January 22 marked the tenth anniversary of the sentencing to death and long jail terms of dairy workers and company executives in the wake of one of China’s most grizzly scandals. The previous year, infant formula tainted with the chemical melamine, which is used to make plastics, had claimed six infants and an estimated 300,000 victims.
The scandal raised concerns about food safety and political corruption in China after it was alleged there had been a cover up between local officials and the dairy major at the center of the affair, Sanlu.
Chinese consumers quickly demonstrated their fear of local products after the melamine scandal by shunning them in favor of foreign brands. Now, 10 years after some of the people behind it were convicted, the market continues to boom for foreign manufacturers—and firms that can claim supplies from overseas.
Foreign milk
Today’s domestic giants, Inner Mongolia Yili Industrial Group and China Mengniu Dairy, have been engaged in a well-documented race to hoover up sources of foreign milk and dairy products as they aggressively build up their supply chains.
Another Chinese owned company now has one of New Zealand’s biggest herds. Shanghai Pengxin-owned Milk NZ milks 30,000 cows on 12,000 hectares of land, producing some 10m kgMS each year. From this it exports UHT, fresh milk and powders to China under the Theland brand.
Though nine in 10 Chinese consumers are happy to drink local milk, it will take much longer for parents to gain confidence in Chinese-made nutritionals, Mengniu’s chief executive lamented last month.
“Ten years ago, everyone felt depressed and said there was no hope for China’s domestic dairy industry,” said Jeffrey Lu at the World Economic Forum in Davos.
“Most local brands now have international supply chains that produce baby milk powder on par with the global brands. We need to make the supply chain more transparent,” he added.
Milk origins
Other local firms have been taking a more creative approach to reassuring consumers of the foreign provenance of their products. One of these, Feihe International, broadcasts the overseas origins of its milk, though the reality is it is produced in China’s northeast.
Even so, the brand is really the only domestic player to have successfully carved out a market post-melamine, with a share of upwards of 8%.
Different approaches
Some high-profile moves have been made by foreign companies and multinationals to cash into an infant formula market that is expected to be worth around $32bn by 2023.
French giant Danone has been targeting an e-commerce strategy and is tapping into fast-growing and under-supplied second-tier cities. It has also benefited from an ongoing delay to the regulation by Chinese authorities of cross-border e-commerce, though new rules meant to formalize the daigou trade and make it taxable have been implemented.
"China's evolving business environment and opening-up has contributed to Danone's steady growth in the country," Danone's executive vice-president told Xinhua late last year, adding that he believes China's ongoing consumption growth and booming e-commerce segment will benefit not just domestic sales, but also other parts of the world.
For rival Nestlé, which also has eyes on the secondary city market, teaching farmers how to produce high-quality, safe milk has also been a focus. Among its initiatives in the country was a dairy farming institute in northeast China which opened in 2014.
“Milk is becoming a vital part of the Chinese diet, so the institute represents our commitment to helping China move its dairy sector to the next stage of development in a sustainable and efficient manner,” said Hans Joehr, Nestlé’s head of agriculture, said of the $30m investment.
The company now has 33 factories in China across its entire operation, ranging from a dairy factory in Heilongjiang province to coffee production in Yunnan province, as well as four research centers in order to source, produce and sell locally as much as possible.
Its share of China’s milk formula market has quadrupled since the scandal, to make it the clear leader.
Australian influence
Australian companies in particular have benefited from the fallout of the melamine scandal. In the years following 2008, the country has been a favorite source for formula supplies among middle-class Chinese through the informal daigou sales network.
For a period of time, vast stocks of dairy nutritionals found themselves on the way to China by agents in Australia on behalf of customers, leaving shelves depleted.
This rampant demand prompted Australian dairy businesses like A2 Milk, an Australian-listed company with Kiwi heritage, to tear into China to the point that the country now accounts for half its revenue. A decade ago, this figure was closer to NZ$1.5m.
Its foray from Middle Earth into the Middle Kingdom has been up and down recently, with regular fluctuations to its share price. Revenues from 2018 of close to NZ$1bn (US$670m) were an impressive 68% higher than the previous year, however, though they came amid a downgraded forecast last year.
Rival formula maker Bellamy’s Australia has suffered several tumultuous years in China that almost led to the collapse of the organic baby food and formula maker.
It is currently waiting to gain necessary certification from Beijing that will allow it to sell Chinese-labeled products in China—a wait so far that has lasted more than a year. The company missed its January 1 filing date, allowing other formula manufacturers to receive approval ahead of Bellamy’s.
It had also attempted to buy a canning unit with the necessary paperwork that would have allowed it to sell direct into China, though the move turned sour just days after the acquisition closed in 2017. Until then it had been one of the rising stars of the Chinese infant formula market, with A2.
China’s dairy landscape now is vastly different from what it was 10 years ago. It’s certainly one where companies should enter and beware, regardless of their size, though the opportunities are certainly there to be taken. Most importantly, though, it has embraced the slump in confidence prompted by the melamine scandal to coax a new generation of more transparent—and ostensibly foreign—infant formula products onto the market. It’s still to be seen, though, whether lagging consumer confidence will ever catch up.
