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Fonterra shame also Labour’s

  • April 10th, 2013

Months of rationing of baby formula in China, panic buying and hoarding, and tourist purchases here unmistakeably reveal the huge premium attached to our reputation for incorruptibility on food standards, and the value of brand New Zealand.

This was predicted years ago, particularly after the melamine scandal in China, of which Fonterra had first hand knowledge. Synlait and others saw it. They've long been trying to increase their baby formula capacity and some is coming on stream this season.

But much more will come from new Chinese funded, owned and controlled businesses. Clearly they will use the NZ source brand for all of the vast premium value it is worth. But their very involvement will damage our brand, for the same simple reason that the premium exists. They will know that, but enough will remain to make it worth their while to exploit it while they can. Mainland Chinese business integrity is an oxymoron. Obviously there are trustworthy people and firms, but consumers have little way of distinguishing them from those who are not, and the proportion between the two is believed to be vastly different from here.

I have direct experience, through clients, of what is to us breathtakingly ruthless dishonesty. The casualness of it speaks for the prevailing culture.

I've seen nothing to indicate any New Zealand moves to ensure that the new Chinese businesses will not use their plants in New Zealand to provide misleading cover for sales of dairy produce from more dodgy sources (probably incorporating some genuine NZ product). For example, it should have been a condition of OIA permission that their consents will be revoked and their investments will be confiscated in compensation immediately there is reasonable evidence that they are improperly hitchhiking in China or elsewhere on the reputation of their NZ investment.

I suspect that even those subject to such conditions would have welcomed them. Because they face in China a classic prisoners dilemma. Unless they can be confident that their competitors will be obliged to be straight, anyone who stays straight is a mug.

But the supply gap should not have been there in the first place. Faced with both the opportunity to profit from the premium that is instead going to the tourists and informal importers who are buying our product here, or counterfeiting our packaging, why did Fonterra not ensure years ago that it could fully supply enough genuine product? Why did it not ensure that there was no supply gap to entice the Chinese manufacturers into their direct investments,  the seeds of destruction of our valuable brand New Zealand reputation? Why did Fonterra not embark on a crash conversion of some of its existing commodity milk powder capacity, to create the much higher value infant formula?

None of the technology is secret. We are as familiar with building such plants as anyone in the world. The Chinese who are now here and running hard to fill the gap, are using local planners, engineers, and manufacturing.

I think the answer lies 10 years ago, when Helen Clark and Jim Anderton agreed with farm politicians to exempt Fonterra from normal competition law, so it could become the only game in town. Led by ideology to be suspicious of orthodox economics they dismissed the evidence that favoured monopolies are almost always more fat and lazy and exploitative than competitive markets. Instead of requiring that corporatisation create at least two behemoths (one led by Kiwi, the other by NZDG) they colluded with the farmer politicians who were dazzled by the size = market power story.

And so Fonterra has fiddled. It has burned off attempted local start-ups, spent millions fighting competition law issues and  with high pay-outs fuelled a dairy land price boom. The farmers' best interests would have been instead in a crash upgrading of its powder plants to preempt the invasion we are now seeing. That was the kind of strategic investment that the monopoly was supposed to enable.

Instead we are witnessing the squandering of our greatest asset – our business culture and reputation. Sure, we are self-handicapped by our strait-jacketed capital market, the RMA, and the manana attitude of the generation who inherited the second richest country in the world from the can-do WW2 vets.

But Labour's DIRA (enthusiastically supported by National) gave us the added ball and chain of monopoly arrogance, complacency, a limited employment market for executives who fall out with the monopoly, and the absence of competition for benchmarking comparison.

Same kind of reasoning as now supports local government amalgamation.


  • Harry Young
  • April 10th, 2013
  • 11:00 am

Entirely agree with your analysis. However, I am very uneasy about baby formula milk generally. Fonterra are risking opening themselves up to the same criticism as Nestle and BAT – the creation of a market where the actual product is a bad thing for the consumers. I accept that it should be up to parents whether to breast feed or bottle, but only if they are fully informed. Will they be?

  • Mike Mckee
  • April 10th, 2013
  • 6:26 pm

Another ereason Helen Clark should have NO honours at all.
Shame on John Key.

  • peterquixote
  • April 11th, 2013
  • 7:29 pm

What honour do we give Helen Clarke Mike McKee, if she came back here we would send her to Greenland with old yellow tooth Geoffrey Palmer, and a few others. But I bet she would’t dare. who would greet her, who still loves her, oh thats right, poor old Micky Savage.

  • John Morrison
  • April 20th, 2013
  • 4:21 pm

That is the best criticism of that damned DIRA I have read. Minus the distortions it has caused in the rural economy.
So okay, we know the problem, what can we do that isn’t just pointing it out?
Because mark my words Mr Franks, the way some sheep farmers are gathering together, snivelling and wringing their hands just as some dairy farmers did in the nineties, I’ll bet that soon DIRA will have a little sister called MIRA.
Then what.

(SLF) John on logic you are right, but from comforting experience they will fume and buzz backwards and forwards and announce grand schemes but none of it will crystallise into suicidal action. I guess there is a risk that this time could be different, because the Green and Labour parties want to show their committment to French style socialism. They could adopt collectivisation of the sheep meat industry in the same spirit as they’ve just reverted to 1950w ‘solutions’ to a non-existent electricity industry ‘problem’.

  • Don Nicolson
  • April 21st, 2013
  • 4:10 pm

Perfect Steven. And so in 2013 we have Zespri, Fonterra, Landcorp all having dominance from legislated privilege within New Zealand and also in China? That other producers want to follow that same pathway to the Parliament door can be stopped by what argument now the die is cast? JM is right. A MIRA is close by.

  • Tauhei Notts
  • April 22nd, 2013
  • 8:32 pm

For the past 35 years I have hearing about how, firstly the NZ Co-Op Dairy Co and then Fonterra would squash Tatua.
Talk to neighbouring dairy farmers; one side of the fence with Tatua and the other side Fonterra. The Fonterra supplier is so envious it is unbelievable.
Economies of scale are the biggest lie peddled by any economist. Tatua is living proof of that.
Note, Tauhei is too far from Tatuanui to be included in Tatua supply.

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