Too many eggs in one Fonterra basket
Or should that be too much milk in one jug? Fonterra, New Zealand’s leading company, has just announced that its exports now exceed one quarter of New Zealand’s’ total export earnings. I suggested some years ago that Fonterra could be New Zealand’s Nokia, so at first blush, this news seems like a ringing endorsement of Fonterra’s strategy and execution. But I think a strong note of caution is needed.
Fonterra is a cooperative company owned by most of the dairy farmers in New Zealand, and controls more than a third of global cross-border trade in dairy products (eg. butter, cheese, powders, food ingredients and even nutriceuticals). It doesn’t seem that long ago when the entire NZ dairy industry was less than 10% of the country’s exports, and the forerunner to Fonterra controlled only a few percent of cross-border trade.
This might sound churlish, but Fonterra has been in the right place at the right time, with global food demand increasing, especially from countries with new wealth. Credit is due that Fonterra has seized the opportunity to increase its market share and earnings, but its critics have argued that its cooperative structure means that the company has not delivered its full potential (both from capital raising and from tougher scrutiny of management).
From a national policy perspective, I doubt that the NZ government is thrilled to hear the news. The economy is very exposed if there is a serious dairy herd disease outbreak, or a collapse in dairy prices as world grain supplies shift out of ethanol production and back to food use. Successive governments have tried many (too many?) initiatives to stimulate other export industries, and indeed the country is full of small and medium scale innovative companies doing moderately well, even in difficult times. However, the global dairy price boom has meant that the country’s reliance on its primary industries is as strong as ever.
A country is not a company that should stick to a narrow range of competencies. It needs a diversified portfolio of companies onshore and offshore to earn its keep through the ups and downs that beset every country and industry. New Zealand needs to widen its portfolio.
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July 29th, 2008 at 9:09 am
Hi Jim,
I couldn’t agree more.
“Successive governments have tried many (too many?) initiatives to stimulate other export industries”
My issue is that these aren’t executed over the long term, they aren’t strategic and they aren’t done with the long term interests of the country, only the next re-election.
Where is the long term vision?
July 30th, 2008 at 1:58 pm
Jim, a couple of thoughts on this. What exactly was in the Stats NZ report to Fonterra? All any of us know is what Fonterra chose to put in a media release. I, for one, have asked for the full report and did not even get the courtesy of a reply. Anyone can add up the latest merchandise export figures but they do fall short of what Fonterra claims for dairy, i.e. 27%. So what is Fonterra claiming to make the difference? And why are they coy about giving the detail? I agree it is of concern that we go in for mono-culture in NZ. Ever wondered what would happen if BoP kiwifruit got a blight of some description? But as for a diversified portfolio - well it is a good idea in theory but that is all it ever seems to be - theory. It seems that no matter how governments and others try to pick and support winners they are always confounded. And why not? As you say it is almost serendipity that Fonterra has done as well as it has. Especially as all the best advice and strategy (as Paul mentions) has been to abandon commodities and concentrate on value-added. Does anyone ever worry that Nokia might leave Norway exposed? Does it simply just come down to the fact that we have to go with what we are good at, manage the risk as best we can and some people will just have to live with the cringe factor of the NZ economy being based on agriculture?
July 30th, 2008 at 7:49 pm
I’m relaxed about having commodities as part of the mix (ask Australia),and NZ is always going to be an economy that relies heavily on land-based products - it has natural advantages and developed strengths in land-based industries. So living with the risks and managing them is a fact of life.
NZ could do better - e.g. forestry is too narrow (a single cheap softwood species) and too focused on just growing. And NZ doesn’t have enough truly international businesses (as opposed to just exporters) apart from Fonterra and and a few others.
Finland (home of Nokia) does have the same worries, and is pursuing similar strategies of encouraging new businesses, but investing in a more focused way (at least it was last time I looked). It also has the advantage of having major markets on its doorstep, but there’s nothing NZ can do about that, so there’s no point in agonising over it.
My point remains that, notwithstanding Fonterra’s success, a foreign earnings mix based on cows, sheep, Pinus radiata and long distance tourism is too narrow. NZ’s long term national policy aim has been to broaden the country’s economic base but it has yet to do so. Whether or not those are land-based commodities or value-added is a second order question.
There is a limit to what governments can do. Industry and individuals have to want to get involved. Governments can only set in place the educational, taxation and regulation environment to encourage that. I’d be inclined to fewer programmes with clearer, more specific focus, but political and bureaucratic nervousness over not having a success every time means it’s unlikely.
