40% of China’s Dairies Left Industry in 2011

China’s General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ), the country’s product and food safety watchdog, announced last week that 426 dairy companies, which account for 40.4% of the industry, had their licenses revoked in 2011. The news came just days after it was reported that a batch of dairy products from Mengniu, China’s largest milk producer, contained dangerously high levels of carcinogens; and months after the AQSIQ ordered 533 dairy companies to halt production in the wake of nation-wide audits.

The contribution, in terms of total revenue or output, of these companies to China’s dairy industry as a whole remains unclear. What is more likely though is that the widespread closures will help pave the way for greater consolidation in the industry and more transparent supply chains, which many experts believe are necessary steps in order to bring Chinese safety standards to international levels and promote best practices.

“Supply chain security is the key area that really needs to improve,” James Roy, a senior analyst at China Market Research, told FoodNavigator-Asia, an industry website, last September. Roy added that the China’s diary industry “has been very fragmented… at the base of the dairy supply chain you find small scale, poor farmers trying to make ends meet.”

Dairy safety in China has been a particularly sensitive topic since 2008, when toxic melamine-tainted milks and baby formulas resulted in thousands of cases of illness and the deaths of six infants. In the years since then, dozens of food safety scandals – involving products as varied as oil, peanuts, rice and buns – have lead to widespread outrage among Chinese citizens and damaged the reputations of some of China’s biggest food companies; several of which are owned, in full or in part, by the country’s government. Few industries though have attracted as much negative press and so much public ire as the dairy industry.

Several days ago, for example, Mengniu’s website was attacked by hackers who replaced the company’s home page with a banner saying that the Inner Mongolia-based diary giant had “once made the Chinese people strong and proud, but now it’s doing harm to its own people.” Internet users have also called for a boycott of Mengniu’s products, with tens of thousands pledging their support, following the company’s most recent scandal. Similarly, experts argue that foreign food companies – Mead Johnson Nutrition Co, Heinz, and Danone, for example – selling dairy products in China can expect to see boosts in their sales following several recent well-publicised scandals involving domestic food safety.

Although dairy products have traditionally played a small role in Chinese diets, rising wages and living standards are bringing milk and related food items to more of the country’s kitchens. Mengniu and Yili, two of China’s largest dairy makers reported profits of $123.7 million (up 27% year on year), and $127.5 million (up 137% year-on-year) respectively in H1, 2011.