How should domestic dairy companies respond to the impact of EU dairy products?
The milk quota that EU countries have implemented for more than 30 years will be officially abolished starting tomorrow. Driven by this policy change, global milk supply in 2015 is expected to rise by 2%-4%. Many European dairy companies have long since laid plans in advance to expand production capacity to welcome the new policy. Industry insiders analyze that, judging from customs data, the segment in which EU dairy products have the greatest impact on China's dairy market is infant formula, and the most important countries are the Netherlands and Ireland, which are precisely the biggest rivals of domestic milk powder companies at present. Therefore, after the EU milk quota is abolished, the pressure on domestic local milk powder companies will also rise sharply.
European dairy companies lay plans in advance
The European milk production quota system refers to the total dairy production limit regulation that EU countries have followed for more than 30 years, namely that each EU member state allocates its national quota to dairy farmers. Whenever a member state exceeds its quota, it must pay a super levy to the EU as a penalty, thereby limiting and controlling milk production.
Starting tomorrow, the EU will abandon this 30-year-old milk production quota, which means that milk production in EU countries will develop freely according to domestic production capacity and market demand, no longer subject to government quota restrictions.
For the global market, the abolition of the European milk production quota means an increase in production capacity. Industry insiders previously estimated that global milk supply in 2015 would rise by 2%-4%, while Rabobank predicted that by 2020 total EU milk production would increase by 4 billion liters.
As is well known, China's demand for dairy products has maintained relatively rapid growth in recent years, and China has also become a market contested by major global dairy companies. After the European milk production quota system is liberalized, China will also become a strategic priority for dairy producers from European countries.
Companies have also laid plans here in advance. Last year, when Wyeth launched its ultra-premium infant formula Illuma, Irish Ambassador to China Paul Kavanagh said that as the EU dairy total limit is abolished, Ireland's dairy production capacity is expected to double in the next five years, and China is a key market for efforts.
In addition, Royal FrieslandCampina of the Netherlands, besides expanding production capacity in the Netherlands itself, also decided to cooperate with domestic dairy company Huishan to produce infant formula, preparing for expanded production capacity.
Infant formula is the first to be affected
In the view of dairy experts, after the abolition of the EU milk production quota system, the enthusiasm of dairy companies to enter the Chinese market will have a greater or lesser impact on China's dairy industry. Judging from past data, the influence of EU dairy products on China's dairy market is mainly concentrated in the field of infant formula milk powder, rather than industrial bulk milk powder.
Data from the General Administration of Customs of China show that in 2013 China's main milk powder importing countries were New Zealand, EU countries, Australia, the United States and other countries, among which EU imports accounted for only 6.3%, while 80.4% of bulk milk powder came from New Zealand. “Although New Zealand dairy products were abandoned by some companies because of food safety incidents, which turned to EU milk sources and raw milk powder, the gap between the import shares of New Zealand and EU countries is huge. The liberalization of EU production quotas will not have too great an impact on the global raw milk powder market, nor on domestic imports of raw milk powder”, said Wang Ziheng, dairy expert and chief operating officer of Zhongbei Lanhai FMCG Brand Marketing Planning Agency.
Unlike bulk milk powder, the importing countries for infant formula milk powder are concentrated in European countries. Data from the General Administration of Customs of China show that among the source countries of China's infant formula imports, the Netherlands alone accounted for 33%, followed by Ireland at 22%, and France and Germany at 9% and 6% respectively, with European countries accounting for more than 60% of imports.
“It is precisely because of the large demand for European infant formula milk powder, combined with the advance planning of EU dairy companies, that after the abolition of the European milk production quota system, the first domestic sector to be affected will be the infant formula milk powder market, and the competitive pressure on domestic companies will increase accordingly”, Wang Ziheng said frankly.
Domestic dairy companies make an issue of “freshness”
At present, the European infant formula milk powders with a relatively large share of the domestic market include the brands under the three major series of France's Danone, the Netherlands' Royal FrieslandCampina and Wyeth, while France, Denmark and Switzerland also account for a portion.
An unnamed local dairy company person frankly told a Beijing Business Today reporter that competition between domestic and foreign infant formula milk powder companies is becoming increasingly fierce, leaving narrower and narrower space for local and regional brands. If EU-system milk powder increases its entry into China, it will inevitably form a fierce impact on them. Therefore, in his view, entering the EU system in various forms to add gilded pedigree may be a relatively reliable way out.
“In European countries, there are not many infant formula milk powder brands, and well-known brands have long entered the Chinese market. Therefore, like other domestic dairy companies, one must either seek milk sources in Europe to improve quality, or find a lesser-known brand to operate jointly and increase market share”, the person said.
However, this person's idea was questioned by dairy industry figures including Wang Ziheng. “The above approach is only one of the response measures and treats the symptoms but not the root cause. For domestic dairy companies, the most effective way to respond to the impact of foreign milk powder is to base themselves on their own conditions, maximize strengths and avoid weaknesses, tap latecomer advantages, and complete transformation and upgrading as soon as possible.”
For example, give play to the distance advantages of pastures being close to factories and factories being close to markets, and make an issue of “freshness”; in addition, as soon as possible, through mergers and acquisitions, restructuring and other financing means, integrate resources for advantageous restructuring, and develop a moderately scaled, intensive and modern dairy industry, reduce costs, improve efficiency, and enhance product quality.