You might not think a country with a one-child-only policy would be a booming market for infant formula, but China has become one of the hottest markets for U.S. suppliers, who are responding by stepping up production and prices.
Abbott Laboratories (ABT) said Aug. 16 that it's investing $230 million to build a new powdered-milk plant in Jiaxing, which it calls its largest investment in China to date. Abbott spokesman Pete Paradossi says even with the one-child policy, some 17 million babies are born in the Middle Kingdom every year. And they capture and consume more attention and resources than ever before.
"That growing middle class is really demanding higher-quality products and can afford the premium-priced products as well," Paradossi told IBD. "With one child, you've got two parents, you've got two (sets of) grandparents, and many times you've got great-grandparents all wanting to do what's best for that child."
A Chinese supermarket worker removes Sanlu baby milk powder from store shelves on Sept. 11, 2008, after a recall of contaminated products.... View Enlarged Image
Another U.S. player jockeying for position is Perrigo (PRGO). Like Abbott, Perrigo is better known as a drugmaker, mostly of private-label over-the-counter medicines. But last year it moved into the infant-nutrition business with its $808 million buyout of PBM Holdings.
'Made In U.S.A.' Label Sells
On the same day that Abbott announced its new plant, Perrigo CEO Joe Papa told investors in a conference call that Asia represented a "major opportunity" in infant formula, especially for U.S. companies.
"We believe we've got a quality product," Perrigo said. "That is very important to people in Asia because it's made in U.S.A., and we believe that made in U.S.A. is an important quality advantage vs. some of the concerns that have occurred in Asia with another infant formula."
Papa's comment hints at the darker reason U.S. companies are doing well: the scandal that erupted in late 2008 when melamine was discovered in Chinese powdered milk supplies. More than 800 infants wound up hospitalized, and six of them died. In July 2010, more contaminated powder was seized in Qinghai.
Paradossi says China is "beginning to move in the right direction" in quality standards, but says local suppliers still have a serious trust problem. He points out that 100% of the milk Abbott uses in its Chinese formulas is imported.
The melamine scandal hasn't prodded Chinese parents to give up on infant formula. According to Euromonitor, the market grew at a compound annual rate of 28.5% from 2005 through 2010, to $3.78 billion last year. Morningstar analyst Damien Conover estimates that by 2015, Asia will represent 51% of the infant and child nutrition market, up from 46% now.