Massive 2 page spread in Friday Business section of NZ Herald:
Memories of the 2008 melamine scandal might have faded in the West, but the incident is still top of mind for China's regulators.
Some babies died and thousands needed hospital treatment after they were fed infant formula adulterated with melamine — a chemical that gives the appearance of higher protein content when added to milk.
After that tragedy, the Chinese Government has pursued food safety regulation with the kind of vigour that only a single-party state can.
Eleven years on, the melamine scandal still got a mention at this month's fourth China Special Food Conference in Zhuhai, in the southern province of Guangdong.
The conference is focused on China's special food regulation, which among other things, covers infant formula.
Food security and safety remains a hot issue in the People's Republic, a fact not lost on a2 Milk and its closely associated supplier, Synlait Milk.
China has played a big part in propelling a2 Milk to become one of the biggest companies on the New Zealand sharemarket, as measured by market capitalisation, fuelled by demand for its infant formula.
At last count a2 Milk's share of the Chinese infant formula market — the world's biggest — was 6.4 per cent in the nation's tier one cities.
Others chasing the same market have not been so lucky.
China hurdles
Australian organic dairy company Bellamy's — which is often lumped in with a2 Milk, and which is now the subject of a A$1.5 billion takeover bid from Chinese company Mengniu — has consistently failed to clear regulatory hurdles in China.
A2 Milk also struggled early in its 20-year history.
The first breakthrough came with the enthusiastic take-up of a2's fresh milk in Australia, where it now accounts for more than 11.2 per cent of the market.
The infant formula that followed also with met with an enthusiastic response across the Tasman.
Then, Australia-based Chinese individuals and businesses began sending formula to friends and family on the mainland through the unofficial — or "daigou" — trade channels.
A2 Milk's formula distribution in China is more diverse now. Today it sells through e-commerce channels and in stores, but the daigou trade remains important.
Most cows carry both the A1 and A2-type beta casein proteins, but a2 Milk specialises in marketing milk that contains just the A2 variety, which it maintains can help people who have trouble digesting standard milk.
Clearly, the a2 Milk "ecosystem" has not hurt its prospects in China.
The company has a 17.4 per cent stake in its supplier, Synlait Milk, second only to China's Bright Dairy, which owns 39 per cent of Synlait.
Shanghai-listed Bright Dairy is part of the state-owned food conglomerate Bright Food. A2 Milk also has a strategic relationship with China State Farm, a2 Milk's exclusive import agent.
A2 Milk chief executive Jayne Hrdlicka told the Herald after the conference that the a2 beta casein story had differentiated the company from others who could not get the same momentum in China.
"That played through daigou because daigou was taking something that was special in Australia and making it possible for friends and family in China to gain access to it.
"That's what daigou does brilliantly all over the world — they make it possible for people in China to connect with something that is important to them in a different market.
"So our business evolves through consumer pull and retail pull.
"We are now building the capability to be more sophisticated across multiple channels and to have the same level of excellence across multiple channels in China, relative to what we have elsewhere in the world."
Hrdlicka says a2 Milk is "absolutely aligned" with the objectives of the regulator, the State Administration for Market Regulation (SAMR), formed last year as part of an overhaul of government administration.
Share price slump
China's own infant formula companies have been encouraged to buy up overseas producers with the aim of targeting the mid to high end of their home market.
A statement from the country's National Development and Reform Commission (NDRC) in June outlined China's aspirations for the local infant formula players.
"Encourage Chinese companies to buy foreign producers and set up production facilities overseas, so as to reduce the cost of raw ingredients," the NDRC said.
"Encourage Chinese companies to provide overseas and bring back in original Chinese branding.
"Encourage producers to broaden sales channels and differential to compete targeting the mid to high end market."
The NDRC, which formulates and implements economic and social development strategies, suggested that financial incentives should be offered to Chinese companies to consolidate and buy assets overseas. A2 Milk's share price fell sharply on that news, but then recovered.
Hrdlicka describes the NDRC's self sufficiency drive this way: "It's what we would do if we were in their shoes.
