The Chinese infant formula industry is recovering from the 2008 scandal and making major progress in reclaiming the domestic market

Ren Zegang

It has been more than 9 years since the outbreak of China’s infant formula scandal as the products from several major Chinese dairy corporations were contaminated with melamine. The total victim was estimated to be around 300,000 with 6 babies dead and 54,000 babies hospitalized.

This biggest scandal of food safety in the history of China dealt a devastating blow to the Chinese dairy industry. The demand and price for the domestic infant formula collapsed. More than 100 foreign bands have flooded into the Chinese market as mainland Chinese are rush to buy infant formula from Hong Kong, Macao and overseas retail markets such as in New Zealand and Australia by all means. The market share of imported infant formula has climbed to 60%, while it was over 80% in the high end sector.

Being taught a lesson, the Chinese government introduced the Food Safety Law on June 2009. China Food and Drug Administration (CFDA) was set up as a ministry-level agency for enforcement of the law on March 2013. Consequently quality inspections on raw materials and finished dairy products have significantly intensified as well as crackdown on abuse of power and bribery within the industry.

In accordance with Liu Shengmiao, Vice President of Junlebao Dairy Group, the Chinese dairy industry has gone through the strictest and unprecedented quality control on dairy products in the history of China and even the world after the 2008 scandal.

Such efforts have been paid off handsomely. The rate of satisfaction from random check on domestic infant formula reached 98.7% throughout 2016, the highest score among all kinds of processed food in China.

Apart from lack of effective regulation and control, excessive rivalry among too many  bands which often leads to deployment of deceptive marketing methods is another major problem to the Chinese infant formula industry.

Currently there are 106 domestic infant formula producers with more than 2000 formulas and 77 international producers with 231 formulas in the Chinese market.  The total of infant formula brands is over 1000 including those of on-line suppliers and daigou (a channel of commerce in which a person outside of China purchases commodities for customers in mainland China). Many of domestic producers are substandard or only processing products for OEMs.

In an effort to consolidate the industry, CFDA promulgated the “Methodology and Administration for Recipe Registration of Milk Powder Products for Infants and Children” on June 6, 2016. Those formulas failed to be registered before the deadline on January 1, 2018 will be eliminated from the market.

In accordance with Ma Fuxiang, deputy director of the department in charge of registration of infant formula under CFDA,  598 recipes from 93 corporations have been registered up to November 14, 2017. Among which 70 are domestic companies with 486 recipes while 23 overseas entities have 112 recipes. It is estimated by industry insiders that 50-70% bands of infant formula will be eliminated.

While consolidation of the domestic dairy industry is accelerating, the demand for infant formula in China is on the rise. Because of the change to the “one child” policy, the newborn baby in 2016 was 17.86 million nationwide, an increase of  7.6% from the previous year.  It is estimated that the annual newborn baby will be around 20 to 22 million during the 13th five-year planning period (2016-2020). This will convert into the demand for infant formula up to 100,000 tons per annum as breast feeding rate in China is declining. In 2014, the breast feeding rate in China was 27.8%, much lower than that in Japan of 51%, India of 46%, and international average of 38%。

The price of domestic infant formula has increased by 2.3% in the period from 2013 to 2017. The increase of birth rate and rise of price will push the volume of the Chinese infant formula market from current 120 billion yuan to more than 160 billion yuan in the foreseen future.

Combing the new demand and elimination of a big chunk of supply capacity as a result of the new registration procedure, there will be an expansion of the Chinese infant formula market estimated to be 70 billion yuan. Activities of merge and acquisition will be on the rise and new focal point of the competition will be on China’s third and fourth tier cities.

At this point of time, key figures within the Chinese dairy industry, such as Gao Hongbing, Chairman of China Dairy Industry Association, see the industry has encountered an unprecedented historical opportunity. Rejuvenation of the Chinese dairy industry has been halfway to its destination. Now great efforts should be made to lift up consumer confidence and loyalty, market share and international influence.

Some of the domestic corporations have done well in recent years. Feihe Dairy Industry recorded its sale of high-end infant formula up by 200% in the first half of 2017. Junlebao infant formula has maintained its strong momentum of growth for three years in a row. In 2017, it won the championship of growth among leading infant formula brands at home and abroad. In January-October 2017, sale of Junlebao milk powder increased by more than 110% overall and more than 300% in the high end sector.

Now the Chinese infant formula has recovered its domestic market share up to the level prior to the 2008 scandal and is expected to push further to 70% this year.