Cream of NZ's dairy producers to China
By Zhang Lu (China Daily)
Updated: 2005-11-18 06:40

Several months of negotiations between a firm from New Zealand and the Shijiazhuang Sanlu Group over a dairy joint venture are likely to come to a happy ending soon.

New Zealand dairy firm Fonterra Co-operative Group has signed a letter of intent with Shijiazhuang Sanlu Group on a dary joint venture. [newsphoto]

Fonterra Co-operative Group which claims to be the world's largest exporter of dairy products has signed a letter of intent with the Chinese dairy firm and will sign legal documents soon, China Business News reported yesterday.

It said Fonterra will invest hundreds of million of yuan to buy around 40 per cent of the Chinese enterprise. Ultimately the joint venture will mainly focus on the milk and yoghurt sectors.

Domestic dairy consumption has been growing by 10 to 20 per cent annually in recent years.

Statistics from the Dairy Association of China say per capita dairy consumption is now 18 kilograms a year. This represents huge growth potential; per capita consumption in developed countries is 100 kilograms.

The New Zealand company plans to penetrate the domestic market through local production with domestic partners and complement its current export business from New Zealand.

The newspaper report quoted industry expert Wang Dingmian as estimating the purchase price at more than 300 million yuan (US$37 million), likely the biggest purchase made by a foreign investor in China's dairy sector.

Fonterra and Sanlu started talks in 2002. In April last year, officials from Sanlu said negotiations were in the final stages but it seems that was not the case.

"The deal has not been completed; when it is completed, we will make an announcement," an official from the Sanlu Group told China Daily yesterday, refusing to reveal any details. No comment was made by Fonterra.

Andrew Ferrier, chief executive officer of Fonterra, told China Daily two weeks ago that his company had a joint venture under negotiation in China.

"Optimistically, the venture will be completed in the coming few months," Ferrier said then.

However, as a final agreement had not been reached, he refused to name the local partner, just saying it was one of the top five dairy companies in the country.

The New Zealand business, owned by around 12,000 dairy farmers, exports over US$200 million worth of products to China each year. Its brands include Anchor, Tip Top and Chesdale.

"Fonterra's purchasing of Sanlu shares shows foreign companies' increasing interest in the rapidly growing domestic milk sector," said Dong Junfeng, an analyst at Galaxy Securities.

Other overseas food companies such as Arla Foods and Danone have also chosen to co-operate with local players to seize a bigger share of the market.

According to Ferrier, the reason for choosing a local partner was because domestic players have already established distribution channels. Therefore the two sides can complement each other's brands and find an ideal mix of products.

"We will use both brands of the two sides over time," Ferrier said.

In the long-term, the joint venture's focus will increasingly be milk and yogurt, where market growth opportunities lie, Ferrier said.

Currently, the milk and yogurt markets are crowded with local producers and top brands like Mengniu and Yili enjoy a large slice of the pie.

(China Daily 11/18/2005 page9)