By Bernard Hickey
Just imagine if you owned a business and your sales manager told you the business sold 46% of your most popular product to just one customer last year.
Would you celebrate and ask how you could switch all your production to that one product and see if that one buyer wanted to buy all your stock?
Or would you wonder if you might be over-exposed to that one product and one customer?
You may ask, which is this business and who runs it?
It is not a supplier to Countdown. It is New Zealand in 2014.
The product is milk powder and the customer is China.
New Zealand sold 46% of its milk powder to China in 2013.
Exports of this one product doubled, helping to drive overall exports to China up 45% to NZ$10 billion for the year. Meat, log, fish and wine exports rose at double digit rates, but milk powder alone made up 40% of all New Zealand's exports to China.
The share of our exports going to China has risen from 3% to 21% in less than a decade. A largely unreported milestone at the end of 2013 was China becoming New Zealand's largest trading partner, both for exports and imports. Australia had been our biggest partner since 1989.
New Zealand has never seen such a dramatic jump in trade with a single partner in such a short space of time.
But we have been in this position before of having to think about a dramatic shift in trade before, except in the other direction. In the late 1960s and early 1970s New Zealand worried about just this problem of relying so heavily on one buyer.
Back then New Zealand mostly sold sheep meat and butter to Britain. We fought two wars with Britain to help preserve that trade dependence, but Britain's entry into the European Common Market in 1973 blew away that complacency. Much of the next three decades was spent desperately hunting for other markets to diversify away from Britain.
New Zealand's success in finding other markets and other products was extraordinary, particularly our surge into the Middle East, Southeast Asia and Latin America and our move out into wine, fish, beef and logs. Even by 1992 Britain still bought 14.5% of our dairy exports and China bought just 0.5% of our dairy exports.
But by 2013 Britain's share dropped to 0.3% and China's share was over 25%.
New Zealand is not as dependent on exports of milk powder to China now as it was on exports to butter to Britain in the 1960s, but at the current pace of growth we'll get close sooner than we think.
So is that a good thing?
Most farmers would say we should make hay while the sun shines. But there is also the problem of having too many of one type of egg in one basket.
This explosive growth in demand and prices for milk powder is also dominating our national economic strategy, which is focused mostly on enabling increased production of milk and its subsequent processing into milk powder.
That is putting enormous stress on our waterways, and on the relations between town and country.
New Zealand had a sneak preview of the risks of such a reliance on one product to one country when for a brief moment in August last year it appeared China had banned all New Zealand milk powder imports after Fonterra's botulism scare.
Many breathed a sigh of relief when it became clear only the whey protein concentrate imports had been banned and not the golden goose of plain milk powder.
This reliance on one product to one country is also forcing us to tweak our strategic relations with our oldest friends.
New Zealand now has a clearly softer stance than Australia on China's more muscular stance with its near neighbours Japan and the Philippines in their various disputes over who owns which rocks in the seas between them. Australia angrily protested China's imposition of a air defence zone over the Senkaku Islands late last year. New Zealand just said it preferred China and Japan settled the dispute between themselves.
So far New Zealand has managed its relations with China well and dodged a few bullets, but our largest trading partner now is a country New Zealand knows much less about and has far fewer connections with than Britain.
Those cultural, political and social connections are growing fast, but not as fast as the trade links. Some things change quickly and others do not.
New Zealand sold just NZ$2 million worth of butter to Britain last year and NZ$4 billion of milk powder to China.
Yet we still share a monarch, a language, a political system and our love of Coronation Street with Britain. Few New Zealanders would know the name of China's President Xi Jingping or that China's currency is called the Renminbi.
We have a lot of catching up to do, and perhaps a little spreading around as well.
(Updated with images from this ANZ research note)
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A version of this article was first published in the Herald on Sunday. It is used here with permission.
47 Comments
Its a macro-economic issue , we need to diversify the economy to ensure more money comes from more sources :-
- Oil and Gas
- International Financial services such as funds management and pension management
- Industrial scale fish factories
- High- tech- low- labour manufacturing (we have cheap reliable electicity)
You could go Brazilian
http://www.forbes.com/sites/kenrapoza/2014/02/04/as-emerging-market-cri…
If you want lower rates we could try borrowing less.
When you are small this is somewhat of an occupational hazard, in the end there is only so much energy and resource and opportunity cost is a real thing.
I am inclined to believe most market intervention has unintended consequences, especially as intervention is stacked on previous interventions. Not being swayed by the cry 'something must be done' I think it best to let things pretty much run their course unless the proposal is extremely persuasive.
