabouts, the Board of the company became sufficiently worried at the remarkable success of their China endeavours that they placed a restriction on the CEO that, on the grounds of risk management, only 35 percent of product could be exported to China.
Soon thereafter the CEO had to go back to the Board and tell them that the China markets were sufficiently profitable relative to other markets, especially for mutton forequarters, that the company could not be competitive in farm-level procurement market under that constraint. And so, the constraint was removed.
To reinforce that message, we are now in a situation some 12 years since that New Zealand company made its first exploratory visit to China, that China is not only New Zealand’s dominant market for sheep products, but also for dairy, beef, seafood and timber (See Figure). Those exports continue to increase each year.
The latest concern, captured recently in commentary to the Wellington Chamber of Commerce on 11 March 2020 by Finance Minister Grant Robertson is that ‘some industries’ had probably become too reliant on China.
My rejoinder can be summarised in two sentences. First that was where new consumers with increased spending power were emerging, and they wanted animal-based foods that we could supply. Second, developing alternative markets will not be easy.