Filling in the milk void

Fonterra looks to capitalize on China's need for safer milk products

The 2008 melamine scandal served as both a wakeup call for China and a vacuum for Chinese milk producers. Four years later, more and more consumers are drinking products from overseas brands, which has created business opportunities for more foreign companies.

Fonterra Cooperative Group Ltd, a New Zealand-based dairy product maker, is among the foreign companies looking for a bigger stake in the Chinese market. The company has an ambitious plan to expand its farming hub to boost production in China after more than 30 years of providing dairy products from New Zealand to the Chinese market.

"With China's huge growth prospects, our challenge is being able to develop fast enough to ensure there's enough milk to keep up with the population's appetite for dairy nutrition, while maintaining the quality our customers and consumers know and expect from our brand," says Philip Turner, president of Fonterra China.

Fonterra, the world's largest dairy product exporter whose brands include Anchor, Anlene and Anmum, plans to establish an integrated milk business in China that processes high quality milk from Chinese farms. The New Zealand cooperative, owned by 10,500 dairy farmers, produces more than 2 million tons of dairy products every year.

The company, which operates two dairy farms, Tangshan Fonterra Farm and Yutian Farm I and is building the Yutian Farm II (all of which are in Hebei province), announced in April that it would invest 557 million yuan ($87.6 million, 69.5 million euros) to expand to five farms in Hebei.

It established Tangshan Fonterra Farm in December 2007 to test whether New Zealand genetics and dairy farming expertise can be used in China to produce New Zealand standard milk. The farm is now producing more than 28 million liters of milk every year.

Fonterra's dairy farming hub in the province will have around 15,000 cows and produce about 150 million liters of milk every year when the farms are expected to start production by the end of 2013, Turner says.

The company's milk line in China focuses on four key areas: ingredients, service, brands and a fresh milk supply. Last year, its sales in China posted a double-digit growth to NZ$2 billion ($1.6 billion, 1.3 billion euros), making it the largest market for the company.

Turner expects growth to continue based on increasing domestic demand, which is expected to double in the next eight years with projections that Chinese people will drink about 70 billion liters of milk every year by 2020.

The optimism in China's milk consumption have encouraged Fonterra setting its emerging market development plan to focus on the market.

He says that adding two more dairy farms in Hebei province is a vital move in the group's global strategy.

"The next decade is about driving rapid growth - better utilizing New Zealand milk in China and expanding local farming operations. We are also committed to working alongside the local industry to help further develop dairy farming capabilities in China," Turner says.

"Our customers have told us they want high quality milk with the flexibility of local supply and consumers are looking for fresh and liquid dairy options. Fonterra's future in China is therefore intrinsically linked with growing high quality local production and processing," he says.

The New Zealand dairy industry first began supplying dairy ingredients to Chinese customers in the 1970s and launched its first consumer brands in the 1990s. Today, Fonterra's investment plan has been the most ambitious attempt to dig deep into the Chinese market since 2008, when the infant formula melamine scandal rocked the nation. Its Chinese partner, Shijiazhuang Sanlu Group Co, in which Fonterra had owned a 43-percent stake. It subsequently wrote off its NZ$200 investment in the Chinese company.

"The melamine crisis was a severe blow to the industry and tragic for those affected. But Chinese consumers are ultimately benefiting from the changes that have been made since the crisis. There is now a renewed focus and attention on food quality and safety in China, and people are paying closer attention to how their food is produced," Turner says.

In 2008, six children died and about 300,000 fell ill after drinking melamine-tainted milk.

Though the government responded to the melamine crisis with newer, stronger regulations for the dairy industry in 2010, many experts slammed the new national standard for milk as the "lowest in the world ever". The suspicion among consumers has forced Fonterra and other companies along the supply chain to place consumer trust high on the priority list.

"We want consumers and customers to choose our products because they know are the same consistent quality every time they buy them; products that they do not need to research or question, because it has the Fonterra stamp of approval. Building this trust requires us to have complete management and control of our entire supply chain, and a concerted commitment to quality at every step of the way," Turner says.

Fonterra also launched a new innovation center in Shanghai last month, which will focus on tapping into specific dairy consumption trends and developing unique products for China. Turner says Chinese consumers are not only consuming more dairy products, but are also looking for different types to suit their lifestyles. Turner says, for example, a busier urban lifestyle has forced people to look at quick and easy meal options or meals that they can eat on the run, opening up big opportunities for the food-service market.

"The center will further leverage our world class dairy innovation capability, developed in New Zealand and used by Fonterra around the world. It will bring this expertise closer to the market, closer to consumers and help us understand, develop and respond to uniquely Chinese consumer needs faster and more effectively," he says.

xiaoxiangyi@chinadaily.com.cn

(China Daily 06/22/2012 page13)