Mengniu – game changer of the Chinese dairy industry

China’s two dairy giants, Mengniu and Yili, are located in the self-styled Dairy Capital of China: Huhhot. What is their relation and the nature of their competition in the Chinese cultural context?

A blog needs to renew regularly. Although most of my posts introduce companies, after the post on COFCO I have never written another one featuring a single company. I will make up for that, starting with this post about one of China’s top dairy companies. This post is derived from a case study in one of my academic writings: Chinese Corporate Identity. Readers who are triggered to get a deeper understanding, please read that chapter, or better: the entire book.

Inner Mongolia – a bit Chinese and a bit Mongolian

Inner Mongolia is an administrative region of northern China of the same level as a province, but with a larger degree of political autonomy.

The greater part of Inner Mongolia is a plateau with elevations of about 1000 metres. The Yellow River flows north from Ningxia and forms a loop that encloses the Ordos Desert. Grasslands predominate on the plateau, where they sustain large numbers of grazing animals such as cows, sheep, goats, camels, and horses. Milk from all those animals has been part of the traditional diet of the Mongols. Apart from drinking the fresh product, milk is processed into a number of cheese and yoghurt-like products. Horse milk is even fermented into an alcoholic beverage.

The population of Inner Mongolia is approximately 25 million, up from only 6.1 million in 1953. The rapid population growth since the 1950s is a result of better nutrition, increased health care services, and a substantial migration into the region of Han Chinese. More than 80% of the current population is Han. Mongols comprise the largest minority group in Inner Mongolia, and their presence is acknowledged by the government’s designation of Inner Mongolia as an autonomous region.

From orphan to entrepreneur

Mr Niu Gensheng (1956), Mengniu’s founder, is one of the most mythical among present day China’s entrepreneurs; more even than that of Jack Ma, the founder of Alibaba. Story has it that he lost his parents at the very early age of 3 months and was raised by a farmer called Niu (which ominously means ‘cow’). His foster parents gave him the name: Niu Gensheng.

Niu was hired by what was then called the Yili Dairy Factory in Huhhot, as a bottle washer, in 1978. From that humble position, he gradually worked his way up from work shop supervisor, subsidiary director, vice-director of the mother factory to Vice-President in charge of production of, what was then rename into, the Yili Group. Niu’s career did not pass by unnoticed. He has been granted a number of regional awards and was included in the 10 Top Young Entrepreneurs of Huhhot.

Ousted from Yili

For reasons that have never been actually expressed, a conflict developed between Niu and the other board members, resulting his removal from the board in November 1998. The Board issued a statement indicating that ‘Comrade Niu Gensheng no longer fitted his position.’ He was ‘advised’ to find a place to study outside his home region for at least two years. Judging by this ‘advice,’ it could have been that his fellow board members did no longer feel comfortable with a self-made man among their ranks. Niu grabbed this opportunity to enrol himself in the MBA course of the prestigious Guanghua Business School of Beijing University. He left Yili the following year.

Founding Mengniu

Already within the same year, 1999, Niu Gensheng and a group of more than 50 of his old subordinates at Yili and a number of private individuals, raised RMB 1.3 billion to establish Mengniu Dairy Co., Ltd. When asked during an interview how Niu could so easily convince a considerable number of his former colleagues at Yili to not only quit their comfortable positions, but also entrust a considerable amount of their savings to him, Niu’s own rationale was that he had the habit of sharing his income with his subordinates. His last salary as a Vice-President of Yili exceeded RMB 1 million, which he found more than he needed to make a good living. He often shared part of it with subordinates that he believed to have contributed to his success. In Niu’s eyes, he was cashing in on the goodwill thus accumulated during the establishment of Mengniu. This was good leadership in a communitarian culture like the Chinese.

Fastest growing private enterprise

At that point of Mengniu’s early age, the company was still in a situation Niu himself recalls as ‘four deficiencies:’ no raw milk source, no factory, no brand (he had registered a brand name, but it was unknown among Chinese consumers), no market. He contacted dairy plants all over China with a surplus capacity and contracted those to produce for Mengniu. Mengniu provided specifications, a brand name and technological assistance. Mengniu first created a market and only then built its own production facilities.

