After a chilly 2006 for domestic companies, China's ice cream industry is expected to see more consolidation due to rising costs of raw materials and increasing competition, although overall growth should continue.

Companies in the sector are expected to focus on product innovation and wiser marketing.

Last year the domestic ice cream industry entered a period when large brands from home and abroad including Yili, Mengniu, Nestle and Wall's rose to key positions by utilizing advantages in capital, advanced technology, management and marketing.

It was a very different picture from 10 years ago when the number of companies reached a peak of more than 3,000.

Rising costs of the major four ingredients used to make ice cream milk powder, sugar, chocolate and palm oil led to bankruptcy for a number of small- and mid-sized enterprises (SMEs).

Price increases since 2003 of sugar were the sharpest, at some 111 percent.

Milk powder has also become more costly, increasing in price 20 percent over three years, while chocolate prices have risen about 22 percent

All of this caused severe problems for SMEs. Few of them survived and grew up, due to insufficient capital, inefficient distribution and immature management skills.

But surviving players have opportunities in the coming years.

In 2006, the industry generated sales revenue worth 27 billion yuan, with an output of 2.2 million tons of ice cream. Sales and output volume are estimated to grow to more than 30 billion yuan and 2.5 million tons.

Despite the positive figures, the consumption of ice cream in China still lags that of the developed nations.

Sales per capita is currently 1.7 kilograms, which contrasts sharply with that of Western nations, ranging in consumption from 11 to 23 kilograms per person.

Such a gap leaves room for growth in the industry, and raises interest from investors at home and abroad.

But companies should exercise caution due to raw material costs and fierce competition.

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