The Financial Times today published a profile of Chinese dairy
giant Yili. While it might be unfair to describe the piece as “fawning,” let’s
just say it’s surprising that such a long story cites only one source aside
from the company itself, and quotes no one other than the company’s CEO, Mr.
Pan Gang. The reader gets a touching tale of how a collective dairy factory in
Inner Mongolia worked its way to national prominence despite the tremendous
challenge of having to deal with huge numbers of small, backward farmers. We
hear how fiercely competitive the dairy market is, with Yili the only “purely”
Chinese firm vying for market share with a host of foreign and joint venture
rivals. And we feel Mr. Pan’s anger about tax breaks the Chinese government
gives to foreign dairy firms, who turn around and use that advantage to
undersell local companies.
The real picture is a bit less heroic and more complex.
Despite its complaints about the unfair advantages of its international
competitors, Yili has always had lots of government support. Its expansion to
now buying milk from a million farmers (!!!) has depended on those top-down sweetheart
deals with local officials that the farmers in Yunnan were complaining about
last week. (I was expecting a more critical take on this from an article titled
“Chinese Dairies Milk The Local Advantages.”) And even if they weren’t being
rounded up for Yili by local government, farmers would have few alternatives
for their milk. Yili and Mengniu, another Inner Mongolia-based giant, have over
55% of the Chinese market, and probably a much higher percentage in the
Northeast. Economists tell us that the definition of “oligopoly” is when the
top four firms in any industry control over 40% of the market. Recent food
safety scandals are speeding up the process, Pan says, since nervous consumers
are sticking with big brands and this is driving out smaller players.
Yili’s earning for the first three quarters of 2007 reached
14.8 billion RMB. (about $2 billion) A Reuters story tells us that as of the
end of the Third Quarter, 40% of China’s dairy farmers were losing money and some were
having to kill their cows. Welcome to Modern Farming!