Mengniu turned out to be the fastest growing private enterprise in China’s history. The company generated a turnover of RMB 43 million in the first year of its existence, which was approximately 4% of Yili’s turnover of the same period. The turnover of 2002 was already RMB 2 billion, exactly half of Yili’s turnover of that year.

Foreign investment

A milestone in the history of Mengniu was its acceptance of foreign participation late 2002. Niu Gensheng himself had repeatedly stated in the national press that he was not in a hurry to follow Yili’s example in seeking registration on the stock exchange and expose Mengniu to the whims of speculators. It therefore was even a surprise to insiders when it was reported that Morgan Stanley, CDH Fund and China Capital Partners had signed an agreement with Mengniu to invest USD 26 million in Mengniu. As a result of that deal, the three foreign investors held a total share of 32%. According to a spokesperson of Mengniu, the Chinese side had attracted foreign participation to better compete with the other dairy giants like Sanyuan (Beijing) and Bright (Shanghai), that were heavily supported by their respective local governments. Morgan Stanley had already invested in a number of Chinese enterprises including Ping’an Insurance Company, Nanfu Battery Company and Heng’an International Group. CDH Fund had invested in 12 Chinese enterprises, also including Nanfu Battery and Sina.com, an important Chinese business Internet portal. China Capital Partners, a UK fund for investment in China, had invested USD 55 million in China since its establishment in June 2000. Following opening its door to foreign influence, Mengniu’s next step was to seek listing on the Hong Kong Stock Exchange in June 2004.

Cultural drivers of Mengniu’s success

Niu Gensheng’s strategy has never been to ‘push Yili from the market’, which would be the typical Western MBA textbook approach. Instead he kept praising Yili in his advertisements of Mengniu, position his company as a faithful follower of leader Yili.

He vouched in media interviews that Mengniu would not try to snatch raw milk sources from Yili and that Mengniu would never buy raw milk that did not comply with Yili’s specifications.

In the Chinese cultural context, Niu himself, and the Yili employees he had pulled from Yili, would still maintain friendly contacts with their former Yili colleagues. An aggressive strategy would not fit such relations. In the political field, the Huhhot authorities, while welcoming new entrepreneurial activity, would dislike a Western-style life or death fight between state-owned enterprise Yili and private newcomer Mengniu. Commercial competition must never harm the Confucianist ideal of harmonious society.

In short: Niu Gensheng’s entrepreneurial behaviour suited the Chinese communitarian culture and complied with the Confucianist principles of good governance.

Mengniu and Yili outside Inner Mongolia

During the following years and decades, Mengniu and Yili kept growing and expanding into other regions of China. In most regions, either Mengniu or Yili would be the first to enter, but the other would soon follow suit. While Mengniu kept profiling itself as the follower, in their de facto relationship they alternately acted as follower or leader (for concrete case studies see the above-mentioned book).

Mengniu turns SEO

The Chinese business world was shaken by the news that COFCO (see my post that positions COFCO as the next Nestlé) had acquired a significant share in Mengniu in 2009. The media, that had so far regarded Niu Gensheng as a favourite person to interview, now accused him of going against the tide. While privatization was the trend in Chinese economy, China’s most successful private company was now becoming a de facto state-owned enterprise. Niu was not shaken by the fierce criticism, as usual. He calmly replied that the real trend was that the differences between various types of enterprises in China (state-owned, private, foreign invested, etc.) were decreasing. He simply believed that Mengniu would be best off as a subsidiary of the emerging multinational COFCO.

History has proven him right. Mengniu ranked 9 in the Rabobank 2019 Top 20 global dairy companies. The company has generated a turnover of almost RMB 70 billion in 2018; up 14.7%. Net profit for that year came in at a record RMB 3.04 billion, up from a profit of 2.05 billion yuan in the previous year.

