China dairy rush

Western dairy companies flock to China

Even in a country used to food-safety scandals — the latest include poisonous rice, ginger laced with pesticide and rat meat masquerading as lamb — dairy is a sensitive topic. In 2008 six children died and tens of thousands were made ill by local milk powder tainted with melamine (added to boost the apparent protein content).

Subsequent scandals involving fresh and powdered milk have shattered confidence in domestic firms.

Ai Weiwei milk artwork

“A country like this can put a satellite into space but it can’t put a safe bottle teat into a child’s mouth.”

So declares Ai Weiwei, China’s most famous dissident artist. His latest provocative work, part of an exhibition which opened on May 17th in Hong Kong, is a map of China made up of 1800 tins of baby-milk powder.

Many have turned to imported dairy products, but suppliers simply cannot keep up. Well-heeled mums and opportunistic middlemen have also tried smuggling in huge quantities of milk powder, but resultant shortages abroad have led to a backlash, and to purchase limits as far away as Ireland. Get caught leaving Hong Kong with three tins of milk powder and you may go to jail.

So the only hope for Chinese consumers is for the domestic industry to clean up its act. That has created an opening for multinationals with strong brands and a record of safety.

Danone, the French dairy giant, has announced a €325m investment to expand its yoghurt business in partnership with Mengniu, China’s largest dairy firm.

Arla Foods, a Danish milk producer, already owns a stake in Mengniu and is helping to professionalise its research. Nestlé, the Swiss food giant, is improving quality control and farming practices at its local suppliers, and is building a hands-on “dairy university” in north-eastern China.

In the short term, such investments will encounter snags, argues The Economist. The agricultural supply chain is highly fragmented, so it is difficult to control the quality of inputs. Regulators are erratic: sometimes dangerously lax, but at other times arbitrarily harsh (especially toward foreign firms). And local partners can undermine joint ventures, as Danone discovered in an earlier failed venture with Wahaha, a beverage firm.

Over the long term, though, companies that work out how to make Chinese dairy products reliable are sure to milk healthy profits.

Source: The Economist

Related news:

China Mengniu Dairy, the country’s largest dairy producer, has agreed to buy 26.9 percent of China Modern Dairy Holdings for HK$3.18 billion ($409 million) to gain greater control of milk supplies amid food safety concerns in the country…..

….. Mengniu sells liquid milk products including UHT milk and yogurt under its namesake brand in the Asian nation. It also produces ice cream and other dairy products such as cheese and milk powder. The company has the biggest share in China’s drinking milk market, controlling more than 34 percent share in 2012, according to Euromonitor International. Inner Mongolia Yili Industrial Group ranked second with 24.8 percent.

Sales of milk in China will rise 70 percent to 147.4 billion yuan ($24-billion) in 2017 from last year, according to data from Euromonitor International.

Modern Dairy, which first started operations in 2005 and is the largest raw milk supplier to Mengniu, runs 22 large-scale diary farms in China.