28 June 2017

Upgraded FTA between NZ and China set to supercharge Kiwi exports – but don’t assume it’s a golden ticket

Kiwi exporters are starting to see big benefits of New Zealand's free trade relationship with China. But those same companies warn doing business in China is not painless.

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Chris Russell

Chief Executive, HSBC New Zealand

For over a decade kiwifruit giant, Zespri has been exporting fruit to China but in the past three seasons sales volumes have more than doubled to over $400 million last year. New Zealand's pioneering Free Trade Agreement with China in 2008 allowed Zespri to find firm ground in the highly competitive and complex market.

“We have been caught up in the general interest in New Zealand [generated by the FTA] … it is good momentum,” says David Courtney, Zespri's General Manager Grower and External Relations.

The 2008 FTA removed restrictions on the company to provide better outcomes in both New Zealand and China, allowing it to expand its Asian operation. Zespri has invested in digital trading platforms - with China fast becoming the world's largest ecommerce market1 - and built close relationships with large, high-end retailers. A three-year trial growing premium kiwifruit in Shaanxi Province could allow Zespri to supply their product during the New Zealand offseason, providing 12-month access to the Asian markets.

“As the tariff has gone down and non-tariff aspects have taken effect, it has made doing business easier and allowed us to deliver value back to consumers and growers,” says Courtney.

This growth and investment in China was recognised when Zespri won both the Supreme Award and the Excellence in Export category, at the New Zealand China Trade Association's (NZCTA) China Business Awards in May.

With ever-increasing trade links with China, Kiwi exporters have an opportunity to make further progress in the world's second largest economy. New Zealand is leading the world again in its trade relationship with China, becoming the first country to start upgrading its FTA2 with the global economic giant this year.

China overtook Australia in 2013 to become New Zealand's largest goods trading partner3, with annual exports to China rising to $12.3 billion in 2016 - a 76% increase since 20114. The two countries hope to reach $30 billion worth of two-way trade by 2020. China provides an important opportunity for growth with export markets disrupted by the US withdrawal from the Trans Pacific Partnership and the uncertainty arising from Britain's exit from the EU5.

But companies experienced in China warn the FTA upgrade does not provide guaranteed success.

It is essential that New Zealand businesses get first-hand experience and build real relationships with partners in China, says Courtney. His advice to New Zealand companies looking to expand is not to assume they understand China.

“If you sit back and take your learning from reading and academia then it is not going to work so well. Seek advice from any number of parties that have deep experience in China and New Zealand, because they are invaluable in helping understand the culture, and how you can get your business to work the best,” he says.

Another China Business Awards winner, Kahl Betham, Gallagher Security's Global General Manager, has similar advice - build local relationships in China.

“Talk to others who have done it, learn from people's mistakes, invest locally and hire locally,” he says, noting that in their early days the Hamilton-based security firm flew in and out of Asia “and found we were not getting much traction”.

Gallagher is now looking to triple its business growth in Asia over the next five years from its initial expansion into Hong Kong. This would not be possible without strong local relationships, says Betham.

“A critical success factor was getting on the ground, getting into the networks, hiring locals and forming those longer-term relationships.”

Speaking after the awards evening, HSBC's New Zealand CEO Chris Russell stated that the FTA has been important for opening doors for Kiwi exporters, but the ability to succeed in China requires intimate knowledge of the region. New Zealand companies [leveraging HSBC's network] have received essential support in extending their reach in China through access to local expertise and introductions to regional funding sources and supply chains - including export credit funding and access to HSBC's network across China.

To expand into China for the first time takes a lot of resourcing and a lot of skill. We [HSBC] are uniquely placed to help clients do that

Chris Russell, Chief Executive, HSBC New Zealand

One example is an innovative approach to providing supply chain solutions to New Zealand corporate clients who have rationalised down to one or two suppliers. For approved6 Chinese suppliers, HSBC may provide financing solutions to enable them to step up production to cater for enhanced demand coming through the consolidation of the supply chain.

HSBC's extensive history in China also allowed it to identify the Pearl River delta's opportunities for Western-based companies to get their entry into China. It has the single largest middle class population, and is the region most focused on import and export with the best infrastructure to accommodate this growth.

"[The Pearl River delta] has at least seven cities with at least 5 million inhabitants and growing, and the growth is around that educated class. We are investing heavily in that area and our expansion will help New Zealand corporates," says Russell.

But, although New Zealand's relationship with China is strong, Russell cautions that the enhanced FTA should not be seen as a golden ticket for exporters.

“The FTA helps manage the risks better and makes it more efficient and cost effective to do business with China. Tariffs that might generally apply to other countries might not apply, but corporates will still have a lot work to do,” he says.

New Zealand China Trade Association China Business Awards

HSBC is the lead sponsor of the biennial NZCTA China Business Awards. The 2017 awards evening held in Auckland was attended by a capacity crowd of over 600 people, including, Deputy Prime Minister Paula Bennett, Chinese Ambassador Wang Lutong, Sir Don McKinnon and the former Prime Minister, Sir John Key.

2017 Winners

SUPREME AWARD WINNER
Zespri Group Limited

CATEGORY WINNERS
Auckland Airport Award for Contribution to the growth of Chinese Tourism in New Zealand
China Travel Service (NZ) Ltd

DLA Piper Award for Investment between China and New Zealand
Waste Management NZ Limited

New Zealand Trade and Enterprise Excellence in Export or Import
Zespri Group Limited

Cathay Pacific Award for Best use of eCommerce in exporting to China
Aladdin 2015 International Limited

New Zealand China Council Award for Outstanding Contribution to the New Zealand
Rt Hon. John Key

SPECIAL RECOGNITION for Outstanding Contribution to the New Zealand
Professor Yihuai Gao (Alpha Group Holdings Ltd)

Hong Kong New Zealand Business Association Award (Success in Hong Kong by a New Zealand organisation)
Gallagher Security (International) Limited

1 http://www.nzherald.co.nz/the-country/news/article.cfm?c_id=16&objectid=11841953

2 https://www.mfat.govt.nz/en/trade/free-trade-agreements/free-trade-agreements-in-force/nz-china-free-trade-agreement

3 http://www.stats.govt.nz/browse_for_stats/industry_sectors/imports_and_exports/trade-china-tripled-decade.aspx

4 http://www.stats.govt.nz/browse_for_stats/industry_sectors/imports_and_exports/goods-and-services-trade-country-info-releases.aspx

5 http://www.economist.com/news/finance-and-economics/21716620-how-new-zealand-coped-loss-preferential-access-its-biggest

6 Subject to HSBC's terms, conditions and due diligence approval requirements.

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