Food for thought

Mengniu Dairy’s entrepreneurial history provides a large bowl of food for thought. I will leave most of it for you, my readers, to think over. I will restrict to one challenging thought: considering the problems major dairy multinationals like Fonterra and FrieslandCampina are experiencing in China, how much could they learn from Mengniu, to grow roots in the Chinese cultural context? Nestlé, an early Western investor in China, seems to have done a good job in this respect. The key issue in embedding your Chinese subsidiary in the local society is forging valuable relationships, with business partners, but also with competitors.

Eurasia Consult Food knows the Chinese food industry since 1985. Follow us on Twitter.

Eurasia Consult Consulting can help you embed your business in Chinese society.

Peter Peverelli is active in and with China since 1975.

 

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China: the world’s biggest ice cream market

Food historians credit China with inventing ice cream and Marco Polo for introducing it to Italy on his return from the Far East.

Ice cream is believed to have been invented in China, but it’s taken more than 2,000 years for the Asian powerhouse to warm up to the frosty dessert. Their version of ice cream was made from a soft paste of tender overcooked rice, combined with spices and milk and then packed in snow to solidify. It probably was more of a gritty ice milk and less like today’s smooth ice cream. China is now the world’s biggest ice cream market, with sales estimated at 4.3 billion litres in 2016. Half (49%) of urban Chinese consumers eat ice cream at home as a snack, compared to four in 10 (39%) who said the same in 2015.

The Chinese word for this cold treat so loved worldwide is an interesting combination of a Chinese stem and a loan word. Bing is the Chinese word for ‘ice’. The jiling part has entered Mandarin from Cantonese, where it is pronounced something like ‘keeling’ or ‘keelam’, which is a local rendering of the English word ‘cream’.

One third of all ice cream bought globally is consumed in China, which became the largest ice cream market in the world in 2014, beating the US by a lick with USD 11.4 bn in sales compared with USD 11.2 bn.

Chinese people spent 54% more on ice cream in 2014 than they did five years earlier, while the US market managed a more tepid 6.6% growth. However, Americans retained their crown as the most gluttonous ice cream consumers in the world, consuming 18.4 litres of the dairy dessert per capita in a year – more than four times more than the average Chinese person’s annual intake.

Rising incomes are driving the growth in China’s ice cream market, helped by the country’s increasingly developed retail infrastructure and facilities for storing and supplying “cool cargo” such as fresh produce, frozen foods and pharmaceutical drugs.

The pace of development, coupled with the immensity of the population, is having an increasing impact on the Chinese ice cream market. However, the vast array of locally produced, low-price brands present a challenge for global ice cream giants looking to develop there. Top Chinese dairy company Mengniu recently launched China’s first yoghurt ice cream.

MnFrozYoghurt

Just two non-Chinese companies make the list of the country’s 10 most popular ice cream brands. Unilever, which owns Wall’s and Ben & Jerry’s, is the fourth biggest company in China with around 3% of the market, while Nestlé holds 1%.

The value of the Chinese ice cream market in 2018 was RMB 123.937 billion and is expected to exceed RMB 160 billion by 2021.

Regional production

The following table shows the production of ice cream in China in 2017, broken down in major administrative region.

Region mt
National 3,783,321
Henan 596,858
Guangdong 525,317
Jilin 325,367
Hubei 319,049
Sichuan 261,499
Guangxi 210,840
Hunan 194,380
Hebei 173,731
Beijing 155,946
Liaoning 132,678
Shaanxi 132,064
Inner Mongolia 112,137
Jiangxi 90,538
Guizhou 87,176
Anhui 77,032
Zhejiang 73,389
Tianjin 72,683
Heilongjiang 71,494
Shandong 68,827
Shanghai 32,300
Xinjiang 29,590
Yunnan 15,841
Jiangsu 15,701
Fujian 8,884

As is the case with many statistics like these, it is useful to also look at the total figure of the cities Beijing and Tianjin and Hebei province, that are geographically one region. The Chinese government is currently conceiving a development plan to (re)integrate those regions. The total volume for ‘Greater Hebei’ would then be 402,360, making it China’s 3rd ice cream region.