"You have to have an industry that is balanced so that your domestic industry is very strong, vibrant and trusted.
"I think it is good for everyone if there is a strong domestic industry in China.
"China has advanced hugely in the last 70 years and particularly in the last 10, so it is a very dynamic environment.
"It is developing very quickly. We are not uncomfortable about that at all and it plays right into our strengths as a company."
Consolidation
China's infant formula market — now divided up among some 1200 brands — is consolidating rapidly.
Hrdlicka says the regulators will decide how that happens over time, but there are too many brands to manage effectively when they are trying to secure the underlying quality of the category.
"The regulator is doing a very good job in managing a lot of brands and over time we would expect that number to come down, and we think that that is a good thing," she says.
In terms of her key message from the conference, Hrdlicka says: "My judgment is, number one, they are going to move quicker."
A2 Milk's revenue shot up by 41 per cent to $1.3b in the June year, driven in no small part by its growth in China,where the company's operations are now headed by Li Xiao, appointed in April to the position of chief executive Greater China.
Hrdlicka says there is no risk of growth getting away on the company "because we have done a good job in building up all the component parts".
"There are a couple of parts that we are catching up with the size and scale of where we are as a business and investing to deliver the next significant phase of growth.
"That's people, IT systems and capability — new-generation tools to deliver better, faster productivity in the way that we execute to market."
Hrdlicka says she is not concerned that Nestle's Wyeth also has an A2 infant formula product in China. United States-based Mead-Johnson has also recently joined the club.
She says a2 Milk is investing in China in "in proportion with the opportunity".
"We are only about products that emanate from the A2 fresh milk.
"We are not confused about what is better or not. We are single minded in our purpose."
Data lakes
Hrdlicka says a2 is lifting its effort to improve its ability to react to trends.
"Basically, we are enabling the business to make good decisions, day-to-day, with the best data available.
"That's a relatively simple thing to do in Australia and New Zealand but much more difficult in China and the US.
"So we are getting access to data building tools to manage a big lake of data and to have the skills and capability in the organisation to analyse that data to extract insights and to make decisions."
A2 Milk still employs only 250 people or so, yet it is one of the biggest companies on the NZX, with a market capitalisation of $9.5b.
"We have the highest market cap per headcount than any company anywhere in the world — certainly in Australia and New Zealand.
"We have too few people for this business that we are running so we are catching up with ourselves and we are laying down a platform for further growth."
Optics
The issue of getting product registration in China has prompted more than the occasional conspiracy theory in the Australian, media, particularly around the problems Bellamy's has faced.
For Synlait chief executive Leon Clement, it all boils down to basics.
"There is a lot of machiavellian thinking and speculation around what the other [Chinese] objectives may or may not be, but I find the most consistent logic that always stacks up is from a food perspective, there are two core drivers for China: that is to ensure that there is stability and security of food supply and are we certain that we have got and are improving the standards for our people around food safety.
"They are rightfully concerned around that because in the way that they govern, if there is not enough food or food is not safe, then it can create instability very quickly.
"The objectives of the regulators are pretty clear — 'we want to make sure that our population has access to safe food'."
After melamine, China looked overseas for pointers on how to improve food safety.
"The dynamic of a more mature market is a consolidation of the market to fewer players who are stronger and better around systems and processes," says Clement. "Their policy direction is really clear; they want higher standards and those who meet those standards will survive."
And he says China has to do that on a grand scale, given that just about every other country in the world wants to share in the nation's growth.
"China will be saying how do we think about a world where six to 10 players are making up 80 per cent of market share — consolidated players that we can trust.
"The question for New Zealand is how do we make sure that we are part of that?"
Clement says the conference represented a "validation and strengthening" of the position and China's regulatory system would continue to evolve.
In public relations terms, he says the "optics" — such as participating in the conference — matter. "It's important that your optics match your substance."
• Jamie Gray attended the 4th China Special Food Conference in Zhuhai courtesy of a2 Milk.
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