Mengniu milks the fat of the land amid dairy revolution
An enormous modern glass and concrete palace complete with fountains and a well-appointed guest house rises out of the arid plains less than an hour's drive from Hohhot, the provincial capital of Inner Mongolia. This is the house that milk built. Or more exactly, the house that China Mengniu Dairy's Hong Kong initial public offering proceeds paid for.
Under the tutelage of maverick director and president Niu Gensheng, who likes to quote Mao Zedong and runs his company like an army, Mengniu has grown from nowhere to become the largest dairy company in China in just six years.
Like Mr Niu, who began his career 20 years earlier as a bottle cleaner at state milk company Yili, the company had an inauspicious start. It was established with just one million yuan by Mr Niu and other former Yili colleagues after he was ousted as vice-president over policy disagreements.
Today, despite serious concerns over the quality of milk products in China, Mengniu is riding the crest of a digestive revolution. As incomes rise, and China continues to open to the world, eating habits are changing rapidly.
Mainland per capita dairy consumption has grown 30 per cent for the past four years and is expected to grow at least a further 15 per cent this year. Despite the rapid growth, per capita dairy consumption in China is still about 10 kg a year, compared with the world average of about 100 kg. That has got everyone very excited about prospects, and brought every dairy company in the world looking for a slice of the cheese.
Mengniu's first-half net profit grew 34 per cent to 247 million yuan, well ahead of its mainland-listed peers Bright Dairy, whose profits grew 3 per cent to 151 million yuan, and Yili, which grew 12 per cent to 171 million yuan.
'Mengniu is the most innovative dairy products producer in China,' according to BNP Paribas Peregrine head of China research Erwin Sanft. 'Its combination of aggressive marketing and innovative new products - a recent example being the promotion of its SuanSuanRu yoghurt drink through the SuperGirl singing competition - saw its market share jump from 22 per cent to 26 per cent in the first half.'
One of those new products was proudly launched late last month at the company's sixth anniversary celebration, held at its Inner Mongolia headquarters. Bottles of 'Special Brand Number 6' were parachuted in to be distributed to guests assembled in the hot Mongolian sun, while Mr Niu signed a 540 million yuan deal with European dairy giant Arla to build a powdered milk plant.
The vast bulk of China's milk comes from peasant farmers who graze their own cattle and sell the milk to Mengniu and its competitors. One such farmer is Ren Biao. He bought four cows for about 16,000 yuan each two years ago by taking advantage of a government loan scheme. A healthy cow can make its owner 3,000-4,000 yuan a year, but Mr Ren says his cows produce nothing.
'The cows don't have enough good grass to eat,' he says, kicking the dusty soil. 'But I still have to pay the government back from what I make growing corn.' To add insult to injury, he says a new cow now costs just 4,000 or 5,000 yuan a head.
Needless to say, Mr Ren is not one of the new wealthy middle class whose diets increasingly include milk, cheese and yoghurt. As with every other industry in China, predictions of enormous future leaps in per capita consumption must take into account the reality that the majority of the Chinese population is more akin to Mr Ren than Mr Niu.
Another big concern for the dairy industry - but one that it tends to ignore - is the massive problem of desertification. A couple of hours drive from Mengniu's headquarters, the dusty grassland ends and the desert proper begins. Cows are everywhere, right up to the edge of the creeping sands.
According to Chinese government statistics, by the end of last year, the area of desertified land in China totalled 2.63 million sq km, or 27.5 per cent of total land area. Until two years ago, the deserts in Inner Mongolia were growing as fast as 3,436 sq km a year, but abnormally high rainfall has slowed the trend in the last two years, according to Zheng Rui, head of the Asian unit of the United Nations Convention to Combat Desertification in Bonn, Germany.
'Desertification has actually been reversed in some areas, but only because of the extra rainfall,' he says. 'The main problems in Inner Mongolia are still overgrazing and overpumping of the underground water table.'
The air around Hohhot is heavy with coal smoke and the horizon is punctuated with the extinct chimneys of backyard furnaces - the latter a poignant reminder of the incredible folly of the Great Leap Forward in the late 1950s. Though Mao's economic policy of mobilising the masses to produce steel led to widespread famine and ecological disaster, many of today's residents have no idea of the chimneys' significance.
When asked what Mengniu is doing about the problem of desertification, Mr Niu responded that the company has introduced modern rotational farming techniques in order to minimise damage to grasslands.
On a visit to the company's impressive model farm, cows were being fed grain in a controlled, indoor environment that boasted such bovine luxuries as soft mattresses, automated grooming machines, classical Mongolian music and automatic milking robots that allow cows to choose when to be milked.
As the first animal welfare conscious dairy farm in China, this facility is a world away from Mr Ren's dusty roadside paddock, and it makes up just a tiny fraction of the increasing volumes of milk Mengniu is producing.
