Managing complexity in diverse Asian markets
At the fourth Action Asia Business Leaders seminar held at Deloitte's Auckland office on 15 May, Fonterra CEO Andrew Ferrier talked about Fonterra’s business in Asia and trends in dairy consumption in the region.
Fonterra recognises there is no one Asian market. Rather, Asia is made up of a huge range of countries with large populations, diverse cultures and identities, and complex market dynamics. Fonterra has had to adapt to different market conditions in different countries. This requires having local teams, building relationships and trust for selling commodities to customers and selling brands to consumers.
Fonterra operates businesses in both consumer brands and exporting dairy products. A big theme for Fonterra throughout Asia is giving consumers nutritional reasons to consume dairy. The company sells NZ$4 billion worth of product into Asian markets with 25 percent of commodity exports going into Asia. Within the Asian region NZ$2.4 billion or 60 percent of the total is sold in the countries that comprise ASEAN (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar (Burma), the Philippines, Singapore, Thailand and Vietnam).
Fonterra’s head office in Asia for its brand-based businesses is in Singapore. The focus of this office is primarily on consumer dairy products and food service products. The office functions as a strategic business unit and makes the company nearly NZ$2 billion in sales, with NZ$750 million of that coming from the ASEAN region.
Over the last five or six years investment growth in brands has increased by 10 percent per year. A large amount of investment in its key brands – Anchor, Anlene and Anmum – has since 2006 resulted in a 55 percent compound annual growth in profitability in its business in Asia. The key to developing Fonterra’s brands has been promoting the idea of family values and health for children. Such has been the success of this strategy that in Sri Lanka, where Anchor is promoted as family milk with high nutritional value, it is a better known brand than Coca Cola.
New Zealand science has been used to augment the nutritional value of milk by adding calcium into products that increase the bone density of children. A key success story for Fonterra resulted from a joint venture it entered into with General Electric which involved deploying thousands of bone scanning devices in countries in Asia to raise awareness of the relationship between diet and osteoporosis. On this project Fonterra also worked with the International Osteoporosis Foundation, which endorses Anlene as a product with proven health benefits for consumers’ bones.
In the case of Anmum, a formula for pregnant mothers and infants, the emphasis was on brain development. The focus on these big three brands in Asia has been very successful and 38 percent of the company’s revenue is now earned in Asia.
Fonterra’s food service business has also performed well in the region. In some parts of Asia, such as China, where milk is not usually consumed on its own, dairy products are finding a way into consumer diets through fast foods such as pizza. As a result, Fonterra’s food service is growing rapidly across the region.
Although much greater than in the past, the amount of dairy products consumed in Asia is still far smaller than in New Zealand. Whereas New Zealanders consume on average 130 kg of dairy products per year, consumers in Japan only get through around 50 kg. However, Asia will continue to be an attractive market for Fonterra as there is huge potential for growth in consumption of dairy products.
In the ASEAN region, for example, with a combined population of 750 million people, only 8 percent of the population is over 60 years of age. This means there is a huge opportunity for milk consumption: as these populations and economies are growing, per capita consumption is increasing. Asia, therefore, will continued to be a very attractive market.
There is another attraction of Asian markets from a trade perspective, and it is that apart from South Korea, Japan and India, those markets are relatively open .General tariffs in the wider region are below 30 percent; in Southeast Asia and China they are around 10 percent. Japan and South Korea offer lower levels of market access to Fonterra’s products: tariffs on New Zealand butter going into Japan have a rate of 300 percent; those on milk powder going into South Korea are at a rate of 176 percent.
By 2020 30 percent of Fonterra’s exports will go to ASEAN and China, and by then the reductions in tariffs will result in an estimated savings of NZ$100 million. Fonterra is very supportive of free trade initiatives and their potential to release free trade benefits across Asia, whether they are bilateral or regional agreements.
Potential free trade agreements with South Korea and India will offer fantastic opportunities to increase trade in Asia. The Trans-Pacific Strategic Economic Partnership Agreement involving New Zealand, Chile, Brunei and Singapore is viewed as a fantastic vehicle for trade liberalisation across the Asia-Pacific. There are indications the agreement may be extended to include Australia, Peru, Vietnam and, potentially, Japan.
Although business in Asia hasn’t escaped the effects of the economic downturn, overall the region remains a good trading environment for Fonterra. The company is reasonably pleased with how their businesses are performing in Asia. Overall profits are lower and the food service’s business performance is marginally down on recent years. Across Asia in 2009 there has been GDP growth of around 0.9 percent, driven by growth in export markets and weak domestic demand. Growth is down 3 percent in the better performing markets and down as much as 20-25 percent in countries where consumers are spending less. The forecast for next year is for a modest recovery of GDP, but this depends to a great extent on how demand picks up in the United States.
Up until recently, consumers in Asia have been buying more and more imported milk products. China remains the fastest growing milk market in the world. Chinese consumers have lost confidence in domestically produced milk powders and are consuming more imported products as a result.
Commenting on the Sanlu melamine-tainted milk scandal that erupted in 2008, Ferrier said where Fonterra went wrong was to take too long to make the supply chain safe. They were investing in the milk production supply chain in accordance with a milk production strategy in China of 5-6 years.
Fonterra has been doing business in China for thirty years and intends to be back in China and to invest in developing its supply chain as time goes on. During the recent visit to China by Prime Minister John Key, Fonterra’s Chairman Henry van der Heyden received a warm reception from all levels of the Chinese government. The messages Mr van der Heyden received from the Chinese government were very constructive as its officials believe New Zealand has an important role to play in the milk industry in China.
While in China, Mr van der Heyden was present at the launch of the China Soong Ching Ling Foundation, which is a non-profit organisation, dedicated to improving the health of pregnant mothers and infants in China. Fonterra decided to do this because it wanted to put something back into China to support its economy.
In short, although Fonterra has lost a lot of money in China, is the country remains a very attractive market, where the company intends to continue to build on its 30-year presence so far. The economy in China has been hit by the global economic downturn, but as the Asian region leads the world economy out of recession, the food service business will rebound in China.
