By Gareth Vaughan
New Zealanders need to develop long-term investment thinking, realise there are good returns to be made in their own country and stop selling all their assets to foreigners or resign themselves to being "serfs in their own country", warns Brian Gaynor.
Gaynor, an executive director at fund manager Milford Asset Management and long-time business and economic commentator, told interest.co.nz that rather than legislating against foreign takeovers of New Zealand farms and companies or taxing exports of low value products such as logs or milk powder, he'd rather see New Zealanders start thinking over the long-term rather than settling for a quick buck.
In a Double Shot interview following up on his Saturday NZ Herald column 'A lesson we shouldn't have to learn again' comparing the foreign takeover of the forestry industry with the potential NZ$200 million Chinese buy up of the Crafar dairy farms, Gaynor said the Crafar deal - requiring just Overseas Investment Office approval - was an important precedent.
"The history of New Zealand is if we sell an asset in one area, whether it be forestry, brewing or say the publishing industry, we tend to sell others fairly quickly. The same happened with banking," Gaynor says.
"And I think it just sets a precedent. It’s important that we establish at the beginning whether this is a precedent that we want to continue, or else it’s something that we think is of such important national interest that we should take some steps to ensure that it doesn’t occur, or occurs in such a way that’s an advantage to us rather than a disadvantage."
Gaynor notes that the forestry industry 30 years ago was considered one that was going to be a major export earner for New Zealand and a great wealth creator. Companies like Fletcher Challenge and Tasman Pulp and Paper dominated the sharemarket.
What went wrong, Gaynor says, is the forestry industry got into difficulty, overstretching itself during the 1980s boom. In a not too dissimilar development, dairy farming - with the likes of beef farms and forestry blocks converted to dairy - assisted by eager banks leveraged itself up during the boom of recent years leaving rural debt sitting at NZ$47.7 billion. Now, KordaMentha, the Crafar farms receiver, has accepted a bid from Pengxin International Group which is led by wealthy Shanghai property developer Jiang Zhaobai.
Overseas forestry buy up curtailed investment in the sector
Gaynor notes when forestry companies got themselves into difficulty a familar situation developed.
"And we did what we always tend to do when our companies get into difficulty. We accept an offer from an overseas purchaser. As soon as that started, and it started off very quickly in about 1988, 1989, in the space of the following 10 years, virtually all our forestry companies and all our forests, became offshore owned."
"And as a result of it there has been almost no investment in the industry," adds Gaynor. "And when we compare ourselves with Chile, for example, which was seen to be a similar country with pinus radiata, it has completely surpassed us in terms of exports."
"One of the major companies in Chile last week announced a US$600 million investment in a new pulp plant. We’ve had nothing new in the last 30 years and now we’re exporting logs, low value logs, which actually adds very little to the New Zealand economy."
What this means is that some local sawn timber millers can’t get any logs because overseas forest owners have contracts with overseas purchasers and some are forced to close. Meanwhile, in South Korea the sawn timber industry is prospering through imports of New Zealand logs.
"Now I’d hate that to occur in the dairy industry," says Gaynor.
"The real way that you create value, you create wealth, is the added value. Distribution profits are normally higher than the amount you get at the farm gate."
"I remember when there were a lot of meat companies listed on the stock market we worked out that about 10% of the total value of the meat when it was sold went to the farmer, about 20% went to the meat company here and about 40-50% went to the distributor in the UK."
'Fonterra needs capital to compete globally'
That means if New Zealand just exports the raw material, the commodity, the country gets little of the value.
"That certainly happened in forestry and it’s why the forestry industry has really not fulfilled its potential,' Gaynor says. "The dairy industry has got huge potential in New Zealand but we will lose a lot of that potential if we just export the raw material commodity product."
"Fonterra has done a very good job but unfortunately it’s capital constrained. If you compare it, for example against Nestle, Fonterra has capital of just over NZ$5 billion whereas Nestle has capital of NZ$88 billion. In other words Nestle has about 20 times more capital than Fonterra."
To compete in the big global dairy markets, New Zealand needs a strong and well funded Fonterra and perhaps even another company, Gaynor says.
"If we don’t have that we will just end up exporting our raw material products and most of the value will be captured by the big distributor offshore, whether it be a retail outlet or somebody like Nestle," Gaynor says.
He acknowledges, however, that Fonterra's farmer owners aren't keen on bringing in outside investment. Farmers, already seeing significant foreign buy ups of farms, were "protecting their patch" which Gaynor says you can't blame them for up to a point. Nonetheless, the mentality of not letting outside investors into Fonterra needs to change.
"Because it’s much better to have a strong internationally competitive, aggressive Fonterra rather than a defensive, weak Fonterra," says Gaynor. "At the moment to me Fonterra has done an excellent job but it has got chains around its neck and those chains need to be loosened a little."
'Asset sales contributed to New Zealand's living standards falling behind Australia's'
Meanwhile, Gaynor says much of the gap in living standards between Australia and New Zealand that has opened up since the 1970s, stems from us no longer owning many of our own assets.
"You take the banking industry. We sold the Bank of New Zealand for NZ$1.5 billion. The bank has paid its shareholder in Australia (National Australia Bank) dividends of NZ$5.1 billion since it was taken over. I could go through all the other assets that we’ve sold. And by selling all your assets you effectively become, I hate saying it, but a bit of a serf in your own country," says Gaynor.
"The wealth gets transferred offshore and overseas owners don’t have the same interest in your country and in developing it as domestic owners would have. For example, somebody who is a local director of a company who is going to local football games and is mixing with people at the theatre is going to have a lot more interest in New Zealand than someone who is making a decision from Sydney or New York and only comes here twice a year, jets in and spends a few days here."
"So I think most countries are better off if they own most of their strategic assets. But my way of doing it is to try to convince people not to sell rather than to have legislation saying that you can’t sell," Gaynor says.
However, he acknowledges is a hard ask.
"Because we do tend to take the (takeover) offer particularly in positions where companies are going through a poor period and that of course is what happened to the BNZ, it happened to Fletcher Energy, Fletcher Paper, there’s a list of them a mile long."
He says he wouldn't support the introduction of a tax on log or milk powder exports as an attempt to promote more value-added development of the commodities within New Zealand before they were exported.
"My answer would be to try and convince New Zealanders to take the long-term view. I know there are other bidders for the Crafar farms but it appears theirs is a much more short-term view than the Chinese."
Gaynor says he'd like to see more equity capital in New Zealand and more savings in New Zealand so the country has enough capital to compete with overseas interests.
"But of course we don’t because in the last 20 years there has been a real swing away from investing in the productive sector to investing in residential property."
People need to be convinced there is merit in investing onshore.
"Because there are actually huge advantages of investing in New Zealand particularly from a tax point of view," says Gaynor.
"We’ve got some very high yielding stocks in New Zealand (with) fully imputed dividends. And if you compound that over a period of time, as long as those companies are competing well, I’d be quite surprised if the KiwiSaver funds that are invested in New Zealand - particularly in the equity market on an after tax basis - are not doing substantially better than the money that’s invested offshore."
"But for some reason New Zealanders are convinced that you’re always going to do better offshore even though the New Zealand sharemarket on an after tax basis when you take into account dividends, has actually done pretty well since the KiwiSaver scheme has come in."
Also see last August's Double Shot Interview with Brian Gaynor: Sharemarket quietest for 35 years, future hopes pinned on generation's X & Y.