Japan's Meiji to pull out of China's baby formula market

SHANGHAI (REUTERS) - Japan's Meiji Holdings Co Ltd said it would pull out of China's baby formula market, the first international firm to retreat from the market following a pricing crackdown and as Beijing moves to help local firms compete with foreign rivals.

China is a magnet for foreign infant milk formula makers, with the US$12.4 billion (S$15.3 billion) market expected to double by 2017.

However, foreign firms have come under pressure amid a crackdown on pricing and as authorities look to consolidate the fragmented dairy sector.

Meiji said it could no longer stay in the market due to intensifying competition as well as the rising cost of its imported milk source from Australia. All of its four formula brands in China use Australian milk.

"Under the harsh environment, continuing to use Australian milk source is ... causing a severe impact on cost and revenue," its Shanghai-based dairy unit said in a statement posted on its website on Thursday.

In August, China's National Development and Reform Commission (NDRC) fined a group of mostly foreign milk powder producers, including Danone SA, a total of US$110 million for price-fixing.

Meiji, Nestle and Zhejiang Beingmate Scientific Technology Industry and Trade Co Ltd were also implicated, but escaped punishment for cooperating with the investigation.

Meiji cut prices on all its products by as much as 7 percent at the time.

Meanwhile, China has emphasised its support for home-grown firms, with local media saying the government will give 30 billion yuan (S$6 billion) to Chinese milk powder makers to help them compete with international rivals.

A Meiji official in Shanghai said the company would continue with its confectionary business in China and would start selling milk and yoghurt products by the end of the year.

Meiji, which entered China's formula market in 1997, has been relying on Australian imports for its baby formulas since 2011 when China banned some dairy products from Japan following a devastating earthquake and tsunami that destroyed a nuclear power plant in Fukushima.

Foreign firms control around 40 percent of the baby formula market in China (80 percent in the tier one cities such as Beijing and Shanghai). Among the foreign brands, Mead Johnson Nutrition Co holds the biggest share, followed by Nestle and Danone, according to data from Rabobank and Euromonitor.