The Agribusiness Association of Australia – KPMG Investment Forum
3^rd November 1997

Mr. Chris Heysen, Managing Director – Howe Leather.

• Howe leather started operations in 1910 in Preston, Melbourne.
• First association with the automotive industry was with Holden Motor Body Builders in the 1930’s.
• As vinyl became popular for automotive interiors, the popularity of leather declined until the mid 1970’s. (The original Holden 45/215 had leather seats as standard).
• BMW became Howe’s first major OEM customer in ’89.
• Howe now supplies Honda and Subaru in Japan, BMW in South Africa and General Motors in the USA.
• Howe is the automotive section of Australian Leather Holdings.
• In 1988 exports comprised 8% of total turnover. Exports now comprise in excess of 90% of turnover.
• Australia’s relative disease free status is a major benefit in that there are no sanitary trade restrictions on the export of Australian hides.
• Major increases in the value of the industry can be gained through increasing the quality of hides and Howe is promoting a hide improvement program. Such a program will require penalties and rewards for poor and good quality hides and will require direct linkages between producer, abattoir and Howe to be successful.
• At this time, hides are seen by many sectors of the cattle industry as a low value by-product of cattle slaughter.
• Utilization of hides is effected by parasites, brands, scratches and general husbandry and handling of cattle.
• Up to 45% of a hide can be discarded as scrap, due to damage, etc.
• A hide from an average 320kg beast is worth about $80. This value would increase by $17 if scrap was reduced to 40% and by $34 if scrap was reduced to 35%.
• The new Howe leather plant is capable of producing chrome (3) free hides for those markets that require tanning without chrome (Europe).
• Howe is leading the world in the use of technology, employing fully automated cutting technology, to reduce variation and increase product flexibility and responsiveness.
• Howe process raw hides in Australia and exports to cutting plants in South Africa and Mexico. The shipping weight of a processed hide is 3kg. The weight of a raw hide is 40kg.
• There has been rapid growth in the use of leather interiors in the automotive industry. In the USA in ’92, 11% of cars used leather interiors. In 1996 this had increased to 23%. Growth in the sport utility vehicle market even greater, from 1.5% in ’92 to 12.5% in ’96.
• The demand for leather interiors is driven by the fact that people are spending more time in their cars and thus they have to be more habitable.
• Dealers and auto makers make a high margin on leather interiors. The additional cost of leather over cloth is about $400, but the retail price may be $3000.
• In recent years the ‘customer’ for Howe has changed from the auto maker to the system supplier that supplies full made up items for the assembly line. System suppliers include Lear, Johnston Controls and Magna Corporation.
• Howe is the major supplier to the BMW cutting plant in South Africa. Howe is able to be more reactive and are able to fit ‘special’ needs of BMW S.A. than local leather suppliers.
• Howe was recently the victim of a claim by USA leather makers under Section 301 of the United Sates Trade Act, where claims were made to the WTO over the Australian governments Car and TCF plans.
• Howe leather ended up with a compensation package from the Australian government of $30 million in grants over 3 years to enable the company to invest and increase world competitiveness.
• Greatest impediments to trade;
• World trade rules that favor the United States unfairly.
• Inconsistent trade policy by the USA, where secondary barriers to trade are often more effective at discouraging imports that up from tariffs or quotas, e.g. Local content rules imposed on third parties that may be customers of Howe – especially in the auto industry.
• The perception that Australia is too far away, difficult to communicate with and non competitive because of the distance factor.
• Experience over the last 10 years indicates that market acceptance requires patience and persistence, even if price, product and quality are #1.
• There is no place for a small regional supplier in the industry where Howe operates, as purchasing decisions are made globally.
• Howe see major benefits to their business, meat processors and producers in hide improvement program, reducing scrap and increasing the ‘value’ of hides.

Mr. John Crosby, General Manager, Asset Development – Elders Ltd.

• Elders is now owned by Futuris Corp, a subsidiary of which is Air International, which manufactures automotive air conditioners through joint ventures in China, SE Asia and other places. The Futuris link provides Elders with first hand knowledge of joint ventures in Asia.
• It is Elders aims to become involved with the whole of the meat industry processing or value chain.
• Elders have, through its traditional and existing business, 90 000 rural customers, out of a potential 110 000 primary producers in Australia. This is a large base off which to communicate with producers.
• Elders are currently undergoing a rebuilding phase, replacing many of the assets sold during the late ‘80s.
• The company is going to concentrate on Japan, China, Thailand, Korea, The Philippines and Indonesia for expansion of its meat business.
• Elders have identified that they can gain greater profitability through improving the quality of the hides its sells than from any other part of the beast. Elders will sell in excess of 400 000 hide next year.
• Recent economic problems in SE Asia and the intervention of the IMF should lead to increased market access for Australia in the medium to long term.
• Elders will be working with government and other companies to continue tariff reductions and to eliminate differential tariffs and to simplify market access through the reduction in licensing, permits, etc.
• The cost of complying with documentation requirements in some markets is prohibitive, especially Indonesia.
• Enforceability of contracts, manipulation of cattle live weight and problems associated with letters of credit are all major impediments in dealing with Asia.
• Currently there is an oversupply in shipping capacity for live cattle to SE Asian destinations. This is leading to undercutting of rates and may lead to withdrawing of capacity which would adversely impact on the trade when demand picks up.
• There is currently an oversupply of cattle in Indonesia, due to devaluation of the currency and increased domestic prices taking the heat out of the demand for red meat, which is still a ‘luxury’ item.
• Continuing growth in the economy of the markets mentioned above will enable the live cattle markets to continue, but growth won’t be as spectacular as it has been in the recent past.

