Helping New Zealand Catch the Knowledge Wave

“Helping New Zealand Catch the Knowledge Wave”

Craig Norgate
Chief Executive Officer

Wellington Chamber Of Commerce

4th floor
WestpacTrust Stadium
Wellington

12.00 pm
Tuesday 9 October 2001

EMBARGOED UNTIL DELIVERY

Thank you for the opportunity to meet with you today. I’m determined that Fonterra, as a leading New Zealand company, will maintain a close relationship with the wider business community. As this speech is entitled, Fonterra wants to help New Zealand Catch the Knowledge Wave. We can do that, partly, by staying in touch with you.

Back in February, the Wellington Chamber hosted our Chairman, John Roadley. By all accounts it was a successful occasion. I’m pleased that the Wellington Chamber has shown such interest in the dairy industry, and a lot has happened since John spoke with you earlier in the year.

Back in February, the industry merger, the creation of Fonterra, and all that we plan to achieve, were objectives we were working towards. There were many barriers ahead of us. Not least was the debate over whether the Commerce Commission merger application process was appropriate for a highly-regulated industry, seeking deregulation, and with a 95 percent export focus. John explained our case to you, as he did to other leading business groups around the country. It was part of our programme to explain to business why we were seeking changes to the law – changes that Parliament has ultimately supported. We couldn’t accept that it could be good for New Zealand to split our industry in two, in a global dairy industry where there is now a major merger, acquisition or joint venture announced every two and a half days.

I don’t underestimate the importance of the support we received from business. One of the reasons I am able to address you today, as CEO of a company, backed by our shareholders, facilitated by the Government, and a week or two away from being formally in business, is because of the strong support for our merger that we received from businesspeople all around the country. It was people in business – and exporters in particular – who could see most clearly that arguing for New Zealand to be a country of only small and medium-sized companies, by world standards, would be a limited, parochial view. It would condemn our business sector – and therefore our country – to second-tier status internationally. The business community could see that our country needed at least one company of truly global scale.

We start business in a week or two as New Zealand’s largest company. That’s well known. We’ll be one of the world’s top ten dairy companies. That’s well known too. We will employ around 20,000 people, marketing dairy products to customers in 120 countries around the world. We’ll generate around 20 percent of New Zealand’s export receipts and around seven percent of our GDP. Our industry has delivered a record payout to our shareholders, the season just gone.

Those statistics roll off the tongue easily. But they mean very little, except that they set a standard that we now have to exceed. That’s the expectation of our shareholders, who backed the merger so strongly, with a record 85 percent turnout and an 84 percent vote in favour. It’s the expectation of the Government and the wider community. And we know, very clearly, that we must deliver on the promises we have made. We have to achieve those promises in a more difficult international environment as a result of the terrorist attacks on the United States and their still unknown aftermath.

Our first and foremost obligation is to deliver on the Business Case, which we presented to our shareholders. It outlined $310 million in gains by the third full year after the merger. Of the $310 million in gains, $190 million will come from revenue enhancements and from improvements in our ability to deliver on our industry’s strategic plan. We have dozens of project teams working on delivering those gains as quickly as possible. As well as revenue enhancement and strategic gains, the Business Plan envisaged $120 million in savings. We still have three boards. We’ll have one. We had three CEOs. We’ll have one. And so on, with those with the whitest collars likely to be the most affected.

As the home of the Dairy Board, Wellington has been worried about what the merger may mean for the city. I repeat what we have said before. There will be savings to be found here in Wellington. There will be some job losses. But there will be no mass layoffs or mass migration to Auckland. Our two main operating divisions – NZMP and NEW ZEALAND MILK – will have their head offices here in Wellington, for as long as it makes commercial sense for them to do so.

The $310 million in gains outlined in our Business Case are our first priority. But the expectations for our company go well beyond them. In the lead up to the merger vote, we argued strongly that we needed scale to be able to launch a more aggressive strategy of alliances and joint ventures. Some had been in the pipeline for a year or more but could not be completed without the merger. Some have since been announced. Other projects are under development.

