Foreign firms are rushing into China’s scandal-plagued dairy industry
“A COUNTRY like this can put a satellite into space but it can’t put a safe bottle teat into a child’s mouth.†So declares Ai Weiwei, China’s most famous dissident artist. His latest provocative work (pictured), part of an exhibition which opened on May 17th in Hong Kong, is a map of China made up of 1,800 tins of baby-milk powder.
Even in a country used to food-safety scandals—the latest include poisonous rice, ginger laced with pesticide and rat meat masquerading as lamb—dairy is a sensitive topic. In 2008 six children died and tens of thousands were made ill by local milk powder tainted with melamine (added to boost the apparent protein content). Subsequent scandals involving fresh and powdered milk have shattered confidence in domestic firms.
Many have turned to imported dairy products, but suppliers simply cannot keep up. Well-heeled mums and opportunistic middlemen have also tried smuggling in huge quantities of milk powder, but resultant shortages abroad have led to a backlash, and to purchase limits as far away as Ireland. Get caught leaving Hong Kong with three tins of milk powder and you may go to jail. So the only hope for Chinese consumers is for the domestic industry to clean up its act.
That has created an opening for multinationals with strong brands and a record of safety. Danone, a French dairy giant, this week announced a €325m ($420m) investment to expand its yogurt business in partnership with Mengniu, China’s largest dairy firm. Arla Foods, a Danish milk producer, already owns a stake in Mengniu and is helping to professionalise its research. Nestlé, a Swiss food giant, is improving quality control and farming practices at its local suppliers, and is building a hands-on “dairy university†in north-eastern China.
In the short term, such investments will encounter snags. The agricultural supply chain is highly fragmented, so it is difficult to control the quality of inputs. Regulators are erratic: sometimes dangerously lax, but at other times arbitrarily harsh (especially toward foreign firms). And local partners can undermine joint ventures, as Danone discovered in an earlier failed venture with Wahaha, a beverage firm. Over the long term, though, companies that work out how to make Chinese dairy products reliable are sure to milk healthy profits.
http://www.economist.com/news/business/21578425-foreign-firms-are-rushing-chinas-scandal-plagued-dairy-industry-uh-oh-danone