Local flavours

Ice cream makers have adopted the products they market in China to the Chinese palate. Most Nestlé Ice cream has a different flavor than in its Western markets. Not as rich or sweet. For the most part at a Chinese Buffet you can find the typical frozen Ice Cream sections for scooping: chocolate, milk/vanilla, strawberry. Then you have red bean (see photo), taro, green tea, sesame seed, green bean, ginger or red date. There is a plethora of fruits in China like longan, lychee, durian, etc., which can all be used to flavour ice cream. Smaller local companies try to experiment with odd flavours, like: ‘sweet green pea’ and ‘tomato-strawberry’ popsicles, to lure consumers away from the major brands.

RebBeanIC

Innovative flavours

A number of local players has started experimenting with flavours inspired by traditional Chinese cuisine. Wufeng introduced a spicy chocolate flavoured ice cream called Mengxiaola in 2016. Moreover, an ice cream store called Global has squid ink flavour and other unique flavours from across the world. Yolk ice cream can be found in Bonus, a Chinese ice cream store in Shanghai. These are all newly invented flavours and consumers are keen on trying them. On a widely used restaurants review and recommendation app called Dianping, Global scored 8.3 on a scale from 1 to 10 in terms of its flavours, which is a pretty high mark.

Agreeing symbolism

Fonterra’s Tip Top ice cream started to be sold on trial through Tmall in June 2016. one of China’s leading e-commerce providers, operated by Alibaba Group. Distribution will be handled by specialist frozen products distributor Zhuhai Ice Technology. It is still too early to report on the launch’s success, but I expect that Chinese consumers will be attracted by the icecream shown this picture, as the tiger is a symbol of strength and energy in Chinese culture.

tiger-icecream

Artisan involvement

The Chinese ice cream market is now so developed, that it is drawing the interest of international chefs. French chef Gerard Taurin, a pastry chef from Normandy, offered his latest creation at Beijing Galeries Lafayette in June 2015. Most of his ice cream is made with unusual, but very Chinese, ingredients, such as jasmine, goji berries, ginger and Sichuan peppers. Taurin’s selection comprises 10 flavours, including black sesame, tapioca pearl, hawthorn fruit, millet, jujube, cinnamon and eucalyptus. His ingredients are inspired by his travels to Beijing, Hebei, Shanxi and Sichuan provinces. He has shared his ice cream with people on the Great Wall, in the Forbidden City and in Beijing’s hutong alleyways to see how Chinese consumers react to his creations.

Taurin

Memory lane

All these innovative products have pushed away older ice creams that used to be produced in the early days of the PRC. This has created a craving among older consumers for flavours from the good old days. I have reported on the return of old brands in previous posts. One local company in Heilongjiang province has launched Dongbei Daban ice cream,playing the nostalgia card to promote its ice cream. Dongbei uses 1980s style packaging to wrap the same simple shaped cones designed from that era. For older customers, this brings back memories of their childhood.

Dongbei

Less sugar, less fat, healthier ingredients

Considering that China has the largest occurrence of diabetes in the world and that obesity is also on the increase, an increasing number of people are calling for healthy or low-fat diets, which facilitates the creation of new ice cream types. Noticeably, frozen yogurt has also become a popular choice in China. The probiotics found in frozen yogurt help conserve some of the nutritional value in ice cream, which is conducive to maintaining beauty, slimming, and digestion. Another example is the “one egg” ice cream introduced by Deshi in 2016. The special ‘’egg + oats’’ ingredients drew a significant amount of attention. Astoundingly, the average daily sales volume of “one egg’’ (see photo) was 2 million in Northeast China in the beginning of 2017.

DIY experience

As Chinese are putting more focus on experience as opposed to the food itself, ice cream is no longer just seen as a mere treat, but as a product of a modern life style. In traditional Chinese mind-sets, eating very cold food is perceived as adverse to health. However, the considerable impact of Western ice cream has changed perceptions. Nowadays, DIY experience ice cream stores is a new strategy to cater to the requirement of customers. Nestlé, Yili , and the Japanese brand Meiji have together invested over RMB 1 billion for developing new ice cream projects in 2016 to win more shares on the market. In May 2017, Magnum reopened its DIY experience shop called “Pleasure Store” in K11 Shopping and Art Center, Shanghai for the third time, which rekindled the enthusiasm of many ice cream lovers. In other cities like Nanjing, Beijing, Chengdu, Pleasure Store also left footprints in the busiest commercial districts like respectively Jinmaohui , Sanlitun and Taiguli in the last two years. The DIY experience does not only endow ice cream with higher value, but also strengthens the ice cream brand and customers relationship.

