Chinese owned Yashili International Holdings will collaborate with French dairy giant Danone on its new $212 million plant in Auckland, as part of a wider deal for the Chinese milk formula maker to buy Danone’s Dumex China brand amid tightening competition in the world’s largest infant formula market.

Yashili, which is 25 percent owned by Danone and one of China’s top 10 infant formula makers by sales, said it plans to acquire Dumex Baby Food for an undisclosed amount. Danone will use the proceeds to buy shares in milk producer China Mengniu Dairy, which owns an indirect 51.04 percent stake in Yashili.

The filing to the Hong Kong stock exchange also said Yashili and Danone intend to collaborate in New Zealand with respect to a manufacturing plant with the aim of “achieving synergies and support in various areas”.
The official opening of Yashili’s Pokeno plant has been delayed eight months until October while the company awaits the required approvals under China’s complex food safety regulations. The company has been negotiating with Fonterra Cooperative Group and Open Country Dairy for raw milk supply.

Yashili had previously imported milk powder from New Zealand for 10 years. The factory will be the biggest single drying plant for infant milk in Asia, processing 300,000 litres of milk daily when it reaches full production. All of its products will be exported to China, where its website said infant formula sales are expected to grow to $32 billion by 2017.

Danone’s local subsidiary, Danone Nutricia, ended its supply contract with Fonterra after the August 2013 botulism scare and launched a $1 billion law suit against the dairy cooperative in compensation for disrupted sales. It has since been sourcing product from Synlait and other manufacturers and last year bought two Kiwi dairy processing companies, Sutton Group and Gardians, with the latter providing access to milk supply from 18 farms owned by Grant Paterson of Dunedin.

In its first half results, Danone said its early life nutrition division reported an 11 percent increase in second quarter sales to 1.23 billion euros, following a boom in online sales in China. Despite that positive environment, Dumex brand products remained well below 2013 levels, “hit hard by the false alert raised by Fonterra and by the shift in consumer preferences from supermarkets to both online sales and specialised distribution”, it said in the statement.

Danone had revised long term sales projects for Dumex in China and taken an impairment charge of 398 million euros as at June 30.

Bloomberg reported analysts saying China’s infant formula market is suffering from too much competition while Chinese consumers are increasingly buying foreign made infant formula online due to concern about the safety of local product. Yashili and Beingmate Baby & Child Food Co, in which Fonterra has bought an 18.8 percent stake to push its Anmum brand in China, are expected to be market consolidators.

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