Chinese infant formula and Synlait – the story moves on

In recent weeks, I have been writing about Synlait’s new infant formula Akarola [here and here]. The Akarola project is a joint venture between China’s New Hope agri-food conglomerate (75%) and Synlait (25%) which has set out to market New Zealand made infant formula online direct to consumers through JD.com.

The strategy is based on cutting out the multiple layers of middle men and pricing the product at just a fraction of what Chinese consumers are used to paying. But the strategy can only work if Chinese consumers can be convinced that low price does not mean low quality.

I am on record as saying that the Akarola product has potential to be transformational in relation to the Chinese infant formula market. But others are not so sure.

David Mahon from Mahon China has expressed doubt on Radio New Zealand National as to whether Chinese consumers can be easily weaned from a belief that a low price means low quality. David has lived in China for some 30 years and is widely regarded as New Zealand’s most experienced China business man. So his comments cannot be lightly disregarded.

However, I am confident that New Hope and Synlait are a powerful combination. New Hope knows what it is doing and it has the marketing budget to get the message across. But that does not mean there will be no hiccups along the way.

This week there have been further problems with supply, with Stage 2 and 3 formulas available, but Stage 1 not available. The online comments at JD.com are generally favourable, apart from one parent grumbling that they could not find the spoon buried somewhere in the powder.

Back here in New Zealand, it is hard to understand the importance that Chinese mums and dads put on infant formula. In China, having a baby is a huge investment decision as well as an emotional decision. Accordingly, deciding on the brand of infant formula is right up there alongside buying a house and buying a car in terms of the personal research that Chines parents undertake.

Currently, Chinese parents know that somehow they are being ripped off when they see infant formula three and four times international prices. But they still want to know that the infant formula they buy is up to genuine international standards.

In recent days, there has been a remarkable further development in the Akarola story, at this stage only reported within the Chinese dairy industry. Apparently Wal Mart China, which has more than 400 stores across China’s cities, is now going to sell Akarola in-store at the same remarkably cheap online price of 99 RMB per 900 g can.

So what is going on and how can this be?

Wal Mart has said that it will buy the product in bulk once it is cleared through China Customs and then it will distribute the product itself to its stores across China. In much of the world, such an approach would be totally unremarkable, but within China it is remarkable. That is not the way things are done there.

It would seem that Wal Mart is happy to take exceptionally slim margins on Akarola. It may even be a ‘loss leader’. The real aim is not to make a big profit but to attract customers into the Wal Mart stores.

By some estimates, Wal Mart has about an 8% market share of Chinese supermarket trade, but in recent years they have been struggling. This is part of their strategy to get back on track.

So already we are seeing the transformational effect of the New Hope and Synlait strategy. Already we have two reactions. First it was Yashili saying they would match New Hope and Synlait with a low priced product online. And now we are seeing the first reaction from the supermarket channel. The ball is rolling.

This raises the question as to how big this might all be for Synlait?

In a previous article, I referred to Synlait’s new 50,000 tonne per annum dryer due to come on stream in September. I suggested that this would be enough to provide 55 million 900 gram cans of infant formula.

Synlait have responded to me by saying I drew a long bow with the figure of 55 million cans. In essence, I assumed that they had the canning capacity to turn all of the new product into consumer-ready products. Apparently, a more realistic estimate of their canning capacity, even with additional shifts added, is a maximum of about 33 million cans across all of their consumer products. Akarola is only one of these products.

However, my bet is that when Synlait’s Board considers their next investments, it will look closely at increasing its canning facilities. This is despite the present canning facility still being in its first year of operation. In the overall product mix, and with the current canning facility at full capacity, somewhere around 75% of the Synlait product would still be going out in bulk form, either as wet-blended base powder for infant formula (in itself very much a value-add product) or as simple whole milk powder.

One of the interesting aspects of the Akarola story is that here in New Zealand it has opened up once again that running sore of foreign investment. Opposition Agriculture spokesman Damien O’Connor once again raised the spectre on Radio New Zealand National of New Zealanders becoming ‘tenants in their own land’.

In regard to Synlait, it is worth noting that they started as a private company of New Zealand investors. Their first attempt to list on the New Zealand stock exchange went nowhere. Their second attempt at an IPO did succeed but only because of foreign investors.

Synlait’s share register shows that currently the major shareholder is Bright Dairy from China at 39.1%. Then comes FrieslandCampina from Holland at 9.99% held through FNZ Custodians. Then comes Matsui from Japan at 8.4%.

The shares are listed on the NZX, and so all New Zealanders have the opportunity to buy-in should they so desire. The reality, however, is that most New Zealanders do not like the risk that is associated with entrepreneurial companies.

A further misunderstanding is that Synlait produces the milk itself. It used to own some farms, but in 2010 they were split into a separate company now called Purata, with minimal overlapping shareholding.

About 9% of Synlait’s milk now comes from Purata, which is controlled by Chinese company Shanghai Pengxin. The rest of Synlait’s milk comes from about 160 Kiwi-owned farms.

There is indeed a lot that needs to be debated about value-add strategies and how they can and should be funded. A starting point is to sort out the fundamental facts.

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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. Bookmark the permalink.

6 Responses to Chinese infant formula and Synlait – the story moves on

  1. Hi Keith, thanks for this article. I have been following this article. What do you see the impacts of the new regualtions fron Chinese government on this?

    • Keith Woodford says:

      Which particular regulations are you referring to? The only ones of importance that I am aware of, which I have not previously discussed, are the new rules restricting advertising of infant formula. I will be watching with great interest to see how those play out. My current assumption, which I may subsequently have to modify, is that they will only restrict advertising which implies infant formula is an appropriate substitute for breast milk rather than a complement.
      Keith W

  2. Pingback: Chinese infant formula and Synlait – the story moves on | Agrigator

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  4. Jim says:

    Hi Keith,

    Six or seven months on are you seeing any infant formula market disruption starting to take place, noting that for instance, the price differential between Synlait made products alone remains quite extreme, with tmall official prices for a2 platinum as high as Y480 and akarola as low as Y79.

    It all seems unsustainable for NZ premium brands, particularly so if Chinese customers are presently predominantly valuing NZ made safety perceptions over any form of premium differentiator such as an a2 protein.

    It seems to me that Daigou’s making money by posting product to China can’t last long when New Hope and probably Yashili soon are bulk shipping and selling at Y79, perhaps the Daigou days are numbered ?

    If you have time for another post on the timing of infant formula market normalisation in China, and perhaps the longevity or otherwise of the Daigou trade, it would be appreciated ?

    kind regards,

    • Keith Woodford says:

      Jim, I have not looked closely since December, but at that time it did seem apparent that the majority of infant formula brands had somewhat reduced in price in China. The decline was somewhat larger in $US than in RMB (because the RMB has weakened relative to the $US). I note that Fonterra CEO Theo Spierings has expressed considerable annoyance, so I take that as indicating that the Akarola effect is real.
      The a2 Platinum is in a different category because it is genuinely differentiated and is also supply-constrained. The Chinese Mums do not necessarily understand the A2 proposition but they know that is what Australian mums are trying to buy, and that is good enough knowledge for them.
      I think the Daigou trade will continue as long as there is money to be made from it. The Chinese Government could shut it down if they really wished, but they too would like to see infant formula sold at a cheaper price, so this ‘parallel importing’ is in everyone’s interest except for the infant formula marketers. Currently, the Daigou trade seems to be focused on Bellamys and a2 Platinum given that they are seen as the premium brands. There will also probably be some European-sourced premium brands
      Keith.

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