Tapping opportunities in domestic markets key to sector's further progress

China's dairy industry has made great progress in improving product quality but much remains to be done to regain public confidence lost after a series of scandals a decade ago, according to a senior industry executive.

In 2008, milk and infant formula from some Chinese dairy firms, in particular Hebei-based Sanlu Group, was found to contain melamine and was linked to the deaths of children.

The scandal shocked the nation and greatly weakened public confidence in domestic dairy products, resulting in a government-led industry consolidation and implementation of tough quality controls.

Lu Minfang, CEO of Mengniu Dairy Co Ltd, described the past 10 years as witnessing a regeneration of China's entire dairy industry.

"Today, the quality standards that are applied to the Chinese dairy industry are the highest in the world," he said, citing the fact that three times more testing work is now required on finished products than in Europe or the United States.

The strict quality control system covers the whole supply chain from individual farmers to relatively large cooperatives and large production bases including how cows are fed and how milk is collected.

Lu added that the system allows Mengniu to trace production all the way from raw milk to the consumers.

While saying that the quality of Chinese dairy products is "as good as anything you can buy", Lu added that the problem today is not about product quality, but rebuilding consumer confidence, something he said would take time.

"So it's more about rebuilding trust and confidence. But on the quality side of the work, we've been doing a really good job," he said.

According to statistics from AC Nielson, Chinese companies dominate more than 87 percent of the domestic liquid milk market, but in the baby formula market, imports take 60 percent of the share.

"When you only have one child, product selection is extremely sensitive," Lu said of the lingering negative impact from the 2008 scandal.

Lu is pleased to see the rapid growth of locally produced infant formula in the past two years and he expects that to continue in the coming years.

Mengniu has enjoyed rapid growth in the past decade and is among the top 10 dairy companies in the world, according to a 2018 RaboResearch ranking.

Despite the rapid growth, Lu said this is just the beginning given the huge opportunities, especially in the fast-growing domestic market. He said Mengniu's $10 billion business could easily be doubled if the average consumption of Chinese consumers goes up.

He had earlier said the coming decade would be a "golden decade for China's dairy industry".

Per capita dairy consumption in China was estimated at 26.2 kilograms in 2016, according to OECD data quoted in a DBS Research report in 2017, much lower than consumption in the developed world and many of China's neighbors. The report predicts that per capita consumption in China will expand to 33.2 kg by 2025.

Lu is more optimistic, saying that the dairy industry will double in the next five years if factors such as the growing Chinese appetite for Western foods like pizza and pasta are taken into account.

Besides the domestic market, Mengniu has been expanding overseas, including production facilities in Australia and New Zealand, and an R&D center in the US and a small lab in France. In November, Mengniu opened a factory in Indonesia's West Java province to produce liquid yogurt, probiotic drinks and yogurt desserts initially.

Lu described the new strategy as "stay global for global", meaning that products Mengniu sources in Australia will be sold in the Southeast Asian market.

He said the next five to 10 years will be critical for Mengniu and the whole Chinese dairy industry to regain full consumer confidence, and he is optimistic about that prospect.