France Has a Formula for China’s Baby-Milk Needs

France Has a Formula for China’s Baby-Milk Needs

Plant Under Construction in Brittany Fills Supply Gap While Bolstering Farms

RUTH BENDER

March 17, 2014 5:19 p.m. ET

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Synutra CEO Liang Zhang, left, and Carhaix Mayor Christian Troadec in January. Zuma Press

CARHAIX, France—Mayor Christian Troadec is trying a new formula to revive his sleepy town in central Brittany: quenching Chinese thirst for baby milk.

On a recent damp morning at exactly 08:08—a lucky number in Chinese culture—workers broke ground on a 37-acre tract the municipality sold to Synutra International Inc.,SYUT -0.71% one of China’s top 10 baby-formula makers, to build a milk plant.

“It’s a win-win deal,” said Mr. Troadec, walking the muddy field where a dozen CaterpillarCAT +0.29% bulldozers and other earth movers lined up to start laying the foundation for the factory. “In Brittany, we produce some of the world’s best-quality milk but we don’t have enough [economic] activity.”

Synutra is investing €90 million ($125 million) to build what will be the region’s largest milk-drying factory and the first infant-formula plant on French soil entirely in the hands of a Chinese company.

The plant feeds two needs. China’s voracious demand for infant formula is surging as the middle class flourishes. But since a 2008 scandal, when Chinese-made formula tainted with the industrial chemical melamine killed six infants and sickened 300,000, parents have preferred to buy formula from well-known Western brands. Now, dairy companies in China, already the world’s largest importers of milk, are racing to win back consumers by tying up with producers abroad.

At the same time, Chinese investment offers a lifeline to Brittany, a farmland on the western tip of Europe that has been hurt by the unwinding of European subsidies.

“It’s a big project,” said François Musellec, a Breton freshly hired by Synutra as the site’s future factory chief. “Now we have to prove worthy of it.”

Mr. Musellec is preparing for the arrival of a small team of Synutra executives, which will watch over the construction until its completion at the end of 2015. He spent his first weeks here buying everything from bed linen to mobile-phone contracts to prep what he calls “the house of China,” where Synutra executives will stay, as the town has just two hotels.

Over the past three years, Synutra executives have traveled to the town at least every three months, including two visits by Chief Executive Liang Zhang. For the city’s summer rock festival this year, Mr. Troadec has hired a Chinese band.

Agriculture accounts for around a third of Brittany’s economy. But many farmers have struggled to keep up with technological developments. The food industry has been slammed by factory closures, which together with a truck tax sparked a wave of violent protests last year against President François Hollande.

The government has actively courted investment from China to revive France’s moribund economy, going so far as to invite Chinese companies to take over French ones. A large investment in Peugeot Citroën SA UG.FR +1.59% by Chinese state-owned car company Dongfeng Motor Corp. is set to be completed later this month during a state visit by Chinese President Xi Jinping.

As part of its deal, Synutra agreed to hire around 100 employees of a cheese factory due to shut its doors next year, on top of another 150 from the region. “And there could be more,” said Mr. Troadec, who has reserved an additional 49 acres for a potential expansion of the Chinese site.

Synutra plans to ship the entire output from its new plant swiftly to China. The company teamed up with French dairy cooperative Sodiaal to secure access to 300,000 million liters of milk a year over the next decade—the entire milk production of farmers within a radius of 20 kilometers of Carhaix—and 30,000 tons of whey, all of which will be transformed into dried baby milk and sent by boat.

France—Europe’s second-largest dairy producer behind Germany—already exports to China the bulk of its dried milk used for infant formula, with last year’s shipments jumping 41% from 2012.

China’s Biostime International Holdings Ltd. 1112.HK +2.39% also has come to France, teaming up with two dairy companies in neighboring Normandy. Chinese companies are investing in other European countries too, including Germany, Ireland and Denmark to boost their milk supply.

“Demand [from Chinese clients] is so high, we can’t keep up with it,” said Jean-Paul Barré, Sodiaal’s head of international development.

There could be considerable upside for Chinese companies in tapping international know-how.

“Milk farmers in China don’t have a very developed tradition, training and helping them would take very long and cost a lot,” Mr. Zhang said in fluent French in January, when a ceremony was held to lay the cornerstone of the Carhaix site.

While some farmers expressed concerns that France’s image as a safe milk producer could be at risk if it is closely associated with a market plagued by food-safety scandals, industry experts say China has introduced stricter rules to boost confidence in its formula market.

Not all Bretons are enthusiastic about China’s arrival. “It scares me a little that the Chinese will hold the power to negotiate milk prices,” said Hervé Guilloux, a local farmer who delivers his milk to Sodiaal. “Our point person will be even further away than Sodiaal’s headquarters in Paris, against which we are already powerless.”

Mr. Troadec says allowing Chinese or other foreign investors into the food industry will boost growth in a region where local firms are overly dependent on the domestic market and often lack the capital to expand.

“Bretons must stop putting all their eggs in the one basket,” he said.

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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