This article was originally writen by the Chinese media Yuanchuan Research (远川研究所) and translated by PandaYoo.com after it was licensed. Copyright belongs to the original author and it is forbidden to reprint without permission.
Author: Yao Shuheng (Yuanchuan Research consumption Group).
Support: Kou Xing (Chief Food and Beverage analyst of Huaxi Securities).
Editor: Li Motian / Boss Dai
In the summer of 1953, an American media made a piece of big news: Physicist Joan Hinton, who disappeared five years ago, defected to China with top-secret nuclear bomb technology.
Joan Hinton is a talented girl who was recruited into the Manhattan Project at the age of 23. But in August 1945, after Joan Hinton saw the destructive power of the atomic bomb engulfing hundreds of millions of lives, she refused to stay in the army and applied to be transferred to the University of Chicago. She followed Nobel laureate Fermi as a Ph.D. student and became Yang Zhenning’s senior sister apprentice. She was also the only girl in Fermi’s team at that time.
If she continues to pursue further studies, Joan Hinton can win the Nobel Prize. But in 1948, when she found that her scholarship and scientific research funds were all provided by the military, she chose to drop out of school and traveled across the ocean to Yan’an with an invitation written by Soong Ching-ling herself. Here, she met her boyfriend Owen Engst, who came to Yan’an earlier.
Owen Engelster is also an idealist. He studied at Cornell University and came to Yan’an to join the revolutionary tide after reading Edgar Snow’s Red Star Shining China in 1946. After being reunited with Joan Hinton in Yan’an, the two married in 1949 in a dilapidated cave in Wayaobao, Yan’an, accompanied by the music that “Unity Is Strength“.
In the following 60 years, the two men devoted their lives to China. But unlike the nonsense of the American media, they have done only one thing in 60 years: raising cows.
At that time, there were only more than 30 Holstein cows in Yan’an, and Irving Engelster, who had majored in agriculture and animal husbandry, was one of the few people who could serve cows. When Hu Zongnan attacked the Shanxi-Gansu-Ningxia Border region, some soldiers wanted to abandon or even kill these cows when they turned to war. Fortunately, Irving Engelster rushed out in time to stop them and said : these cows are the hope of new Chinese agriculture.
When Joan Hinton came to Yan’an, she gave up other positions to join her husband’s career. Having worked on the atomic bomb, raising cows is an easy-peasy work for her. While others were still using buckets to carry water and guillotine to cut grass, she built a water lift, a straw cutter, and a harvester. During the first five-year plan, the two vowed to let poor Chinese drink fresh milk and no shoddy milk, even one kilo .
They worked hard for 50 years, moving to pastures in Shaanxi, Inner Mongolia, and Beijing, breeding cows, and laying milking equipment for farms. At that time, Chinese Holstein cows generally produced 3, 000 to 4, 000 kilograms of milk a year, but their cows produced more than 9000 kilograms a year. The two also developed China’s first set efrigerated milk cans, which greatly improved the transportation distance and shelf life of fresh milk.
Unfortunately, too few people try to raise cows and too many people take shortcuts to get rich. Around the year 2000, China’s dairy industry has developed by leaps and bounds. Mengniu, which pursues “market first, then dairy factory” and Sanlu, “cows go to the countryside and milk to the city”, take the top spot alternately. Behind their rapid expansion at that time, they had one thing in common: they did not raise cattle themselves, but only received milk from farmers.
The huge demand for milk has directly promoted the imminent battle for fresh milk everywhere, adding various chemicals to the milk to meet the milk market-purchase standards, painting farm cattle as black and white as cows to sell, quickly rising prices and reselling them after buying cows, and other chaotic phenomena also emerge one after another. The retail investors who raise dairy cows, the milk stations that do not refuse to come, and the desire to get rich quickly, quickly engulfed the industry.
Irving Engelster died in Beijing in 2003 at the age of 85. His ashes, who enjoyed the vice-ministerial treatment, had already entered Babaoshan, but Joan Hinton, following his will, “buried where the cow could be seen in the cow farm,” insisted on taking the urn back from Babaoshan and buried him under a tree at the Xiaowangzhuang Farm in Changping, Beijing, where they had worked for decades.
