Mengniu to use Danish tech to improve product quality

China Mengniu Dairy Co Ltd is striving to use Danish technologies for managing ranches to improve the quality of products made by the domestic dairy industry, which has been plagued by food safety concerns in recent months.

Mengniu has been appointed by the Ministry of Agriculture to work with the dairy company Arla Foods to establish the China-Denmark Milk Technology and Cooperation Center as a means of sharing knowledge about ranch and risk management, according to a Mengniu statement. Through the local and overseas dairy industries' exchanges and cooperation, the company believes the Chinese dairy industry can reach a world-class standard.

"We forecast that by the end of 2012, the long-term benefits of Mengniu's product quality improvement will start to pay off after the introduction of these means of cooperation," Sun Yiping, Mengniu chief executive officer, said on Tuesday during a teleconference.

"We think the company, to diversify its product portfolio, can move into other dairy products, such as baby formula, yogurt, cheese, butter and milk powder products."

Arla has become the second-largest strategic shareholder in Mengniu, having about 5.9 percent of the company's equity. After the acquisition, Arla will participate in Mengniu's operations, according to the company's Tuesday statement.

"Mengniu is developing the upper stream of the dairy industry, that is, to ensure the milk sources of its products can be free from pollution," said Kenny Tang, a securities business division manager at AMTD Financial Planning Ltd.

"This can enhance its product image so that it can ... enjoy higher profit margins in the future."

"Mengniu will benefit from improving its brand image and from technology upgrades brought about by the cooperation in both quality control and products innovation," said Louie Shum, Sincere Securities Ltd chief executive officer.

Meanwhile, Kevin Yin, an analyst with Credit Suisse Group, raised his estimation of Mengniu shares to "outperform", saying the new alliance will improve the quality of the company's products, accelerate its milk powder operation and introduce high-value-added products to the market.

Mengniu's alliance with Arla is a step in the right direction toward reinforcing the management of the supply-chain, which will help improve the brand's status, said a research report from Deutsche Bank Group.

Arla said in a statement on Friday that it plans to invest 1.7 billion Danish kroner ($289 million) into China, some of which will go toward the acquisition of a minority stake in Mengniu.

Arla said the agreement will help boost its sales in China fivefold by 2016 as Mengniu has agreed to do more to market Arla products in China. Last year, the company had about 700 million Danish kroner in revenue from China.

Oswald@chinadailyhk.com