What are the three major predictions for the development strategies of domestic dairy companies in 2015?

After the 2008 “Sanlu incident”, Chinese dairy companies learned from their shame and made considerable progress. However, the trust crisis that the “Sanlu incident” brought to the Chinese people is far from over. The situation of “overseas shopping” for foreign milk powder and the hot sales of imported milk powder is still playing out in the infant formula milk powder market, intensifying the crisis and competition in the domestic dairy industry.

In early 2015, incidents of dumping milk and slaughtering cows occurred in concentrated fashion in raw milk supply areas such as Qinghai, Shandong and Hebei, arousing widespread public concern. The milk-dumping incidents were the product of intertwined causes including falling international milk prices, a sluggish dairy market, lagging development models in the breeding industry, and weak consumer demand for dairy products. The multiple difficulties facing upstream dairy cow breeding have seriously affected the health of China's downstream dairy development and the improvement of its international competitiveness.

In order to reverse this situation, Chinese dairy companies rushed overseas in 2014, accelerating their expansion. At the same time, they actively expanded channels to meet the needs of young consumers.

What other development measures will domestic dairy companies take in 2015 to completely reverse the situation in which Chinese consumers are keen on foreign brands? This publication has made bold predictions on this.

Prediction One: Increase overseas investment?

As competition in China's milk powder industry intensifies, Chinese dairy companies in 2014 chose overseas mergers and acquisitions, factory construction or subsidiary establishment to make up for insufficient domestic market development. Yili, Evergrande, Bright Dairy, Mengniu and many other dairy companies took many overseas expansion actions. On the one hand, this shows that domestic consumers have demand for dairy products originating from overseas; on the other hand, relatively low-priced raw milk abroad is also an important factor in companies' cost considerations.

Domestic dairy companies investing in and building factories overseas brings to mind the “dairy farmers dumping milk incident” in early 2015. During this year's Two Sessions, Wang Jinghai, a deputy to the National People's Congress and chairman of Wondersun Dairy Group, said that China's breeding costs are relatively too high, resulting in high purchasing costs for processing companies and uncompetitive products on the market. At the same time, as China joined the WTO, while integrating with the international market, milk source protection measures have not followed suit, which also makes China's dairy industry face more severe challenges and is the main reason for the milk-dumping and cow-slaughtering incidents.

In short, the profit-seeking nature of companies leads them to prefer foreign milk sources with better cost performance. In the view of industry insiders, as long as the supply-demand relationship in the domestic upstream production segment remains unchanged, the difficulty dairy farmers face in selling milk will not change in the short term. Although this incident was alleviated under government intervention, once the contracts between companies and dairy farmers expire and companies no longer renew them, dairy farmers will still face the situation of difficulty in selling.

Therefore, as the leader among domestic dairy companies, Yili's statement about choosing to build factories overseas is somewhat representative:

First, it can realize overseas place-of-origin production and packaging of mid-to-high-end infant formula milk powder, increasing the proportion of imports from the place of origin and the market competitiveness of infant formula milk powder;

Second, by using mature overseas deep-processing technology for raw cow's milk, products will meet consumers' more diverse nutritional needs;

Third, by using New Zealand's raw milk cost advantage, it enhances the company's profitability;

Fourth, it meets the company's self-sufficiency rate, increases product added value, promotes global dairy technology innovation, and drives industrial structural adjustment and upgrading;

Fifth, it helps expand overseas dairy processing bases and ensure products meet global market demand.

According to reports, Yili's overseas investment in 2014 exceeded 2.5 billion yuan. Obviously, for Yili, if it can obtain sales in overseas markets, then returning to China to persuade consumers will clearly be easier. It can be foreseen that the pace of overseas expansion by domestic dairy companies will further accelerate in the future.

However, for Chinese dairy brands, whether they can change consumers' fixed impressions of them by building factories overseas still needs time to test.