Prée: extremely tasty and expensive

The best evidence of the money (urban) Chinese are willing to pay for high-end icecream is Prée that opened its doors in Shanghai’s expensive entertainment quarter Xintiandi. This new high-end ice cream lounge claims to use “smart technology” and alleged recipies from “a very low profile three-star Michelin chef”. The cream gets made fresh on site, with black truffles, bourbon, roasted cherries, and other pieces of luxury. The name is said to have been derived from a popular ice cream shop owner in a small Swiss town, on a street called Ai Prée. The owner, this mystery Michelin man, only uses traditional recipes combined with advanced ice-cream technology, the PacoJet. With prices ranging from RMB 42 to 88 for a dressed up ones-scoop cup, it is the most expensive icecream parlour in China, but the customers are raving about the experience. Prée opened a subsidiary in Hangzhou mid 2018.

Trade fair

Ice cream is now big business in China and in particular so for the suppliers of a broad range of ingredients: flavours, sweeteners, emulsifiers, thickeners, etc. This generates a more than enough critical mass for a dedicated trade fair. CICE 2015 – The 11th China International Ice Cream Industry Exhibition will be held in Beijing, April 16-18, 2015. Here, I will only copy the ingredients part of the published scope of this exhibition: specific herbs, flavors and fragrance for ice cream, compound dairy stabilizer for ice cream, natural coloring materials, diet coloring materials, sweetening substances, lactic acid bacteria, specialized & condensed milk essence, special ice cream protein powder & bean powder, other supplements include potato powder, malt essence, fresh cream, dried cheese element, primary dairy products, dairy purification powder, natural fruit powder, chocolate plate, coffee bean, coffee powder, coco fat substitute, nuts, dried fruit.

Downs too – between all the ups

Rising rents and lower profits have forced Haagen-Dazs to close stores in second- and third-tier cities in China in 2015 and 2016 amid a slowdown in the ice-cream market mainly due to a lack of innovation and its inability to keep pace with demand from increasingly sophisticated Chinese consumers. Many Chinese consumers perceive Haagen-Dazs as overpriced. To quote one media article:

‘Two egg-size scoops of Haagen-Dazs icecream costs me RMB 60. I get more value for less by eating two eggs

However, the brand has 380 stores in 84 cities in the country, despite the challenges at markets in second and third tier cities in the country. The company reports it still maintains strong growth in large cities. Revenues in Shanghai and Beijing grew 16% and 13% respectively in June 2016, and it opened more than 60 new stores as well in 2015. Insiders believe that the slowdown is partly due to rising rental and labour costs, which have made it become more conservative regarding expansion. Haagen-Dazs also faces intense competition from many other food service players. Many cafes and coffee shops outperformed Haagen-Dazs thanks to their sophisticated dining environment and rich product availability.

Challenging flavours for the coming year(s)

The authoritative magazine for the Chinese flavour industry ‘Domestic and Overseas Aromachemical Information (Guoneiwai Xianghua Xinxi)’ of June 2016 carries an interesting article on possible new ice cream flavours, based on ideas collected from all over the globe. I will list the flavours mentioned here.

Bacon flavour

Ice cream flavoured with a tincture of bacon, adding a little caramel, to obtain a proper salty-sweet balance.

Beer flavour

An idea from Ireland, reported best in combination with dark chocolate.

Chili flavour

Chili and chocolate already has become an accepted combination, so why not try it in ice cream? Some Mexicans in the US flavour their ice cream with Tabasco. Perhaps Laoganma can get involved in this project.

Celery flavour

The origin of the flavour is closer: Japan. The taste sensation of celery ice cream is reported to be close to that of wasabi.

