Yili to produce milk powder in New Zealand

Inner Mongolia Yili Industrial Group Co Ltd, the Chinese dairy giant, announced plans on Tuesday to produce 47,000 tons of baby milk powder annually in New Zealand after buying all of the shares of a New Zealand dairy company.

According to the notice, the total investment of the proposed project in South Canterbury, New Zealand, will be more than NZ$214 million ($174 million), while production is expected to begin in June 2014.

The project is part of Yili's global expansion strategy, and the announcement comes after the company purchased all of the shares of Oceania Dairy, a New Zealand company.

Zhang Jianqiu, executive president of Yili, said that the melamine scandal involving milk and infant formula in China placed much more pressure on domestic dairy producers, which tend to import milk from other countries.

The latest notice issued by the Ministry of Finance on Monday showed that the rate of duty on imported goods such as baby milk powders will be lowered.

In addition, the import tariff on New Zealand dairy products will be reduced to zero by 2020, according to the free trade agreement between China and New Zealand.

"The cost of importing overseas milk is now even lower than collecting domestic ones," Zhang said.

"The original dairy source and quality control of dairy production abroad is much better and more reliable than products made in China," said Qu Yongxiang, an analyst at Guotai Junan Securities Co Ltd.

"It is a wise strategy that Yili has taken to expand the overseas market with buying a company with a full production chain and reliable sources to meet the increasing demands for imported products in China," Qu said.

Since a scandal involving tainted milk powder containing melamine was exposed to the public in 2008, domestic companies including China's biggest beverage producer Hangzhou Wahaha Group Co, have claimed that they use imported dairy.

"I've tried to buy baby milk powder from New Zealand over the past two years in order to ensure that my son can drink safe products," said Shao Jie, who works at an advertising company and is father of a 2-year-old boy.

If the domestic dairy giants begin manufacturing and importing high-quality products, Shao said he will probably try Yili's overseas products.

The Chinese dairy sector has continued to expand overseas.

The Shanghai-based Bright Dairy and Food, China's third-largest dairy producer, spent about 382 million yuan on a 51 percent stake in the New Zealand milk processor Synlait in 2010.

The company also recently announced that its profits increased by 44.1 percent year-on-year between July and September thanks to high brand loyalty among its customers in East China.

"The purchase behaviors of Bright and Yili Dairy show that Chinese dairy giants have the capacity to chase higher-quality and lower-cost dairy sources globally," said Zhao Jun, an analyst from Xiangcai Securities.