July 31st, 2008 at 3:01 pm
Oops, re home of Nokia. Correction noted. And perhaps the error underscores this question/comment. Jim, you mention political and bureaucratic nervousness. What part do you think intellectual prowess - or lack thereof in our small country - plays in the economy and, well, NZ in general? Very difficult for a small populace to produce, foster and keep anyone of intellect let alone many. Is that not part of the problem? We just don’t have, or have enough of, the best and brightest. In those circumstances how much further could we broaden the economic base without reducing the intellectual base even further? NZ tends to keep company with economic powerhouses because of historic ties. But I wonder whether that might blind us to who and what we really are, and what we are capable of. Interesting you say Finland is having much the same issues. And yet it does have that large ‘home’ market advantage. Whereas I’d wager our biggest threat is ‘food miles’ - just the latest addition to the tyranny of distance.
July 31st, 2008 at 9:40 pm
Speaking as a Brit, Kiwis stack up pretty well, although as small businesspeople operating internationally way before their competitors from larger economies, they can sometimes be a little naive. As for food miles, “deal with it”. See what I’ve written on that.
August 15th, 2008 at 9:17 pm
Jim, Paul & Philippa if they check,
Whilst Fonterra’s success is in part fortuitous, it would be naive to think that it was not in many ways engineered (80%). What they say & do, what they make & don’t make has an absolutely massive impact on the world demand & supply situation & in turn price & returns. Something most of NZ can’t comprehend.
Fonterra’s consumer business alone was +2.0 Billion US$ plus last time I saw the figures. It has the largest Osteoporosis focused milk brand in the WORLD according to New Nutrition & it is a sophisticated player that is being held up by others outside NZ as a leading light on how to market functional food & beverage. Those figures would make it easily one of the biggest FMCG’s businesses alone if not the biggest in NZ. Yes it sells commodities as well, but to say that the best approach is to abandon selling commodities in reference to Fonterra just requires a response of “get your head out of the sand” at least to shock you into a bit of “understand before your spurt”. Sadly, most of NZ is ignorant when it comes to Fonterra & I wish that would change (hence the note).
The only area that Fonterra is not excelling in is raising more capital to take advantage of more opportunities. Many brands & business could have been brought & sucked up around the globe if it had had the capital to do so. In that aspect the critics are correct & it’s a situation that they are trying to address by listing, but the farmers (short mindedly so won’t have a bar of it…yet).
But if you contrast the state of NZ lamb business & farmers, which last time I checked was a mess (a product experiencing all the same fundamental growth factors for protein) or Australia’s dairy export situation (that Fonterra & others are largely taking over) you will see that NZ Diary Board, to Fonterra cooperative to eventual listing (at least in part) is the smart & sensible way to evolve a business from what (let’s face it) is a small, small country.
As for why they aren’t declaring details I doubt they care. The only reason they release those types of figures is to keep the farmers chest pumped up and the positivity running as those farmers are a hard bunch to manage at the best of times, are best kept happy & they run things at club Fonterra.
I don’t share the view that NZ should necessarily diversify. I would challenge that what we in fact need is focus & to manage the risk inside that focus, by doing exactly what Fonterra (for example) is doing, buying companies in Uruguay, Brazil, Europe, Asia as it has done for years. (This is not “as best we can” approach, which implies some notion of struggle, it is a strong systematic sensible management of risk with no struggle at all in fact).
You can’t be the best in the world at everything & I don’t think NZ should try or we will fail or get pretty average at everything. As key industries evolve we can evolve the way we participate in them (e.g. some of our farmers are service & knowledge providers to farms in Brazil & not so much farmers any more), but we don’t necessarily have to focus on a different industry & diversify the portfolio. This is something Taiwan struggled with but is now doing as well. It’s no longer “made in Taiwan” (though the smog still reaches there) but they run a massive amount of the knowledge & technology going into China (58 Billion last check).
Of course Nokia is glamorous for most, but then again Finland is under snow 24/7 for most of the year so they have a bit of time to play around on computers coming up with cool gadgets. We all have different circumstances that make us better at some things than others, a good thing that we should celebrate not worry about, it’s given us the All Blacks after all.
As for successive NZ governments “trying” to stimulate other industries. The only thing they have stimulated is the brain drain. In part that will always happen anyway, we are born to explore it seems. But within this context the government needs to get past physical NZ & think of knowledge NZ. 1 Million kiwis live overseas. You don’t have to bring them back to benefit from them (get past the physical it’s not worth the effort & you may not get them back…actually you won’t). You have to ensure they have vested advantages in being part of business, knowledge, network & social NZ though & generally speaking the government is doing nothing apart from romancing those 1 million with memories of the NZ lifestyle (which get’s us in the heart but not in the pocket & lifestyle is always about what’s in the pocket & your attitude not about where you live). They throw in things about how easy it is to set up business in NZ as well & how we are not as corrupt as “them” (know one cares).
Slightly disjointed rant for a Fri evening. No harm but definite awakening intended. Back to work. Yes I am an expat kiwi (15 years) & no I don’t work for Fonterra’s PR department, though after that they should probably employ me.
August 15th, 2008 at 10:18 pm
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