Garlic ice cream

I have actually tasted this one of my favourite eateries in Amsterdam: the Garlic Queen. It is also a must-eat during the Gilroy Garlic Festival. Chinese are big garlic eaters, so garlic ice cream should have a market there.

TCM ice cream

Last but certainly not least, Tradition Chinese Medicine (TCM) includes a number of herbs that could be used in ice cream. No one would object to turning such a delicacy into a health food.

These ideas provide a rare insight in what Chinese food technologists are thinking about developing new types of ice cream. I will keep you informed about which of these flavours will be turned into a commercial product.

Russian ice cream diplomacy

Russian ice cream has been rapidly gaining popularity in China during the past couple of years. Particularly in vogue are the products of IceBerry and sold in Qing-Feng Steamed Buns (mantou) Shops.

The photo shows a freezer containing the ice creams was labelled “Russia’s national gift”-a phrase which refers to Russian President Vladimir Putin, who brought a few boxes of that as gift for his Chinese counterpart Xi Jinping when they met on the side lines of the G20 Hangzhou Summit in east China’s Zhejiang Province. Some Chinese media are referring to this as ‘ice cream diplomacy”.

The ice cream is priced between RMB 6 to 30, and each store sells an average of 300 ice creams a day. According to Roman Lola, the CEO of IceBerry, the company plans to export 500 mt of ice cream to China in 2017. It will not be an easy trip for the ice cream to travel from Russia to China, as the chilly dessert needs to be moved within a temperature-controlled supply chain. “Compared to high-end ice cream brands in Europe and the US, the Russian ice cream has an obviously benefit on price,” said Wang Xianzhe, a company manager focusing on Russian food imports in China. “The good quality and affordable price, let alone President Putin’s advertising effect, all support the Russian ice cream catching on in China.” IceBerry’s ice cream is reportedly made from high quality milk from the Ural and contains no preservatives or other artificial additives. The Russian export of ice cream to China in 2017 was worth USD 2.7 mln; up 13%.

Eurasia Consult Food knows the Chinese food industry since 1985. Follow us on Twitter.

Eurasia Consult Consulting can help you embed your business in Chinese society.

Peter Peverelli is active in and with China since 1975.

Infant formulae in China – a showcase of Chinese food policy

If you want to understand the basics of Chinese food policy, in particular in relation with foreign products, study this post.

Developments in this business have been literally dramatic, and it is directly related to the most precious item of the majority of adult Chinese: their only child.

Melamine

A synopsis of what had happened from 2008 up to the present day.

In the year of the first Chinese Olympics it was discovered that several brands of domestic infant formulae contained melamine, a compound that make the protein content of milk appear higher in the standard tests as conducted by dairy companies. It caused about 300,000 babies to get seriously ill, with a small number of deaths.

As a result, the market share of the domestic brands dropped even lower that it already was at that time.

Hubris

Foreign brands believed that a Golden Age had come, in which they could virtually set the market price of formulae in China. European and American brands increased their prices almost every couple of months, without naming a valid reason.

Chinese consumers were so eager to get their hands on foreign products, that Chinese on foreign trips were asked by the relatives to buy up any formulae they could get their hands on, as products there were much cheaper than in Chinese supermarkets. In countries like the UK or The Netherlands, quotas were promulgated for the number of packagings single customers could buy at one time.

Then the gods punished the foreign suppliers for their hubris. Fonterra came with the news that of its whey powder could have been contaminated with botulism. That shocked China.

Leveling the playing field

The Chinese authorities grabbed the momentum of the falling consumer confidence in foreign formulae to start a media campaign trying to restore the reputation of domestic product.

To support this, they launched an investigation into monopolistic activities by foreign suppliers of infant formulae. Most of them were found guilty, and those who have not fully cooperated with the investigation, were heavily penalized.

The most recent problem are the accusations against Danone that it had bribed hospital staff to feed babies first with their Dumex formula, to get them hooked on that brand.

Yesterday, a news item in the Chinese media reporting about a survey among young parents noted that the latter are still more confident in foreign formulae.

Who are the guilty parties here then? I believe all of them.

The domestic suppliers have forfeited their favourite position with relatively low cost to produce good, generic perhaps, but good, infant formulae.

