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Chinese domestic formula companies floundering amid stiff competition

By RJ Whitehead , 10-Jan-2017
Last updated on 11-Jan-2017 at 07:31 GMT2017-01-11T07:31:48Z

© iStock
© iStock

With more than 100 infant milk powder manufacturers established and thousands of product lines launched in the last 30 years, overcrowding in the segment appears to have hit Chinese businesses hard.

In the last year, the sales revenues for China’s top five homegrown suppliers registered at less than than 30% of the entire market, far below the rate of 80%-90% in many developed countries, according to one analysis of the industry.

This is coming at a time when imported brands are in hot demand among newly wealthy consumers and parents taking advantage of the relaxation of China’s one-child policy. The overall formula market was calculated to be worth US$10bn last year by Euromonitor, led overseas brands such as Nestlé and Mead Johnson.

Yet domestic milk-powder makers had dominated the Chinese market before a melamine scandal in 2008, when the biggest manufacturer at the time, Sanlu, was found to be adding an industrial chemical to its formulas following the death of six babies and illness of 300,000 infants.

The drop in consumer trust that followed brought opportunities for foreign brands. By the end of 2013, the market share of domestic brands had slid to 46%, according to auditing firm KPMG, especially with major players facing declining sales of middle-quality infant formula. Three years later, these corporations have been hitting the business headlines after sustained disappointing results. 

Biostime, a Guangzhou baby products major which in December completed its buyout of Australian vitamin-maker Swisse, saw its sales drop by 3.3% over the first three quarters of 2016, mainly due to declining sales of middle-quality infant formula milk powder products, according to the company.

And Shenzhen-listed Beingmate, one of China’s largest baby milk powder producers, has suffered two consecutive years of revenue declines. Last year, it reported a 10% drop in sales following a net income slump of 90% in 2014.

Meanwhile, the deadline for foreign formula brands to get official approval before selling through through cross-border e-commerce (CBEC) has been extended to 2018.

One of the most popular ways for overseas companies to export unregistered products to China quickly and at a low rate of duty, the CBEC route was responsible for US$86bn in overall goods sales in 2015, according to EMarketer, from US$57bn the previous year. 

By 2020, half of China’s digital shoppers–or more than a quarter of its population–will be buying foreign products online, the analyst estimates, with total sales of US$157.7bn.

Though the CBEC regulatory deadline had previously been set for last year, the decision to delay it for another year has been piling more misery on local manufacturers, who see this easy import channel as a threat.

Intense competition within China's infant milk powder industry has led to a race to the bottom, with “many” manufacturers being forcedto use “low-quality materials or add illegal ingredients to reduce costs, frequently causing safety events in the industry,” according to Research & Markets. 

To address concerns over the quality of domestic formula the government has been feverishly reinforcing regulations governing infant milk powder manufacturers. In the last year, for example, it has officially regulated the registration process for products, while a notification enforced this month limits each milk-powder manufacturer to three categories of infant formula, with a maximum of three lines per category.

This means that companies with more than nine products have have only a short to clear their inventories, though precise details of the policy are yet to be confirmed. Last year’s draft notification began an industry-wide de-stocking and forced downward pressure on prices .

Though officials have been raising the barrier to entry to the industry, Research & Markets predicts that it will be virtually impossible for the domestic industry to solve its quality issues completely.

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