China to Shut One-Third of Infant Formula Producers Amid Product Safety Fears

Quality Crisis Drives Chinese to Buy Formula Overseas, Clearing Shelves in Europe, Australia

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China's government plans to force up to a third of the country's infant formula producers out of business as it tries to address the crisis of confidence in product quality and safety, local media reported.

Foreign-owned Dumex, part of Danone, is China's top infant formula.
Foreign-owned Dumex, part of Danone, is China's top infant formula.

China's 127 licensed baby formula producers will be scrutinized over the next three months and regulators will allow no new entries after Thursday, when the government introduces detailed rules on ensuring safe production, Caijing business magazine reported, citing Wang Liming, minister of industry and information technology.

About 25% to 35% of companies will be ordered closed, the China Daily newspaper said, citing Zhuang Pei, an official with the Shanghai Municipal Commission of Economy and Information. "They are not necessarily unqualified but the country needs more powerful alliances," Mr. Zhuang said.

Small-scale domestic producers were expected to be targeted. The campaign was not likely to directly affect foreign brands such as Danone's Dumex, China's top brand with 15% market share.

China's struggles with food safety are well-known but consumer fears are especially acute with infant formula. In 2008, six babies died and 300,000 were sickened after drinking tainted formula sold by domestic brands. Middlemen had spiked watered-down milk with an industrial chemical called melamine to fool tests for protein content.

Since then, Chinese parents who can afford it buy only foreign brands, which are thought to be better quality. That preference has been taken to the extreme this year after a Chinese distributor for a premium Swiss brand was caught tampering with products, including mixing expired formula into cans being prepared for sale. Now, Chinese parents with means buy formula only from overseas, clearing shelves as far away as Australia and Europe.

China's influence on the baby formula industry is huge. Chinese demand is set to double over the next four years to $25 billion, the Financial Times reported, citing Euromonitor data. By 2017, China could account for half of global sales.

Consolidation was already underway before the government's latest moves. Top Chinese dairy company Mengniu announced this week a $1.6 billion takeover bid of major domestic baby milk brand Yashili. The company was among those found to have sold poisonous baby formula in 2008. Since then, Yashili has sourced all of its raw milk powder from overseas, mostly from New Zealand.

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