Milk Powder Wars – China vs Hong Kong
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According to Time world news dated 4th February 2013, stocks of baby-milk powder have become alarmingly scarce in Hong Kong because of the activity of so-called gray-market traders from mainland border towns. They turn up in Hong Kong on multiple-entry tourist visas, often making several runs a day to buy up tins of formula from Hong Kong retail outlets and sell them back in the mainland, where the item commands a stiff premium. High import taxes in China have also created a thriving grey market for traders who buy products tax-free in Hong Kong and take them on crowded trains across the border on trolleys, in suitcases or stuffed in their jackets, to resell for a profit. Still, often it’s the personal and social issues that loom largest. Although authorities have finally cracked down on the practice — arresting and jailing several hundred “birth tourists” in 2012 — for years, local mothers were forced to compete for maternity-ward beds with mainland women who wanted to secure residency rights for their children by giving birth in the tiny territory.
Thousands of those locally born children of mainland mothers have now reached primary-school age, further exacerbating tensions with local parents, who resent the new pressures on the school system. Since 2008’s contaminated-formula scare — in which hundreds of thousands of mainland babies fell ill after being fed Chinese-made formula and related products that had been adulterated with melamine — foreign milk-powder brands, such as those on sale in affluent Hong Kong, have been seen as safer. But while the desire of any parent to secure the best possible supplies of food for their children is understandable, the milk-formula issue has come to crystallize for Hong Kong people the disquieting ease with which the mainland is now no longer a brooding, remote power, at a distance behind the Kowloon hills, but instead an intrusive force in the daily life of this semiautonomous enclave. The dearth of formula in Hong Kong shops led the government to announce that, with effect from later this month, people leaving the city will only be allowed to take two cans of formula with them. The possibility of designating milk formula a “reserved commodity” like rice — meaning that its export would be restricted, price ceilings set and a reserve stock created — has also been mooted, alongside proposals to ban mainland visitors from entering Hong Kong more than once per day.
Through a popular online forum for baby-related topics, Hong Kong mothers have banded together to report to one another on the availability of milk formula in stores around town, and to help buy whatever is available in their own neighborhoods and then meet up to trade with those in need. After the announcement of the impending two-can limit, many of the forum’s users expressed relief that something was being done but also anger at what they had been put through. The grubby, hectic hub of the business is Sheung Shui train station. Although activity there has quieted since the announcement of the government crackdown, it has not been unusual in recent weeks to see hundreds of traders snaking into the station entrance, with police looking on. Each trader pulls a cart loaded with large parcels of everyday commodities from diapers to toothpaste — but the most sought-after item is baby formula. A local English-language paper, the South China Morning Post, estimates a hard core of about 3,000 mainlanders engaged in the gray market. But the lack of faith in China’s food security is well founded, so even genuine tourists will often buy items like milk formula to give to relatives in the mainland.
It must be said that a more porous border with China hasn’t been all bad for Hong Kong. In fact, mainland tourists have provided a much needed boost to Hong Kong’s economy ever since they were allowed individual entry for leisure purposes in 2003. (Before then, only tour groups and individuals on business could obtain visas.) Spending by mainland Chinese accounts today for more than one-fifth of the city’s retail business, as the visitors snap up luxury goods at prices lower than in China, where steep duties and differences in exchange rate add about 20%. Even in matters of basic sustenance, Hong Kong simply couldn’t survive without China, which supplies up to 80% of city’s drinking water and most of its fresh meat and vegetables. Some would argue that means Hong Kong should have a more accommodating attitude toward its vast neighbor. But the problem is that when it comes to their babies, there’s not one parent on earth who would compromise.
The main theme of the news is about product sourcing which was resulted from the product safety issue. The melamine contamination scandal has profoundly damaged Chinese consumer trust in domestically produced dairy and baby milk formula brands. Foreign players are benefiting, but they could be more proactive by targeting the economy end of the market. Before the melamine scandal broke in September 2008 homegrown Chinese milk formula producers had been performing strongly. Between 2002 and 2007, milk formula value sales soared by 158% to exceed RMB20 billion. This trend also reflected the increasing participation of women in China’s workforce, which has done much to spur on China’s miraculous economic growth. Rising consumer confidence also led to burgeoning “food nationalism”, which was also reflected in parental milk formula choices. As a result, the value sales performance of foreign brands suffered at the hands of Chinese-made offerings. In mid-2008 the impact of the melamine contamination disaster hit. With thousands of babies gravely ill, Sanlu, the company at the eye of the storm, issued an official product recall on 12 September.
The story that emerged was not pretty. The company, whose Shijiazhuang headquarters are decked out with posters proclaiming that “Quality and safety are the foundations of social harmony”, had known about babies being sickened by its products since at least December 2007. Melamine was finally identified as the culprit in June 2008, but the authorities were not alerted until 2 August 2008, and only after Fonterra, Sanlu’s New Zealand-based stakeholder, saw itself forced to bypass obstructive local officialdom by imploring Helen Clark (New Zealand’s Prime Minister), to call Beijing directly. The scandal’s gory details, involving unscrupulous middlemen, corrupt officials and corporate greed, did not start to trickle into the public domain until September. Other Chinese companies’ milk formula brands, including Mengniu’s and Yili’s, were also identified as tainted with melamine, as were many other packaged food products containing milk produced in China.
