Fonterra & Workplace Learning - John Wilson Speech
"Fonterra & Workplace Learning"
Chairman, Shareholders' Council
Skill New Zealand Conference
Wednesday 22 May 2002
Adrienne D'Ath; Distinguished Guests; Ladies & Gentlemen:
Fonterra very much appreciates this opportunity to be here today. John Roadley, our chairman, had hoped to be able to speak to you himself - to signal Fonterra's commitment to workplace learning, and to thank you for the work Skill New Zealand and all of you do to lift the skill base in the dairy industry and in New Zealand more widely. John's board commitments mean he is not able to be here. I'm pleased, as Chairman of the Shareholders' Council representing 13,030 Fonterra dairy farmers, to speak on his behalf today.
I don't intend this afternoon to take you through the intricacies of standards setting or course development in the dairy industry. That's not my expertise and after two intensive days I don't think that's what you're looking for this late in the afternoon. Instead, I'm going to tell you a little about our company and industry, and the importance we place on ensuring our skills sets are in line with the aspirations we have set for ourselves. And I'm going to do so as a dairy farmer.
My wife Belinda, my brother Robert and I farm just over 1,000 cows in the Waikato, which - along with Taranaki - is a traditional heartland of the dairy industry. We also, in conjunction with partners, farm just over 2,000 cows in the more recent dairying heartland of Canterbury. In a good year - such as 2001/2 - we employ 23 people, full- and part-time, and our business could be expected to have gross revenues next year of around $5.5 million. Over half of our gross profit goes to meet farm expenses, a large part of which is our staff, and the balance to interest payments, debt repayment and drawings.
Due to the cyclical nature of commodity prices and our exposure to world markets, we have an incentive to keep costs as low as possible. More importantly, we have an incentive to keep productivity as high as possible. By any standard, our farming business is a reasonably substantial business in a New Zealand context, and we are just one of Fonterra's 13,030 supplying shareholders around New Zealand.
What we do is, on the face of it, straightforward: we process grass into milk. The cow is the biological machinery that enables us to meet that end. And New Zealand dairy farmers, and our sharemilkers and employees, are the most efficient at doing that in the world. We can turn grass into milk more than twice as efficiently as farmers in the United States, the country which produces the most milk each year. Our productivity edge - in feed conversion and also in manufacturing - is our most important advantage over the competition.
Fonterra is a co-operative, owned by the farmers who supply it. And the reasons the dairy industry has been built on co-operative principles are, again, very simple. Cows have to be milked daily, and we need to have their milk collected on time everyday by training professionals. The need for a guaranteed daily buyer for our milk is one of the reasons farmers have preferred to own their dairy companies co-operatively. We are dealing with a very perishable product in its raw form.
The second reason we have always preferred to own our dairy companies co-operatively is because we want to extract as much additional value as possible from the value chain, rather than have someone else take that profit, leaving us as mere milk suppliers with no control over what happens beyond the farmgate.
The companies that came together to form Fonterra have built an international reputation for excellence in milk procurement, processing, manufacturing and logistics that is second to none. We have to stay well ahead of the game in those areas to be able to absorb the huge transportation costs, which many of our competitors do not face to the same extent. It is our company's expertise in procurement, processing, manufacturing and logistics that largely motivated the world's most respected food company, Nestlé, to seek us out as their partner for North, Central and South America - including the wealthiest and fastest-growing dairy markets in the world.
We also need to stay well ahead in our marketing. We manufacture milkpowders and speciality ingredients for the world's leading food companies, and we need to ensure our products and service meet their needs every time. At the consumer end, we have to keep inventing new and wide-ranging consumer products that will delight people in the 140 different countries we do business in. It is far from easy. Forget the idea that our business is built on putting butter on a ship and just sending it to the UK. That is a relatively small part of what we do.
The dairy market we face is one of the toughest and most competitive in the world and it is also highly restricted. Of the world's total dairy market, only around six percent is truly open to us. In some cases, high tariffs mean that we start with a huge disadvantage over local competitors, or that we can't access the market at all. In other cases, tight quotas mean we have to be able to build a profitable business despite knowing it can only expand so far before we run out of access. We have to maximise the potential of that tiny slither of the pie.
I believe New Zealanders should be proud of how well the old manufacturing co-ops and their marketing arm - the former New Zealand Dairy Board - have done in this environment. Thanks to their efforts, Fonterra starts its journey as one of the world's top ten dairy companies - Rabobank ranks us fourth in the world. We are the world's largest exporter of dairy products, responsible for a third of international dairy trade across borders. We employ 20,000 people - around half in New Zealand and half offshore. They market products to customers and consumers in 140 different countries around the world. And they have done well. We have established market-leader positions in countries as diverse as Sri Lanka and Venezuela. It makes us by far New Zealand's biggest company - with revenues of around $14 billion, and responsible for over 20 percent of New Zealand's exports and seven percent of GDP. But we are increasingly facing new challenges, that will require all our wit to overcome.
