China’s food-safety regulators pulled production permits from more than a third of the country’s infant-formula makers, pushing for consolidation and greater control in an industry that has suffered quality scandals

China Pulls Permits From Some Infant-Formula Makers

Food-Safety Push Aims to Bolster Local Producers in Market Led by Imported Brands

CHUIN-WEI YAP and LAURIE BURKITT

May 30, 2014 7:17 a.m. ET

BEIJING—China’s food-safety regulators pulled production permits from more than a third of the country’s infant-formula makers, pushing for consolidation and greater control in an industry that has suffered quality scandals.

The China Food and Drug Administration said on Friday that it granted production permits to 82 companies out of 133 that had applied, as it wound down a six-month review that officially ends on Saturday.

The review caps a six-year campaign to rebuild China’s dairy industry after ascandal over melamine-tainted baby milk in 2008 put local brands under a cloud. The incident killed six infants and sickened 300,000 others. Beijing has sought to reshape the industry, in part to force it to compete more effectively with foreign brands.

“On the question of consolidating these 51 companies, we are coordinating with the industry ministry on how to approach it. Consolidation will increase as we step up supervision,” said Ma Chunliang, a supervisory department head with the administration, at a briefing on Friday.

Of the 51 infant-formula producers that didn’t make the cut, 23 had asked for extensions for further review, said Bi Yu’an, a supervisor with the administration. It wasn’t immediately clear when the government would decide on the extensions.

Last year, the Ministry of Industry and Information Technology said it wanted to shrink the sector to 50 manufacturers by 2018.

Administration officials credit tighter restrictions, including the certification process and more stringent spot checks, for an unblemished record in the past year.

China has prioritized food safety and building a strong domestic food industry, as consumers flock to imported foods, citing lack of trust in local producers as a main concern. The slimmed-down domestic industry will be competing with about 41 foreign enterprises that are allowed to import and sell infant formula here, said Yingchao Zhang, an analyst with investment bank North Square Blue Oak. Foreign brands account for about 55% of China’s infant-formula market, analysts say.

While regulators’ core motive is improving food safety, there is also an element of local protectionism, said David Mahon, a dairy expert and managing director of investment consultancy Mahon China Investment.

“There’s an ongoing struggle for market share for China’s local infant formula manufacturers,” said Mr. Mahon, adding that “they are under huge pressure to perform against foreign makers.”

Because of high growth and profit margins in China’s infant formula market, many companies have jumped in to sell to consumers, creating a highly fragmented market. But the fragmentation has made it difficult for regulators to keep a tight watch over food safety.

China continues to be a price-taker in the global baby-milk market, despite a market that is poised for further growth as Beijing relaxes its one-child policy. As public trust in domestic producers plunged after the 2008 scandal, Chinese families looked abroad for infant milk powder.

Authorities acted last year to stem what they said were high prices charged by foreign producers. The National Development and Reform Commission, China’s top economic planning agency, fined six global dairy companies 669 million yuan ($109 million) on complaints of “anticompetitive” practices.

Currently, infant formula sold in Europe for about 130 yuan is sold in China for as much as 470 yuan, said Jiang Yujun, deputy director of the National Dairy Industry Engineering and Technology Research Center. Premium domestic brands were pricing at similar levels, which is buoying prices across the board, Mr. Jiang said. Such prices are typical for tins of formula that range from 800 to 900 grams each.

Chinese food regulators also said Friday they have applied the same quality standards to domestic brands as they do with imports, as another means to force prices to converge.

“Everyone here hopes that domestic infant-formula powder producers will account for an ever increasing share of the market,” said Mr. Jiang.

 

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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