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At the beginning of March, Beijing-based Sanyuan Group acquired Sanlu Group at the price of 616.5 million yuan (USD 90.8 million) after an auction. This result was not out of peoples expectation. But the discussion about how this takeover will change the situation of Chinas dairy industry has never stopped.

On the morning of March 4, 2009, the auctioneer dropped the hammer, putting an end to the fate of Sanlu, which used to be a dairy giant in China. By then, the “Sanlu Period” of the Hebeis dairy industry had officially ended.

The fall of Sanlu left many questions: can Sanyuan emerge rapidly in the hard situation? Can the dairy industry of Hebei and China resurrect itself after this takeover. Sanyuan Group, as well as all the practitioners of dairy industry in China, will have to face these problems in the future.

Start from Nothing

“Sanyuan began to take over Sanlu early at the beginning of November 2008. Right now the production of the enterprise has already been initially resumed,” said Gao Qingshan at the end of the auction. At that time, Gao had been in the post of General Manager of Hebei Sanyuan Foods Company Ltd for less than two months. In his opinion, the status quo of the enterprise is “to start from nothing”.

After the outbreak of the melamine event in last September, Sanlu Group, which was criticized severely, stopped the production completely. With nearly 4,000 employees, Sanlu Group was busy looking for a suitable offeree company. Sanyuan, which was untouched by the event, was the most ideal candidate.

On November 4, 2008, Sanyuan Group sent seven working groups to Shijiazhuang City, Hebei Province, respectively responsible for resuming production, milk sources, technology and quality, sale, human resources, finance and external legal affairs. Their task was not only to check the conditions of Sanlu, but also to resume the production as soon as possible.

On December 8, 2008, Beijing Sanyuan Foods Company Ltd contributed 5 million yuan (USD 730.9 thousand) to establish Hebei Sanyuan Foods Company Ltd. After signing off some relevant leasing agreements, Sanyuan Group resumed the production of some core plants of Sanlu Group. “By now (the beginning of March), the production of the second and third factories of Sanlu Group has been resumed. The production of the first and sixth factories will be back soon,” said Gao Qingshan. In his opinion, the enterprise is back on the right track. He estimated that the sales amount of Hebei Sanyuan would reach one billion yuan (USD 146.2 million) at the end of this year.

Build a 1.5-billion-yuan Pasture

Sanlus sudden fall was mainly attributed to the problem of milk sources. Hebei Sanyuan has made a long-term planning for the management of the milk sources.

“In the next three to five years, Hebei Sanyuan will invest 1.5 billion yuan (USD 219.3 million) or so to build a pasture which can feed 20 thousand milk cows. This can help to solve the quality problem of milk sources.”

Wang Baozhu, head of the working group for milk sources, said in a feeding base in Yuanshi County, Hebei Province: “Presently there are 600 milk cows in this base. Sanyuan Group got the management right of this base from the milk farmers through contracting. In that way, every link of producing milk, from the plant of forage grass to the feeding of milk cows, are under the control of Sanyuan Group. It is just like producing something in a plant whose every production link is under control. The former pattern that the milk farmers raise the milk cows scatteredly will be eliminated step by step.” In the future, Sanyuan Group plans to build twenty feeding bases with the same scale.

In short, Hebei Sanyuan hopes to solve the problem of milk sources through the pattern of “dairy enterprises to milk source base to the milk farmers”. In that pattern, the first plant of a dairy enterprise is where the milk sources are from. No extra links exist between the milk sources and processing.

In order to guarantee the benefits of milk farmers, Hebei Sanyuan plans to implement its strategy from three aspects besides the construction of its own large pasture. The second aspect is the way of contracting. In addition, the company plans to train those milk farmers, enabling them to provide raw milk conforming to the standard of Sanyuan. “Judged from the future development trend, it is harder and harder for the milk farmers to earn money if they still raise the milk cows by themselves. The feeding pattern in a large-sized pasture will be in fashion.”

As for the huge amount of money for the construction of milk source base, Zhu Fazeng, General Manager of Hebei Sanyuan, said that a part of money would come from the sovereign debt provided by the relevant state department in the supply of milk sources, while the other part will come from the “strategic investors” introduced by Hebei Sanyuan.

Here Comes New Dairy Situation

The outbreak of Sanlu event was the evil consequence of the contention in the milk sources. Chinas dairy industry, which saw fast development in the past several years, fell into the trough and suffered deficit comprehensively.

An expert in dairy industry said: “On the one hand, the melamine event last year hit the credibility of the dairy industry; on the other hand, the financial crisis made the hit more terrible. Those two factors caused the depression of Chinas dairy industry. Under the double stresses, Chinas dairy industry must recall the past with pangs in the heart. A great change is necessary.”

Before being knocked down by the melamine event, Sanlu was a member of the “Ten-billion-yuan Sales Revenue Club” in China. Its overturn is only less than the ones of Yili and Mengniu and its output of milk powder took the lead in China.

In 2007, the sales revenue of Sanlu group was 10.016 billion yuan (USD 1.46 billion). Its total assets was 1.619 billion yuan (USD 236.7 million). According to the annual report of Sanyuan, the prime revenue of Sanyuan in 2007 was 1.1 billion yuan (USD 160.8 million). In truth, the statistical data issued by Sanyuan showed that the annul sales income of Sanlu Group was not so large because of repeated calculation. Its real sales income was 4 billion yuan (USD 584. 7 million).

However, in many experts eyes, the acquisition of Sanlu by Sanyuan is just like that “a small fish eats the big one”.

In the press release on March 4, Niu Liping, General Manger of Sanyuan Group admitted that taking over Sanlu also meant certain risk for Sanyuan. Apart from the differences in enterprise culture and management style, the two companies also have similarity in the market and some kinds of products. Time is needed to solve those problems.

Gao Qingshan also expressed his opinion towards the future development outlook: Hebei Sanyuan will attach more importance to the production of milk powder, which is not the advantage of Beijing Sanyuan. Sanlu had rich experience in milk powder, especially the milk powder for infants and young children. The sales volume of its products was once ranked at No.1 in China. Whats different from the previous is that Hebei Sanyuans milk powder will be mainly for the middle- and high-end market, while Sanlus milk powder is mainly for the low-end market, such as the market of countryside. The distribution channel seems not to be a problem because over 70% of the 600 distributors of Sanlu had said that they were willing to cooperate with Sanyuan. It is known that the formula of Sanyuans milk powder will be developed from Sanlus previous formula. According to the introduction, the proportion of Sanyuans milk powder and liquid milk will be respectively 40% and 60% after several years development.