China’s crackdown targets ‘food safety, not Aussie dairy’

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China is certainly not targeting Australian dairy products, one of the leading international experts on China’s food sector says, but it is still developing the skills and regulations needed to ensure high standards in what is a new and rapidly growing industry.

David Mahon, the Beijing-based chairman of Mahon China, a private equity management company that advises foreign companies on China’s food sector, said China would not waste political and economic capital on such a campaign.

“Australia is a consumer star here, with its reputation for quality and safety sky high,” Mr Mahon said, adding there was “no reason” for the Chinese government to throw a spanner in the works.

But both Australia and New Zealand had failed to capitalise on their China opportunities because they had focused on short-term trading rather than building brands, he said.

The dairy industry is nervous following the suspension of the Chinese licences to import from Parmalat’s Clarence Gardens milk production centre in South Australia, and Bellamy’s — for infant formula and other products — from Camperdown Powder in Victoria.

Jan Cameron, who owns 18 per cent of Bellamy’s shares, said last week: “I’d love to get inside a Chinese baby formula factory and see what standards of practice they have there.”

Mr Mahon, a New Zealander, said that “within China, the authorities are being even more rigorous. They have closed down hundreds of plants. And factories in countries such as The Netherlands and Germany have also been told they don’t meet standards, for reasons that seem odd,” Mr Mahon said.

China depends on imports for about a quarter of its dairy products, which are becoming rapidly more popular and, in the case of formula, important, especially with the influential middle class. So slowing that flow is not a popular move.

“At the same time, the government is driving a revolution in food safety,” said Mr Mahon, following a succession of scandals including over the tainting of milk with melamine. “China has been trying to upgrade and better govern its domestic industry.”

Regulating imported products is complicated by the “plethora of fake products, particularly claiming to be from Australia and New Zealand, particularly infant formula”.

In a survey conducted by Mahon China, about 100 products were discovered falsely claiming to be from Australia or NZ. This, said Mr Mahon, was another area where the Chinese authorities were clamping down.

Part of the problem, he said, was that some companies — he gave Bellamy’s and a2 as examples — “which have very good products”, sell a significant amount through the daigou route.

This means Chinese students, tourists and others obtaining products from retail outlets in Australia and NZ, so that they have been entering China’s porous markets in a way previously uncontrolled, but which the government “is now trying very hard to govern”.

When distribution systems are not clear, concern grows in China about loss of tax revenue, and about safety.

From January 1, China will determine which formula producers will be approved.

“The number will be reduced, and that will enable the government to keep an eye on what’s coming in,” he said.

This was not bad news for Australian or NZ producers, but presented “a huge opportunity for focused companies, as long as they place themselves well and govern how they are distributed and build brand awareness and loyalty”.

It was important to have verifiably controlled supply chains, he said. Products bought from contracted suppliers, and those randomly distributed, may struggle to gain approval.

If dairy products first come on the Chinese market via online commerce, he said, “consumers perceive the companies want to shift product quickly, and expect it will be discounted.

“It’s hard to gain margins without building brand awareness first. People want to know the provenance.”

Consumers often seek first to encounter the products in stores, and then might photograph them with their phones and order them online.

Mr Mahon also said the inspectors deployed to check on international sources “are not deeply experienced, compared with their equivalents, say, in Australia”.

Rather, “China is stretched on that front”, which can lead to misunderstandings.

“It’s not a trade war, it’s genuinely about food safety.”

Giving a global context, Mr Mahon said six years ago the perceived rate of growth for dairy was such that the world went into oversupply, with the US newly exporting, NZ opening new farms, and idle capacity in Europe being brought back into production because prices of UHT and formula in China had shot up.

“Suppliers were selling into China for three or four times the prices in their own countries.”

The bubble subsequently burst, especially as Chinese tourists began to compare prices overseas.

Australia, he said, “is looked upon by Chinese consumers across the board as a highly reliable, safe producer. Australian beef, for instance, has had an incredible run”, although US beef was now returning to that market.

Mr Mahon is disappointed that Australia has not taken further advantage of its good name in China. “It could have been doing a lot more since the resource boom ended, I’ve been waiting for its food products to come into their own, with companies pitching accurately.”

He said Australia could have dominated the infant formula market if more had been done to build brands and distribution infrastructure, but it had instead been distracted by “short-term trade”.

“Both Australia and NZ have stuck products in a box, put them on a boat and waved them goodbye, and have thus failed to realise the potential margins, which they give away every day to importers and distributors.

“It is expensive to build brands here as everywhere, but you have to start with that.”

By ROWAN CALLICK
The Australian

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