Not only do we need to diversify our customers but also what we produce. Wouldn't it be a breath of fresh air to also specialise in products and services other than commodities? I know there are knockers of companies like Xero, but regardless of its hyper valuation v its lack of revenues, it's indicative that there are Kiwis out there looking to put NZ on the map with ventures that don't involve milk, wool , logs , fish etc.
P.S Bernard, speak for yourself re the love of Coronation St. :)
Yes I must agree regarding the Fed and Xero. The operations of Xero would need to prove itself further before I would invest but my point is that at least it's an attempt af creating a highly productive entity that could earn the country more than commodities. And yes Coro St is awful. :)
I do a lot of "research" in IT and frankly the cloud is overblown, overhyped and over-priced.
Besides that Xero has a valuation that far exceeds its income probably for many years out.
That's not to say it doesnt have a good product (I dont know about that), just its priced like it has no competition when in fact it does.
regards
XERO has no Albert Ross hanging around it's neck ....
... the company has enough cash on board to last it several years .... And from what SME directors are saying , Xero's software is making life easier and more profitable for them ....
If investors got it wrong , and have overpriced the stock , that is their lookout ... it doesn't affect the day-to-day running of the company one whit ...
For me Nestle is an amazing example..... I was eating "milky Bar " chocolate and drinking Milo over 40 yrs ago..
I can only guess how many countries know Nestles' brands...
I thought Fonterra, when it was first formed, was going to emulate Nestle.... ie. Build ubiquitous Brands that are iconic.
I'm guessing that to do that would take a major commitment in time, investment and creativity.....like planting a seed that very slowly grows into a massive tree... ( In this regard China is/ was an opportunity because companies like Nestle don't have a Brand presence yet ) ......
I have no idea if Fonterra is doing this...or not...???
My only interest in Fonterra is that I was raised on a dairy farm and after leaving school... I worked in a NZDC Dairy Factory... ( one of my jobs was melting big blocks of cocoa down and spraying it into milk powder, destined for Nestle..... this was about 1981 ) ... Even while I was covered in milk powder dust , inhaling cocoa fumes, I kinda thought all the power belonged to whoever owned the "Brand"..
I'm not a Marketing guy.... what I've just written could be a load of BS.... it just seemed/seems like common sense to me..??
Well on the farm some do it this way
We like the comment about bank lenders:
http://www.radionz.co.nz/national/programmes/countrylife/audio/2584963/…
Food wise, its the middle kingdom or: global supply chanins and supermarkets. This is really worth a listen.
http://www.radionz.co.nz/national/programmes/morningreport/audio/258556…
Colesworth are playing mh with the Fornterra Oz assets, and cutting Fonterra brands off at the knees. Refer the Fonterra ANZ lost earnings over the past 3+ years...
Its seems that the progressive mgt has taken a turn.
http://www.stuff.co.nz/business/industries/9727417/Behind-the-supermark…
Cliffing', 'rogering' and other bully-boy tactics... Have the business practices of Australia's supermarket giants finally arrived in New Zealand?.....
Insiders who spoke to the Star-Times say the culture of Progressive took a sharp turn for the worse late last year, with the arrival of a hard-nosed senior executive from Australia.....
Hard-nosed, self loathing & destructive etc. more like it.
Henry the problem is that there is a monopoly postion. And we have to change that - IMHO the only effective means is to break up the monopoly. Break down the concentration from two large chains to a mimimum of ten.
In business we all deal as best we can. Some behave worse than others, including some newly arrived senior executive. But it's always going to be somebody, if the conditions allow it. If you only have one source to sell to, or to buy from you are going to be screwed. There are series of monopolies and collusive industries to be dealt to, which have made New Zealand an expensive place to live.
If we just tut tut about some naughty individuals, we will be misleading ourselves.
you are right.
While on the one hand there is the "let the processes of good corporate goverance, ethics and stakeholder management run through the situation" - we see these such being demonstrated in Fonetrra as it displays its thinking and pointing to procedures within such processes - though a portion of this is backed by legislation.
while across the ditch we observe a much more "to what I am legally obliged to do" position.. - followed by see you in court once my commercial contracts manager and ligation lawyer have softened you up, and your lawyer will have invoiced you to an inch of your life.....