Did the vows of the two come true? In the second year of Irving Engst’s death, a “big head baby” incident broke out in Fuyang, Anhui province, where hundreds of babies were malnourished by eating shoddy milk powder. Sanlu, a leading company, was on the blacklist. For this reason, Sanlu Chairman Tian Wenhua personally set up a crisis public relations group, and four days later Sanlu disappeared from the blacklist .
Over the next four years, shoddy milk powder continued to be delivered to the mouths of Chinese children until the melamine incident broke out in 2008.
01. The plight of food shortage
In June 1960, welfare houses in Shanghai were crowded with abandoned infants and young children.
At that time, it was a difficult period of three years, and the adults themselves did not have enough to eat, so they had no choice but to send their children to welfare homes in big cities. People thought that there would be food in a big city like Shanghai, but they did not know that at that time the central government had continuously issued documents of the urgent food supply in Beijing and Shanghai and that Beijing had only enough grain to eat for 10 days. Shanghai’s grain stocks have almost been exhausted .
Shanghai is unable to support more and more children. In an emergency, Kang Keqing, then director of the All-China Women’s Federation, turned to Zhou Enlai for help and asked for the transfer of milk powder from Inner Mongolia. After much deliberation, Zhou Enlai decided to send malnourished infants directly to Inner Mongolia and be raised by herdsmen . By 1963, Inner Mongolia had received about 3000 orphans from Shanghai and its surrounding areas.
This sad past reflects the plight of China’s dairy industry before the reform and opening up. For a long time, China has been a largely agricultural country, with more farming cattle, fewer beef cattle, and fewer dairy cows. In Yan’an in the 1930s and 1940s, relying on the pastures seized from the war and dozens of cows donated by international friends, the daily production of fresh milk was only enough for the wounded and some babies to drink a small cup.
After the founding of the people’s Republic of China in 1949, there were only 120,000 dairy cows and four dairy factories among the 500m Chinese people. Wang Zhen, the founding general with experience in large-scale production in Yan’an and the then minister of land reclamation, ran around to develop the dairy industry. Almost when he met people, he said: “to make the people healthy, to help the babies grow an inch taller, and it is not possible to eat only rice and millet. We should drink more milk and vigorously develop dairy cows.”
But in China, there are natural difficulties in raising cows. The first big problem is that the previous domestic cows are not very good.
The most productive cow in the world is Holstein Cow, which can produce 10 tons of milk a year, but its origin is not in China. In the past, domestic milk basically came from yellow cattle and buffalo, but it was usually used for farming, and only 1-2 tons of milk were produced every year. Besides, as most of them eat rice and corn stalks, the nutrition of the milk produced is not enough. To solve this problem, we can only rely on the introduction of breeding cows.
In April 1999, Zhu Rongji went to the United States for WTO negotiations. When he returned home, he brought back a Holstein bull named “Dragon”. The bull comes from a wealthy family, and his mother once won the North American cow beauty pageant. After coming to China, the cow lived up to expectations and was not only ready to mate for a long time, but also allowed scientists to clone “Da long” and “Erlong” to improve Chinese cows side by side.
Another problem that has plagued China’s dairy industry for a long time is that “Milk from Northern Area” cannot be transported to the south. Domestic ranches are in the north, while the main markets are along the coast and in the south, but before Joan Hinton developed refrigerated milk cans, there was no refrigeration and transportation technology. Therefore, for most people at that time, milk was used by female stars to take a bath and veteran cadres to replenish their health.
To avoid transportation problems, Shanghai, Guangzhou, and other places have built cowsheds and food factories in the suburbs to produce fresh milk and milk powder. But constrained by a weak economy, supply is still limited.
A technician at Jiaotong University, who was the director of the Shanghai Yimin Food Factory at that time, led the food factory to produce Guangming brand milk powder and lower-cost milk substitute powder successively in 1950. But 20 years later, when he returned from Romania to visit Wang Daohan, what he brought is Romanian milk powder but Guangming. This could be the earliest Brought-From-Forgein milk powder in China’s history which the engineering man of Jiaotong University made..
