Thursday, August 8, 2013

Economy Wide Lessons as the lustre of white gold loses its shine

It is critical to understand that the issues for the NZ economy arising from the current Fonterra debacle  (as opposed to dairy farmers and Fonterra directors and managers) is assuredly not a "public relations" issue or one of "reputational management". The best PR firm in the world cannot resolve such issues through spin - nor should it try.

Calling for better "PR" is simply a form of denial.

Key problems from an economy wide perspective are:

1. Nowhere else to turn

The choice for producers has been narrowed by statute to Fonterra for some 90% of the market. There is virtually no diversity, depth or spread of processing in the industry. The statute prevents it. Dissatisfied producers have nowhere else to turn. All eggs in one basket – then we drop the basket.

2. No incentive to create somewhere else to turn

Neither is there any incentive to invest and develop processing capacity. With only a tiny part of the market available since Fonterra has 90% of it, why would anyone invest and grow. At best some niche processing - Sunlait and A2 style processors for example - might develop.

This matters...

not because Fonterra is necessarily "poor" or run poorly - it matters because reality has it that there will be mistakes and accidents in even the best of companies. When those inevitable mistakes happen economies with a diversified capacity and several choices are able to respond. At the moment we can’t.
 
3. Serious competition keeps firms seriously sharp

Apparently this "best of breed" firm needs the protection of a statute. Regardless of claims to the contrary it remains the case that competition spurs productivity, higher standards and efficiency. Fonterra simply doesn't face that competition. If it is as sharp as claimed it would survive and prosper in the face of competition.

Apply the same forces everyone else faces.

4. Company mistakes should not contaminate the NZ brand

Lumping "all things NZ" together and tying them to one company runs huge risks for brand NZ. NZ is not itself nor is it synonymous with Fonterra or agriculture or dairying. The mistakes and misfortunes of one company are not the mistakes of NZ and the brand should not be punished for those.

This is the fundamental flaw of the entire NZ Inc. concept. We are not a single incorporated society which rides on the fate of single companies, industries or sectors. Our economy is undiversified enough without making it worse.

It took many costly years for Americans to learn that "what is good for General Motors" is not in fact necessarily good for America.

Tragically we knew this but we granted statutory powers to the co operative that is Fonterra. That is not, demonstrably not, in the interests of NZ. If we don't want a repeat performance we need to adjust the policy settings accordingly.

What's to do? And Not do

1. Detach, once and for all, the NZ Govt from dairying. Remove statutory protection from Fonterra and in one fell swoop we create the potential for choice, competition, development of diversity in capacity and we decouple Fonterra's brand risk from NZ brand risk. It doesn't come much simpler.

2. Leave Fonterra's owners to discipline Fonterra's management. It is their job, their concern, their responsibility. It is not for the Government or the media or any other "interested party" outside the owners. Under competitive conditions this would happen with even greater steel and urgency.

3. Do not see the issue as being about "PR" or "the Chinese" or "managing reputation". It is not - it is about having the best institutional arrangements for all firms to prosper. Govt’s role is not protection of producer organisations and when it plays that role it risks several things – notably - the taxpayers' brand name.

4. Make certain that we do not have a repetition in the meat industry and elsewhere... please pay attention and keep paying attention.

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