Potential market

That means there is huge scope for expansion and consolidation in the sector.

And many companies are doing just that. New Hope Dairy, a brand in China's western region, is establishing manufacturing bases in Zhejiang and Anhui in eastern China. Hangzhou Wahaha Group, a leading beverage maker, announced late last year that it would enter the dairy sector.

Earlier this year, Bright Dairy, for the first time introduced dairy products that could be kept at room temperatures. It has developed 1,400 distributors for these products in 500 cities.

Guo Benheng, the company's president, was also reported as saying that Bright Dairy was thinking of buying some powerful regional brands, with negotiations now under way.

Sanyuan Group, the parent of Sanyuan Food, has also turned into a leading agricultural group by purchasing two Beijing-based poultry enterprises last month, which, according to Zhang Fuping, the chairman of the new entity, would help sharpen its competitiveness in R&D, marketing and logistics.

"Bright Dairy and Sanyuan Food are definitely potential candidates to grow stronger," said Chen Yu, a senior dairy analyst and professor at the Institute of Cadre Management under the Ministry of Agriculture.

Yet, they are much smaller in size compared to the industry leaders.

Mengniu and Yili posted sales worth 23.86 billion yuan and 21.66 billion yuan, respectively, in 2008. Bright Dairy's sales were only 7.36 billion yuan. As for Sanyuan Food, sales would touch 11.41 billion yuan only if Sanlu's sales of 10 billion yuan for 2007 were to be included.

During the first quarter of 2009, Sanyuan earned a profit of 32.32 million yuan, one third that of Yili's, at 113 million yuan.

"It will take no less than five years for them to reach the level of Mengniu and Yili," Wang of the Dairy Association said.

It is not only about size, marketing and R&D, but more importantly, a "professional team that could map out the right strategy," said Yang of Mengniu. Bright Dairy and Sanyuan Food, being State-owned entities, were less efficient in management and strategy implementation, he said. "Professionalism is the key to becoming the leader," Yang said.

The government too has done its part.

It has taken a series of measures, such as drafting guidelines to tighten and standardize the industry. Under the norms, relevant laws will be strengthened or revised to ensure that dairy source quality is safe for processing, and that manufacturing is stringently checked for quality.

"If they had taken such steps years ago, the scandal would have never happened," said Chen.

For years, too many organizations were responsible for the supervision of the dairy sector. As a result, "nobody knew what they respectively had to do and there were many loopholes with the management system. The crisis compelled them to rethink, and about how to coordinate," Chen said.

(China Daily June 15, 2009)