China Uses Dairy Scare to Help Domestic Firms

Updated August 6, 2013, 9:47 p.m. ET

China Uses Dairy Scare to Help Domestic Firms

Chinese State-Run Media Criticize Foreign Baby Formula

BEIJING—China is taking aim at foreign dairy brands amid rising worries over tainted supplies from New Zealand. But to boost its own tarnished industry, it has to win over customers like Wang Suhong. Ms. Wang, who said she is expecting her first grandchild, was checking out brands of baby formula on Tuesday at a supermarket in Beijing’s Dongcheng district. Her decision was between the U.S. brand Mead Johnson and Dutch brand Royal FrieslandCampina, bypassing well-known Chinese brands. “I’m going to the U.S. in September and plan to bring some formula back from there,” she said.Chinese state-run media have ramped up criticism of foreign baby formula after New Zealand’s Fonterra Cooperative Group Ltd., FCG.NZ +0.57% the world’s largest dairy exporter, warned that it had sold products potentially containing harmful bacteria. China has banned imports from New Zealand of some products, including those with ingredients used to make infant formula.

While Fonterra doesn’t sell infant baby formula in China, the issue has affected other foreign brands that use Fonterra ingredients. On Tuesday, Chinese regulators said they asked a Chinese unit of Abbott Laboratories ABT -0.96%to recall two batches of infant formula after New Zealand embassy officials said it could be tainted. Abbott said in an announcement on Monday that the two batches didn’t use tainted ingredients and that its recall is precautionary.

Dumex Baby Food Co., a subsidiary of Paris-based Danone SA,BN.FR +0.35% and Coca-Cola KO +0.20% China, a subsidiary of U.S.-based Coca-Cola Co., over the weekend announced recalls of some products, though both stressed they were precautionary.

The scare—for which Fonterra Chief Executive Theo Spierings on Monday apologized on a visit to Beijing—has given Beijing’s efforts to help its own dairies a rhetorical shot in the arm. Beijing this year has intensified efforts to bolster a domestic industry hobbled by a 2008 tainted infant-formula scandal that killed at least six babies and hospitalized thousands of others, in one of China’s most shocking food-safety scares.

“Some Chinese consumers hope that foreign brands are absolutely safe, but recurring problems prove that famous foreign brands are not always safe,” said an editorial published on Tuesday by the People’s Daily newspaper, the mouthpiece of the Communist Party. The editorial said a number of foreign brands have had quality issues.

China’s official Xinhua News Agency said in a report that among Chinese consumers, “an increasing number of them have come to worship foreign brands.” Xinhua also quoted industry analysts saying that the scandal is a good opportunity for domestic producers to “gain the battleground back.”

The critical reception followed a push last month by China’s top economic planning agency to probe price-fixing allegations among foreign formula makers. Danone,Nestlé SA NESN.VX +0.62% and Fonterra said they would trim prices as a result.

Mead Johnson Nutrition Co. MJN -1.00% said Tuesday it would pay a $33 million penalty tied to an antitrust review stemming from the investigation. Fonterra said Wednesday it had been fined 900,000 New Zealand dollars, or about $704,000, and said it accepted the Chinese regulator’s findings.

Central Propaganda Bureau didn’t respond to questions about the media onslaught.

China is an important growth market for dairy companies and one of the world’s largest for infant formula. Sales of dairy products are expected to climb to $46.5 billion by 2016, up 66% from 2011, according to market-research firm Euromonitor International. Last year it imported $1.05 billion in food ingredients for infants, more than four times what it imported in 2007, according to the Global Trade Atlas database.

The tainted dairy issue has dealt a blow to Fonterra’s reputation in China. “What can we still eat?” asked a number of mothers on Sina Weibo, Sina Corp.’s popular microblogging service. Still, many said they would stick to foreign brands, while a few praised Nutricia brand Karicare because the company was quick to announce its precautionary recall. Nutricia New Zealand Ltd. is a unit of Danone.

“This will certainly have a negative impact on New Zealand dairy products, or the imported food industry,” said Robin Kerawala, partner of SmithStreetSolutions, a Shanghai-based consulting firm. However, Mr. Kerawala added, “it would be very difficult for them to switch back to domestic brands.”

One such mother, Lan Li, closely examined the label of a can of Mead Johnson formula while shopping at a Wal-Mart Stores Inc. outlet in Beijing’s Chaoyang district. “Is this from New Zealand?” she asked. “No.” She then put two cans in her cart. She said she hasn’t considered domestic brands for her 21-month-old child.

The demand for foreign brands has sent ripples through markets around the world. Chinese tourists have swept Hong Kong, Australia and Britain, among other countries, for baby formula, prompting some countries or areas to ban Chinese consumers from buying more than a certain quantity of milk powder. Infant formula bought by Chinese abroad and brought back home accounts for as much as 10% of the market, according to Mr. Kerawala.

Though domestic production has rebounded since the 2008 scandal, China’s dairy industry is still struggling to overcome its damaged reputation. On Tuesday, citing China’s State Food and Drug Administration, Xinhua said China issued draft rules calling for domestic infant-formula producers to have a milk source built or controlled by themselves as well as research and development capability.

The tainted dairy products that sent shock waves through China in 2008 were found to contain melamine, an industrial chemical high in nitrogen that mimics protein in some tests and was used to fool supplier checks. In some cases, according to authorities, recalled milk products were simply repackaged and sold again. Food experts placed much of the blame on China’s decentralized food supply system, which relies on vast networks of independent small farms and middlemen.

Following the 2008 scandal, China’s government quickly implemented a radical overhaul to rebuild the industry and restore consumer trust. So that inspectors could better monitor production and distribution, and to cut out middlemen, the government forced backyard farmers to move cows into approved facilities known in academic circles as “cow hotels.”

The government also encouraged the development of big American-style factory farms. It provided cash, free land and other incentives. The government told the country’s top milk processors—those who buy the milk and turn it into boxed milk, yogurt, ice cream and cheese—that they had to purchase a substantial percentage of their milk from big farms rather than small producers.

China’s dairy industry has been rebuilt with higher-producing cows living on efficient massive factory farms and eating better food. China this year will make nearly as much milk as the pre-scandal peak in 2007, with 350,000 fewer cows, according to U.S. Department of Agriculture data.

China’s Agriculture Ministry didn’t respond to a request for comment on Tuesday.