China encourages baby formula mergers

Chinese authorities on Friday released a work plan to encourage merging and corporate reorganization among domestic baby-formula producers to ensure the healthy development of the troubled dairy industry.

The quality and safety of infant-formula milk powder is a key issue concerning people's livelihood, as well as a major economic and social issue, according to the plan, released by the State Council and jointly formulated by several government organs including the National Development and Reform Commission and the China Food and Drug Administration (CFDA).

The work plan says that companies will be encouraged to reorganize through mergers and acquisitions (M&A). By 2015, China will aim to have formed around 10 large baby-formula conglomerates, each with an annual sales revenue of more than 2 billion yuan (325 million U.S. dollars).

By that time, the top 10 domestic brands of baby-formula are expected to account for a total market share of at least 65 percent.

The plan also sets a further goal of forming three to five baby-formula heavyweights with annual sales revenue exceeding 5 billion yuan each by 2018. The top 10 domestic industry players are then expected to nab more than 80 percent of the entire market.

To realize such goals, the plan stipulates several policy measures, including strict rules and regulation for industry access and production.

On the other hand, administrative approval process for M&A in the sector will be simplified. Authorities will strengthen fiscal and taxation support and financial support for relevant M&A.

Policy measures concerning land allocation will also be carried out, according to the plan.

The Chinese baby formula industry has been embroiled in a series of safety scandals since 2008, when milk powder containing melamine left at least six infants dead and many others suffering kidney problems.

As a result, an increasing number of Chinese parents have opted for foreign-branded dairy products for their children in recent years. About three-fifths of all baby formula sold on the Chinese market, worth around 60 billion yuan in total, is from foreign-branded.

To restore consumer confidence and revamp the domestic dairy sector, the CFDA has unveiled a series of moves, highlighted by a revised regulation in December 2013 to step up standards for domestic infant formula producers.

Following the half-year campaign, the administration said on May 30 it had renewed production permits for 82 baby formula producers. A total of 51 producers failed to obtain renewed production permits or asked to delay applications for renewals.

Meanwhile, stricter regulation is likely to force companies to merge or switch to manufacture other products, while some might be shut down, according to Gao Fu, an official from the Ministry of Industry and Information Technology.

Gao said by the end of 2013, the ten largest infant formula makers in China accounted for 45 percent of the entire market, making the goal to increase the percentage to 65 percent by 2015 attainable.

But the ministry official also stressed that companies should act on their own accord in M&A, as there will be no "forced marriage" or government imperatives.

"The work of the government should be focused on fostering an environment for development, improving policies and regulations by removing unfit rules hampering corporate M&A, as well as strengthening fiscal, financial and land policies," Gao said.

According to Gao, Friday's plan applies only to dairy producers in China that have legally acquired baby formula production permits. Companies can only be eligible for M&A as long as they have high standards in a number of areas, including milk sourcing, processing technology and business performance.