The Bottom Line

Selling products around the world is much more complicated than it once seemed.

Listener: 4 September, 2010

Keywords: Business & Finance; Globalisation & Trade;

There is no problem understanding why Fonterra exports milk products to China. New Zealand is a very efficient producer of milk, and it sells its large surplus offshore. But why does Fonterra have a dairy farm in China?

Although it provides about 40% of the world’s internationally traded milk products, Fonterra produces less than 3% of the world’s total, since most of what other countries produce is used domestically (often behind protected borders).

Fonterra has made the strategic decision that it needs more supply if it wants to make the most of its New Zealand milk. It thinks it cannot be an effective multinational if it is limited to supplying only from New Zealand.

Not all New Zealand farmers are comfortable with this – some fear they will ultimately lose control of their company. But if Fonterra cannot hack it in the international markets, it may end up being knocked around by bigger multinationals.

Although we think of the melamine disaster as bad news – which it certainly was for the children who drank the contaminated milk – the way Fonterra and the New Zealand Government handled it was praiseworthy. Fonterra was not the first company to observe the phenomenon, but it – or more accurately Prime Minister Helen Clark on its behalf – was the one that alerted the Chinese Government. Nowadays Fonterra will not get involved in a joint venture unless it has adequate control over such things.

On Fonterra’s China farm (more are planned), cows are fodder- rather than pasture-fed, and their waste is recycled onto fodder crops. The Chinese may be more likely to be lactose intolerant than we are, but this does not seem to affect sales.

Not so long ago we sent our butter, cheese and wool off to a foreign auction market and hoped we got a good price. We did think a lot about what the market wanted from us – even in the 19th century farmers bred sheep to produce the fibre that the customers wanted for their woollen mills. But in today’s international markets, one has to be a much more aggressive trader.

Exporting is significant only in so far as it generates the foreign exchange we can use to buy overseas products (and service international debt). And it turns out that obtaining goods to the required standard and at a cheap price is more complicated than it might seem. It’s not just a matter of passively bidding at an auction market.

So today, import purchasing is rather like exporting. You can get a sense of what happens from Joe Bennett’s Where Underpants Come From, with its economic story wrapped up in a travelogue. He was chasing up the underpants you can buy at the Warehouse.

The garments are made in China after the Warehouse team has specified what it wants and checked in New Zealand that they meet its standards. As with other big international purchasers, the working conditions and environmental standards the Warehouse sets are not as high as New Zealand’s but higher than the minimum the Chinese Government sets.

Bennett captures an important feature of current international trade when he finds the underpants’ waistbands are made in Thailand, yet the cotton comes from Xinjiang, China’s most western province and further from the underpants factory than Thailand.

It is an example of “chaining”, where production is not carried out in a single factory but involves a number of operations in different locations, with the product finally assembled in a factory (in this case Quanzhou, between Shanghai and Hong Kong) and then shipped out through the giant Shanghai container port to New Zealand stores.

Not that we notice the active chain from dairy farm and factory whose offshore sales generate the foreign exchange to fund the import that sits snugly around our bottoms.