Is the Chinese state poised to redress the balance between international and domestic formula brands?

19-Apr-2018 - Last updated on 19-Apr-2018 at 02:28 GMT

While the safety and traceability of infant formula products have markedly improved, the Chinese market is now dominated by multinational companies. ©iStock

Significant investment into Ausnutria by state-owned management fund has put the Chinese government's plans for the country's infant nutrition sector in the spotlight.

CITIC Agri Fund Management, backed by Chinese state-owned CITIC Group, agreed to buy a 25.18% stake in Hong Kong-based Ausnutria, one of China's top domestic infant formula suppliers.

Data and analytics firm GlobalData said that before this, the government had mainly focused on regulation reform in the sector, with local suppliers still recovering from 2008's melamine contamination scandal.

The incident, which affected approximately 300,000 (including 54,000 babies hospitalised and six dead), led to the introduction of stricter laws on composition, labelling, plants, and technologies.

Most recently, infant nutrition companies were required to register their brands and products via a complicated approval system.

Foreign favour

While the safety and traceability of infant formula products have markedly improved, the Chinese market is now dominated by multinational companies.

In fact, GlobalData reported that in 2016, the top four — Abbott, Danone, Mead Johnson and Nestlé — had a combined market share of 48.3%.

GlobalData's Research Director of Baby Food, Valerie Lincoln-Stubbs, said in a press release: "The Chinese government has supported local infant formula companies in the form of investment in subsidies, such as that announced in 2013 for leading companies Mongolia Yili Industrial Group, China Mengniu Dairy, Heilongjiang Wondersun Dairy, Feihe International and Treasure of Plateau Yak Dairy.

"However, this has done little to stem the tide towards imported brands. Even the strongest of the subsidised companies, Mongolia Yili Industrial Group, ranks only fifth, with just a 6.8% value share of China’s baby food market in 2016."

The problem with perception

She told NutraIngredients-Asia, however, that the small market share held by domestic infant formula firms was not the result of stricter regulations, but a matter of public perception.

Apart from the enforcement of more stringent laws, the 2008 scandal had also caused a significant shift in Chinese consumer preference towards infant nutrition products from Australia and New Zealand, where the industry has a reputation for safe, sustainable practices.

Lincoln-Stubbs said: "The regulations have actually levelled the playing field a lot more, with both domestic and foreign companies being subject to the same rules.

"It's an issue of perception — in most sectors, the Chinese favour domestic products, but not in the infant formula sector. Since 2008, local brands have been struggling to shake the negative image Chinese consumers have of them in general."

Competition compounded

She added that the fragmentation of the domestic market had made it more challenging for local brands to obtain a larger market share, with international brands' continual investment in China exacerbating the situation.

To get around this, some domestic firms have employed methods such as using English-sounding product names to differentiate themselves from other Chinese infant nutrition companies.

Some incorporate strong USPs, such as the use of A2 milk, which is marketed as safer for consumption than regular cow's milk. Infant formula produced specifically for Chinese babies is also used to attract more local buyers.

But while larger domestic brands will be able to hold their own against popular MNCs, Lincoln-Stubbs said that smaller local firms "may not have a bright future" if they were unable to use such strong USPs to drum up enough business.

Time to turn the tide?

CITIC's investment in Ausnutria will increase state involvement in the infant nutrition industry, adding to the latter's existing 31.4% stake in China Mengniu Dairy, whose market share is around 2.5%.

This also bodes well for Ausnutria, whose deals mainly in infant formula made from cow's milk and goat's milk. The firm has been doing well, reporting a 43.3% increase in sales last year to US$624.68m.

Outside the infant nutrition space, the most recent deal involved two Chinese private equity firms — one a subsidiary of state-owned sovereign fund China Jianyin Investment Ltd — buying a majority stake in Australian vitamin firm Nature's Care.

Still, Lincoln-Stubbs said she could not predict which companies might be next in line for state investment, as the government would likely be highly secretive about it.

"It's difficult to say if there will be more state investment in China's infant formula sector, or which firms are likely to receive such investment. The government will play its cards close to the chest."

Furthermore, numerous private acquisitions of and investments in Australian supplement firms by Chinese companies for as high as $1.69bn have limited options Down Under for both state investors, who may in turn be looking closer to home.

Lincoln-Stubbs said, "If there are more of such investments, their purpose will be to redress the balance between local and international companies, and as such, will focus more on domestic brands as opposed to multinational ones."