China Mengniu's steps to consolidate dairy industry are welcome

The recent decisions by China Mengniu to take over or partner with domestic and foreign dairy companies is a welcome move by one of the country's industry leaders to consolidate in a sector that has yet to recover fully from the 2008 scandal over melamine-adulterated milk.

In the last two months, Mengniu has announced it will form a strategic joint venture with French dairy-foods maker Danone, expand its stake in China Modern Dairy and take over baby-formula producer Yashili International. These ventures will not only help Mengniu establish itself as a dominant market player, but lead the way to much-needed consolidation. Investors have reacted favourably to Mengniu's decisions; with each announcement, its stock price received a boost.

Since the 2008 scandal, in which at least six babies died and more than 300,000 others were made ill, many suppliers have been shut down. But quality control and the monitoring of the supply chain remains a serious challenge.

A key difficulty with the industry has been its fragmented supply chain, with small farm producers, which makes it difficult, if not impossible, to ensure consistently safe and high-quality supplies.

To rebuild China's dairy industry, public confidence must be restored and regulations toughened with serious enforcement. These have not been achieved. For example, the row over baby milk powder in Hong Kong, with mainland visitors and traders buying up local supplies, was a direct consequence of the loss of confidence in mainland suppliers. Many mainland parents do not trust even foreign brands made in China, preferring instead supplies sold in Hong Kong and manufactured elsewhere.

With fewer big industry players, companies and regulators must work together to maintain quality control and boost confidence. Companies must realise that tougher regulations are good for business. Mengniu's recent commercial decisions are helping to move the industry in the right direction.