Key competitors - the United States is the major one - are becoming more efficient relative to us. Over time, they risk threatening that on-farm productivity advantage I have spoken of. In 1998, the dairy industry set itself a goal of annual productivity improvements of four percent a year, right through the value chain. We assessed that we would require annual four percent improvements, to ensure we could at least stand still in the productivity race.
That requires a comprehensive response. On-farm, we need to ensure that our pasture continues to improve, to provide the best possible nutrition for cows to produce milk. In our breeding programmes, and in how we manage our herds, we need to ensure we are maximising their production of the proteins that are most valuable on the world market. And we need to capture the efficiencies that come from farm consolidation.
On average, New Zealand herds are becoming bigger and their management requires a degree of sophistication not necessary a generation ago. Our farmers, sharemilkers and their employees are managing more and more complex production systems. And they are becoming even more complex and more interesting as we better understand the interface with our biological production system of pasture and cow. At every level in our farm businesses, we must upskill so we are the best milk harvesters, the best machinery operators, the best stockmen, the best managers of pasture and the best businesspeople. At every level, we need to drive, to stay ahead of the four percent productivity target.
Our next challenge is driven by the consolidation of the food industry globally. The world's leading retailers are seeking to become bigger and more powerful. We see it in New Zealand, with companies such as Starbucks taking over the café scene - even here in Wellington - or StarMart slowly replacing the corner shop. Supermarket chains in New Zealand are continuing to consolidate. In Australia, there are now just two major supermarket chains, and the same trend is happening all over the world. The Economist magazine predicts that, ultimately, there will be just ten major retail food businesses in the world. One of them will be Wal-Mart, now the world's largest company, tipped to eventually be the first to reach an annual turnover of over one trillion US dollars. In fast food, there is an increasing tendency for companies to want single suppliers of cheese and other inputs.
These global retail giants are exercising increasing market power, they are demanding suppliers who can service them globally and they are able to drive down prices. That's contributing to much more intense competition among the businesses that supply them, and that includes Fonterra. Our response has been to consolidate our business into Fonterra so that, for the first time, we have one cow-to-customer business with the necessary scale to continue to compete, but now with the ability to take a whole-business view of our needs.
Our competitors are also merging, to the extent that since the beginning of 1998 there have been more than 592 major acquisitions, alliances and JVs in the dairy business. Our merger received a great deal of publicity in New Zealand. It is just one of nearly 600. We do not face a static market. That means we have to get faster and smarter in what we do, through every stage of our processing, manufacturing and marketing efforts.
One way is through new products. In an increasingly health-conscious world, we have an opportunity to position milk and dairy products as healthy nutrition. We also speak of a race to unlock the hidden potential of milk. Milk is the only substance in the world designed by nature solely for nutrition. In it are proteins that could contribute to solutions to health challenges such as diabetes and bone health among the elderly. Our scientists are in a race to identify them, and our businesspeople in a race to develop new products from that knowledge, and everyone in the value chain - from cow-to-customer - must support them in their work. Through more skilled breeding, we can bring out those proteins, or through improving pasture, or through on-farm management. Science is just an overhead if it stays in the laboratory. The challenge is to take what we learn there and for everyone to apply it to what they do through the production, manufacturing and marketing process.
New Zealand has some advantages in terms of dairying. But so do other countries. Our advantage, in the end, is based on only one thing: our people, our people, our people. We need the best, the brightest and the most committed.
Just a few years ago, people described agriculture - including dairying - as sunset industries. It's a frequent refrain. In the 1980s, New Zealand was going to become the Switzerland of the South Pacific, with a new economy based on financial services. In recent decades, we've seen significant growth in our tourism industry, so it is second only to dairy in foreign exchange earnings. Now, the focus is on IT, communications and creative industries, where Wellington is so strong.
I don't mean to knock any of those industries. New Zealand needs a diversified economy. We need excellent financial services, a growing tourism sector, and we need to exploit the fast growth possible in new industries, based on new technology and creativity. But perhaps because of the strong growth in those areas, agriculture and dairying are sometimes seen as less interesting career options for young New Zealanders. It creates a particular challenge for us, in dairying and Fonterra, to attract the people that we need.
We have aspirations to become one of the world's leading multinational dairy companies, a major player in the Australasian and world economies, and a true national champion for this country. To do it, we need to meet the challenges I have outlined. We need to see particular growth in our consumer dairy products business, with - by some measures - as little as 20 percent of our production going into that area. Through the value chain, dairying must aspire to becoming the "preferred employer" of the best and the brightest, and this obviously requires a perception change. We need to see our finest young New Zealanders understanding the opportunities that our company, dairying, and agriculture more widely, offer them.
And I think we do risk failing to attract the people we need into the primary industries, particularly on-farm where we already have skills shortages in some areas. Currently, we believe that 30,000 people are working on-farm in our industry. This includes owner-operators, sharemilkers and employees. Ten years ago, on-farm, we employed 2,000 skilled employees. Today that figure is 15,000. It is estimated that we will need 25,000 skilled employees on-farm over the next five to ten year period. Remember, that is only skilled on-farm employees, and doesn't take into account the rural service industry. We have not done as well as we could have, in explaining the multi-skilled nature of our farming business, and the fact that there are jobs to suit all levels of commitment, skill and aspiration.
