BEIJING—Nestlé SA is renewing an effort to expand in China's fast-growing dairy market, even as the government cracks down on the sector.
The Swiss food maker plans to spend millions of dollars to teach farmers like Wang Shanshan and her family how to care for their cows.
Nestlé said this week that the company and the northeastern city of Shuangcheng are investing a total of 2.5 billion yuan, or about $400 million, to open a dairy-farming institute. The goal is to train Ms. Wang and some of the other 11,000 farmers with whom Nestlé works about how to feed and care for 500 cows instead of just a handful.
Nestlé will guarantee bank loans for farmers to buy more cattle. The company also plans to set up "cow bases," at which small-scale farmers will pay to have their cattle professionally managed.
Still, expansion appears daunting to Ms. Wang, whose family owns just eight cows. "My parents are growing older and I may just want to get out of the business altogether," she said.
Nestlé, which hopes to increase its market share in China's dairy industry, says it hopes that larger farms will help it boost production and efficiency while projecting a reputation for safety.
Nestlé also works with other farmers globally to increase yields and earnings. In 2010, it began a push to boost the quality and quantity of its coffee, giving thousands of farmers world-wide new coffee trees and teaching the farmers how to get the most from their crops.
In China, domestic dairies and foreign hopefuls are taking steps to bolster safety as Beijing tries to remake the industry after a series of health scandals. Fonterra Co-Operative Group Ltd., which is based in New Zealand, has strengthened plans to build larger farms in China. In 2008 a Chinese dairy in which Fonterra owned a 43% stake was implicated in a contaminated-milk scandal that resulted in the death of six infants and illnesses in 300,000 others.
"If we were to get hit by a safety flaw, it would be devastating," says Roland Decorvet, the chief executive of Nestlé China. The country's overall dairy sales reached $28 billion last year, up 8.5% from a year earlier, according to research firm Euromonitor International.
But most of China's agrarian landscape is made of small-scale farms, using different feed and different varieties of cattle. That adds steps to the distribution channel, maximizing the chances of contamination and decreasing accountability.
One upshot has been health crises, such as the 2008 tainted-milk scandal. Food-safety regulators last year shut down more than 400 dairy producers for not meeting sanitation and certification standards. Last month, government inspectors said they found higher-than-acceptable levels of a carcinogen in milk from China Mengniu Dairy Co., the country's leading dairy by sales. Mengniu, which didn't return calls for this article, said the implicated batch hadn't yet reached the dairy's own testing stage.
On Thursday state-run Xinhua News Agency reported that authorities are investigating the death of a four-month-old infant and the illness of his twin sister after they drank milk-powder formula made by Synutra International Inc. "We firmly believe this is an isolated incident unrelated to Synutra's products," the Qingdao-based company said. Synutra said it is cooperating with authorities but didn't order a recall, saying it is confident that its products are safe.
China's solution is to consolidate the industry. As a part of a five-year economic plan announced last year, leaders aim to accelerate "agricultural modernization," which includes moving toward decreasing the number of farms. Beijing also offers subsidies to help dairies buy more cattle to create bigger farms. Leaders have said they plan to double milk production to 64 million tons by 2020.
Domestic milk producers are consolidating. China Modern Agriculture Inc., based in China's northeastern city of Harbin, in December finalized an agreement to acquire smaller dairy operation Shangzhi Yulong Cattle Co. Terms weren't disclosed.
Nestlé was dealt a blow in China in 2005, when authorities said varieties of Neslac infant formula contained iodine in excess of national standards. Nestlé has struggled to win back market share in infant formula, which stood at 2.3% in 2010, down from 14.3% in 2003, according to the most recent data from Euromonitor.
Still, Nestlé's results show the market's promise. Its sales from China of all products jumped to 2.8 billion Swiss francs ($2.93 billion) in 2010, up 11% from a year earlier, according to the company's most recently disclosed data. Nestlé last year acquired confectionery company Hsu Fu Chi International and a 60% stake of drink maker Yinlu Food Groups Co.
Mr. Decorvet says the largest herds Nestlé will work with will contain no more than 3,000 cows. He cautions against excessive consolidation, saying that bigger farms can also lead to problems. "Extremes by any means are wrong," he says.
At the Nestlé training institute, foreign and Chinese experts will teach farm management and practical skills, such as machine sanitation. Nestlé says it hopes that the school will inspire entrepreneurial farmers who otherwise might be reluctant to take on debt to borrow milk money for expansion. Some farmers will be trained to run the cow bases to care for the cattle of other farmers, such as Ms. Wang.