According to Chinese media reports, agencies providing wet nurses saw demand increase by around 50% in a matter of weeks, and desperate consumers flocked to foreign milk formula brands, which were largely unaffected. Suspicions started to arise that one of the main reasons the scandal had been kept under wraps for so long was not to upset the smooth running of the summer Olympic Games, bringing consumer anger and distrust to new heights. Sanlu ceased to operate in September, and Fonterra is currently looking for a buyer for its 43% stake in the doomed company. Euromonitor International predicts that leading domestic milk formula brands, like Yashili, Mengniu, Shengyuan, Yili and Nanshan, will be forced out of the baby formula market for at least 3-6 months. And even after that, consumer confidence in Chinese milk formula brands is unlikely to fully recover for some time. Understandably, parents are not prepared to take chances with what is by far the most precious thing in their lives –their only child, even if they would normally prefer to buy Chinese. Safety is paramount, and in that respect, trust in foreign brands is infinitely greater.
This is all well and good for those who can afford foreign produced milk formula, but the higher price With new health standards and stricter controls to be introduced into the Chinese market before the end of 2008, local manufacturers will start adapting their labeling, manufacturing processes and safety protocols to the new regulatory environment, and this should eventually revive consumer trust in Chinese brands in the medium term. It is well worth remembering that not all domestic players were negatively impacted by the scandal. For example, Wonder Sun Dairy Co Ltd, based in Northeast China, has emerged largely unscathed, and this company will also stand to benefit hugely from consumers who want to buy from Chinese companies with a good safety record.
March 2010: China introduces new regulatory framework
The new scandal comes more than one year after a new regulatory framework to improve national food safety was announced by the Chinese health authorities. The new framework, introduced in mid-March 2010, highlighted 11 action points to amend existing laws on adding non-food substances to food. The new regulation also aims to achieve better enforcement of tests for pesticide residues on fresh produce and seafood. The authorities in Beijing also want to “increase testing for high-risk foods, especially dairy products” and set up a national risk monitoring system. The need to improve food safety standards came in the wake of repeated food crises that dented China’s credibility both domestically and abroad. The scandal with the biggest impact was the revelation in mid-2008 that compounds commonly used in the plastics industry, namely melamine, were added to milk and baby milk formula to boost its apparent protein content. Infant formula made from this milk led to almost 300,000 infants becoming ill, with six officially confirmed deaths. Since then, the Chinese government has sought to restore trust in the domestic dairy industry, cracking down hard on the perpetrators of the melamine scandal and implementing new safety regulations. Despite these measures, batches of melamine-tainted products have continued to appear over the past two years.
Looking ahead: Challenges and opportunities
According to Euromonitor 2012, local manufacturers failing to abide by the new rules will not only be subject to consumers’ ire – as reflected in the recent cyber attack on Mengniu’s web page – but also risk heavy penalties from public health authorities and the potential withdrawal of their products from the market for an indefinite period of time. Regardless, abiding by the new rules is bound to have financial costs. This means that the higher production costs faced by Chinese dairy manufacturers to comply with new regulations are likely to reduce the price differential between imported and domestically-produced offerings across the market. Research suggests that this could represent an opportunity for international dairy manufacturers competing with mid-priced and semi-premium domestic lines, as the latter are likely to suffer the full cost impact of stricter production standards. Bullish economic prospects for the Chinese economy might enable a significant number of Chinese consumers to bridge this narrowing price gap between cheaper but potentially less safe local brands and more expensive, but better trusted, international offerings.
According to Euromonitor International’s Countries & Consumers database, China’s GDP is predicted to grow by 9% in 2012, far exceeding the economic headwinds currently affecting Western Europe and North America. In addition, international manufacturers anticipating the impact of newly introduced, as well as any forthcoming, regulations will gain a notable competitive edge over future entrants. Looking ahead, new scandals affecting locally produced milk brands are unlikely to be forgotten by China’s increasingly sophisticated and savvy middle-class consumers, especially if they have sufficient purchasing power to trade up to more expensive – but safer – foreign sourced milk. If the economy keeps growing at its current rate and production costs between locally sourced and imported milk converge as a result of new regulations, new growth opportunities for international dairy companies will expand even further.
Hong Kong Government Announcement
According to Asia Daily Wire, Hong Kong on 1st February 2013 outlined measures to tackle shortages of baby milk formula caused by food-safety-conscious mainland Chinese hoarding the product across the border. The government said it would limit the luggage allowance on trains that connect the city to the mainland to 23 kg (50 lb) from 32 kg (70 lb) and allow only two cans of milk power per person for every visit. Mainland Chinese authorities in the adjoining city of Shenzhen would ensure that travelers would not make repeated day trips across the border. Hong Kong mothers will also be able to place orders for infant formula through a hotline set up on Friday evening, according to Reuters. Mainland Chinese resorted to bulk purchases of high quality and regulated infant formula brands in the city after local companies were found to have mixed melamine into baby milk powder in 2008, making nearly 300,000 mainland Chinese children sick, Reuters reports.
Asia Daily Wire. (2013, February 04). Hong Kong limits amount of baby milk powder Chinese can take across border. Retrieved from http://www.asiadailywire.com/2013/02/hong-kong-cracks-down-on-baby-milk-powder-hoarding/ Euromonitor International. (2008, November 03). China watch: Melamine crisis precipitates turnaround for foreign brands. Retrieved from Euromonitor Passport GMID database. Euromonitor International. (2012, January 18). Milk product safety: The new market winner in China? Retrieved from Euromonitor Passport GMID database. Ko, V. (2013, February 04). Mainland Chinese traders milking Hong Kong for all its worth. Time World. Retrieved from http://world.time.com/2013/02/04/mainland-chinese-traders-milking-hong-kong-for-all-its-worth/