In the latest scandal to rock China's dairy industry, 3 children in Gansu Province were fatally poisoned by milk adulterated with nitrite, a chemical often used in curing meat. 75 people, mostly children, were hospitalized.
This comes immediately after a massive inspection of dairy companies closed nearly half of them. After chronic problems with melamine adulteration, "leather milk", and other problems, last November the government announced that all dairy companies would have to be inspected to have their production licenses renewed. The inspections were originally to be completed by the end of 2010, but it was extended to March 31. Provincial technical supervision bureaus inspected dairy companies to make sure they have an acceptable factory layout and equipment that can test for 64 different substances, including melamine.
Of China's 1,176 dairy companies, 426 have been shut down and 107 must stop production until they can meet the standards. In Zhejiang, 19 companies were relicensed, 11 withdrew their applications, and 5 did not pass the inspection. In Shanxi, only 12 of 42 companies were relicensed and in Yunnan only 30% passed. Companies have 15 days to upgrade to meet standards. Some companies are reapplying or asking for reconsideration.
The dairy company shut-down may be more than it seems. At least one industry expert sees the inspection serving as a shake-out to shave off excess capacity. Nearly every food industry in China has more processing capacity than the industry can support. On one end there is vicious competition for sales and market share, investments in advertising and price-cutting. On the other end, companies compete with each other to procure raw milk (pork, corn, etc.) to utilize capacity and spread the costs of their factory over larger volume. Consequently, processors have little control over their raw materials, have incentive to accept poor quality materials, and suppliers get away with watering down milk or using toxic additives. In every industry the government has plans to eliminate small, "backward" producers to address the excess capacity problem.
Meeting the new requirements for testing equipment, labs, technicians, automated cleaning equipment, air purifiers, etc. requires an investment of 2-to-3 million yuan. A licensing official in Shandong estimates that the 44 companies that got re-licensed invested 320 million yuan in improvements, an average of 7 million yuan each.
Medium and small companies can't afford these improvements, so most of the companies shut down are small ones. A Ministry of Agriculture dairy analyst estimates that the re-licensing campaign will shut down 20% of dairy companies, but will reduce capacity by just 5% because they are small companies. Another analyst estimates the industry's capacity will be reduced 20%.
Some analysts see this as part of a major consolidation of the dairy industry. Coincidentally, a number of companies recently released their 2010 financial reports. The biggest companies--Yili, Mengniu, and Guangming--report big gains in sales and profits last year. However, second- and third-tier companies had weaker performance as they continued to suffer from the effects of milk safety scandals.
According to an Inner Mongolia official in charge of the relicensing campaign, the biggest (and richest) companies, Mengniu and Yili, invested 100 million yuan to upgrade their facilities. Many of the companies are investing in huge company-operated farms to gain control over their source of raw milk. One recent article estimates that these company-operated farms account for 10%-15% of milk. An alternative is the animal production zone where farmers keep their cattle together and companies send a technician to oversee production and milking. These are estimated to account for 25% of milk. But still 60% of milk comes from small, scattered farmers.
A 10,000 head dairy farm operated by a company in Shandong Province