Article provided by Business Research and Insights

The growing Asia region presents many opportunities for Australian businesses. Australian Country Choice’s CEO shares his experience of expanding a supply of high quality meat into the region.

One of the largest vertically integrated supply chain organisations in the world, Australian Country Choice (ACC) is looking to expand its supply of high quality meat into Asia. CEO David Foote discusses the challenges and opportunities ahead.

Why is ACC interested in exposure to Asia and particularly China?

We have a relatively mature domestic business that creates a surplus of product, so we have capacity that can take advantage of overseas customer opportunities for highest value and best use. Being on the doorstep of Asia and having had an existing business into Asia through the sale of product, we wanted to capitalise on our experience by exploring new growth opportunities in building our supply chain relationships within Asia and with a principal focus on China.

ACC’s Australian model has been based on a stable customer base – the major supermarket sector. How different is the business risk model in Asia, where supermarkets are not as concentrated?

Our current model allows us to have a risk averse approach, so our priority is to look for a customer or customers that will most closely match our business today – for example, a supermarket or large restaurant chain that sees both the intrinsic and extrinsic value in an integrated supply chain that can provide continuity of supply, quality, food safety, provenance and value.

We’ve learned that no single country or company can service China. We have to really look at China in terms of its provincial areas and identify tier 1 or 2 cities with key operators in food service or retail in those markets and then pitch the supply chain model to them.

What risks does ACC face using this model?

Outside the commercial trading risks you face in any other country, and outside selling the supply chain model as a customer/consumer benefit, nothing stands out. If there’s a risk in China, it’s around rushing to do a deal out of excitement rather than following your strategic plan, which will take time.

We’re learning that China has a history of taking 100-year horizons with subsequent activation time frames on major projects. Australia is very different, so it can be challenging to adapt. We rush to do a deal in six months to last three to 10 years. The Chinese are looking for deals that last much longer, so six months has never been on the horizon.

You also have to recognise the extent to which many Chinese businesses or business managers have been influenced by their previous status as state-owned enterprises. This makes this sector more cautious in their approach and generally less entrepreneurial.

In supplying Asia, how does ACC plan to manage counterparty risks?

At the moment we always start with money up front before anything happens. One significant advantage of exporting by ship is that the product can be en route but the documents to clear it and transfer ownership are not exchanged until payment is made.

There’s some risk in having the goods and documents in port, but you can always reload the boat and send it home or to another customer or destination if something goes awry. This will cost you, but you won’t lose the goods. Choosing the right partner will limit this risk.

What due diligence does ACC apply to potential partners?

We see greater sovereign risk than company trading risks. But generally we call on 35 years of international trade experience in doing business around the world when it comes to selecting partners.

We’re unlikely to do business with any company that does not have assets, a strong corporate or business profile or a traceable and verifiable history in any country. In the case of China I can also ring my NAB bankers to ask for their view on any proposed partner.

How will the beef sector meet the aspiration of being the ‘food bowl’ of Asia?

Australia will never be Asia’s food bowl – our production systems are simply not big enough. But we can be one of the grains of rice or cubes of beef in the food bowl. As a high cost nation, Australian product will not be affordable to a majority of the Chinese population for some time to come. Our productivity cannot meet the protein demands, but we do have capacity to supply as much as we see fit.

However, trade and technical access issues in Asian markets will continue to be a challenge for Australian meat exporters, based on a combination of lack of understanding of our inspection and accreditation systems and an unbalanced trade environment. The world wants to supply China, but China doesn’t need the world. Over 70 countries count China as their No.1 trading partner. And we can’t have open slather into China when we don’t allow free access for Chinese suppliers into Australia.

Our free trade expectation is quite one sided, especially when it comes to agricultural products. If there is open access between food products, it may threaten our bio security status and our bio security status remains a significant and highly valuable point of difference. So we will most likely have to deal with a free trade situation that’s unlikely to change for agricultural products.

To what extent does weather volatility create challenges in ensuring long-term supply?

For agricultural products weather is a key to determining annual productivity. Given our small population base, Australia remains reliant on export markets for all of our commodities. Dry or wet years simply determine the amount of product surplus to domestic demand. Apart from increasing costs of production, I see no cap to Australia raising its productivity levels or not being able to sell its products. Weather isn’t the biggest issue – cost is. It all comes down to whether the market can afford the cost of production to create a sustainable business.

That won’t be the case in all circumstances. As the Chinese middle class grows the capacity to pay more grows. But the reality is, if the average weekly wage is the equivalent to the cost of a kilo of Aussie beef, consumers won’t see value for money, and we won’t to be able to sell below the cost of production.

Where do you identify global competitive threats to the Australian beef and sheep meat sector?

Australia is now a dominant sheep meat producer and exporter thanks to the significant change in the New Zealand production system from lamb to dairy. This has created significant opportunities for Australia’s sheep meat industry across South Asia, China, the UK, Europe and the Middle East. After goat, people of the Muslim faith prefer sheep meat, so that’s an important and opportune growth market for us, with few competitors.

The cross global flow of beef seems to be focused on Asia, which is importing over 3.4 million tonnes per year, with Africa importing 600,000 thousand and Europe 900,000 metric tonnes (mtn) from the major exporters such as India (1.5 mtn), South America (1.9 mtn) and Australia-New Zealand (1.8 mtn). South American beef exports are restricted due to continuing foot and mouth disease, so countries with bio security concerns won’t buy. North America can be an aggressive competitor but it’s a net importer of beef, with its Bovine Spongiform Encephalopathy (BSE) history limiting open access to all markets.

The European Union (EU) has a long history of being protective and restrictive, with stringent quotas that are easing as EU production declines.

This article was first published in Corporate Finance Insights – February 2014.

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