As we look at our options internationally, we will be ruthless in our use of capital. We need to ensure we are maximising the return on the funds we employ. We will make strictly commercial decisions. Our expertise and our resources will be applied to those parts of the world and to those product lines where we forecast the best potential for profitable growth.

The forecasts I will share with you are pre-11 September. We don’t know exactly how recent events will impact on us. The military response is still unclear, and therefore how it will impact on our business. We are getting information in daily.

Prior to 11 September, we were expecting demand for dairy products to grow slightly faster than supply over the next five years, leading to a modest increase in prices. In the developed world – Western Europe, North America, Japan, Australia, New Zealand – population growth was forecast to be almost stagnant. Demand for dairy products was forecast to grow by only around one percent a year. Product by product, consumption of traditional lines was expected to remain static and for butter was expected to decline. Growth was forecast for products such as pizza cheese, functional foods, milk drinks, and also organics. The real growth, however, was not expected to be in the developed world. It would be found elsewhere.

I define our domestic market as being Asia. If Asia isn’t our domestic market, then we don’t really have one. In Asia, the expectation was for continuing growth. In South Asia, growth in demand for dairy products was expected to be up to three percent a year over the next five years. China is always an important market for almost any exporter. Its accession to the WTO will see its tariffs on butter and cheese fall from 50 percent to ten and twelve percent respectively. It’s a substantial market, it’ll be a growth market, and we regard it as part of our domestic market.

That’s Asia. Now let me put it in perspective. As a dairy market, China is smaller than Mexico. It’s a country where incomes and demand have raced ahead, largely as a result of closer integration with the US economy through NAFTA. In the Americas as a whole, dairy products are already an integral part of the diet. We don’t have work to do introducing consumers to a greater dairy diet. From the Bering Strait to Cape Horn, the Americas offer a dairy market worth US$94 billion a year. In the US and Canada, we see two of the wealthiest markets in the world. In Latin America, we expect growth in demand for dairy products to be in the vicinity of four percent a year. That’s four times faster than the growth we expect in Western Europe. Much of the growth in the Americas is expected to be in higher-value fresh and chilled products.

These opportunities in the Americas have led to the Dairy Board successfully putting greater focus on the region in the last five years. And our analysis is behind the initiatives we’ve announced in recent weeks. The first was the export agreement with Dairy America, to become the largest exporter of skimmilk powder out of the United States. It’s a very important deal. In Mexico, we’ve purchased two companies – La Mesa and Eugenia – making us the number one player for cheese and number three for spreads. I think I’ve already explained the importance of Mexico. And our big deal is the planned alliance with Nestle, for a wide range of dairy products, including shelf-stable and fresh milks.

Due diligence for the Nestle alliance is now underway. We plan to establish a new entity, owned 50:50 by Nestle and ourselves. There will be equal representation on the board, from both companies. Executives will also be drawn from both companies, and be appointed on merit. We’ll identify opportunities which deliver dividends to Nestle shareholders and a higher milk price to New Zealand dairy farmers. We’ll be using our brands and their brands – whichever is the best for the particular market. Neither of us intends to be precious. Fresh milk will be sourced locally in the Americas and ingredients will be sourced from New Zealand.

In Nestle, we saw the world’s most respected food company, with the world’s leading dairy brands, and a global research and product development infrastructure. They saw in us the world’s largest exporter of dairy products, with strong brands, and with unique skills in large-scale milk procurement, processing and management. And we have vast experience in consolidating dairy industries – our own, for example. We can’t discuss numbers yet, because we have not finalised the opportunities we are likely to pursue. But there is little doubt the alliance with Nestle – if finalised – will be New Zealand’s biggest-ever offshore commercial deal. I’m delighted that, less than a year after we signed our merger agreement, the dairy industry is in the position of getting down to the real business of such an alliance.

