Small-scale infant formula producers face bleak future

[This post was first published in the New Zealand Sunday Star Times on 24 November 2013.]

In recent years there has been a proliferation of infant formula producers in New Zealand. Almost invariably, the brands are aimed at the Chinese market, with very few of them actively marketed in New Zealand.

The New Zealand Infant Formula Exporters Association lists 13 members, but there are many more infant formula producers who are non-members. Most of these brands have no long-term future even if they meet all of the New Zealand regulations. Quite simply, the Chinese Government does not want them.

Most of these new brands are custom manufactured in two Auckland factories. The owners of the brands are a mix of Chinese immigrants and New Zealand born Kiwis. These small New Zealand brands have been developed by entrepreneurs who saw an opportunity to make good profits.

Chinese consumers have been paying extremely high prices for infant formula, including extra-large premiums for anything of foreign origin.  The profit margins have been so great that there was good money to be made, even if the formula was priced a lot lower than the premium brands. However, the Chinese infant formula industry is now undergoing rapid transformation.

The Chinese Government, through its Ministry of Industry and Information Technology, has recently nominated six of the 127 China-based infant formula companies to be the ‘national champions’ of the industry. These ‘national champions’ are eligible for government assistance to develop their quality systems. The Chinese Government hopes these companies will come to dominate and the rest will fade away. The six designated companies  include Mengniu and Yili, which are China’s two biggest milk producing companies. Less well known among the six is the ‘Treasure of Plateau Yak Dairy Company’ in Tibet.

The Chinese Government is very clear that it wants not only the infant formula industry, but also other parts of the dairy industry, to be managed by a few large-scale companies. They see that as being the quickest way to manage issues of food safety and food quality.

Here in New Zealand, the domestic infant formula market is dominated by a few brands. New Zealand parents are not interested in small-scale brands owned by low profile companies. To the Chinese Government, it is therefore offensive that our infant formula producers would attempt to sell a product in China that has no market in New Zealand.  It looks like exploitation.

The small-scale infant producers were hard hit by the Fonterra botulism scare, and they have had major problems trying to get their product released through China Customs. However, in China things are not always what they seem. There has to be a reason why Fonterra could still send its milk powder to China, yet these infant formula manufacturers, many of whom claimed to not even be using Fonterra sourced milk, were unable to get their products released. Perhaps someone was sending them a message.

Our Prime Minister John Key appeared for a while to be taking up the cause on behalf of the small-scale infant formula producers, but in all probability without understanding some of the realities.  The real message from China is get big or get out.

Both Mengniu and Yili are currently developing infant formula plants in New Zealand. In the case of Mengniu, this will occur through its recently acquired subsidiary Yashili.

Clearly there are also ongoing opportunities for large New Zealand companies such as Synlait, with its strong focus on nutritional products. If Fonterra enters the Chinese infant formula market then it too will be welcome. The New Zealand Goat Co-operative may also have a sound future. Its Asian-focused Karihome joint venture brand is already well-established across a range of Asian countries, with annual returns to the Co-operative now exceeding $100 million.

There could also be several other companies who can invest the necessary capital to consolidate a position in the China market. But most of the small-scale producers should now be considering their exit strategy. If they stay, then life is going to get a great deal tougher.

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About Keith Woodford

Keith Woodford is an independent consultant, based in New Zealand, who works internationally on agri-food systems and rural development projects. He holds honorary positions as Professor of Agri-Food Systems at Lincoln University, New Zealand, and as Senior Research Fellow at the Contemporary China Research Centre at Victoria University, Wellington.
This entry was posted in Agribusiness, China, Dairy, Synlait, The Fairfax SST Articles. Bookmark the permalink.

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