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Foreign, local dairies to milk profits from smaller industry

2014-05-28 10:31 China Daily Web Editor: Qin Dexing
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Dairy products at a supermarket in Xuchang, Henan province. The government's stricter permit requirements, which are expected to keep up to one-third of domestic infant formula producers from manufacturing, is driving up competition between local and foreign dairy brands. Geng Guoqing / For China Daily

Dairy products at a supermarket in Xuchang, Henan province. The government's stricter permit requirements, which are expected to keep up to one-third of domestic infant formula producers from manufacturing, is driving up competition between local and foreign dairy brands. Geng Guoqing / For China Daily

Stricter regulations tighten the market as they bolster safety

The government's stricter permit requirements, which is expected to keep up to one-third of domestic infant formula producers from manufacturing, is driving up competition between local and foreign dairy brands.

As of May 31, the 127 manufacturers of infant formula have to apply and receive production permits or their production must cease.

Song Liang, a leading dairy industry expert, said about 45 formula milk producers have received the permits and it is estimated at least one third of the domestic factories will be phased out or face orders to stop production.

"Many smaller manufactures are done," Song said. To deal with the new standards, infant formula milk producers are consolidating to take on their foreign competitors.

Leng Youbin, chairman of Feihe Dairy Co Ltd, which has received six permits, vowed to invest nearly 5 billion yuan ($800 million) in expanding and updating factories to reach their goal of manufacturing 4,000 metric tons of fresh milk daily. They also plan to develop their Guanshan brand as the country's leading goat milk label by building three goat farming bases in Shaanxi province, Inner Mongolia autonomous region and Jilin province.

Leng said the new regulation, which aims to eradicate "fake" foreign infant milk powders, won't have a major impact on domestic brands but will escalate the competition between two sides.

Meanwhile, non-registered offshore production of dairy food may not be imported into China, banning all but 41 foreign makers of infant milk formula from selling in China.

Song Liang, said that since one-third of Chinese dairy producers are getting permits, the market share of imported infant milk formula has been boosted since all major foreign OEM (original equipment manufacturing) producers have succeeded in registering to sell in China.

The recent move has encouraged major foreign OEM providers to take initiatives to cut some smaller brands and to consolidate their portfolios, Song said.

There are about 8,800 registered domestic and foreign infant milk brands in China, and the new rules are likely to push half the foreign brands, but only 10 percent of the market value, off Chinese shelves, he said.

As of April 1, imported baby formula products had to be tagged with Chinese labels before arriving in the country. Unregistered producers were not allowed to import to China as of May 1.

Sales of imported milk powder in China rose by 79.3 percent in the first two months of 2014 compared with a year ago. Foreign companies made up 54 percent of the Chinese market in terms of sales revenue in 2013, according to Global Intelligence Alliance.

The dairy regulations will give both foreign and local brands a chance to capture market share. Foreign companies, known for their quality assurance, will be able to leverage the current demand for their products. Local companies will be able to build on their relationships with local distributors, suppliers and logistical operators to lay claim to the newly available shelf space, said Nicolas Pechet, senior vice-president of Global Intelligence Alliance China.

For the time being, the memory of the 2008 melamine incidents in China are helping to bolster Chinese consumers' preference for foreign brands. The dairy market is being driven by brand confidence, and the new regulations do not address that, Pechet said.

Leng from Feihe Dairy said it will take time to regain Chinese consumers' faith in domestic dairy enterprises, but efforts to improve and ensure product quality should win them over.

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