Penalty For Heist Of NZ Gold…..en Kiwifruit – A Cup Of Water On A Blazing Inferno?

According to an announcement released on the website of the Courts of New Zealand, due to his smuggling of Zespri’s golden kiwifruit variety – “SunGold” – into China, a former kiwifruit grower Haoyu Gao has been ordered to pay damages to the kiwifruit grower Zespri in the sum of NZD 12.1 million. 1

This 12.1 million was a reduction from the sum of NZD 14.9 million which had been ordered earlier in the year but appealed by Gao – supposedly due to an inexact measurement of Chinese orchards involved in utilizing the smuggled kiwifruit. Other details of Gao’s appeal were dismissed. 2

Interestingly, there is a Chinese saying “to pour but one cup of water on a blazing inferno on a cart of firewood” (杯水车薪). The saying, albeit largely self-explanatory, essentially refers to a method or solution too insignificant to solve an issue. While the above ruling against Gao may on the surface appear to be a win for the New Zealand kiwifruit industry and its battle against the propagation of smuggled kiwifruit in China, rather it may be the equivalent to “pouring but one cup of water on a cart of firewood set ablaze”. This is because:

  • (1) There are still 5,500 hectares of SunGold kiwifruit growing in China3 and these are unaffected by the ruling on Gao.
  • (2) Ultimately, when feasible, Chinese corporations generally favor partnerships at different parts of the value-chain over pure import and distribution.

Below, I would like to expand these opinions of mine based on more than 12 years of experience in China.

(1) There are still 5,500 hectares of SunGold kiwifruit growing in China and these are unaffected by the ruling on Gao

According to Zespri, there are still approximately 5,500 hectares of illicitly grown kiwifruit of the SunGold variety growing in China. In comparison, in New Zealand there are approximately 6,500 hectares planted with the SunGold variety. Thus, the 5,500 hectares in China is a significant amount of illicitly grown kiwifruit difficult to ignore and this is unaffected by the aforementioned ruling against Gao.4

Zespri previously explored the idea of trialing collaboration with these illicit growers so that they could be added to the Zespri value chain rather become a separate and competing value chain. The idea was that the formerly illicit Chinese growers would, over a 3-year-trial-period, produce 1.9 million trays of the SunGold variety – about 1.9% of the total trays of the variety that are expected to grow in New Zealand over the same period.5 However, Zespri only managed to get 71% of New Zealand kiwifruit growers’ votes in support of the trial – short of the required 75%. As a result, the trial will not be carried out.6

Thus, it is plain to see that these orchards growing kiwifruit propagated from the Zespri SunGold variety are there and not going away and do not appear to be affected by the ruling on Gao. Previous efforts to get Chinese authorities to crack down on the illicitly grown kiwifruit have supposedly been unsuccessful and thus it is highly unlikely that these illicit orchards will be routed.8 I anticipate, if they are not integrated into the Zespri value chain, then the growers of these illicit kiwifruit may attempt to compete with lower pricing. Undoubtedly, there will be certain demographics of consumers that will prefer to pay a lower price for their kiwifruit and this may affect the market share of imported New Zealand kiwifruit to some degree. However, exactly to what degree the illicit kiwifruit will affect the market share of imported New Zealand kiwifruit in China is debatable. Consumers in China tend to value other product attributes over price. In 2020, KPMG conducted a survey which required participants to rank the importance of a series of  roduct attributes related to food products on a scale of 1 to 10. These attributes included things like Price, Convenience, Familiarity, Health/nutrition, Innovative/unique, Taste, Texture, Fashion/trend, Brand, Aesthetics, Country of origin, Carbon Zero etc. Participants from China scored health/nutrition as one of the second most important attributes – with price as the fourth most important factor.7 This value that consumers place on health and nutrition means that when it comes to food products, Chinese consumers still have a perception that imported food products – namely from countries with high food safety standards and food industry production transparency such as New Zealand – bring a higher value proposition than do locally produced products. Hence, even if there are locally-grown kiwifruit and the production capacity of these is sufficient, they may not necessarily replace imported kiwifruit. Rather, they may coexist with imported kiwifruit and steal some market share by attracting consumers that are more sensitive to price. This may include some of the existing market demand and thus affect Zespri’s market share; however, it may also capitalize on latent market demand pertaining to a demographic that is sensitive to price and unexploited by Zespri.

