New Zealand trade winds - which way are they blowing? - Milford Asset

New Zealand trade winds – which way are they blowing?

Tom Monti

Investment Analyst

Tom joined the Milford Private Equity team as an Investment Analyst in 2017 and is responsible for the assessment of opportunities, valuations, executing transactions and supporting the management teams of investee companies. Prior to this, Tom had been working in the investment banking team at UBS in Auckland, where he was involved in a number of significant capital markets and private transactions.
Tom holds a Bachelor of Commerce, majoring in Economics and Finance (with First Class Honours) from the University of Canterbury.

The New Zealand Government last week announced it had signed the Regional Comprehensive Economic Partnership (RCEP) deal – a new trade deal between New Zealand, Australia, China, Korea, Japan and the nine members of the Association of South-east Asian Nations (ASEAN).

The countries involved in the agreement represent approximately one-third of the world’s population and account for nearly half of New Zealand’s exports. The New Zealand Government expects the deal will, in time, boost our GDP by $2 billion through trade efficiencies.

This will be welcome news to New Zealand exporters who have faced increasing trade headwinds in 2020, particularly with China, our largest export market.

New Zealand was an early leader in developing a multilateral trade program with China. Through this, New Zealand has been a major beneficiary of the rapid growth of the Chinese economy since 2000.

China, competition & COVID…

More recently, however, we have seen rising headwinds from geopolitical tensions, increased competition, and the flow on effects of COVID-19.

The current geopolitical environment creates uncertainty for our exporters and poses a risk if the US-China rivalry and rising tensions in Hong Kong and Taiwan are not navigated with precision by our government. Indeed, Australian exports to China have faced a wave of punitive tariffs. How much of this can be attributed to promoting local products versus the deteriorating relationship between Canberra and Beijing is unclear. Whatever the case, statements perceived to conflict with the Chinese government are being retaliated against and operators in China are using the tension as leverage in negotiating margin on imports.

Travel restrictions relating to COVID-19 border closures have severely hamstrung the Daigou channel. Daigou is a form of cross-border exporting in which an individual or group outside China purchase products for customers in China. The dislocation of the Daigou is a double-edged sword for exporters; not only have they lost a sales channel, but they have also lost a key source of customer information and marketing. This has the effect of reducing revenue and increasing the cost of customer acquisition going forward.

COVID-19 has also impacted the global supply chain, with container shortages and inefficiencies at ports impeding access into markets. This resulted in a shock to loyalty, with Chinese consumers switching stores or brands to fit with the access constraints. Domestic brands who are in-market, and able to bridge any supply shortfall quickly, benefitted from this trend. These brands also benefitted from formal and informal government support including subsidies/vouchers and a lighter regulatory framework to market products compared with foreign competitors. Moreover, competitive threats from international players continue to rise as brands look to China for growth.

These headwinds have tapered the easy growth opportunities enjoyed by New Zealand exporters in the past and have combined to increase the cost of doing business in China.

Growth potential still exists

The China post-pandemic recovery has been strong, and the economy has avoided a real recession. Domestic travel is rebounding and the Government’s ability to keep on top of outbreaks is demonstrable. Chinese consumers are generally optimistic about the domestic economic recovery.

So, how can our exporters navigate the headwinds and continue to win in China?

Demand for high quality New Zealand product remains, but the value proposition must be clear. This does not mean we have to compete on price, but more focus on education around points of difference such as origin, health benefits, product format and safety is required. We must also push our environmental credentials and leadership in sustainable production and packaging.

COVID-19 has prompted a flight to digital for the Chinese consumer. This shift in behaviour should benefit New Zealand exporters with strong e-commerce capability, helping to gain access to consumers in lower-tier cities, where brands have not had a physical presence to date. Older industries must quickly evolve traditional routes to market to take advantage of the digital environment. This will involve updating product formats, shifting away from mass commodity units (e.g. bulk boxes of unbranded meat) and up the value chain to smaller, branded units. There is also a real opportunity for medium-sized enterprises to invest in digital and unlock a market that has been difficult to access in the past.

The way forward

Executing in the new environment going forward may require a fresh approach. Key Opinion Leaders and Key Opinion Customers (influencers promoting products via social media platforms) are becoming increasingly important information sources with significant influence on purchasing decisions. Beyond this, affiliate marketing could be used to harness a broader salesforce locally in China. Affiliate marketing provides employees of physical stores with a platform and remuneration structure to promote and sell their company’s products digitally, in addition to their physical in-store sales. Finally, brands must be ready to support the Daigou channel when it eventually re-opens.

China remains an attractive market for New Zealand exporters, but the rising costs of doing business and recent tariffs on Australian imports are a reminder that we must allay mounting single market risk with a more diversified trade program. Indeed, as China becomes more competitive, we will need to look to alternative markets to support future growth. The recently executed RCEP deal should act as a tailwind to help achieve this.

Disclaimer: The material contained herein is based on information believed to be accurate and reliable although no guarantee can be given that this is the case. This is intended to provide general information only. It does not take into account your investment needs or personal circumstances. It is not intended to be viewed as investment or financial advice. Before making any financial decisions, you may wish to seek independent financial advice.