Tuesday, March 19, 2024

Just how exposed is Zespri to Chinese counterfeit gold?

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Zespri, the world’s dominant kiwifruit marketer, is underestimating the level of counterfeit gold variety kiwifruit being grown in China, New Zealand growers say.
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Concerns over the scope of the problem follow the disclosure by Zespri chief executive Dan Mathieson at last week’s annual meeting that it estimates about 4,000 hectares of its SunGold gold variety kiwifruit could be illegally growing in China, most of that in the Chengdu growing region.

But growers told BusinessDesk this could be closer to 4,500ha and probably more like 5,000ha of plantings.

Either way it’s an expensive headache, potentially taking $840 million out of the pockets of local and international kiwifruit growers based on indicative returns of $168,000 ha for the gold variety this coming season. With local growers having paid $400,000 ha to Zespri for a limited release of 700ha of gold licences and estimates of even higher pricing and staged releases going forward, there is understandable local concern.

Zespri chief grower and alliances officer David Courtney said it is clear the problem has been getting bigger since the market became aware of the issue in 2016.

Courtney told BusinessDesk the firm’s best chance of estimating additional hectares of G3 (SunGold) plantings were after the grafting period in China during February and March. 

This year however, he said investigations were hampered by the covid-19 lockdown in China at the beginning of the year, resuming only “once movement restrictions were lifted.” So Zespri’s best guess remains at 4,000 ha of illegal plantings.

Singapore-based Mathieson, who was paid $1.9m during the year, said Zespri’s focus now “remains on halting the growth of these plantings” and “mitigating the impact on our brand and business.”

He said the firm will adopt a “multi-faceted legal and political approach to protect its retail channels” while exploring the option of commercialising SunGold in China, to help minimise the spread of the unauthorised fruit. But no decisions will be made without engaging NZ stakeholders.

Zespri does not think elimination of the existing illegal plantings is a viable option.

“The consistent advice we’re receiving from our discussions in China is to see if we can find a way forward through a pragmatic win-win approach to managing our plant variety rights (PVR) concerns,” Courtney said.

But Zespri hasn’t been entirely without teeth.

Earlier this year it won a civil case against a former kiwifruit grower and was awarded $15m after the court found the grower had fraudulently offered to sell Zespri’s varieties as well as the right to licence them to parties in China. The former grower then helped with the planting of Zespri varieties on Chinese orchards, breaching his contractual obligations to notify Zespri of any infringement they were aware of.

The marketing firm has also been granted key trademark protection status in China, ensuring greater protection against copyright infringements, and has begun legal action against a nursery that is propagating the gold variety.

But how much could growing unlicensed fruit in China actually hurt Zespri and its growers?

It’s a key risk to the firm and the industry as a whole, and one of several examples of intellectual property issues in China that are cropping up, said Nathan Penny, senior agri-economist at Westpac.

With kiwifruit in particular, Penny points out that while China production is counter seasonal to NZ production, meaning it won’t generally impact in season fruit demand, but rather during the shoulder of the season where it might compete with China supply.

“So from a market sense, it is more a risk to northern hemisphere plantings, including the Italian growers and that may well have a longer term impact on their dividend flow,” he said.

Zespri’s Courtney suggests the potential impact is varied and depends on many factors, “not least that if less fruit is sold in China it can still be sold elsewhere in the world so there is a return that will still be earned.” 

But Penny said IP reflected the rampant success of the new Zespri varieties since the challenges of PSA over a short span.

“These are the kind of issues you have when a product is growing quickly and attracting interest from a variety of angles,” he said.

“Kiwifruit has had a fantastic run in terms of rebounding from PSA, through their gold variety and in terms of growth into new markets as well, but with that comes headwinds.”

So while in a sense it’s a “good problem to have,” because the fruit represented a smaller category-within-a-category for NZ, it was more vulnerable than, for example, dairy or red meat which had more economic muscle with China. 

He said while China was clearly a huge market, on a wider scale horticulture was a little more balanced, with apples and green kiwifruit also big in Japan and Europe.  

Nor are growers complaining, on the strength of record per hectare returns across both green and gold kiwifruit on a per tray basis, with global sales revenues at $3.36 billion for the year, from $3.14bn last year, on the strength of 164.4m trays delivered into 20 markets.

Mathieson said the performance for the year had continued the momentum of recent years and had put the firm on track to reach its goal of $4.5bn in sales by 2025. 

Penny said first mover advantage had underpinned sector growth, for example with NZ apples with the advent of the Rockit brand into new markets, and that had seen kiwifruit export receipts leapfrog the wine sectors, which had been promising $2bn in export income for many years.

Zespri chair Bruce Cameron said the firm wasn’t taking anything for granted, but there were “good signals in the markets and increased demand for fresh healthy fruit” particularly in the wake of the covid-19 pandemic.

Cameron said in addition to counterfeiting the industry is also working to mitigate other risk, including continued investment in biosecurity, addressing potential food safety concerns and exploring new markets “so that we can diversify and avoid being too heavily exposed to the performance of a single market.”

“These are all important steps in an increasingly uncertain world,” he said.

-BusinessDesk

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