The foreigners have been too greedy. The constant price hikes increased the financial burden for young parents. Without those unreasonable price increases the authorities would probably have left their high market shares untouched.

The peculiar contamination incident at Fonterra was the dead blow for the reputation of imported formulae. It is not only something a market leader should never let escape attention, the time elapsed between the first signals about possible contamination and the publication by Fonterra was measures in months.

Chinese companies like Sanlu were heavily criticized in the Western press for at first trying to hide the first reports about health problems, not to spoil the national Olympic party. The same media were a lot milder towards Fonterra.

The Dairy Association of China (DAC) has begun to promulgate ‘state endorsed milk powder manufacturers’. Here, ‘milk powder’ mainly refers to infant formulae. 12 have so far been stamped this way. Others are allowed to produce as well, but the state guarantees the quality of the suppliers on its shortlist. It will surprise no one that China’s top dairy company Yili (see the item on China’s top brands of 2014) heads the list.

The best that can come out of this mess is that there now is finally an opportunity that the Chinese market for infant formulae becomes a level playing field in which domestic and foreign brands can compete fairly.

The latest measure, promulgated in January 2016, is that infant formula makers are not allowed to be active in China with more than 3 brands or 9 different products.

First victims of the new policy

The first victims of the new playing field (level or not) have already presented themselves. Yashili International Holdings Ltd the Dumex infant milk formula unit from Danone SA in July 2015. Yashili is 25% by Danone and one of China’s top 10 infant formula makers by sales. Financial terms weren’t disclosed, but Danone will use proceeds to buy shares in milk producer China Mengniu Dairy, which owns an indirect 51.04% stake in Yashili.

Inbound foreign investment- new style

Recent statistics seem to confirm that it works. China has imported 78,893 mt of infant formulae during the first 8 months of 2014. This is happening in spite of recurrent media reports about batches of imported infant formulae being rejected by the Customs inspections.

A number of international players try circumvent those problems at the customs through setting up local production.

FrieslandCampina of the Netherlands entered into a joint venture with Huishan Dairy (Liaoning) to jointly produced infant formulae in October 2014. The joint venture will own Huishan’s facility in Xiushui (Liaoning). During the obligatory ceremony, the Dutch partner’s CEO said that he was ‘proud that FrieslandCampina will be part of the first joint venture between a Chinese and a foreign dairy company that will locally source, manufacture, market and distribute infant milk formula’. That statement called for correction, as a number of international investors have preceded FrieslandCampina, with varying results. A few years later, mid 2017 to be precise, the joint venture got into serious problems, when the Chinese partner Huishan was accused of fraud. FrieslandCampina opted to buy out their local partner early 2018 and now operate a wholly foreign owned company alongside their partner. This situation is far from ideal, as it renders FrieslandCampina’s local production in China extremely vulnerable.

Later that same month October 2014, Danone announced that it was to subscribe to a private placement by Yashili, one of China’s leading infant milk companies. Upon completion of the subscription, Mengniu, currently Yashili’s majority shareholder, will hold a 51.0% equity interest and Danone will hold 25.0%. Danone and Mengniu want to use this expanded alliance to grow Yashili and develop a wide range of products that meet the very highest standards in this category. Through their alliance, Danone, Mengniu and Yashili intend to expand and strengthen their cooperation in the infant milk formula business in China. The parties will study the possibility of a minority equity investment by Yashili in Danone’s subsidiary Dumex China.

Reaping success

Domestic brands have started recouping market share in 2018, fastening the pace in 2019. A leading player in this developed is newcomer Junlebao (Hebei). Founded in 1995, Junlebao used to make only yogurt. It added infant formula to its product line in 2014 to help revitalise the product’s domestic presence. In the following five years, the company established a whole industrial chain, including a planting pasture, a base for breeding cows and quality-control centre. By 2019, the company had 17 production plants and 10 breeding bases with more than 60,000 cows across China. To improve the quality of its milk sourcing, Junlebao has developed a high-standard cow breeding system, which consists of raising the animals in comfortable barns, feeding them with high-quality fodder and using high-tech machines to milk them. The market share of domestic formulae in China increased to more than 60% in 2018, thanks to Junlebao.

