Fonterra: We’re in China for the long haul
Dairy co- op’s woman in China says Beingmate investment is strategic, not financial,
For Fonterra, the rationale for investing in Beingmate Baby & Child in 2015 is as valid now as it was then, despite the company’s latest troubles, says the co- operative’s top executive in China, Christina Zhu.
It’s been a rocky road for Beingmate over the past year or so. In January, the Shenzhen- listed company said its loss for the year was now expected to come in at 750- 800 million yuan ($ 155.6m to $ 166m) because of accounting adjustments and provisions for bad debt arising from its subsidiaries.
Last year Beingmate faced a fake infant formula scandal, following the arrest of nine people in China after more than 22,000 cans of counterfeit infant formula were found being sold under the brands of Beingmate and Abbot Laboratories.
Its shares last traded at 13.78 yuan — down from the 18 yuan Fonterra paid in early 2015, and less than half the peak of nearly 30 yuan midway through that year.
Fonterra’s investment has sometimes drawn criticism from fund managers, who have said the co- op paid too much ($ 755m) for the 18.8 per cent stake, and that the holding needed to be bigger for Fonterra to influence Beingmate’s direction.
But for Zhu, who is president of the co- op’s operations in Greater China — China, Hong Kong and Taiwan — the logic of the investment still stands: Beingmate is a strategic investment, not a financial one.
“We have all seen the numbers,” says Zhu during a visit to New Zealand. “It’s a fact that the business, like all the other infant formula businesses in China, is going through a very interesting and dynamic period.”
China’s attempts to formalise regulations on infant formula — known as Article 81 — have dragged on. It now appears that some time next year the number of infant formula providers will shrink radically, and all will need to be registered.
This has brought uncertainty to the market and all the majors — the multinationals but particularly the local players — have suffered, Zhu says.
But she says there was an obvious need for the Government to regulate the market.
“The direction is very clear,” she says. “The Chinese Government just could not deliver a food safety and quality promise to their people with the thousands of brands in the Chinese marketplace, so that just had to change. “Consolidation just had to happen. “There will be a much smaller number [ of players],” says Zhu. “Over the long term, the bigger brands will benefit.”
Beingmate and Fonterra’s main infant formula brand, Anmum, were among the first to put in their applications to get registered.
In the big picture, the reasoning behind Fonterra’s move on to Beingmate’s share register still holds, says Zhu.
“If you step back, China is still the biggest infant formula market, and the fastest growing, in the world,” she says.
“If you are serious about the paediatric market, you need to win in China, so the strategic rationale for that investment still holds. It holds for us and it holds for Beingmate.
“It holds for us because it is still the largest growth market and we know we need a partner.
“For Beingmate, the rationale holds as well, but there is no doubt that we are in a very challenging period.
“They [ Beingmate] are not alone with that. They are well aware of it and they are working through it.”
Zhu says the infant formula market has proven to be more challenging and uncertain than many people anticipated — including the Chinese Government.
Fonterra’s tie- up with Beingmate, which operates four plants and 80,000 retail outlets across China, includes a distribution deal for Fonterra’s Anmum infant formula brand and a joint venture manufacturing operation at Darnum, in Victoria.
Forsyth Barr analyst James Bascand says the Beingmate move has drawn some flak.
“The long- term strategic rationale behind the investment — direct market access for the distribution of infant formal products — remains sound,” Bascand says. “There is still a good opportunity there.”
As Zhu sees it, Fonterra tripled its earnings before interest and tax ( ebit) last year in Greater China.
“It’s been a phenomenal growth trajectory,” she says. “Beingmate — as important as it is — is only a part of that.”
Fonterra plays the long game in China, and the fact that the co- op has set up three huge farming hubs, milking 31,500 cows, has not gone unnoticed by the Chinese community and by the Government.
“We are not someone who has come here to make a quick buck. We are here for the long term,” Zhu says.
“Our roots are in New Zealand — and we are proud of that — but to really sustain success in China, and to leverage off that, we really need to be ‘ local’ at the same time.”
Zhu notes that many companies have risen to prominence through the unofficial parallel import — or “daigou” — channels.
“Some companies have chosen the easy way — through the daigou channels — but the easy way is not always the most sustainable way,” she says.
“We did not take any shortcuts. We invested in local knowledge and in building a team, but we are the only one who has made that commitment and we are the only one that has the advantage of a local milk pool, as well as a New Zealand milk pool.”
Fonterra’s presence in China dates back to 1973, when the first New Zealand dairy delegation visited the country. Ties strengthened in 2008 through the New Zealand- China Free Trade Agreement.
The co- op has invested heavily in
China is still the biggest infant formula market, and the fastest growing, in the world Christina Zhu
the food service market — setting up big demonstration kitchens to teach local chefs how to use dairy products.
Fonterra’s mozzarella is a huge seller in China and it’s estimated that half the pizzas sold in China are topped with Fonterra cheese. It’s also big in cream cheese and UHT milk.
For some, Fonterra doesn’t move quickly enough, but Zhu says it’s a matter of balancing the short term with the long term.
“Our farmer shareholders are people — they are not Wall St fund managers. These are people whose livelihood depends on the payout that they get from Fonterra, so it’s our job to balance the short term with the long term.”
Fonterra’s focus has been on getting the farms up and running and it is now in the process of integrating, or “synching”, them into the co- op’s wider operations.
Unsurprisingly, Zhu is enthusiastic about dairy’s potential. “For Fonterra, Greater China is very different now from the Greater China of three or four years ago. And we are only at the beginning of it.”