Pirated plantings of our top kiwifruit variety in China put New Zealand’s highly successful industry at risk, unless it changes its approach to its biggest market
Over the past 20 years our kiwifruit growers have shown others in the primary sector it is possible to parlay a small competitive advantage into a sophisticated global business. That’s the big lesson of the Zespri system they’ve created, which spans the entire value chain from lab to orchard to customers, all under the powerful Zespri brand.
Along the way they’ve made themselves wealthier, more resilient and in recent years immune to boom-bust market cycles. But so far, they are unique. The rest of the primary sector is dogged by a litany of overseas ambitions laid low by commodity business models and vicious industry politics.
Various of our dairy, meat, forestry and horticulture companies have tried to become truly international. But having squandered shareholder funds on their failures, they have retreated to being just exporters. Given we are a small country, they’ve drastically limited their long-term potential.
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But now China, our kiwifruit growers’ greatest market success, has rapidly turned into their biggest test. Rampant, unauthorised plantings of their prized SunGold 3 variety in China threatens to upend their Zespri business model. A flood of fruit of variable quality, some sold under fake Zespri labels, would likely erode the hard-earned premiums on genuine Zespri fruit, and the credibility of the brand.
Yet, if our growers stick to their two core characteristics – discipline and innovation – which have driven their success for the past two decades, they will turn the current challenges in China into their next springboard. They will develop big, strong Chinese research, supply and marketing components to their global strategy. It will take them a big step closer to supplying Zespri quality and brand kiwifruit into the global market year-round.
While the short season of supply from New Zealand was Zespri’s initial advantage, it has hit its limits. It means Zespri can’t maintain its relationships with distributors, retailers and consumers. It has to reinvest and re-engage with them every year to reclaim its share of their shelf space and budgets.
Zespri has found it hard so far to develop supply from growers in countries such as South Korea and Italy. Fruit from non-NZ orchards currently account for only 13 per cent of its global sales. It reckons it could raise that to 30 percent over coming years if it succeeds in working with the right partners in China. Doing so would increase its market power and strengthen its leadership of the global fruit category.
Our kiwifruit growers learnt the discipline lesson the hard way. Their waves of opportunistic plantings caused repeated supply gluts and market busts over many past decades.
To force themselves to take an economically rational approach to their future, they created Zespri in 1997 as their sector-wide marketing co-op. It is their sole route to all overseas markets except Australia and for some very small-scale collaborative marketing partnerships with Zespri.
Seasonality has been the advantage they are exploiting. They account for only 13 percent of global supply. But with Chile’s 4 percent, they are the only southern hemisphere suppliers to a global market which is mainly in the northern hemisphere. So they sell most of their fruit into those markets in the few months before northern hemisphere growers harvest their vines.
Zespri and its grower-shareholders have taken a rigorous approach to licensing plantings here to keep supply shy of demand in the consumer channels they’ve built, and to develop superior varieties, innovative orchard practices, environmental sustainability, supply chain excellence, and strong distribution and retail relationships in overseas markets.
Above all, the Zespri brand powerfully articulates those qualities and assurance standards to consumers, who eagerly pay a large premium for a Zespri kiwifruit over a lesser brand or no-name one. This is particularly true in China, Zespri’s largest and most lucrative market with the best premiums, accounting for about one-third of the New Zealand kiwifruit harvest.
But China has also quickly become the biggest threat to the Zespri model. Five years ago, the illegal export of a small quantity of budwood from SunGold 3 vines here gave Chinese growers unauthorised access to Zespri’s prized variety.
Budwood is easily propagated by grafting on to existing rootstock. Zespri reckons some 5,500 ha of the variety are growing in China now and will soon overtake the 6,500 ha here. Five years hence, unauthorised vines could be producing between 30 million and 90 m trays of fruit a year – the latter being three times Zespri’s current exports to China.
China matters hugely to Zespri. Not only is it the biggest market by far, but it is also the largest grower of kiwifruit, accounting for some 50 percent of global supply. The Chinese government, as it is with all other food sectors, is pushing the kiwifruit industry hard to lift its supply, quality, food safety and innovation. Government investment is helping it do so.
Given the local kiwifruit sector’s large scale, it also has a diversity and abundance of germplasm, the genetic material from which to breed new varieties. Thus, the next blockbuster after SunGold 3 might well come from China rather than here.
The Chinese government is signalling it wants Zespri to play a bigger role in the local sector. But it will likely focus its help. Across consumer sectors, the government has strengthened legal support for international brands against local counterfeits. Last year, for example, Zespri became the first New Zealand company to gain Key Trademark Protection Status in China.
But it seems unlikely the Chinese government will support Zespri in its fight against unauthorised SunGold plantings. Most are by small scale orchardists so clamping down on them would be unpopular; and anyway, the new supply of high quality fruit is welcomed by consumers and the government.
However, Zespri might get help from an international body to better protect subsequent varieties. The International Union for the Protection of New Varieties of Plants (UPOV) is an intergovernmental organisation headquartered in Geneva. Its 77 members, which include New Zealand and China, are working on the first substantial overhaul of its rules since 1991.
Similarly our parliament is working on the Plant Variety Rights Bill to update our legislation which dates back to 1987. One big task is to ensure we can refresh our commitment to UPOV, since we, like China, are only currently compliant with its 1978 version. That’s an astonishing lapse on our part since plants are so important to our economy.
For all these reasons above, Zespri has to deepen its relationships in China if it’s going to stand any chance of maintaining its global leadership and premiums. Then its shareholder-growers here hopefully will benefit from the maintenance of high prices for the fruit they grow and, via their Zespri dividends, from the co-op’s success engaging with local growers and researchers abroad.
Zespri’s first step in that journey was its recent proposal for a small, one-year trial to market high quality fruit from some of the best of the unauthorised SunGold 3 growers; and to use the Zespri brand to do so.
Both proposals required a 75 percent approval vote from Zespri’s shareholders. The final tally, though was 70 percent for the trial and 64.5 percent for using the Zespri brand. Zespri knows it has a lot more work to do to make its case to shareholders.
Many of the shareholders who were opposed expressed fears the trial would mean Zespri would lose more of its intellectual property to the Chinese, such as on orchard practices and marketing.
The concern is valid. But that’s always been the challenge for every business working in China, from major multinationals leading their global industries down to small companies. They all have to develop relationships and systems to protect their IP and to fight for steadily increasing legal protection for it in China.
But as each Chinese sector becomes internationally competitive, China shows more willingness to protect its IP and that of foreign companies working alongside it. The Chinese kiwifruit sector would follow that pattern as it progressed.
Zespri’s innovation and discipline has earned it a big measure of success over the past two decades. Now the co-op and its grower shareholders must step up both those strengths to rise to the big new opportunities and challenges China is presenting to them.
If they don’t, kiwifruit growing will slip back into a poorer NZ-based model. Worse, in doing so, vicious sector politics will likely tear the sector apart, as they have in the past. Just as such dysfunctional industry politics are currently crippling some other parts of our primary sector.