Milk that went sour

Niu: quitting milk business to focus on charitable giving

The year 2008 may have been a disaster for the global economy, but it will be remembered rather more fondly in China. Not only did Beijing host a very successful Summer Olympics, a month later one of the nation’s astronauts performed a debut space walk.

Back on earth, the TV channels celebrated with gusto. One set of congratulatory commercials was made by Mengniu Dairy, a corporate sponsor of the space programme. It told patriotic consumers that only Mengniu had produced ‘special milk for China’s astronauts’.

The marketing gimmick was a high point for the milk firm, which had earned wide name recognition among consumers – besting that of virtually any other privately-owned domestic brand. Partly that was down to its willingness to spend heavily. It broke records buying ad slots from state broadcaster CCTV to air its distinctive commercials in peak viewing hours.

In its heyday, Mengniu was a symbol of thriving entrepreneurship. Then, the comedown. In late 2008, news broke that it was implicated in the now infamous melamine milk scandal. The initial culprit was thought to be rival brand Sanlu, whose baby milk powder had been mixed with melamine as a way to raise protein levels at low cost. The contamination led to six infant deaths and more than 300,000 babies suffered kidney damage.

But it soon became clear that the scandal had affected the whole industry. Like Sanlu, Mengniu was also discovered to have sold melamine-tainted baby formula, from faulty milk provided by its suppliers. With confidence in the company’s supply chain shattered, the Hong Kong-listed stock plunged 66% on a single day in September 2008.

For the firm’s founder Niu Gensheng, these were probably the lowest moments of his business career. Niu was born in 1958 in Inner Mongolia and began his career in the milk industry in 1983 when he joined the Red Flag Dairy Farm. After a corporate reorganisation, this was renamed Yili and grew to be China’s biggest dairy producer – taking advantage of Inner Mongolia’s lush grasslands to feed up its cows.

As vice-president Niu was one of the key executives who helped build Yili, but he then quit after a falling out with the chairman Zheng Junhuai, reports 21CN Business Herald. In 1999 Niu established Mengniu (which means ‘Mongolian cow’) to take on his former firm, and by 2007 he’d achieved his goal of overtaking Yili and becoming the biggest dairy company in China with a 33% market share.

In the meantime he’d raised capital with a Hong Kong IPO in 2004 that so excited investors the retail tranche was 200 times subscribed, points out Reuters. A succession of share placements followed, right up to August 2008, only a few days before the melamine scandal would surface.

Niu needed the cash for turbo-charged growth, spending (as earlier mentioned) heavily on advertising and also on broadening distribution. However, that rapid expansion ran the risk of “running out of control”, says 21CN, because the model effectively outsourced the production of milk to third parties. Lacking control of supply, the milk giant did not do enough to monitor quality – a situation that would lead to disastrous consequences with the melamine scandal.

When the crisis broke, Mengniu’s management insisted in a statement that it hadn’t become aware of the tainted milk problem until it hit the headlines elsewhere. Unlike the bosses of Sanlu and Yili, Niu avoided prison. But he did face a cashflow crisis. With falling sales, the company needed a strong partner to add credibility and supplement funds.

Niu rallied his forces, putting out a public manifesto claiming Mengniu should not be allowed to fall into foreign hands. Instead he turned to fellow Chinese businessmen like Jack Ma and Legend’s Liu Chuanzhi for help. But at the same time he also recognised his firm’s entrepreneurial era was over.

A deal was brokered in mid-2009 (see WiC25) to save Mengniu, with state-owned food conglomerate COFCO buying a 20% stake for $780 million. Niu had prevented the company falling into the hands of a foreign predator, but it was the beginning of the end of his control of the firm – even though he kept a 15% stake.

So it was not great surprise on June 10 this year when he finally resigned as chairman. It was announced he would be replaced by COFCO’s boss, Ning Gaoning.

Some economic liberals in China will lament that an erstwhile thriving private firm has fallen into the clutches of a state behemoth. But for COCFO’s management it couldn’t have worked out better.

COFCO has a strategic position in most segments of the Chinese food sector but had avoided creating its own dairy brand. Mei Xinyu, an associate research fellow with an institute affiliated to the Ministry of Commerce said Niu’s inevitable departure opened the way for COFCO to absorb Mengniu so as to develop its “dairy platform”.

COFCO already has four board seats and, as part of its creeping integration of the firm, many of Niu’s executive stalwarts – such as veterans Yao Tongshan and Sun Yubin – have already departed. The only member of senior management now remaining from the Niu era is Yang Wenjun, says China Economic Times.

Government sources view COFCO as well placed to develop Mengniu as part of a wider consolidation of the dairy industry, rebuilding its reputation with a jaundiced public. For one thing, new chairman Ning has a track record in delivering a vertical business model that goes from “farm to fork”, reports China Economic Times (by which it means ownership of farms, food processing facilities and supermarkets). The hope is that COFCO’s approach will ensure a greater measure of quality control in its dairy sources, reviving consumer confidence.

That will be a challenge. As reported in WiC95, many Chinese have little faith in domestic dairy products anymore. (Mainland tourists visiting Hong Kong and Macau often stock up on foreign milk powder to take home with them. During busy periods like the Lunar New Year Hong Kong and Macanese parents complain there is little left on the shelves to buy for their own infants).

As for Niu, what will he do next? He will remain as a non-executive director of Mengniu but he has already said that he intends to spend much of his time on charity.

His remaining stake in Mengniu is held through a trust, and Zhang Zhenhua, the board secretary of Mengniu, claims Niu now views Bill Gates as his new role model. According to Zhang the milk tycoon wishes to donate the bulk of his assets to charitable causes.

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