The Chinese government has laid out a plan to improve safety standards in the high-profile infant formula sector through a combination of tougher regulation and consolidation. Nevertheless, the question of whether Chinese manufactures can convince consumers of the safety of their products remains. Katy Askew reports.

Officials in Beijing have signalled the Chinese government is now prepared to take decisive action on the contentious issue of safety standards in infant formula production. 

Particularly after the melamine scandal of 2008, when contaminated infant formula resulted in the deaths of six babies and sickened 300,000 more, the Chinese government has made some strides to tighten regulations and step up inspections. Nevertheless, a plethora of regulatory bodies overseeing a befuddling mix of businesses means plenty of holes remained in the net.

Speaking last week during the country’s food safety week, Chinese Vice Premier Wang Yang urged government institutions to develop “innovative supervision methods” that examine the “entire process from the production of ingredients to the final products leaving the factory”.

In response, nine government bodies – including the country’s Food and Drug Administration – have united in an attempt to standardise and reorganise the domestic infant formula sector.

Infant formula manufacturers will now be subject to the same product certification system that applies to drug companies in China, regulators revealed. Manufacturers will be required to provide food safety authorities with a detailed ingredients list and inform them of changes to the product make-up.

Producers will also be banned from importing and then re-packing large quantities of formula from overseas – a model that most recently saw Hero Group formula adulterated by a local distributor last April. 

The authorities also moved to increase supervision of the production process while strengthening punishments for violations. These standards will be applied to both domestic and international infant formula manufacturers.

In addition to strengthened regulatory oversight, the Chinese government is backing a process of consolidation in the highly fragmented sector – where more than 200 brands are advertised on television. Beijing is pushing for a reduction in the number of domestic formula producers in order to simplify the task of overseeing production. 

Euromonitor senior food analyst Ildiko Szalai says reducing complexity by cutting in the number of companies operating in the sector should make oversight less of a gargantuan task.

“In theory a more consolidated market is better when you want to enforce safety regulations… In theory it should work,” she tells just-food.

However, she adds government-sanctioned consolidation could also have some “unintentional by-products” and even “stifle the growth potential” of domestic infant formula manufacturers.

“I’m sure that it is going to face some challenges. More consolidation could limit growth potential in the market – with lower competition leading to less innovation,” Szalai warns.

Even if the new regulations – coupled with an increasingly consolidated sector – result in improved product safety, domestic formula manufactures will face another challenge. They will need to convince Chinese consumers their products are safe.

Following the melamine contamination scandal, many Chinese consumers lost faith in the safety of domestic brands.

The majority of companies that became embroiled in the scare were Chinese firms. Starting with Sanlu – which was part-owned by Fonterra – the scandal drew in more than 20 companies, including Beijing Olympics sponsor Yili and leading dairy Mengniu Dairy Co.

Since 2008, domestic infant manufacturers have been plagued by further safety scares. In December 2011 and July 2012 Mengniu and Ava Dairy recalled baby formula containing high amounts of aflatoxin, a carcinogen produced by fungus in cows’ feed. Meanwhile, in June 2012 Yili Group recalled its baby formula after “unusually high” levels of mercury were detected.

As a result of these scares, consumer trust in domestic Chinese brands has been significantly undermined.

Data from MarketResearchReports.Biz suggests the baby milk output from Chinese companies fell 12% to 550,000 tonnes in 2010 – despite overall growth in the sector totalling 20% that year – while international companies increased their share of the market to almost half of sales.

Indeed, concern over the safety of products manufactured in China has led food giant Nestle to import all of the milk used in its infant formula sold in the country, CEO of Nestle China Roland Decorvet told just-food in a recent interview

“For all infant formula products we have either completely imported finished product, mostly from Europe, or we manufacture locally the product but using imported milk. Infant nutrition is so sensitive – we can guarantee the safety but from a marketing point of view people really want imported milk,” Decorvet revealed.

However, while there is strong demand for internationally produced infant formula, domestic players do benefit from some competitive advantages, notably lower price-positioning and distribution channels that reach to third-tier cities and beyond.

“There are always, in fact, a large portion of Chinese consumers buying domestic brands,” Sean Zhang, equity analyst at SWS Research Co., tells just-food.

According to Zhang, improving infant formula safety – and consumer perceptions of it – is likely to be a lengthy process. However, he maintains local infant formula producers should be able to expand their share of sales over the long run.

“I believe the portion of domestic sales will be increased as a result of the new initiatives”, Zhang predicts. “I don’t believe that the Chinese infant formula sector has a lower standard, yet what has been insufficient may be supervision and implementation. I also think domestic dairy producers need to demonstrate good track records of improved product quality to regain consumer confidence.”

One company that is certainly keen to improve the safety credentials of domestic infant formulas is leading Chinese dairy Mengniu. 

Earlier this month, the company – which has state-backed COFCO as its largest shareholder – took what many view as the first step to kicking off sector consolidation when it acquired local manufacturer Yashili.

Through the acquisition, Mengniu said it aims to strengthen its hand in the high-growth infant formula sector and leverage its safety and quality expertise to improve infant formula production standards. Mengniu CEO Sun Yiping said the company intends to “offer consumers with more choices in dairy products that are safe, healthy and of highest quality”.

Speaking to just-food, a spokesperson for the firm suggests the government’s new regulations are a step in the right direction that should benefit domestic brands.

“The regulations forbid to import large packages of milk powder and divide and repack in China, which may set limits on those companies adopting the import and repack business mode. So along with the advancing of the reorganisation, big brands will have more room to grow and go to scale. And along with the reinforcement of the supervision, the product safety will improve, and the consumer will have more confidence for domestic brands,” the spokesperson predicts.

“As the leading player of the industry, Mengniu takes formulating the safety standard and building consumer trust as our genuine responsibility, and we have been devoting ourselves practically to do so. We believe a favourable image will come along with our continual endeavour for product safety.”

Beijing will no doubt hope Mengniu’s predictions of improved standards come true.