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Opinion: Aussie/Chinese JVs spell ‘win-win’ in vexed foreign ownership issue

Jon Condon, 11/03/2016

It’s hard to remember an Australian property portfolio sale that has aroused as much media attention and passionate public comment as the still-to-be resolved S.Kidman & Co transaction.

It’s equally hard to escape the fact that the biggest driver of that attention was the prospect of outright sale to foreign interests – and perhaps more specifically, Chinese interests.

That Kidman was an iconic Australian name tracing back to the legendary Sir Syd, and the sheer size of the footprint of the holdings involved, meant it was always likely to attract criticism from those who oppose foreign investment, per se.

In the past three days, however, there’s been two significant large commercial developments that have brought a new perspective to the foreign ownership of Australian agricultural land issue.

There are a number of similarities between Wednesday’s disclosure of ownership structures for the proposed Kidman sale to the Shanghai Pengxin group, and yesterday’s announcement that Queensland processor ACC will form a business alliance with China’s Genius Link Asset Management.

In the case of the Kidman sale, Australian fund manager, Australian Rural Capital has confirmed that it will be an active equity participant – and boardroom contributor – in Pengxin’s proposed purchase of Kidman.

In both business deals, the stakeholders involved have gone to considerable lengths to emphasise the strong benefits they see in such alliances, as opposed to outright sale and management responsibility simply handed to foreign interests.

Here’s what ACC owner Trevor Lee had to say following yesterday’s announcement:

“Most importantly, the partnership approach will ensure our on-ground success will come from ACC’s beef industry management expertise, which is integral in the day-to-day operations and long term success of these opportunities. The time is right for Australian agriculture to embrace foreign investment, be it from China or as in the past from other countries, and we believe the best model is one of ‘partnership’ utilising the core skills of each party.”

His comments were supported by his new business partner, GLAM chairman Joel Chang:

“As GLAM looks to develop its investment portfolio in agriculture, we have had significant interest from potential investors in wanting to deploy capital in Australia. We recognise the importance in working collaboratively with local partners to achieve success,” he said.

The public response, both on social media and via direct comments posted by readers on Beef Central has been overwhelmingly positive. Many have emphasised the view that such deals represent ‘win-win’ outcomes for both sides, rather than simply ‘selling the farm’ to a foreign entity.

Here’s a couple of edited examples:

“We can expect to see more of these joint ventures for the benefit of both parties. Australian agriculture is very attractive for foreign investors, but similarly the joint ventures offer untold opportunities for Australian companies prepared to expand overseas” – Bill Loughnan

“Such joint ventures are now clearly the way forward for those involved in primary production. Australia has such a fine reputation for quality and as I see it, such joint ventures further open up overseas opportunities” – Doug Russell

“This puts a real positive spin on the discussion around foreign investment and working toward long-term benefits for all producers and the industry” – Phillip Kelly

Certainly there have been examples of Chinese outright owned and managed agri-enterprise investments in Australia ending badly.

Chinese ownership of Australian red meat industry assets really had its origin in the sale of Metro Meats to the China International Trust and Investment Corporation back in 1993. CITIC was established by the Chinese Government in 1979 as an investment vehicle to bring technology and capital to help the country’s modernisation drive.

The deal to purchase Metro included five operating Australian abattoirs, a feedlot and domestic wholesale and retail operations mostly in South Australia, Victoria and NSW. Not surprisingly, the transaction attracted its fair share of criticism at the time.

The company’s vision for export growth in Asia never eventuated, and CITIC’s business model contrasted strongly with that of the previous Metro ownership, leading to the collapse of the business four or five years later. Some of the ‘bones’ of that business now figure in TFI’s processing assets.

Metro Meats perhaps provided an example of the risks involved in outright control and management by offshore owners unfamiliar with business and trading conditions in Australia.

A more recent example is the troubled Chinese owned and operated Moe and Wonthaggi meatworks in Victoria’s Gippsland, apparently yet to open this year after being bought in 2014 by China’s HY Australia Holdings Pty Ltd.

There has been growing concern in the region about the plants’ futures, with a series of postponements over starting dates. The firm’s CEO, Jacky Jiang has told local media that the shut-down has been forced by the high price of cattle, loss of overseas markets to cheaper competitors, and some unique financing challenges experienced by Tabro’s owners, the the Foresun Group.

“The only thing you can add is that the company has spent a lot of money on capital works and improvement, so you would expect that they were serious [about their interest in the industry]. But I just don’t think they fully understand our markets and the seasonal nature and how that drives prices,” a union spokesman said.

Would the outcome have been different under a JV model? Impossible to tell, but it appears that joint ventures, in some form, are likely to be much more commonly seen in future meat and livestock industry foreign investment in this country, if the ACC and Kidman cases are any indication.

 

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Comments

  1. Richard Cooley, 11/03/2016

    Andrew’s comments remind me of the celebrated episode in the early 1990s when a Macquarie Bank hotshot was sent up to Japan to unravel the complex Japanese meat supply chain and try to define why Australian beef was not making the money it should have been. He went missing, and was found three days later wearing only his undies, tied-up on the side of the road. Investigation over.

  2. Andrew Dunlop, 11/03/2016

    Joint ventures never work when the product is sold through a tariff barrier as our experience with the Japan meat trade showed in the 1990s. All joint ventures failed at that time to the cost of the Australian JV partner and the Australian Industry. The problem is that the partners have different objectives in that the Australian partner wants a profit before the tariff barrier (ie a profit within the Australian JV entity in Australia) to satisfy shareholders, but the overseas JV partner wants to take the profit after the tariff barrier (ie in the destination country, after the tariff is paid).
    It must be remembered that tariffs are taxes levied as a % of turnover (40 odd percent in the case of Japan in the 1990s) and have a much larger influence over business structure than company tax which is levied on profits. Japanese FDIs in the Australian meat industry ran their Australian operations at a loss or at break even to minimise their tariff obligation as the product entered Japan through their vertically integrated channels so they could take their profit in Japan. The Australian partners were sacrificed to run on the smell of an oily rag or the promise of future profits that never eventuated.
    Not only that, but beef going into Japan was misrepresented, often being sold as domestic beef at significantly higher prices following a magic transformation of the product somewhere after it arrived in Japan. There was a famous joke in Japan amongst the meat trade that the Yoshinogawa River was the longest river in the world. Yoshinogawa beef was a famous domestic beef brand from Shikoku. The joke was that the Yoshinogawa river went all the way from Shikoku to Tasmania because most of the beef sold as Yoshinogawa beef originated in Tasmania, not in Shikoku.
    All of this came to an end when Japanese cattle were found with BSE. The Japanese Government instituted a buy back scheme to buy back all domestic beef, test product and release tested domestic beef back into the market for consumption. The Japanese Industry in its wisdom sold imported beef including Australian beef back to the Japanese Government as “domestic beef”. The Government realised that there was no way Japan produced such large amounts of beef and in cartons that were labelled “Product of Australia”.
    Investigations followed and several major meat companies were forced into bankruptcy and there were some indictments.
    One famous member of the Japanese Meat Mafia as it was then known was issued with a 25Million US$ bail order, the largest bail amount set to that date in Japanese legal history. And that was just his bail amount. He had previously been a guest of the Japanese Government over fraudulent pork dealings and evasion of pork tariff.
    Once this opportunity for super profits disappeared, almost all those Japanese meat companies with FDIs departed Australia.
    It is my opinion that no foreign direct investments should be allowed by the FIRB where the product is sold through a tariff barrier into the investors country, as it is against the National Interest.

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