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China's dairy industry growth curdles

  Photo: Consumers move to imported baby formula. (Courtesy of Xinhua News Agency)
  Consumers move to imported baby formula. (Photo courtesy of Xinhua News Agency)
The trend for Chinese mainland consumers to visit Hong Kong to buy baby formula milk powder has been an enduring headline, with SAR retail stores even setting limits on the cans of milk powder Mainland visitors can buy.

The huge demand by Mainlanders for imported milk powder has been due to the fact that consumers have little confidence in Chinese dairy products and are forced to buy overseas brands.

The fact is that China's dairy industry has been undergoing a worsening crisis.

Ava Dairy of Hunan Province is facing the prospect of closing, because five batches of milk powder under its Nanshan brand name were found to contain an excessive amount of aflatoxin M1, which is highly toxic and carcinogenic.

Meanwhile, bacterial content in two batches of Bright Dairy's products was also found to exceed the allowable limit.

Such incidents have caused confidence levels in Mainland dairy products to plunge lower still.

Since the melamine scandal in 2008, incidents in China's dairy industry have shown no signs of abating. In 2009, Mengniu's Milk Deluxe was found to contain carcinogenic substances.

Then in October last year the milk produced by both Mengniu and Fujian Changfu Dairy was found to contain an excessive amount of aflatoxin M1.

Earlier this year, the media reported that quite a number of dairy brands have evidence of industrial gelatin in yogurt products, a substance not fit for human consumption. This finding has created yet another crisis.

The Ava Dairy incident has certainly shown the worsening prospects facing the Mainland domestic dairy industry, particularly in view of a deteriorating market environment and strong competition from large international players.

From the letter of apology issued by Ava Dairy, it appears that the company is by no means intending to be unethical. On the contrary, there's a history of 30 years of operation upholding the principle of producing good milk.

However, as its prospects for survival continue to deteriorate and its profits keep falling, it has been able to raise insufficient capital to upgrade technology and equipment. Hence, the company can't afford to upgrade its monitoring of the whole process of dairy cattle rearing and dairy production - causing its business model to be questioned further.

Since the medium- to high-end levels of the milk powder market have been dominated by foreign brands, the majority of domestic dairy enterprises can only concentrate on low-end milk powder products.

The pressure of rising costs has also forced enterprises to engage in high-volume, low-margin sales but failing to pick the best milk sources. Standards can only fall, as industry observers say.

But it's noteworthy that Ava Dairy was one of the few dairy product enterprises which narrowly escaped the 2008 melamine scandal.

In the past few years, Ava and other enterprises were hopeful that they could accelerate expansion and snatch up more market shares previously taken up by leading players such as Yili and Mengniu. They spent huge sums on advertising.

The recent missteps made by Bright Dairy of Shanghai also show that even dairy enterprises with a sound foundation can fall back when they expand too fast.

In the food industry, such crises can immensely undermine consumer confidence. In fact, even leading dairy product enterprises such as Mengniu and Yili can hardly expect to overcome the industry's poor image fast.

They need time to build more farms, rear more cattle and spend more on technology before they can increase production.

The Nanshan milk powder and Bright Dairy problems are not isolated cases, commentators suspect. The Chinese dairy industry is still likely to be a "high risk" sector over the next five years.

For China's dairy industry to turn the tide, it has to slow down its pace of development, analysts say, and plan a lot more carefully.

from special correspondent Sun Xin, Beijing

Content provided by Hong Kong Trade Development Council
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