Baby formula firms face overhaul

China will set up three to five large baby formula enterprises with an annual income exceeding 5 billion yuan ($818 million) for each by 2018, while the market concentration rate of the top 10 domestic dairy brands should be more than 80 percent, according to a plan formulated by the Ministry of Industry and Information Technology, China Securities Journal reported Friday.

The plan aims to promote mergers and acquisitions among baby formula enterprises in a bid to improve the competitiveness and quality of Chinese baby formula companies, said an insider, according to the newspaper.

"Mergers and acquisitions are a trend for domestic dairy brands," Cao Mingshi, a vice secretary-general of the Shanghai Dairy Association, told the Global Times on Friday.

"Only through mergers and acquisitions can the enterprises improve their recognition, management and quality," Cao said. "Quite a few dairy enterprises are preparing to do this."

On June 18, the ministry summoned 127 powdered formula enterprises, encouraging them to improve the quality of their products and raise confidence among consumers.

At the conference, the minister listed 10 top domestic diary enterprises including Yili and Wandashan and hoped they could merge and reshuffle other dairy brands.

The mergers and acquisitions in the dairy industry will start this year and will be conducted over a number of phases.

Gao Fu, an official with the ministry's consumption industry department, said the ministry will try to spend two years setting up 10 large Chinese brands with an annual income of 2 billion yuan, and the market concentration rate of the top 10 domestic brands will reach 70 percent in China. He also said the deadline for the mergers and acquisitions is the end of 2018.

Some insiders said all the baby formula enterprises will complete their reshuffle and receive official approval according to baby formula production regulations by 2015. The government will support the enterprises that comply with the regulation with preferential tax policies and financial aid.

Currently, there are 127 baby formula manufacturers in China whose annual production hits 600,000 tons, while only three enterprises have an annual production of more than 30,000 tons.

A number of foreign milk powder producers were targeted recently for monopolistic practices. Six manufacturers, including Fonterra, Mead Johnson and Dumex, were fined a total of $110 million for price-fixing and anti-competitive behavior.