. what we see is the fine fence line of the law having large gaps between posts and in some places large sections of wire missing (your point being - there will always be some chancer/brazen etc.happen along) hence the Dick Smith commentary and analysis
puts pay to the supermarket ownlabel myth of Australian made is needed by customers
describes the ever search for corpoate returns driven by surplas and fake money driving up assets that then demanda yield
and a post we found from an Ozzie fund manger earlier in the week (describing what he termed "over reach" [gaps in the fence] by and around banks, supermarkets and shopping centres/landlords- see [3:05] in clip below).:
http://www.abc.net.au/news/2014-02-12/roger-montgomery-talks-to-the-bus…
of note is comment at [1;10], the banking/concentration of ownership example and description of how instuitution shareholders [institutions that have shareholding across all 4 banks] may have told NAB (BNZ) to fall back into line with the other three banks [infrerence being kept sum of industry margins up]..
- not so much about customer value, but value of customer to the institutional hareholder....
could it be an example of the over production of credit that is smashing the real economy...
Is NZ being set up for a fall?
Does our one-trick wonder economy mask structural problems such as 35% youth unemployment, low skilled workforce, 40% of our unemployed are under 25, provincial areas in decline, etc?
http://www.smh.com.au/business/why-new-zealand-is-the-new-ireland-20140214-32qhc.html
I think one of the major things that bothers me about the under 25s is how docile they are about the whole thing.
Perhaps a sweepstake should be run on when it will be our turn to provide the near slave wages to produce the goods the unthinking world wants.
Globalization, coming soon to a sweatshop near you
My kids have taken their trade skills to Australia, for better wages, & deeper job market & free Tafe training paid by employer. There are more kids in NZ now that have the ability to go on to University but electing to learn a trade first - which is quite good, I think. But finding a longterm apprenticeship in provincial areas in Nz is not easy.
BH, the implicit assumption in your article is that NZ is culturally incompatible with China, and hence will have difficulties with it's New Best Friend.
That does a massive dis-service to the hundreds of thousands of NZ'ers of Asian extraction, who are the builders of the cultural bridges to said NBF.
It is also curiously blind to some of the more incisive comment about the Middle Kingdom's current thought patterns as it manages the transition from export to domestic consumption - AEP as always is one such.
And surely the work ethic and general business nous, apparent in most of these citizens, is to NZ's particular advantage?
Unless it is being suggested that a colder, poorer version of the South Seas Idyll, sans palm trees for us in the Middle Island - is our preferred future.....and That view has not a few supporters amongst the common taters 'round 'ere.
Or, less comfortable, you are squirming under the dominant boot of what could be described as a New Commercial Imperialism - coloniser is in turn colonised....
It is the difference between east and west Waymad. Concious vs Unselfconscious culture, opposites that will never meet. An unconscious culture will never conceive intellectual property as the concept is foreign in a society that values the group over the individual. Not saying that is right or wrong, just different.
In the context of design my university has partnerships with Chinese universities. My lecturers report that the Eastern approach to design is that they can't. The can copy, and will do so, but they can't design. In response to a design brief they ask: "just show me how to do it and I will".
BH should also watch this clip from a former World Banker.
Cheers.
Waymad.
Not completely culturally imcompatible, but we've got a lot of catching up to do.
I may be very biased on this given my vocation. I've worked as an editor managing reporters working inside China.
The culture in the media and political scenes in China is utterly foreign to ours.
The default culture in China is to keep state secrets and to imprison or block dissenters.
Ours is not, despite what Kim Dotcom says.
I'm not saying it's can't be overcome, but we've been lucky so far. Lots of work to do.
cheers
Bernard
Interesting question Gummy.
My take is that there was no reason at all for us joining Britain in WW1 and WW2. There is a radical view that even Britain should not have joined in.
Except of course that we thought we were British too. We thought that, but was it enough reason? Maybe, maybe not.
What is certain it was a disaster. WW1 was New Zealands worst social disaster. Took out huge numbers of young men from a small population. Destroyed some country areas in a way they have not recovered from today.
Recently I read somewhere that NZ was in WW1 largely because the NZ government was heavied by the UK government to the effect that we send troops, or forget about selling any lamb to Britain in future.
Would have to verify that though. I think it was one of those things that comes out when the archives are declassified after however many years.
And the Uk certainly kept its eye on the middle east and outcomes regarding petroleum supplies, which required the war to run a little longer.
Im just reading ' The tide at sunrise' looks like a cracker.
http://www.amazon.com/The-Tide-Sunrise-History-Russo-Japanese/dp/071468…
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