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Tariff cuts won't reduce price of baby formula

2011-12-22 17:02    Ecns.cn    

(Ecns.cn)--The price of imported baby formula will soar by up to 10% in spite of tariff cuts starting next year.

The Chinese Ministry of Finance announced on December 15 that tariffs on 730 categories of commodities – including infant milk powder – will be reduced to an average of 4.4% starting on January 1, 2012, less than half of the most-favored-nation tariff rate.

But lower tariffs will not result in lower prices, since major foreign brands of infant formula, including Wyeth, Biostime, Ausnutria and Nestle, will increase the prices of their products by around 5-10% in December.

The price of a Wyeth Illuma Stage One milk powder product with a net weight of 900g will increase from the current 378 yuan ($60) to 408 yuan ($64.5%) by the end of this month. Wyeth attributed the price hike to an increase of production costs caused by higher quality and nutrition standards.

Zhao Xiaoli, a housewife and mother of a one-year-old boy, feeds her son with Ausnutria Allnutria milk powder, which costs her about 2,000 yuan ($316) a month. She thought the coming tariff cuts would bring some savings, but later heard that the price of the milk powder would soon go up from 298 yuan ($47) to 328 yuan ($52) per tin. She says she has already stored a few extra tins before the price becomes too expensive for her.

Reports from the Guangdong Price Monitoring Center show that the price of imported infant formula went up by 62% from 2006 to 2009.

Cao Ming, deputy secretary general of the Shanghai Dairy Association, says higher production costs are an "untenable" explanation for price hikes. He says the global market has seen a downward trend in milk prices since August, and even if there is a slight increase of raw material and transport costs, the companies should be able to cover them since their gross profit margins are usually as high as 30-50%.

"Price rises are a strategy by the Chinese market. It will not reduce the companies' market shares sharply, but will boost their profits," says Cao.

Statistics from Chinese Customs indicate that foreign dairy companies have an advantage in brand value and technology, and occupy 80% of the high-end formula market, which leaves very limited space for their Chinese rivals.

A report from ACNielsen, a leading global marketing research firm, reveals that five foreign companies, namely Dumex, Mead Johnson Nutrition, Abbott, Wyeth and Nestle, together hold more than 50% of the shares in the Chinese milk powder market.

Wang Weiqing, a scholar at Shanghai Jiao Tong University, says foreign formula brands, like imported cosmetics, have developed clear business strategies in China. Their products will remain expensive despite tariff reductions to maintain their high-end market position.

Still, Chinese consumers favor imported infant formula over domestic ones. China's dairy industry suffered a heavy blow after a scandal in which formula tainted with melamine killed at least six infants and sickened thousands in 2008. The chemical used in plastic manufacturing was added to the milk powder to mimic high-protein additives.

Gu Jun, a professor at Shanghai University, says China's dairy industry needs to increase the transparency of its production process and prove the quality of its products to consumers in order to reclaim their trust.

Imported baby formula is not always safe either. Meiji Dairies Corp of Japan announced earlier this month that radioactive cesium was found in its baby formula. Though this product was not officially sold in China, it was widely available on various shopping websites.