This situation did not begin to ease until after the Reform and Opening-up. In 1983, the United Nations and the European Union began to assist China’s dairy industry for 20 years. But the way is neither the introduction of high-quality dairy cows, nor the introduction of production and packaging technology, but a formula : using skim milk powder and anhydrous butter, mixed with some fresh milk, blending “reduced milk” which is highly similar to fresh milk.
At that time, not only the milk from the mainland was blended, but also in Taiwan, which received assistance. When the writer Long Yingtai gave a speech at the graduation ceremony of the School of Medicine of the University of Hong Kong in 2011, he once talked about an experience of his youth: when he went to study in the United States in 1975, the first thing that surprised him was : how come the milk that Americans drunk is not soaked in milk powder?
Fresh milk is not easy to store and transport, but processed into a powder state (commonly known as “big bag of powder”) can be easily imported into China, combined with milk powder blending technology, so that more people drink scarce milk. But the side effect is that blending milk powder has become natural in China, and has even trained a group of “milk blending experts” who can make milk tastier than fresh milk.
Then, no one thought that the best cause would produce the worst.
02. It sucks.
In the early summer of 1998, Sanyuan, a dairy seller in Beijing, joined hands with Sweden Tetra Pak, which makes packaging boxes for milk, and sponsored more than 200 experts to hold a “China Milk Science Forum” in Beijing to discuss why the average height of the Japanese is 10 centimeters taller than that of the previous generation. The experts discussed for several days and finally agreed that the Japanese grew taller and depended on drinking milk.
After the meeting, he immediately issued the well-known slogan : a glass of milk, a strong nation.
The following year, the Ministry of Agriculture and the Ministry of Education issued an order to kick off the vigorous “student milk” program. Education authorities in major cities are responsible for purchasing so that students can drink a glass of milk every day. The demand from schools, coupled with parents who do not want their children to lose at the starting point, has created a huge market in which whoever can produce the cheapest milk fastest can be the winner.
In the year when the student milk market emerged, the 41-year-old Niu Gensheng left Yili, where he had worked for 15 years, to start Mengniu. At that time, he only had 10 million yuan, but he decided to spend 3 million yuan to sell advertisements: first, he won more than 500 outdoor billboards in Hohhot and painted them with “(We are) the second Brand of Inner Mongolia Dairy Industry”; then he bought the time slot on CCTV and shouted, “(We are going) to be the best dairy enterprise in China.”
At that time, Mengniu was actually an empty shell, with no factory or pasture, so it had to buy fresh milk from a dairy dealer, give it to a contract factory for processing, and then sell it with a brand name. But this does not prevent it from getting a steady stream of orders after it has been on CCTV. Niu Gensheng’s strategy of “doing the market first and then the factory” was a great success, with 3 million advertising fees in exchange for 40 million of sales.
To grab the speed without raising cattle, Mengniu is a newly recruited and Sanlu is the elder market participant.
Tian Wenhua, the boss of Sanlu, worked as a veterinarian, accountant, office director, and party committee secretary in the factory when Sanlu was still a “Shijiazhuang City Dairy Factory.” After taking charge of Sanlu in 1986, he set the strategy of “cows go to the countryside and milk to the city”. He went to the countryside to collect milk, processed it, and then sold milk powder in the city. From 1993 to 2007, Sanlu milk powder ranked first in the country for 14 consecutive years.
But the foundation that supports the rapid development of Mengniu and Sanlu is the weak aquaculture industry. At that time, the vast majority of domestic milk sources came from more than 2 million retail investors all over the country, of which more than 80 percent had less than five cows. After the cows produce milk, retailors usually sell the milk to the milk station, which is then transported to the dairy enterprises.
The rapid growth of demand, the competition for milk sources of dairy factories, relatively loose supervision, gave way to the upper reaches of the industrial chain of dairy farmers, milk stations, and full of the characteristics of the times “milk master”, soon entered a state of disorder.
Yili, Mengniu, Sanlu, and other manufacturers scramble to seize the source of rural milk so that cows become chickens that can lay golden eggs. At that time, when the big factories went to the place, they often offered 20% higher than the market price to compete for the fresh milk that dairy farmers had been rejected by other factories . This also made Inner Mongolia herdsmen welcome the new trend at that time. A kilogram of milk could be sold for 1.6 yuan to 1.75 yuan. Straw, grass, and other feeds were available everywhere. A cow could earn 4,000 to 5,000 yuan a year, and each calf cow could be sold for 4,000 to 5,000 yuan .
