Surging demand for better-quality powdered milk has also spurred imports. Customs figures show that in the first quarter of 2008 China imported 31,000 tons of powered milk, at the value of US $140 million, an increase of 5.5 percent and 95.9 percent respectively over the same period in 2007.

Huge Potential to Be Tapped

    The per capita annual milk consumption of urban residents in China was merely 27 kilograms in 2008 — the figure was even lower in rural areas. This is far below the world average of 80 kilograms, or the 200 kilograms per head in developed countries. In the U.S. the figure consumed is 260 kilograms per capita, almost ten times the rate of consumption in China. It is estimated that only 300 million of the 1.3 billion people in China regularly drink milk, leaving a vast virgin market to be explored by dairy companies.

    Since 2006 the government has launched a campaign to promote dairy consumption in an effort to enhance citizens' nutrition, under the slogan, "A glass of milk every day can make people stronger." Meanwhile, a local baby boom is taking place, lending momentum to the formula milk sector. Dairy companies see these conditions as offering an unprecedented chance to expand their business. Mengniu, for example, offered free milk to 500 rural primary schools under the "one glass of milk a day" movement, before the melamine scandal cast a shadow over the ardor for dairy products.

    One of the few domestic brands unscathed by the crisis, Sanyuan ensures its quality control by running its own dairy farms. At present it has 27 dairy farms with 35,000 cows, producing 160 million kilograms of good-quality raw milk every year. Their model, though more costly, has been copied by other companies in the wake of the melamine scandal. Mengniu merged its small, dispersed farms, and placed them under direct supervision. Bright dispensed with supplies from individual dairy farmers, which previously accounted for five percent of its raw milk supply, and has instead incorporated individual operators into standard farms.

    Kong Xiangzhi, a professor with the School of Agricultural Economics and Rural Development at Renmin University, predicts that it will take two or three years for China's dairy industry to recover from the blow of the melamine scandal. For companies like Mengniu and Yili, it will be an uphill battle regaining the trust of customers.

    For all businesses, in the dairy sector and beyond, an old lesson has been proven true once again: quality is the cornerstone of a strong, long-term market presence.