Can Zespri’s intangible assets save its Kiwifruit from illicit growers?

In 1904, Mary Fraser packed a few cuttings of the Chinese gooseberry into her baggage as she made her way back to New Zealand from a visit to China.

Fast-forward to 1950 and New Zealand had enough of the fruit growing in orchards across the country to begin exporting it in bulk to the US. However, it was the height of the Cold War and the name “Chinese gooseberry” wasn’t very easy to sell to an American audience. So, in 1959, the company Turners & Growers proposed calling it “kiwifruit.” The name stuck.

Kiwifruit has come a long way as a product since then.

New Zealand breeders have since spent millions of dollars creating and marketing new cultivars of the kiwifruit variety that are radically different from the original species shepherded into the country in 1904. These new types, like SunGold (G3) or Charm (G9), are globally recognised and protected by robust plant variety rights (PVRs).

However, history is not without a sense of irony because China is still very much involved in the kiwifruit/gooseberry story.

Zespri, the world’s largest marketer of kiwifruit, has the full rights to licence its SunGold kiwifruit (a yellow variety created in the 2010s) and farmers must pay Zespri about $270,000 for a license to plant one hectare of the fruit.

Zespri is proactive in defending its rights. But these legal protections haven’t been enough to stop some Chinese horticulturalists from circumventing the international rules to illicitly grow Zespri’s protected strain on their farms over in China, far away from the long arm of the intellectual property rights enforcers.

This is a significant problem for Zespri because China is the world’s largest producer of kiwifruit, both legitimate and illegitimate, with an annual output of about 2.55 million tons – almost 14x the output of New Zealand. According to a lawsuit filed in August against two growers that Zespri claims stole its SunGold vines, there are now more than 7850 hectares of illicit SunGold plantations in China.

It’s a tough situation for Zespri. On the one hand, Chinese growers have brazenly stolen Zespri’s intellectual property (IP) and robbed it of millions in potential revenue.

On the other hand, Zespri still has an exceptionally strong constellation of intangible assets that no amount of IP theft can hope to replicate, including Zespri’s brand, data, relationships, processes and industry experience (amongst many others).

Perhaps Zespri’s strongest asset is its brand. According to its website, “with sales revenues of $3.1 billion, the Zespri™ Brand is recognised as the world leader in premium-quality kiwifruit.” Before Mary Fraser returned with her vines, the Chinese gooseberry wasn’t well-known outside of China. Half a century later, New Zealand growers found a clever way to link the fruit to the nation of New Zealand. The Kiwi is New Zealand’s most famous bird and also a shorthand for each of its citizens.

Calling the gooseberry “kiwifruit” was one of the best marketing decisions of the 20^th century.

It meant that even though China exports the bulk of the fruit to world markets, people don’t call it the gooseberry. They call it the “kiwifruit.” In the US market – which imports about 7% of the global annual total – consumers call it the “kiwi,” which is even more aligned with the New Zealand brand.

This is a valuable intangible asset for Zespri. While every SunGold kiwifruit sold into markets by illicit farms in China undercuts Zespri’s profits, people everywhere still associate kiwifruit with New Zealand – and therefore also with Zespri.

The unauthorised Chinese growers must have “Made In China” stamped on the back of each kiwifruit carton. But Zespri doesn’t have this problem. Every pack of its kiwifruit comes from New Zealand – the land of the Kiwi. That’s a huge marketing win, and a major intangible asset that Chinese growers lack.

Furthermore, the unspoken issue with any corporate theft is that it skips straight to the end of the R&D process. What takes decades of research can be stolen in an afternoon on a USB device.

However, theft is usually not worth the trouble since it is impossible to steal the experience and institutional knowledge put into developing something like SunGold (and also that Zespri actively protects its rights with litigation).

According to the aforementioned lawsuit filed by Zespri, the defendant recognised that China’s farms were about 15-20 years behind New Zealand in terms of expertise. Part of his motivation for stealing the SunGold vines was to accelerate China’s horticulture skills.

At this point, Zespri is aware that the kiwi has flown the proverbial coop in terms of its genetic innovation. There are too many SunGold being grown in China for any hope of reversing to the status quo ante.

Yet if Zespri can use the threat of litigation to convince some of the infringing China-based farms to join its global network under a licensing arrangement, it could guide those farms in how to align with Zespri’s high-quality horticultural methods to operate at the same standards, thereby propelling those farms ahead of their competitors.

The incentive is obvious. Not only would these Chinese farms avoid a costly lawsuit, but they would also immediately tap into the valuable intangible assets of Zespri’s brand and experience.

By using this “carrot and stick” approach, Zespri would have a neat way to secure lucrative new deals with illicit Chinese growers, bring them up to Zespri’s world-class standards and grab a larger share of the global kiwifruit production. It’s certainly cheaper than setting up Zespri farms in China and competing with growers who are flouting international law.

Of course, it’s not nice to watch the theft of precious research. But because of its intangible assets, Zespri may now be on the path to turning lemons into lemonade – to use a well-timed fruit pun.