However, such a business, which can make almost no profit, will soon be spoiled.
In 2000, Jiang Weisuo, who later became a famous “anti-fake person in the dairy industry”, began to set up a “cattle care center” and a milk station in his hometown of Yangling, Shaanxi Province, and planned to raise cattle centrally. At that time, the milk station did not need an industrial and commercial license or a hygiene permit, and it could be opened by setting up a shed. But the 40 cows he bought were all fake cows made of yellow cattle painting dyed, breast-riched, and tooth brushed .
At that time, cows were a popular money printing machine, and the number of breeding stocks soared from 6.52 million in 2002 to 12.2 million in 2007. But the market is full of fake cattle painted black and white, as well as stupid cattle with chaotic breeding lineages. The damage was far from self-employed. Zhaoguang Farm in Heilongjiang Province, the country’s first state-owned mechanized farm, was also hit by the introduction of 300 dairy cows, 62 of which fell ill before reaching Heilongjiang, and another 70 fell ill the following year. 109 were not in estrus and 300 cows were almost wiped out .
The quality of the milk produced by these cows can be imagined. However, in need to meet the fresh milk substandard, the “milk wizard” who is active in the fields has his own tricks: low fat, adding fat powder; bacteria exceeding the standard, adding antibiotics; low concentration, adding whey powder; sour, neutralizing with alkali; low protein, mixed with melamine. After adding these things, the milk can only be guaranteed for six or seven hours. Therefore, hydrogen peroxide should be prepared in the car where the milk is sent for inspection, and pour it in quickly before the inspection .
However, the milk powder processed with this kind of milk is very popular with sellers because of its low production cost and high sales profit. At that time, farmers’ markets and supermarkets earned only one or two yuan for selling a bag of regular milk powder, while low-quality milk powder sold cheaply, but one bag could earn four or five yuan.
The evil consequences of corruption from the source to the end soon fell on the children. In 2003, there was a quality problem with the soybean powder used by Anshan Baorun Dairy to produce students’ soy milk, which caused 2,556 primary school students in Liaoning to suffer from food poisoning after drinking “high-milk nutrition student soy milk”. In 2004, the “Bighead Baby” incident broke out in Fuyang, Anhui Province. Hundreds of infants had abnormally large skulls after eating milk powder with nutrients such as fat and protein, which was far lower than the national standard and containing impurities such as nitrite.
After the big head baby incident was exposed, Fuyang issued a warning announcement to 33 brands of shoddy milk powder on the inspection results, among which Sanlu milk powder ranked . Sanlu’s reaction was quick. Tian Wenhua personally led the team to do public relations and even wanted to withdraw the manuscript of Xinhua News Agency , which finally succeeded in making Sanlu disappear from the blacklist. Parents who were kept in the dark let innocent children eat problematic milk powder for another four years.
In 2008, 22 dairy companies and 69 batches of milk powder were found to have melamine, resulting in at least six infant deaths and 300,000 children suffering from kidney stones.
03. Ten-year leap forward.
In January 2015, People’s Daily published a comment entitled “Stop the dispute over the doctrine of pouring milk and killing cows” .
People’s Daily came forward to discuss the matter of “capital and society”. Since the winter of 2014, dairy farmers in Beijing, Hebei, Inner Mongolia, Qinghai, Henan, Guangdong, and other places have poured out freshly produced milk.
The word “pour milk” once appeared in textbooks of several generations, saying that during the Great Depression in the United States in 1929, dairy farmers poured milk into the Mississippi River, reflecting the “insurmountable basic contradiction of the capitalist system.” and now it’s happening in China. Farmers who raise cattle with their heads down every day do not know why dairy enterprises do not want good milk.
Major public events often promote the reform process of the industry. After the Melamine Incident, the common quality problems of milk powder were quickly traced back to cows and dairy farmers: the production of high-quality milk can not rely on small workshops but on large pastures.
In October 2008, China’s State Council took the first step of reform: milk stations can only be set up by dairy companies, farms, and local cooperatives . Dairy farming has once again entered the era of cooperatives, and dairy farmers need to send their cows to “care centers” where cameras are installed in pharmacies, barns and milk parlors to pay trust fees and feed fees, so this model is jokingly called “raising cows like pigs.”
