China and the World

Pastures new

Chinese navy sails into Sydney and does some shopping


A Chinese naval vessel in Sydney

Not the usual white powder’ was the feedback from the police last year after a raid on a property in Sydney turned up 4,000 tins of milk formula. They later arrested five people, the Nikkei Asian Review said, on allegations that stolen formula was being shipped by the container-load to China.

Chinese demand for foreign milk formula has been frenetic for many years, boosting profits for Australian producers. But some Australians are increasingly uneasy about the Middle Kingdom’s buying power in their home market – indeed fresh concerns over shelves being emptied came to the fore this month when the Chinese navy sailed into town.

Three warships passed through the Sydney Heads on June 3, much to the surprise of the Australian media, who had been given no warning.

The mood turned pricklier because the local Chinese community was clearly in the know, with flag-wavers welcoming the arrivals. And hopes that the controversy might die down were dashed two days later by photos of sailors hauling aboard box-loads of milk powder. “Stealth mission finally revealed: Chinese warships on baby milk raid,” ran one of the local headlines.

China’s state-run media responded frostily to the reports, laughing at the notion of some kind of raid on Australian resources. “Why hype it?” the Global Times added cattily. “When the Chinese navy visit Australia, what else is worth buying besides this little bit of milk powder?”

Last week’s shopping spree came a few days after the National Development and Reform Commission announced a new plan to reshape China’s $27 billion infant formula market. It wants domestic brands to account for at least 60% of sales, up by about half on today.

Part of the plan is to boost consumer confidence in local brands with a revamp of inspections of the domestic supply chain. Another promise is more oversight of imports, as well as support for domestic dairies that acquire overseas producers or set up their own international operations.

The initiative comes more than a decade after a national scandal in which 300,000 babies became sick after being fed contaminated milk. More than 54,000 infants were hospitalised and at least six died in a crisis that opened the door to global players like Nestle and Danone. Their broader portfolio of mineral waters and yogurts meant the NDRC announcement last week did not have much impact on their stock prices. But that wasn’t the case for Australian and Kiwi producers such as A2 Milk and Bubs Australia, which saw their shares drop sharply.

Bosses at the formula makers have played down the NDRC plan, arguing that similar schemes have been hatched in the past without any real impact on imports. Notably, regulators haven’t set a target date for when the market is supposed to be 60% domestically-served either.

The international suppliers also claim an edge because a shortage of suitable arable land makes life more difficult for their Chinese rivals. China’s formula firms generally rely on smaller farms for dairy supply, pushing up their production costs and making quality control harder.

And of course, more Chinese parents will have to be convinced that local formula is safe before the domestic brands can prosper. Maybe that will happen as memories fade of the 2008 melamine scandal. Interestingly, they don’t take the same view on the milk they drink themselves, which is mostly supplied by domestic dairies.

Foreign dairy firms are also turning their attention to other parts of the Chinese market: in May we reported how Fonterra, a dairy giant from New Zealand, is making inroads on mozzarella and newer products like cheese tea (see WiC450). Indeed Fonterra may have anticipated the NDRC’s new direction on localisation.

In April it said it planned to sell fresh milk in the Chinese market using its flagship Anchor brand and more significantly it will source the raw milk locally. A giant new farm due for completion next year in Shandong will see its in-country milk capacity reach 1 billion litres per year.

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