17 January 2020

Overemphasis on wet process is counterproductive to home milk

Beijing is bent on forming a national team for the domestic infant milk powder market that can compete with the best multinational brands, but some of the leading homegrown dairy firms complain that the new set of criteria for state support discriminates against them.

The Ministry of Industry and Information Technology has submitted a proposal to the State Council to push forward the revamp and consolidation of the domestic baby formula industry. According to China Business News, the most controversial aspect of the draft guidelines is the requirement for industry participants to adopt wet processing in production as a way to bolster the local cattle raising sector.

Wet processing is one of the major production techniques in making infant formula powder. Compared with dry processing, it requires large amounts of fresh milk right from the start. That suggests that those engaged in cattle ranching such as China Mengniu Dairy (02319.HK) and Inner Mongolia Yili Industrial Group (600887.CN) will be given priority in obtaining government blessing.

Synutra International (SYUT.US) is against this requirement. The Nasdaq-listed Chinese infant formula brand has long been using the dry process in its production with the use of imported raw materials. Synutra boss Zhang Liang {張亮} has said only a third of the country’s baby milk powder output is made of locally produced raw milk, warning that raising the ratio would lead to a cost push that would erode the competitiveness of many home labels.

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