The following table show the recent development of the value of the market (2016 – 2018) and the estimates for 2019 and 2020.

Year Value

RMB billion

2016 157.10
2017 187.30
2018 222.10
2019 257.86
2020 295.51

Although the increase will slow down, it is still substantial.

Outbound foreign investment – recent but rapid

A number of Chinese companies try to overcome the problems in the industry by acquiring foreign infant formula producers. Formulae imported from those plants then have a hybrid Chinese and foreign identity.

Bright Dairy & Food (Shanghai), China’s third-biggest dairy company by volume, has bought a majority stake in Canterbury milk processor Synlait Milk for $82 million in 2010. Synlait, which abandoned a planned $150 million share sale in 2009 due to a tepid response, is a joint owner of its processing company with Bright Dairy, while keeping and operating its farms through a separate company.

In 2014, Bright bought a majority stake in the Israeli manufacturer of infant formulae Tnuva.

September 2014, Guangdong real estate group Evergrande (which also owns the province’s main football team) acquired the New Zealand company Cowala Dairy.

Internet interaction analysis

An interesting development is that the China Statistical Information Service Centre (CSISC) has started analysing online consumer interaction about brands. CSISC published the following table showing consumer interaction about infant formulae in the 2nd quarter of 2014 today (19/9/2014).

infform-ConsumDisc14-9

The brand most discussed is Junlebao (also featuring in my blog on old yoghurt), followed by Dumex and Mead Johnson. The brands that the central government has been heavily supporting in the above described campaign, like Yili, ranks 7. Obviously, brands can also turn up high in this graph, because consumers may share negative experience with it. Still, CSISC analysts believe that this outcome shows that newcomer Junlebao’s low price strategy is reaping results. Junlebao received class A certification of EU’s BRC Food Safety Global Standards in September 2014. Junlebao’s milk powder would be qualified to enter CIES’ 200 supermarket groups in the world. I would like to add that it also proves the central authorities right: the Chinese market for infant formulae is a level playing field now. The international brands are still favourites, but local entrepreneurs have ample space to move, as long as the get their strategy right.

Top imported formulae of 2016

In spite of all the attempts to invigorate the domestic industry, imported formulae remain strong. The following the table shows the development of those import in the past few years.

Period Volume (mt)
2014 121,000
2015 176,000
2016 221,000
2017 Jan – Sept. 200,000

Here is the list of top imported formulae of 2016 as published on a major Chinese food site.

Rank Brand
1 Aptamil
2 Nutrilon
3 Babybio
4 Hipp
5 Bellamy’s organic
6 Karicare
7 Abbott
8 Wyeth
9 A2

More babies, bigger market . . or not?

The market for infant formulae has changed in China, when the government decided that couples who both were only children were aloud to have 2 children. Even though fewer eligible couples responded positively than expected during the first few years after the decision, this is now gradually leading to a small baby boom. That and the continuing growth of an affluent middle class, has boosted the sales of most players in this market. However, this does not mean that China will once more become the paradise of multinationals in this field. It is a genuine level playing field now, and a growing one, with opportunities for all companies that are willing to play by the rules.

However, in spite of the new policy, 15.23 mln babies were born in China in 2018, 2 mln fewer than in 2017. Therefore, insiders estimate that the consumption of infant formulae in 2019 will be approximately the same as in 2018, and will decrease with 2% in 2020.

Innovative products – a step up the ladder for the Chinese industry

Beingmate (Hangzhou, Zhejiang) has received official approval for the production of infant formulae for prematurely born babies and over-birthweight babies in August 2019. While these are not new types of formulae, Beingmate was the first in China to launch these specialist products. Fonterra is a major shareholder of Beingmate. After the repositioning of the regular Chinese infant formulae, this development could mark the beginning of the rise of the Chinese industry on the technological ladder.

Eurasia Consult Food knows the Chinese food industry since 1985. Follow us on Twitter.

Eurasia Consult Consulting can help you embed your business in Chinese society.

Peter Peverelli is active in and with China since 1975.

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