Chinese government backs sector consolidation

Chinese government backs sector consolidation

The Chinese government reportedly aims to reduce the number of domestic infant formula manufacturers to between three and five companies with revenues of over CNY50bn (US$8.17bn) by 2018.

According to a report in China Securities Journal, which cited sources in the Ministry of Industry and Information Technology (MIIT), the government hopes to form the larger companies by "vigorously" backing M&A in the sector. Beijing is reportedly aiming for the top ten domestic brands to account for 80% of infant formula sales in China.

The policy is focused on developing internationally competitive large scale enterprises, which would improve product safety and build consumer confidence in Chinese-made formula, the sources told China Securities Journal.

The move is part of a "dual" action plan with the Chinese State Food and Drug Administration, which has stepped up regulation of domestic infant formula production in response to a number of safety scares and waning confidence in the quality and safety of domestic products.

Chinese consumer confidence in infant formula manufactured in the country was largely undermined by a 2008 safety scare, when formula contaminated with melamine resulted in the deaths of six babies and sickened thousands more.

Since then, demand for foreign-made formula has increased and international manufacturers have increased their share of the market. According to government statistics, prior to 2008, foreign companies accounted for around 30% of formula sales. That has risen to 50-60% of sales and up to 80% of the premium market.

International manufacturers were also the subject of a recent anti-trust probe conducted by the Chinese government. The National Development and Reform Commission probe drew in almost all the leading international formula makers operating in China, including Nestle, Mead Johnson, Danone, FrieslandCampina, Abbott Laboratories and Japan's Meiji. Hong Kong-listed Biostime and Chinese firm Beingmate were also examined by the regulator.

The NDRC found the companies guilty of fixing prices in the market and issued fines totalling CNY669m, the largest antitrust ticket in China's history. 

Earlier this month, Danone and Abbott Laboratories were forced to issue recalls in China after it emerged that some of their products were linked to whey protein supplied by Fonterra and contaminated with a bacteria that can cause botulism.