The coexistence of imported and locally produced products in a product category and sometimes even the same product is actually something quite common in China. It is particularly prevalent in the Passenger Car Market in China. During my time as a Senior Consultant and Project Manager at a software development firm which developed CRM and ERP software for various car brands and their dealerships in China, I worked on projects for Skoda, General Motors, Ford Lincoln and Volkswagen. At the dealerships of many of these brands in China, I found that some car models were available in both “locally-manufactured” versions and also original-import versions. This is still the case now. The locally-manufactured versions are manufactured in China according to the relevant IP. Some brands simply import knocked-down-kits and then assemble the kits in China, while some brands go further and integrate locally sourced components into production; thus, the degree of the local manufacturing varies from brand to brand. Regardless, the locally manufactured cars are generally much more competitive at price point than the imports. The original imports are more expensive due to them being produced in the country of origin with higher labor costs and also due to import tariffs. However, there is still a market for the original imports due to consumer perceptions that safety standards for production overseas – generally speaking in Europe, USA and Japan, are better than in China and thus conducive to ensuring a better product.

I believe the above example of coexistence of imported and locally-produced versions of the same product is relevant to the current Zespri situation. The fact is, there is now a “local-version” of Zespri’s product in China that is not going to be routed. It will likely coexist with Zespri’s imported product in some shape or form and the ruling on Gao will not affect this. However, whether Zespri will be able to integrate this local-version into its value chain or whether it will become an independent value chain is yet to be determined and will depend on whether or not Zespri can find a solution to work with or control the illicit growers.

(2) When feasible, Chinese corporations generally favor partnerships at different parts of the value-chain over pure import and distribution.

In the long-term and where possible, Chinese corporations generally favor partnerships – often in the form of Joint Ventures (JVs) – as opposed to purely being the agent for import and distribution. This is because, in my experience, Chinese corporations prefer to participate as extensively as possible in the value chain so that they can attain revenue corresponding to the different links of the value chain.

Several of the industries I have worked in in China have in fact been industries where the products were originally imported finished products with Chinese partners simply importing and distributing.  However, later the Chinese partners in these industries eventually wanted more extensive participation across the value chain. Consequently, the product evolved beyond being a foreign product simply being imported to and distributed in China. Above, I have already citied examples from the automotive industry, however, I have also encountered similar trends in the aerospace industry and also the alcohol industry.

Previously, I was the Head of Business Development for a Sino-NZ Joint Venture in the Aerospace industry in China. The Sino-NZ Joint Venture was responsible for assembly of an aircraft model that, prior to the JV, had only ever been manufactured in New Zealand with no assembly ever being conducted in any other market. Due to the growing General Aviation industry in China, the Chinese partner – a massive state-owned automotive conglomerate with several JVs with big brands such as Mercedes and Hyundai already set up – had also set up a General Aviation subsidiary for the purpose of creating JV partnerships with aircraft brands. The Chinese partner originally had intended to simply set up a JV partnership in China with the NZ aircraft manufacturer, then gradually phase-in production across the approximate phases below:

  • I. The finished aircraft would sold by the NZ partner to the Chinese partner, imported from NZ by the Chinese partner and marketed in China by the Chinese partner whom would hold the exclusive distribution rights of the aircraft in China.
  • II. The NZ partner would export the aircraft in knocked-down-kits with assembly of the kits conducted at the JV-owned facility in China. The Chinese partner would also, as the exclusive distributor in China, market the aircraft in China.
  • III. Eventually, assembly would gradually evolve into local production and thus the JV would eventually produce a “local-version” of the aircraft to be marketed and sold in China by the Chinese partner.