After the State Council sounded the bugle, various ministries and commissions quickly followed up. The Ministry of Agriculture and the Ministry of Finance put forward the “Action to revitalize the Development of Alfalfa Dairy Industry”, requiring Chinese dairy cows to eat alfalfa instead. Alfalfa, known as the “king of pasture”, has a protein content of up to 22% and can increase milk production of dairy cows. Cows that were originally fed corn produce 5-7 tons of milk a year and 8-10 tons after feeding alfalfa. However, domestic alfalfa is scarce and requires to import millions of tons from the United States every year at a high price.
From cow care to pasture, the cost of raising cattle by retail investors has risen rapidly, and a large number of cattle farmers have dropped out of farming and become milk station managers instead. But regulatory reshaping of the industry continues. Thirteen departments, including the National Development and Reform Commission and the Ministry of Agriculture, have issued the outline of the Plan for the rectification and Revitalization of the Dairy Industry, subsidizing farms with a storage capacity of more than 300 cows, to increase the proportion of dairy farms with more than 100 cows to 30% by the end of 2011. 70% of dairy enterprises should be self-sufficient.
This set off a vigorous battle for milk. Mengniu, which did not raise cattle before, is now led by Vice-Chairman Deng Jiuqiang in modern animal husbandry, spending 4 billion yuan to build 14 pastures with a capacity of more than 10,000 heads; Yili invested 1.4 billion to build seven pastures, and Sanyuan bought Hebei pastures of Sanlu. The four golden milk belts of Inner Mongolia, Xinjiang, Northeast, and Hebei, as well as emerging milk belts such as Sichuan and Henan, were quickly carved up in just a few years.
At the same time, large-scale farms need to bear the cost of self-examination and random inspection of 64 indicators, including melamine. In 2008, Chinese dairy companies accounted for 5% of the total cost of testing. By 2012, that proportion had soared to 12%. At that time, Guo Benheng, president of Guangming Dairy, once said at the meeting of the Dairy Industry Association : spot checks were conducted more than 2600 times in half a year, and such spot checks would kill enterprises.
Tedious breeding and testing procedures make the cost of raw milk in China as high as 3.7 yuan/kg, much higher than 1.5 yuan/kg in the United States, New Zealand, and other places. At the same time, since 2013, China has successfully signed tariff reduction agreements for dairy products with New Zealand, the Netherlands, Australia, and other countries, and the price of “large packets of powder” made from fresh milk powder has dropped sharply. The cost, insurance and freight (CIF) price of imported milk powder is 10,000 yuan/ton lower than that of domestic milk powder.
Due to the huge price gap, domestic dairy enterprises began to import large packets of powder instead of purchasing local fresh milk. The price of domestic raw milk has fallen all the way from 4.26 yuan/kg in 2013. The weak retailors have no choice but to pour out the fresh milk that can not be sold at a loss, or even kill the cattle, and withdraw from the aquaculture industry forever.
Large farms can not escape the fate of being exploited by downstream dairy companies using imported large packets of powder at low prices. China’s four largest farms, modern animal husbandry, which is almost exclusively for Mengniu, lost 1.7 billion in 2016 and 2017; western animal husbandry lost money for five consecutive years in 2015-2019; Zhongding animal husbandry was delisted; and Huishan dairy’s financial fraud was exposed, wiping 85 percent off its market value in one day.
The biggest beneficiaries of this supply-side reform to comprehensively improve the quality of dairy products are downstream dairy enterprises.
04. The king of milk powder.
On November 21, 2019, China Feihe, a domestic milk powder company, was shorted just eight days after it was listed in Hong Kong.
The leading short seller is GMT Research, a Hong Kong investment house that once shorted Alibaba and JD.com and thought the sport brand Anta should have plummeted by 80 percent. This time it aimed the gun at Feihe, the leader of domestic milk powder, believing that Feihe’s revenue would double to more than 10 billion between 2016 and 2018, and the market share of high-end products would be as high as 25%, far surpassing foreign brands such as Nestl é, Wyeth and Mead Johnson.