Looking ahead, our skill base is going to need to rapidly improve as our aspirations do. This is largely the responsibility of our new industry good organisation, Dairy Insight, of Dexcel, and of the Agriculture ITO. We must be fostering a lifelong learning programme for our people, with direction and leadership. But, as by far the biggest player in the dairy industry - and the New Zealand economy - Fonterra itself has a crucial role to play, not just in funding but, in ensuring we provide the world's best on-job training through the value chain from cow to customer.
That, of course, starts at our most senior executive levels. We have been bringing in new talent from around the world - from places as diverse as Denmark and Mexico - to bring our skill base more in line with that needed by a leading multinational company. As for our farms, Fonterra must also be the preferred employer. Yesterday, I was speaking with a farming leader who had just spent some time in Asia with a top Fonterra executive. And the executive commented that working for Fonterra was like playing for the All Blacks. It is the biggest game in town. It is the most challenging, and the aspiration and expectation is success by every measure.
Fonterra doesn't just need to select the business All Blacks, we need to support them in ensuring their skills - leadership in particular - continue to evolve to meet the needs of a changing global business. This, of course, opens us up to a head-hunting risk. But we live with that, and - when other companies do head-hunt our people - you can argue it is a very powerful way in which we give something back to New Zealand.
At the plant level, we are offering both company-specific training, and training leading to national qualifications. We wholeheartedly back the principle that the Skill New Zealand strategy has always been based on: that workplace training can't be seen in isolation from industry; that it works best if industry, educationalists and government agencies work in partnership.
Beyond the specific needs of our business, we are taking other initiatives as a leading New Zealand company. As a member of the New Zealand Business Council for Sustainable Development, Fonterra has embarked on a joint project with other leading businesses and with the Mayors' Taskforce to research and tackle issues of youth unemployment. We're concerned that young people - especially young Maori, Pacific and Asian people - risk missing out on training opportunities. We fear that risks holding New Zealand back, economically and socially, and we want to help.
And, on-farm, we also need the best and brightest. I return, at the end of this speech, to where I started: my own farming business. Of our on-farm staff, two are university graduates. Five are fully qualified through the Agriculture ITO or similar programmes, while four more are currently involved in Agriculture ITO programmes, with fortnightly half-day courses and on-farm training. The balance attend workshops applicable to their skill areas, such as calf rearing, stock management, milk harvesting and farm management.
As an employer, we are passionate about maximising opportunities in these areas. We - my wife, my brother and I - work with other like-minded farmers to ensure our teams can work together to drive productivity, enhance the knowledge of our people, and create a common drive among them which challenges them, and which they enjoy. And, like Fonterra, it does open us up to a heat-hunting risk - and, in fact, the likelihood they will choose to go out on their own.
A young, enthusiastic teenager - even if unskilled initially - can achieve a management position on a medium-sized dairy farm within five years. All they have to do is be keen, work hard, commit to learning, and be nurtured by their employers and up-skilled through industry training. They have opportunities as good or better as in any other industry. By the age of thirty, if they so choose, they have a very real chance of owning a dairy herd, plant and machinery with equity in excess of $500,000. By their mid-thirties, these people could go on to be equity partners or outright owners in a multi-million-dollar farming business, employing staff, meeting the exciting challenge of running a business, bringing up their families in a rural environment, and providing export earnings for our nation. And there need to be pathways for everyone to achieve this, not just those groups of people who have traditionally gone into farming.
Recently, I was made aware of a young Maori who had left school at 14. At 19, he fell into farming via an opportunity provided through a Skill New Zealand training programme. Initially through a TOPS programme and - more recently - through the Modern Apprenticeship Programme, this 25 year old has been challenged and mentored to the stage that he now receives a package in excess of $50,000, is challenged, and he is loving his career.
It is a great career, regardless of an individual's or - importantly - a family's aspirations. Whether providing skilled labour, or aiming to manage a 1,000-plus cow dairy farm, the lifestyle options are fantastic - with an outdoor lifestyle, and inevitably a supportive rural community with excellent schooling opportunities.
I have recently announced that I will be standing down as Chairman of the Fonterra Shareholders' Council, at the end of this month. It probably means I won't be speaking at conferences so often, along with the Prime Minister, and the other distinguished speakers you have heard from. But it also means I will be able to commit myself 100 percent back into my farming business. It means I will be able commit to the most rewarding thing a businessperson can ever do: to develop great young talent, to see them grow and thrive, and ultimately establish their own businesses and careers when they move on. I know that that is what has motivated all of you to commit yourselves to the education and training fields.
On behalf of Fonterra I would like to thank you for the vital role you play, in building the skill base of our industry and of New Zealand. We are delighted with the opportunity to be represented here today. On behalf of John Roadley, the company, and all New Zealand dairy farmers, our very best wishes and support for you all.