That was the original plan. However, after beginning to negotiate the details of this JV and discuss the plan for the set up of the JV, the Chinese partner realized there was a key link in the value chain where revenue would be stimulated by the business activities of the JV in China but would not be shared with either the Chinese partner or the JV entity. The link in question was that pertaining to the export sales of the aircraft, or the knocked-down-kits of the aircraft, from China to New Zealand by the New Zealand partner in the JV – the original aircraft manufacturer itself. Upon realizing this, the Chinese partner revised the negotiations of the JV and required that, parallel to the JV in China with the New Zealand partner, the New Zealand partner would also allow the Chinese partner to purchase a 50% stake of the original aircraft manufacturing company in New Zealand. This acquisition would thus allow the Chinese partner to participate in and benefit from the aforementioned link in the value chain. Both sides eventually agreed to this arrangement and the cooperation ensued.

Another example different to the concept of a JV or acquisition but still illustrative of the Chinese partner wanting to maximize their participation in the value chain is brand collaboration. When I was the Asia Regional Manager and Greater China Sales Manager at New Zealand’s largest independent cider brand, I managed to win over a new sales channel in China – which was a bar-restaurant chain with 30+ venues nationwide and a huge following (hundreds of thousands of users) amongst 20 to 30 year olds on social media. This channel was generally only happy to work with large multinational brands when it came to network-wide supply contracts as large multinational brands could justify giving the channel cash for “marketing services”. The channel would then use this cash to, supposedly, fund advertising themultinational brands’ products throughout its venues and also on its social media – although it was obvious that some of this cash was pocketed as profit for such marketing services. Essentially, this type of arrangement allowed for the channel to not only profit from value at the level of retail profit margins – buying the product at a wholesale price and then selling it at a retail price, but it also enabled them to profit from the value attained by participating in the marketing part of the value chain. However, despite being New Zealand’s largest independent cider brand, our marketing budget was miniscule in comparison to those of multinational alcohol conglomerates. This was an obstacle to winning over the channel since the channel wanted value beyond that of the profit margins of buying the product at a wholesale price and then selling it at a retail price. Hence, after much discussion and negotiation, we found a method that would both bring the Chinese partner – the channel – further participation in the value chain and, in turn, value beyond retail sale profit margins. That method was brand collaboration.

The sales channel had its own craft beer brand. The brand had just been launched and was in need of more exposure. Hence, we came up with the idea of a collaboration cider concept exclusively for the sales channel under a dual-branded label designed by the channel’s marketing team. This was essentially a win-win in the eyes of both parties involved. For the client sales channel, it meant that they were able to attain value beyond that of retail sale profit margins. For us, the producer and seller, it meant that we were able to expand our sales network in China and thus increase our sales revenue.

In my opinion, this tendency for Chinese partners to want to participate as extensively as possible in the value chain is quite common. I am sure there are many other examples both from the industries which I have cited and also from industries which I have not cited. Hence, I believe that if Zespri are to truly ensure that these illicitly grown kiwifruit are not going to result in an independent and competing value chain that produces a competing product, I believe Zespri will indeed need to adhere to the principle of keeping one’s enemies closer than one’s friends. Otherwise, the failure to allow the Chinese side further participation in the value chain may, in the long term, ultimately decrease the overall value of the chain for Zespri. 


References:

1 https://www.courtsofnz.govt.nz/cases/haoyu-gao-v-zespri-group-ltd 2 https://i.stuff.co.nz/business/126311898/kiwifruit-smuggler-ordered-to-pay-zespri-12-million-after-unsuccessful-appeal 3 https://www.newsroom.co.nz/rod-oram-china-scooping-our-kiwifruit 4 https://www.newsroom.co.nz/rod-oram-china-scooping-our-kiwifruit 5 https://www.rnz.co.nz/programmes/the-detail/story/2018790587/managing-china-s-theft-of-nz-s-sungold-kiwifruit 6 https://www.sunlive.co.nz/news/274135-growers-vote-no-to-zespri-china-trial.html 7 https://www.theguardian.com/world/2021/jun/18/kiwi-wars-the-golden-fruit-fuelling-a-feud-between-new-zealand-and-china 8 “Agri-business Agenda 2021: New Zealand,our consumers, and our 2040 future”. KPMG, 2021.

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