The “tightening spell” for quality and safety. The review rules for infant formula milk powder are known in the industry as “China’s strictest food safety production license standards in history” issued by the State Food and Drug Administration on the 25th. According to statistics, this is the twelfth regulation targeting milk powder issued by various national departments since this year.

Can a series of new regulations such as “managing milk powder according to pharmaceutical standards” and “enterprises establishing and controlling their own milk sources” bring consumers a bucket of “assured milk”? With the improvement of quality, will the milk price rise? What impact will the “strictest standards” have on China’s dairy industry? The reporter conducted an interview on this.

Can regulating milk powder according to pharmaceutical standards boost consumers’ confidence?

Since the beginning of this year, relevant national departments have frequently introduced policies and regulations to improve the quality of infant milk powder and build a “Chinese team” of milk powder. According to statistics, there have been as many as 12 policies alone related to quality and safety.

In April, the General Office of the State Council issued the “2013 Key Work Arrangements for Food Safety”, requiring the acceleration of the construction of electronic traceability systems for infant formula milk powder and raw milk powder, etc.; in May and September, the thresholds for imported infant formula milk powder were raised twice; on May 31, the State Council Executive Meeting proposed “pharmaceutical standards” supervision; in June and October, the production of infant formula food by means of OEM (original equipment manufacturing) and repackaging was prohibited twice; in August, information on 128 infant formula milk powder manufacturers was announced; in December, 5 documents on infant formula milk powder were issued in succession.

Among them, the “Infant Formula Milk Powder Production License Examination Rules (2013 Edition)” issued on December 25 re-regulated and put forward higher requirements in 9 aspects, including enterprise quality and safety management, raw and auxiliary material control, formula management, production process control, and inspection and testing capabilities, and was known in the industry as “the strictest standard in China’s food safety history”. Industry experts believe that the biggest highlight of the new rules is the refinement of “referring to drug management methods” for the production of infant milk powder. It requires dairy enterprises to strictly implement the Hazard Analysis and Critical Control Point (HACCP) system and the Good Manufacturing Practice (GMP) for powdered infant formula food, and implement quality and safety control covering the entire production process. Song Liang, a dairy industry researcher at the China Commercial Circulation Industry Promotion Center, believes that if enterprises strictly follow the GMP production management system, it will fundamentally improve the quality of dairy products and reduce food safety risks. “The rules put forward clear and detailed requirements in terms of production, equipment, raw materials, management, and responsibility traceability, which are of great benefit to rectifying the chaos in the production process, enhancing consumer confidence, and even improving the government’s credibility.”

Will milk prices rise amid the major reshuffle in the infant formula industry?

Another focus of the new regulations is to strictly control the raw materials and auxiliary materials of milk powder. Enterprises that use raw milk as the main raw material are required to “establish and control their own” milk source bases, and enterprises that use whole milk powder and skimmed milk powder as the main raw materials are required to establish a raw material supplier audit system. Industry experts believe that for the 128 domestic infant formula milk powder manufacturers, the two major standards of “self-built milk sources” and “pharmaceutical standards” have significantly raised the threshold, and it is expected that one-third of them will withdraw from the market as a result. Industry insiders said that a medium-sized milk powder enterprise spends millions of yuan on testing every year. Once the GMP standards are implemented, it will also need to establish a whole-process product quality traceability system, replace new packaging, improve the existing standards of automated management systems, etc. Coupled with the huge investment in building and controlling their own milk source bases, many enterprises find it difficult to bear. It is expected that some small and medium-sized enterprises among the 128 enterprises will be merged or acquired, and some will withdraw from the infant milk powder market during this audit and switch to other fields in the dairy industry. For consumers, the most concerned issue is the price. “New mother” Yu Lin said that it was very good that milk powder prices fell instead of rising after the anti-monopoly fines were issued, but with the introduction of the new policy, enterprise costs have increased. “This is equivalent to giving enterprises another reason to raise prices. As the saying goes, the wool comes from the sheep. I’m afraid it will eventually be passed on to consumers.” Chen Lianfang, a senior analyst at Beijing Orient Agribusiness Consultant Co., Ltd. in the dairy industry, believes that the new policy will lead to the concentration of the industry in large-scale dairy processing enterprises and large-scale farms. Their production costs will increase, and most of the cows, raw materials, and equipment are imported from abroad, which will lead to an increase in the price of infant dairy products in China. Song Liang believes that the production costs of enterprises will increase significantly, but whether this will lead to an increase in terminal sales prices remains to be seen. “Prices are determined by the relationship between supply and demand. The infant milk powder sector itself has relatively high profit margins and strong cost absorption capacity. In addition, the government has relatively strong price control, so it may not necessarily lead to a price increase in sales.” A person in charge of a dairy enterprise said: “Costs have increased, but now enterprises are afraid of the power of the milk powder anti-monopoly case and dare not raise prices, so they can only wait and see for the time being. Once a leading enterprise raises prices, other brands will ‘follow suit’.”

“A ban” is not a “one-size-fits-all solution”. How far is the road for domestic milk powder to “counterattack foreign brands”?

Industry insiders believe that having a healthy and sustainable national dairy industry is the most powerful guarantee for domestic consumers to drink “reassuring milk”. Before the new version of the detailed rules are implemented next year, one-third of small and medium-sized enterprises will withdraw from the market, leaving a market gap of 2 billion to 3 billion yuan. It is difficult to predict whether Chinese brands or foreign brands will seize this gap. Wang Dingmian, a dairy industry expert, said that in the rectification of foreign brands engaged in OEM production, the once rampant “milk exclusively for China” will be cleared out of the market. It is still unknown who will win the market share after these brands withdraw, and ultimately it depends on consumers’ choices. At present, the top five foreign brands with the largest domestic sales not only firmly hold their positions in first-tier cities but also are in a stalemate with domestic dairy enterprises in the competition for second-tier cities. They will also quickly expand to third- and fourth-tier regions in the next three to five years. Chen Lianfang said that Chinese consumers relatively prefer foreign brands. “Once foreign brands further expand their sales to third- and fourth-tier markets, they may further erode the market share of domestic dairy enterprises.”

Experts believe that both the “Consumer Confidence Action” introduced by the Ministry of Industry and Information Technology and the domestic high-end products vigorously promoted by the China Dairy Industry Association demonstrate the ambition of domestic dairy enterprises to “counterattack foreign brands”. However, there is still a long way to go to truly enhance consumers’ trust. In addition to improving quality and strengthening supervision, it is also necessary to consolidate the mechanisms for consumer supervision and rights protection. Song Liang said that if a vicious food safety incident occurs, not only should it be severely cracked down on, but also the process of the crackdown and the handling results should be made transparent, and a barrier-free communication mechanism with consumers should be established.

Gu Xiaoming, a professor at Fudan University, believes that to rebuild consumers’ trust, it is necessary to clearly convey to consumers the country’s confidence and measures in governing industry chaos. “We must not only take actions but also speak out, so that consumers can truly feel the improvement in quality and the effectiveness of the country’s tough crackdown and governance on the milk powder industry.”