Friesland products are displayed at an exhibition in Fuzhou, East China's Fujian Province. Photo: CFP

Leading Dutch dairy cooperative Royal FrieslandCampina, a merger between Campina and Royal Friesland Foods, will return to China again due to a rising demand for milk products.

However, it might face some challenges despite the market having grown since 2004.

Ten years ago, Royal Friesland Foods sold all of its shares in a joint venture producing and selling milk products to its Chinese partner.

"Our sales targets in 2015 in Greater China are expected to reach 1 billion euro ($1.34 billion)," Gordon Yang, senior vice president of Royal FrieslandCampina Greater China, told the Global Times Monday.

FrieslandCampina will increase its exports of infant formula under the Friso brand, ingredients for infant formula and dairy product, including D90 whey powder, GOS (Galacto-oligosaccharides) and some new products to the Chinese market such as cheese and liquid milk, Yang said.

In addition to exports of its products to China, FrieslandCampina has also entered into exclusive talks with China Huishan Dairy Holdings Company on creating a joint venture to produce and sell infant formula under a new brand.

The new infant formula would "be sourced from raw milk produced by Huishan's dairy farms in China," said Yang.

It seems that FrieslandCampina is determined to capitalize on the rising demand for milk in China, despite having confronted challenges in China in 2004.

"A lack of sources of raw milk, mature supply chains and logistics, and fierce competition from domestic players such as China Mengniu Dairy Co and Yili Industrial Group Co," which have both expanded quickly domestically since the beginning of the 2000s, "were some of the reasons" Royal Friesland Foods sold its share in its previous joint venture, Wang Dingmian, an independent dairy expert, told the Global Times Monday.

Changed business environment 

"The rising demand for high quality and diversified dairy products from Chinese consumers is the major reason for our company to expand in China," Yang noted.

Currently in China, the average consumption amount for milk products per person was only around 32.4 kilograms each year, less than one-third of the global average level, according to Director of Dairy Association of China Gao Hongbin, who disclosed the data at a meeting in 2013.

"There is still a big room for growth," Yang said with confidence.

The infant baby formula scandal in 2008, in which melamine-tainted milk and baby milk powder killed six infants and sickened 300,000 others, destroyed Chinese consumers' confidence in milk products produced by Chinese dairy companies, especially infant powder, and "also brought opportunities for foreign companies," Wang said.

Many young Chinese mothers lost confidence in domestic infant powder brands.

"My son has never had domestic infant formula since he was born," Li Ming, a 29-year-old mother in Beijing, whose son is two and a half years old, told the Global Times Tuesday.

In addition, almost all of her classmates from university, who are also young mothers, purchased infant formula of foreign brands, said Li.

According to customs data, China imported 681,200 tons of milk powder in the first half of 2014, an increase by 75.08 percent year-on-year, with the total imports of infant powder hitting 58,600 tons.

In 2013, China imported 120,000 tons of infant milk powder, with 36.3 percent year-on-year growth, equal to 17 percent of domestic infant milk powder output in the same year, Song Kungang, honorary chairman of China Dairy Industry Association, was quoted by media as saying in May this year. 

More ferocious competition 

Although the dairy market is growing fast in China, "the competition is also fiercer compared to 10 years ago," Wang noted.

In 2013, the total market sales for all of China's dairy products hit 253.06 billion yuan ($40.99 billion), with Yili and Mengniu accounting for 21.7 percent and 18.8 percent, respectively. The top 10 enterprises had a 70.6 percent share of the Chinese market, according to Euromonitor International, a London-based market intelligence firm.

To revive the domestic milk industry, a State Council meeting in May 2013 pledged to strengthen quality supervision over infant milk powder and encouraged mergers and acquisitions (M&As) in the sector to enhance industrial competitiveness.

The Ministry of Industry and Information Technology (MIIT) submitted a plan to the State Council in September 2013 for merging and reorganizing domestic infant formula milk powder producers.

Currently in China, there are around 600 domestic dairy companies, according to Wang.

Mengniu increased its stake in China Modern Dairy Holdings to 28 percent from 1 percent in May 2013. It also announced later in the same month it would form a joint venture with French dairy group Danone. 

One month later in June 2013, Mengniu announced it would acquire milk powder firm Yashili International Holdings as part of its plan to strengthen its milk powder business.

Mengniu's major rival Yili announced in July 2014 that it has formed a strategic alliance with Dairy Farmers of America, the largest dairy cooperative in the US. Although Yili has not disclosed the focus of the alliance, analysts generally expect the two dairy giants to explore the market for high-end products.

In addition to their large market shares after 10 years of fast expansion, "domestic dairy companies also have advantages in logistics and existing sales channels," said Wang.

Unlike most dairy companies, which sell their infant formula or liquid milk mainly in supermarkets, FrieslandCampina chose to sell its Friso brand infant formula on e-commerce websites and major baby goods stores, as "online sales will be a development trend for the sector," Yang noted.

Battle for dairy farms

To rebuild Chinese consumers' confidence in domestic infant powder, the government has taken steps including encouraging dairy companies to invest in their own dairy farms.

Currently, only about 10 percent of milk products are sourced from dairy farms built by the companies themselves, as many companies purchase raw milk from other companies or individual farmers, Wang noted.

To secure raw milk supplies, both foreign dairy companies and domestic enterprises are speeding up building dairy farms in China.

In July this year, New Zealand dairy enterprise Fonterra and US healthcare company Abbott both announced they would build up to five dairy farms in China with total investment hitting $300 million. The planned farms would be Fonterra's third dairy base in China if the plan is approved by Chinese authorities.

In September 2013, China Modern Dairy Holdings and two private equity firms KKR & Co LP and CDH Investments announced they would jointly invest $140 million in a joint venture to build two dairy farms in China.

For FrieslandCampina, one of the reasons it chose Huishan as its partner is that "Huishan has its own dairy farm, which will be very helpful for obtaining high-quality raw milk," Yang noted.