Ever since our merger was first floated, we have talked about earning the status of a true New Zealand national champion – of helping New Zealand Catch the Knowledge Wave. I’ve chosen my words carefully. We plan to earn the status of a true New Zealand national champion. We do not claim it.

National championship doesn’t mean subsidising the domestic market by selling milk for below the world price, or opening our chequebook for sponsorships. It’s not our milk, and it’s not our chequebook. We are a co-operative and proud of it. For most dairy farmers in New Zealand, we are currently the only realistic, large-scale customer for their milk. New customers may emerge as a result of deregulation. But our constitution demands that our suppliers also become shareholders of our company, and they are locked in for at least a year. Our shareholders can’t just sell their shares on the open market if they disagree with our decisions. It places an even higher obligation on us – than for a public company – to ensure every decision we make is one we can stand in front of our shareholders and defend on short-term and long-term commercial grounds. But through performance – through making the right commercial decisions – we plan to earn that status of a national champion.

We are a New Zealand company. As I’ve said, our Corporate Centre will be based in New Zealand, in Auckland. Our key operating divisions are based in New Zealand, here in Wellington. We hope that that means this country’s business support infrastructure – the top international consultancies, the business advisors – have slightly more incentive to have just that much better and bigger operations in this country. Those services are then available to the rest of the business community. That’s a way in which we can be a national champion.

The same is true with science. We are New Zealand’s most significant private-sector investor in research and development. We spend around $110 million a year and have contracts with something like 460 scientists. We do that, first and foremost, because we need to stay ahead of our competitors and so that we have the widest possible range of commercial options available to us in the future. At the same time, we are a New Zealand company. And we are delighted that our investment in R&D delivers to this country a more lively scientific community than it would otherwise have. Our scientists have colleagues and students that they work with, that they teach, that they learn from, that they inspire. Our investment helps provide a critical mass of scientific exploration that benefits the rest of the agri-business sector and New Zealand society as a whole.

We’re working hard to ensure that that activity continues to be based here in New Zealand. The science community in New Zealand has compromised – enormously – through the Royal Commission into Genetic Modification process. But that process has delivered a path forward where our scientists can say: “Yes, it’s not ideal, but it remains within the bounds of what we can work with.” That’s national championship.

With important and growing issues, such as environmental sustainability and animal welfare, we want to set the standard, because that makes sense at every level.

National championship can perhaps be best understood in the context of career opportunities. We are a New Zealand company and we are a multinational company. We offer New Zealanders the opportunity to work as part of a truly global network. That’s unique. We want New Zealand’s best and brightest to want to work for us and with our partners, such as Nestle, internationally. We want every young New Zealander to aspire to work with us, in the same way they might aspire to represent New Zealand in sport.

Our environment will be one where we challenge our people to go beyond their boundaries – to extend themselves – to become better transportation and logistics experts, better manufacturers, better marketers, better scientists, better international managers, and better leaders – better than when they began with us. We want to help them Catch the Knowledge Wave. And then you’ll try to headhunt them. And that’s fantastic. We won’t make it easy for you. But our company will help build a pool of talent to benefit our business, and to benefit this country.

We see no contradiction in delivering to our shareholders and to New Zealand at the same time. There is no contradiction between performing commercially, socially and environmentally at the same time. Resolving apparent conflicts – finding a path forward that no one has travelled before – is what true innovation is all about.

The expectations on our company are very high. We have raised them. And we need, now, to deliver. In some projects, we are likely to fail. That is the price of setting the bar high. And we will be telling you when we fail. But I would like to think that, in eighteen months, I could return to the Wellington Chamber of Commerce and report that we were well on our way to achieving our goals – goals that we have set for ourselves, and that you and our shareholders expect us to deliver.

Thank you for your interest in the dairy industry and in Fonterra. I look forward to staying in contact with the Chamber. Thanks for the opportunity to meet with you today.

END

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