OPINION: Fonterra should split into two competing entities

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By Jim Scott

Back in the 1990s, a transformation of the New Zealand export economy was in full swing.

The wide range of export products being marketed globally from New Zealand had historically been driven by individuals and companies with a strong sense of adventure and “can do”.

These entrepreneurial Kiwis often went overseas like travelling salesmen to all corners of the globe, with their traveller’s cheques and air tickets.

Many of these export products were effectively sold directly from their New Zealand factories to customers against competing Kiwi businesses, based on price. They often competed against each other, down to the lowest price, to get the sale.

In the early 1990s, I chaired the Government-sponsored overhaul of the tourism industry which is also a major foreign exchange earner for our country.

We were concerned that New Zealand-based operators were also racing each other to the bottom, selling holiday packages at the lowest price to intending foreign visitors to our country.

We ultimately recommended to the Government a single-market variation whereby a new tourism body would promote New Zealand as a highly attractive destination.

Our industry operators in off-shore markets immediately moved to target premium prices, underpinned by the high-profile international marketing of New Zealand Tourism.

With many iterations and adjustments since that time the New Zealand Tourism industry performance, nearly 30 years later, is way beyond anybody’s wildest dreams.

The formation of Fonterra into a single export manufacturer and marketer for our dairy industry in 2001 seemed like a great idea.

The farmers, with strong views and beliefs, who had already struggled with significant aggregations within their industry, were hesitant.

The monopoly rights single market granted by the Government in forming Fonterra were quite quickly abused as Fonterra tried to, through direct overseas ownership, dominate the global value-added dairy products markets.

Today, Fonterra, through its international diversification and the lack of a genuinely competitive domestic marketplace, has lost the confidence of its key stakeholders. It is now urgently in need of a major overhaul.

Our internationally traded dairy products are only a small percentage of total global dairy production and will continue to experience the impacts of price and global production volatility.

A major review of Fonterra would require legislative changes along with the goodwill of their dairy farmer shareholders. Fonterra needs to evolve and concentrate on achieving low-cost, globally efficient production from dairy farm to shipping to market.

Numerous other land-based export industries as well as tourism have over the years successfully adapted their single-desk marketing concept to suit changing market needs. A new Fonterra needs to operate in a seriously competitive domestic marketplace – ideally split at least into two separate competing entities.

For me, the big question is will our Government, a coalition of three minority parties, be capable of politically delivering such a major strategic move for Fonterra?

Timaru resident Jim Scott is a former Air New Zealand chief executive officer and a strategic consultant for small-to-medium enterprises.