The agency said : Feihe is “too good to be true”. Obviously, Hong Kong institutions, which are too young and too simple, do not understand the iron law of the industry that “food safety incidents will eventually benefit the leaders”.
After the Melamine Incident, Chinese parents’ trust in domestic milk powder fell to rock bottom, preferring to travel long distances to snap up milk powder from abroad rather than buy domestic brands, even forcing places such as Australia to impose restrictions on the purchase of milk powder. Coupled with the rise of cross-border and online shopping, high-priced imported milk powder continues to enter China, gradually squeezing cheap domestic milk powder to death.
In 2007, foreign brands accounted for 40 percent of China’s milk powder market, which rose rapidly to 60 percent in the following years, and even reached 74 percent in first-tier cities. But in China, the main battlefield of mass consumer goods has never been in first-tier cities. Ordinary cities with large newborn populations and high fertility rates are the keys to the success of the milk powder market.
Feihe and Yili of local brands are well aware of this. When Wyeth and Abbott were calling the wind and rain in first-tier cities, domestic milk powder brands that survived the storm of industry rectification and reform started a counterattack war in the vast ordinary market.
First, ultra-high product pricing. Milk powder is bought by parents and eaten by children, and parents always tend to buy good ones for their children. After many safety accidents of milk powder, in the minds of Chinese parents, cheap milk powder has been about equal to fake and shoddy products, and can even be said to be suffering from “phobia of cheap milk powder”.
Aware of the psychological changes of their parents, domestic milk powder bid farewell to the previous practice of competing for low prices, competing to raise prices, but selling better and better. The market share of high-end and ultra-high-end milk powder increased from 22% in 2014 to 43% in 2019, and the average price rose sharply from 336.3 yuan/kg to 438.2 yuan/kg.
This directly makes the gross profit margin of Feihe and Heshengyuan, which sell milk powder, close to 70%, while that of Yili and Mengniu, which mainly sells liquid milk, is less than 40%.
Second, occupy the channels of mother and child. Milk powder is a highly standardized product that seems to be suitable for e-commerce sales channels. But in fact, 60% of the milk powder is sold in offline mother and baby stores, and e-commerce accounts for less than 30%.
All of them will have this strange online-offline ratio, mainly because of information asymmetry. After all, the vast majority of parents are not nutrition experts, in the face of a dazzling array of milk powder, listening to sales explanations and recommendations is obviously more vivid than reading materials online. Also, as children stop eating milk powder when they grow up, and the consumption cycle of milk powder is short, mother and baby stores must continue to hold activities to attract new parents.
Therefore, thousands of dealers and year-round parent-child activities are the core technology of domestic milk powder brands.
For example, Feihe, which makes short sellers feel “too good to be true,” has an iron army of tens of thousands of shopping guides stationed in more than 100,000 retail terminals and mother-and-child stores across the country, requiring dealers to hold parents-child campaigns no less than once every two days. moreover, the cost of each event will boost sales by 10 times, and if it fails to meet the standard twice in a row, it will be replaced.
Under such a market net, Feihe can hold more than 500,000 parents-child campaigns a year, and it is not surprising that this brand sells tens of billions of milk powder. At the same time, domestic milk powder, which occupies the channels of mother and baby stores all over the country, has also picked up its market share and began to compete with imported brands.
After ten years of leaps and bounds in breeding, testing, and supervision, domestic milk powder has long bid farewell to the messy era of selling a few yuan per bag in the farmers’ market. In 2019, the market size of milk powder in China is as high as 175.5 billion yuan, with an average price of 250 yuan / 900g, which is not only much higher than the world average of 150yuan / 900g but also higher than that of the United States, Britain, Singapore, Japan, and other developed countries .
In other words, Chinese people are now drinking almost the most expensive milk powder in the world, which has to be said to be a kind of sadness.
At a time when aging is about to attack, every child is the most precious asset of China in the future. Although after ten years of rectification and the popularization of industrial production, there are few quality problems in regular domestic milk powder, there are still public incidents such as “protein solid drinks posing as milk powder” from time to time, stirring up the sensitive nerves of parents and public opinion.
Protecting children and letting parents stop worrying is the right way out for China’s milk powder industry. I am afraid it will take a long time for China’s milk powder industry to redeem itself.