Mr. Terry Larkin, Managing Director – JT Larkin and Associates.

"Food Market Channel Development in Japan and Korea."

• In Japan and Korea there is significant vertical integration of the traditional wet markets with western style supermarkets.
• The Japanese and Korean markets have been growing rapidly, but Australia’s performance in these food markets has been ‘less than impressive’, with Australia just maintaining a 6% market share in Japan and losing market share in Korea, down from about 14%.
• Largest gain in these expanding markets has been from the USA on the back of significant local investment to gain the vertical foot hold.
• The Japanese and Korean markets will become increasingly difficult to trade into as growth flattens out and consumers become more biased toward domestic product, driven (in Japan) by local manufacturers using food safety as a competitive tool.
• There have been 3 waves of change in the Japanese market.

1. In the mid 1980’s with a rapid increase in the value of the yen leading to a doubling of food imports, although greater imports didn’t change the traditional wholesaler based distribution system.
2. The end of the 80’s where deregulation of laws governing the operation of supermarkets took place, this led to a rapid growth in supermarket investment, which in turn forced changes to the distribution channels. Most of the channel changes came about through supermarkets dealing direct with suppliers and the growth of house brands.
3. There has been a recent slow down in the growth of supermarkets, as major domestic Japanese food companies have sought to regain market share. Often this has been done in conjunction with major wholesalers, in response to the power of the supermarkets. This has been aided by consumers turning back to domestic products and consumers buying for quality and presentation rather than primarily on price. The recent growth in popularity of convenience stores (Seven – Eleven, etc) has also slowed supermarket growth. Convenience stores fit in well with the traditional Japanese distribution model, small specific lots, and regular deliveries.

• The selection of the ‘correct’ wholesaler and retailer is critical for potential exporters into Japan.
• In Korea, the deregulation of the food retail sector has just commenced and there has been an increase in Japanese supermarket investment.
• Local conglomerates that dominate the Korean economy account for approximately 80% of food production, distribution and retailing.
• Overall there is a serious lack of any cohesive competition policy in any of the Asian economies.
• Markets tend to be controlled by whole sale price setting and monopolistic practices.
• A reduction in tariffs would not lead to significant increases in market share for Australian exporters.
• There is a need for international competition policy guidelines that will enable competitive producers to compete, unencumbered by second level trade restrictions.
• There is also a need for more ‘real time’ market information, to enable potential Australian exporters to better understand whom they should be seeking trade links with.

Mr. Peter Frawley, Executive General Manager - CSR Sugar.

• One of the most serious trade impediments comes from business itself, then through government regulations and other measures and then from customer requirements.
• There is a desire on behalf of almost all governments to interfere in trade to a lesser or greater extent, or for political or social aims.
• Government interference includes tariffs, health regulations, local content rules, subsidies and other means of direct or indirect support.
• The world trade in sugar is one of the most corrupted.
• The current world price is around $300/T. the US support price paid to growers is $600/T, in Europe the support price is $700/T, Japan $1000/T. In many cases there are also transport subsidies.
• Sugar production in the EC is boosted by 30%, the world prices depressed by 15% and price variability is increased by 10 to 15% as a result of support pricing.
• Price support in the USA has led to sugar substitution with high fructose corn syrup and has halved sugar consumption (totally replacing sugar in soft drinks), while building a large competing corn syrup industry.
• When selling sugar into the US market, Australia receives the high US support price, but is subject to import quotas.
• Australia would benefit more from elimination of quotas and a drop in the US domestic price of sugar, than it does from the artificially high US domestic price.
• The diversion of a significant amount of the Brazilian cane crop into ethanol production has the effect of keeping world sugar prices about 10% higher than they do otherwise would be.
• Access to markets is the key to Australian export sugar success. The last GATT round and the ongoing activities of the WTO are having a beneficial long and medium term effect on the Australian industry. Short term, there is little benefit.
• The recent Indonesian currency problems will lead to a reduction in raw sugar exports to that country.
• One of the major failings of Australian agriculture and agribusiness is that there has been too much concentration on problems associated with the production of commodities and products, and not enough attention paid to the needs of the customer. "Is there a better margin if we present the same product in a different way, rather than seeking a new way to produce and present the same product."
• There are too many links between the producer and the customer that insulate market and customer signals to the producer.
• In the sugar industry, pooling dampens out market signals, (as did the wool floor price) and takes away any rewards for ‘above average’ producers, as well as penalties for those who are below the line.
• Australian agriculture and agribusiness should be more active in debating the rights and wrongs of the ‘common approach’, as this would quicken the response of all sectors to market and consumer signals.

