Going big, going broke, or going home? What are the prospects for Kiwi exporters to China as 2022 plays out? Damon Paling, former NZTE trade commissioner to China, shares his views.
The upgraded Free Trade Agreement (FTA) between New Zealand and China comes into effect on April 7 which is a great development and a time for celebration. It’s a reflection of 15 years of strengthening bilateral trade and people-to-people engagement.
Yet of the 300-odd Kiwi exporters having a crack at the China market today, they can be segmented into one of three scenarios: going big, going broke, and going home. A surprisingly large number of companies unfortunately fall into the latter two categories.
For all its merit, the improved FTA will be of little comfort to those exporters that are either going broke or going home. So, why is it ‘the end of the China dream’ for so many Kiwi exporters? Whilst COVID travel restrictions haven’t helped, they are far from being a determining factor.
Celebrating the winners
Goods and services exports between New Zealand and China reached NZD$21.7 billion in the year ending December 2021. This represents a year-on-year increase of around 20 percent, which is remarkable given that tourism and education remain in the COVID doldrums. Three cheers can go out for exporters in the primary sector, most of whom are going big. Dairy, meat, horticulture, seafood, and forestry are trending upwards and retain points of differentiation in the eyes of Chinese consumers.
Several companies in the primary sector retain hallmarks of success, such as having established strong local trading relationships within China. Some companies also retain ‘smart capital’ that aids in funding growth to scale up a ‘made for China offering’ and accelerating sales distribution reach in both online and offline channels. A cursory review of the finalists in the HSBC NZCTA China Business Awards reveals consistent themes, such as a differentiated and defensible value proposition in a product offering, strong supply-chain management, and acceleration/localisation of digital marketing across various social media platforms.
Undoubtedly, Kiwi exporters of goods in the primary sector can benefit from full implementation of up-to-date rules, particularly in areas such as extended tariff-free access and trade facilitation for perishable products.
Headwinds faced in certain sub-categories, such as infant milk formula are due to wider demographic challenges. Headwinds faced in squid and mussel exports may be due to volume/value considerations and product substitution. In celebrating other companies going big in China, a hearty round of applause is deserving for exporters in other niche categories, such as manuka honey and retail-ready pet food, where double-digit revenue growth can be enjoyed.
A strategic reset
We are going broke – stop the haemorrhaging! In many cases the alarm bells were already ringing pre-COVID and the pandemic simply accelerated a much overdue strategic reset. To coin Alibaba parlance, the exporter had successfully transitioned “from 0 to 1” and gained a degree of brand awareness amongst Chinese consumers. But revenue growth had since flatlined. Typically, this can be attributed to a few factors. Cost to serve, particularly in the field of digital marketing, has increased. Competitor offerings have improved in terms of product efficacy. New product development was absent or simply not fit for purpose. Long-term business partnerships failed to materialise.
To turn around the situation, particularly in cross-border e-commerce, the economics often need to show a global turnover of greater than NZD$20 million, with China comprising 20 percent. Several other questions can be asked. Is it possible for the Kiwi brand to rank within the Top 10 by GMV in the applicable category? Is there sufficient margin in the value-chain to fund long-term digital marketing? Is there Chinese talent in-market and a pipeline of new product development that is fit-for-purpose?
From a head office viewpoint these aspects will stretch what is deemed to be commercially feasible. The cost of rebooting China may increase relative to what could be more readily achieved in other international markets.
What else might a turnaround playbook consist of? One option is a strategic equity alliance, such as Bubs Australia (infant formula) and Willis Trading in Hong Kong (daigou wholesaler). A percentage of shares are exchanged conditional on sales goals being reached. Access Corporate Network aspire towards similar outcomes for a selection of Kiwi brands. In niche categories where New Zealand is less heroic in terms of provenance and less competitive in terms of scale, then depending on the incumbent shareholders, this approach may be a pragmatic path forward.
“As we have all come to learn, modernisation of China does not equate to Westernisation of China. Ideally, Kiwi exporters can design a legitimate ‘unfair advantage’ somewhere in the value-chain that can level the playing field and create an opportunity for commercial success.”
As we have all come to learn, modernisation of China does not equate to Westernisation of China. Ideally, Kiwi exporters can design a legitimate ‘unfair advantage’ somewhere in the value-chain that can level the playing field and create an opportunity for commercial success. For example, this might come through a unique ingredient with proven efficacy or the introduction of so-called “smart capital” that can fund growth and support accelerated distribution. As mentioned, most of the finalists in the NZCTA China Business Awards could likely cite an example of an ‘unfair advantage’ in their respective value chains.
The end of the dream?
For many the China journey began with an accidental market entry during the euphoric 2010s. The novelty of being foreign, coupled with entrepreneurial talent of the diagou trade, set the wheels in motion. Underscoring demand in China was lingering distrust towards domestic brands.
Coupled with a somewhat porous border these factors paved the way for dozens of Kiwi exporters. The cost of customer acquisition was cheap and any investment in the market was funded through a healthy trading margin. Happy days!
That was then and this is now. Everything has changed. Those exporters ‘going home’ tend to be concentrated in the wellbeing, beauty, and niche FMCG sectors. For many, the sooner this happens the better.
Finding the working capital, the scale, the commercial capabilities, and a value proposition that resonates with Chinese consumers, is no easy feat. There is no point in throwing good money after bad. Greater opportunities may well exist in other international markets.
China’s zero-COVID policy may well fast-track this new journey. But having the courage to say ‘no’ to China as a core international market is far from easy.
However, it may well be the best decision made in a long time.
Damon Paling is now an Auckland-based NZTE Beachheads Advisor for China. Email [email protected]
