In a surprise move, the State-owned Citic Group is to take a 25% stake in Hong-Kong based Ausnutria Dairy Corporation (Ausnutria), one of the leading local suppliers of infant formula to the Chinese market.

This marks a change in direction for the government, which has hitherto been focusing its efforts in this key sector on regulation. The past few years have seen it introduce tighter composition and labelling laws, strict controls on production technologies and plants, and most recently, the requirement for all brands to be registered, via a complex approval system.

While these measures have undoubtedly improved the safety and traceability of infant formulae, they have done little to address the dominance of the multinational suppliers, with the top four – Nestlé, Danone, Mead Johnson and Abbott – holding 48.3% of the market in 2016 according to GlobalData’s report, The Baby Food Sector in China, 2017.

Local suppliers have never recovered from the melamine contamination scandal in 2008, with parents continuing to put their faith in foreign-made milks even a decade on.

Government support for infant formula

The government has previously given support to local infant formula companies in the form of investment in subsidies such as that announced in 2013 for leading companies Mongolia Yili Industrial Group, China Mengniu Dairy Co., Heilongjiang Wondersun Dairy Co., Feihe International Inc. and Treasure of Plateau Yak Dairy Co. However, this has done little to stem the tide towards imported brands: even the strongest of the subsidised companies – Mongolia Yili Industrial Group – ranks only fifth with just a 6.8% value share in 2016.

The Citic Group’s 25.18% stake will make it Ausnutria’s largest shareholder. The investment in Ausnutria represents a ramping up of the State’s involvement in the baby food industry, giving it a direct interest in an up-and-coming player focused almost entirely on infant formula, to add to its existing 31.4% stake in China Mengniu Dairy Company Limited (Mengniu) via COFCO Corporation. Mengniu currently holds about 2.5% of the infant formula category via its Yashili subsidiary.

Ausnutria’s main business is in cow’s milk and goat’s milk infant formula. In 2017 its sales rose by 43.3% to 3,926.5mn yuan. Of this, its own brands of cow’s milk formula accounted for 40.3%, at 1,528.8mn yuan, a rise of 55.3%, while its own brands of goat’s milk formula increased by 60.2% to 1,279.8mn yuan, equivalent to 32.5% of overall revenues.

Its increased focus on its own brands rather than third-party supply has enabled it to raise its gross profit by 50.3%to 1,690.2mn yuan. With the backing of a state-owned investment arm, the future of the company looks even more positive.

There is a long way to go before the Chinese can wrest back control of their infant formula sector but at least they have made the first step in the journey.

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