Mr. John Edwards, Chief Economist, Markets - HSBC

• The South East Asian ‘Tiger’ economies of Malaysia, Thailand, Indonesia and The Philippines have been growing rapidly over the last decade, with a rapid growth in trade and savings.
• Real GDP growth has been around 8%.
• These economies have had a high percentage of the value of exports to GDP along with a high percentage of savings to GDP over the last 10 years, e.g. Singapore @ 50% savings / GDP and The Philippines @ 38%.
• There has been a higher investment to savings ratio leading to a worsening trade deficit.
• This worsening deficit equation coincided with other factors including in 1995 an appreciation of the Tiger currencies against the Japanese and Chinese currencies, because the Tigers targeted their currencies against the US$ that was depreciating against the other Asian currencies.
• At the same time there was a slow down in European markets which effected demand for exports that in turn accelerated the deficit problems and worsened the debt to GDP ratios.
• High interest rates were established to link the currencies of Thailand, Malaysia, Indonesia and The Philippines with the UD$ which slowed domestic demand.
• Growth in Thailand is expected to slow to 1 – 2% and in the other countries mentioned above 4 – 5%.
• Their currencies will remain weak with interest rates being kept high.
• Slowing domestic demand will reduce imports and put pressure on exporters to increase exports. Exports will be more competitive on the back of devalued currencies.
• ASEAN economies comprise about 4% of US trade and will thus have little impact on the US economy as a whole.
• ASEAN trade makes up about 16% of total Japanese trade, but the Japanese have a lot of capital tied up in SE Asia.
• The effect of the ASEAN currency problems is relatively minor compared to the domestic banking problems in Japan.
• Australia’s exposure is about 15% of total trade, with a growth rate of 15%PA. The major effect will be on the growth in trade which may reduce to zero.
• The total impact on the Australian economy should be in the region of 0.2 to 0.4% of GDP.
• Australia has little capital at risk, due to the relatively low rate of investment in the region.
• The ASEAN economies are the one area of Australian trade that is dominated by manufactures and services, rather than by commodities.
• Australian commodity exporters may benefit from the devaluation(s) where exports from the effected countries are now more competitive and thus exports may increase, as would the demand for manufacturing inputs and some Australian commodities.
• The SE Asian economies are about the same size as the Australian economy (3% of world economy), but the region is very much larger is China is included.
• The GDP growth in China has been 9-10% over the last 5 years.
• China devalued their currency in ’94 and got inflation under control in the early 90’s, this enabled them to avoid the problems being encountered by the ASEAN economies.
• China is currently running a large trade and current account surplus and is building up major foreign currency reserves. Reserves currently are greater than total government debt. This is mainly due to the fact that much of the Chinese government debt is ‘bank debt’; falling as a liability to banks and comprising the majority of Chinese banking sector non-performing loans.

Senator The Hon. David Brownhill

Parliamentary Secretary to the Deputy Prime Minister and Minister for Trade

• Change is now the only constant in trading now, and Australia must accept that trade liberalization is inevitable and desirable.
• The moves by the federal government in the mid 80’s to reduce tariffs and trade barriers was appropriate.
• It is essential for Australia to produce for target markets, rather than trying to find markets for what has been produced.
• Export markets are now becoming the primary focus of businesses, rather than export markets being used to unload surpluses.
• Australian agribusiness is now worth $64 billion and employs in excess of 500 000 people and has an export worth of $14 billion.
• The Australian wine industry is a good example of where imports and exports can be complementary, where wine is imported for the budget (cask) end of the market, with domestic production being sold into domestic and export niche markets.
• This indicates that the way ahead for Australian agribusiness is not to compete head to head with the large ‘commodity’ producers (e.g., Brazilian oranges) but to target niche markets that suit our production capacity.
• It is important that the Pacific Rim countries accept that trade liberalization and reduced market impediments is the way to greater prosperity.
• Latin America will increasingly become a stronger competitor of Australia, their production capacity is larger for many commodities and the can achieve greater economies of scale.
• Australia has to increasingly concentrate on greater research of markets to ensure that consumer trends are understood and to enable Australian exporters to react.
• In summary, Australian exporters need to strive to be responsive to markets shifts and to become world competitive.