Subsidies for domestic milk brands

Some domestic up-market dairy brands are set to receive a government subsidy to promote merging and acquisition within the industry, a senior official of the Ministry of Industry and Information Technology said on Tuesday.

Gao Fu, an assistant inspector of MIIT's consumer goods department, told National Business Daily the government will promote dairy sector consolidation focusing on some high-end powder brands, but declined to give details on the brand names.

But earlier reports revealed that five Chinese dairy companies - Yili Industrial Group Co Ltd, China Mengniu Dairy Co Ltd, Feihe International Inc, Heilongjiang Wondersun Dairy Co Ltd and Tibet Treasure of Plateau Yak Milk Co Ltd - are likely to become the first batch to benefit from the government's 30 billion yuan subsidy package to help them compete with international rivals.

Wang Lirong, director of the general affairs department of the China Dairy Industry Association, did not deny the names and said it is a sensitive period, when China Daily contacted her.

MIIT will hold a news conference this Saturday to release the draft that includes loans from banks, provincial subsidies and tax benefits to foster the growth and merger and acquisitions of infant formula companies over the next five years and to cultivate three to five companies, each with an annual sales revenue exceeding 5 billion yuan ($806.5 million) by the end of 2018, according to a report by Chongqing Economic Times.

Yu Ningjiang, the deputy general manager of Wondersun Dairy, said the government has strict standards to decide which companies will receive the subsidy.

He was quoted by Chongqing Economic Times as saying: "First, it has to be domestic brands and second the companies must have a complete industrial chain that includes their own brands, farms to control the quality of raw milk and a strong ability in research and development."

Quality is an obsession following China's post-melamine scandal in the dairy industry, involving strict quarantine and rigorous testing.

Lian Fang, a dairy expert at Beijing Orient Agribusiness Consultants Ltd, said the move aims to rebuild the trust of customers, which was hurt by the 2008 chemical additive disgrace, and will increase the global competitiveness of domestic infant formula companies in a market where 60 to 70 percent of the share is in the hands of foreign companies.

"The problem of the Chinese dairy companies is mainly focused on the source of the milk," Lian Fang said. "We need more skilled cattle caretakers to take care of the services such as vaccination and quarantine."

Song Liang, a dairy analyst from the Distribution Productivity Promotion Center, echoed the comments and said there's no apparent gap between China and the rest of the world in terms of dairy processing. "The subsidies are not enough to help them grow stronger. They still need investment, cooperation and family farms," he said.

"If the quality of raw milk is better controlled and guaranteed, the rest will become much easier."

He added the plan to support five key dairy producers will strengthen their capability to better rival foreign counterparts, which are traditionally strong in first- and second-tier cities.

There are a total of 127 infant formula companies in China with a total annual output of 600,000 tons. Only three companies have an annual output of 30,000 tons or more. Revenues for the top 10 domestic brands are around 18 billion yuan.