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Foreign baby milk firms to gain from crisis

By Wu Jiao (China Daily)
Updated: 2008-09-19 08:02

Foreign manufacturers of baby milk formulas are set to benefit from the scandal surrounding locally made products, an industry expert said on Thursday.

Chen Lianfang, an analyst with Beijing Orient Agribusiness Consultants said that with confidence in Chinese brands in tatters, the market dominance of foreign brands will be further consolidated over the next year or two.

According to figures from the Dairy Association of China (DAC), the four bestselling baby milk formulas in China all come from overseas producers, which dominate the top end of the market with sales of about 5 billion yuan ($730 million) a year.

Just three domestic brands are among the top 10, the DAC said, and two of those - Shengyuan and Yili - are embroiled in the current scandal.

As well as foreign firms benefiting from increased sales, "some of the dairies built by foreign producers in China will also now have the chance to expand their production capacities to fill the shortfall in the market," Chen said.

Liu Chengguo, director of the DAC, had earlier said the domestic market for baby formula would grow to 30 billion yuan by 2010, with half of that being spent on high-end products.

But despite Liu's estimates, consumer confidence has been hard hit by the current crisis.

Wu Jian, a mother from Nanjing, capital of Jiangsu province, said: "I bought 10 tins of imported milk powder as a reserve soon after news of the scandal broke.

"It's hard to say whether I will ever feed my boy domestic milk again."

Both industry experts and consumers have called for more stringent quality controls on domestic suppliers.

According to Chen, Chinese dairies rely too much on small-scale farmers.

This supply model creates a lot of conflict between suppliers and buyers, as dairies try to squeeze the margins of the farmers, he said.

The system is also poorly managed, which can lead to some unscrupulous suppliers trying to get around quality control guidelines, he said.

"China's dairy product manufacturers should look to establish their own farms, or at least provide better management of large-scale independent farms to ensure milk quality is well regulated," he said.

The existing rules on milk quality, implemented in the 1980s, are also now outdated and fail to take into account the existing market conditions, Chen said.

For example, the rules do not insist on testing for the presence of certain minerals, which would be mandatory in many other countries, he said.

"A considerable proportion of the raw milk deemed as fit under Chinese rules would not qualify for further processing in some overseas countries," he said.