Baby formula sector revamp soon

By Yang Ziman in Beijing and Wang Zhuoqiong in Xi'an (China Daily)

Updated: 2014-06-14

China on Friday unveiled the blueprint for consolidation of its fragmented infant formula industry and indicated that the sector would have 10 manufacturers with annual sales revenue of more than 2 billion yuan ($160 million) by 2015.

The sectoral revamp would be undertaken in two phases, said Gao Fu, an inspector in the Ministry of Industry and Information Technology. According to the plan by 2015, the top 10 domestic baby formula manufacturers will account for 65 percent of the market share, up from the current 45 percent. By 2018, there will be three to five manufacturers with more than 5 billion yuan in annual sales revenue. The market share of the top 10 companies will grow to 80 percent in the same period.

Currently, six of the 128 baby formula manufacturers in China have annual revenue of more than 2 billion yuan.

The main highlight of the plan, however, is to ensure that baby formula manufacturers use the raw milk produced on farms owned and controlled by them. Ministry officials indicated that by using advanced quality control techniques, the companies can also ensure that they get better returns.

Most of the baby formula enterprises certified by the China Food and Drug Administration have high quality assets, said Song Liang, a Beijing-based dairy industry analyst. The restructuring plan unveiled by the government has set attainable goals and ensures that these companies can reap sustained profits, he said.

Quality standards for baby formula will be as stringent as those of medical products, said Gao from the ministry. The criteria for milk source base construction, production conditions, equipment renovation, and environment control will also be improved. "Substandard enterprises will be forced out of business, or may have to merge with bigger companies," he said.

Several large-scale mergers have already taken place in the sector last year. In June 2013, China Mengniu Dairy Co Ltd signed a deal to buy the Guangdong-based Yashili International Holdings Ltd for over HK$11 billion ($1.42 billion). In September, Inner Mongolia Yili Industrial Group Co Ltd invested 310 million yuan in China Hui-shan Dairy Holdings Co Ltd, while in November, the Shanghai-based Synutra International Inc acquired New Zealand-based dairy brand Youthbase.

The industry blueprint also outlines several steps that are expected to provide new wind for infant formula companies. Prominent among them are the simplified procedures for mergers and acquisitions. Companies that are involved in mergers will enjoy deduction and exemption of deed tax and increment tax on land value. Companies that actively eliminate obsolete production capacity will get a bonus from the central fiscal revenue.

"The stricter standards will facilitate the consolidation of upstream milk sources," said Song, "The mergers are going to be initiated by the companies themselves while the government plays a supportive role. Also, companies in different regions and of different ownership are allowed to be merged. With these measures put in place, Chinese baby formula companies will be able to form a production chain and eventually go global."

Song Kungang, director-general of the China Dairy Industry Association, said the Chinese dairy industry has gone through major changes in the past five years. Remarkable improvements have been made in equipment, technology, testing capacity, and milk bases owned by manufacturers themselves. Chinese baby formula is among the best in the world, he said.

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