On 14 Mar 2015, the State Council released the Major Work Arrangements on Food Safety 2015, in which infant formula is still highlighted as a foodstuff of major significance. In line with the goals of the “Arrangements “the Chinese government is continuing to stimulate merger and acquisition (M&A) of domestic infant formula companies. In 2014 the State Council issued a special work plan to promote M&A and the release of the 2015“arrangements”aligns and expands on this plan, expounding the governments ultimate goal of culling the domestic infant formula herd down to 10 large baby formula conglomerates each with annual sales revenue of over 2 billion RMB. Brands made by the top 10 domestic companies are expected to take up 65% of the total market share. The plan also sets a further goal of forming three to five baby formula heavyweights with annual sales revenue exceeding 5 billion yuan each by 2018. The top 10 domestic players are then expected to grab more than 80 percent of the entire market. A favorable environment is being created by regulators to realize these goals, including:
The simplification of the M&A administrative procedures
Implementation of a preferential tax policy
Increased financial support
To date the government’s 2014 plans haven’t brought about the level of M&A activity anticipated. SME manufacturers are still popular in many localities. Larger enterprise are also expanding their own production capacities and investing in more advanced facilities rather than acquiring smaller companies which may need huge investments to modernize facilities. Compounding this issue (as I outlined in a previous article here), larger enterprise are looking to greener overseas pastures as part of their expansion plans. The significance of infant formula in China in the context of the government’s current plans going awry certainly means China is fomenting new legislative and regulatory measures to steer its troubled domestic industry back on course.
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