Supply is at core of baby milk row

PUBLISHED : Friday, 12 July, 2013, 12:00am
UPDATED : Friday, 12 July, 2013, 3:09am

Five years after the melamine scandal, distrust of baby-milk formula produced on the mainland still distorts the market at home and abroad. Trusted foreign brands are tempted to abuse their pricing power, and demand from mainland parents creates shortages elsewhere, particularly in Hong Kong. At last, however, complementary cross-border initiatives could make a difference.

Mainland authorities announced an investigation into whether suppliers, including five big foreign firms, have been engaging in monopolistic behaviour and inflating prices - a probe since extended to Swedish packaging giant Tetra. Then Hong Kong's Food and Health Bureau said it had formed a panel to review the supply of infant formula in an effort to stop shortages - a move that could lead to the lifting of the two-tin limit for departing travellers.

The mainland probe has apparently had quick results, with baby formula firms Nestle of Switzerland, US-based Mead Johnson and France's Danone announcing double-digit price cuts, which will increase the pressure on competitors to review mark-ups. If the probe was designed as a scare tactic, it may have worked. But the key question is whether the central government is serious about a badly needed shake-up of an industry responsible for supplying an essential commodity.

The Hong Kong review points the way forward by focusing on supply chain factors. A government spokesman said supply chain failure had a major bearing on the serious shortage of powdered formula early this year. Likewise, mainland authorities should look at supply chains that have made products so expensive. There are too many layers of middle men in a system that is ultimately controlled by the government. In the long term, supply, quality and pricing problems will best be addressed by consolidation of an industry beset by fragmentation and small, inefficient producers. In this respect the move by China Mengniu to take over or partner with domestic and foreign dairy companies is welcome.