Last year was something of a watershed for the Chinese milk formula market. The discovery in June that a number of babies had been poisoned by milk powder formula produced by the Guiyang Sanlian Milk Company - which had repackaged out-of-date formula to keep its products on the shelves - understandably had parents up in arms at the though that their children were deliberately being put at risk.
Coming hot on the heels of an earlier scare in Anhui province - where babies were being fed fake milk formula with limited nutritional content, causing malnutrition and at least 12 deaths - the poisoning case forced the Chinese authorities into action. A number of officials were arrested over both incidents after it emerged that they had failed to investigate complaints about the formula or, worse, that they had colluded with its manufacture.
But while the Beijing government belatedly began to act to clamp down on fake formula production, parents decided to take their own direct action, trading up to the highest quality brands which they felt better guaranteed the safety of their children.
According to a new report from market analysts Euromonitor, the milk formula market in China grew by 16 per cent in value in 2004 as parents shifted their purchasing patterns as a result of safety concerns. Furthermore, this growth is likely to continue into 2005, with Euromonitor predicting an 18 per cent increase in value sales.
Of course, the move towards higher quality products has only become possible because of the ever increasing affluence of Chinese consumers. China's economy is one of the fastest-growing in the world - the country is the 10th largest trading nation in the world with a 2 per cent slice of world trade, according to a report by the US Foreign Agricultural Service last year - and the higher disposable incomes this has engendered have meant a stronger demand for high quality processed foods by Chinese consumers.
But as the FAS report stressed, many Chinese manufacturers have been unable to meet this demand without cutting corners - leading to cases where sub-standard, not to mention dangerous, food products are passed off as being of a higher quality.
For reputable food producers, including those making infant formula, these fake products constitute a real risk to their business, as they affect the image of the industry as a whole, while the passing off of substandard products as reputable brands can be particularly damaging.
In December last year, for example, Nestlé found itself accused by a Chinese consumer of selling infant formula that was not made from whole milk but rather from skimmed milk and vegetable oil - an accusation thought to come from the greater public awareness of the nutritional content of infant formula following the poisoning case.
Nestlé China pointed out that it deliberately used skimmed milk in its infant formula because whole milk is considered to contain too much protein for young babies to digest. It also said that added fatty acids, minerals and vitamins were a necessary addition to create a balanced nutritional content.
"We are not planning to profit from the misfortunes of others but we will make a big effort to ensure products are of the highest quality," said Nestlé's spokesman Francois-Xavier Perroud last year. "In particular we have been fighting very hard to avoid instances of mislabelling which is obviously damaging for our brands."
Not surprisingly, then, brand manufacturers such as Nestlé have been quick to praise the Chinese authorities' efforts to clamp down on counterfeit production, and the boost it would give to the reputation of 'proper' brands.
The Chinese State Food and Drug Administration now samples and tests products frequently and publishes a list of safe milk formulas, which according to Euromonitor's report has raised awareness of the importance of nutritional content in milk formula and the importance of proper nutrition in the first 12 months of a baby's life.
"As a result, Chinese consumers are now trading up to more reputable brands to ensure their babies have the nutrition they need," the report states.
The fact that it was Chinese companies producing the substandard milk formula has meant that foreign producers have benefited more than most from this shift towards higher quality products, with even the reputable Chinese producers tarred with the same brush, at least to some extent.
"Consumers generally associate foreign brands with higher quality," the report said. "Multinational corporations such as Nestlé, for example, have invested heavily in advertising and offer educational seminars for parents, which has helped to build strong product awareness and brand loyalty.
"Heavy investment in branding means that foreign players such as Nestlé, Bristol-Myers Squibb and Wyeth dominate the milk formula market." According to Euromonitor, Nestlé's market share in 2003 was 17.4 per cent, while Bristol Myers Squibb had 13.6 per cent and Wyeth 12 per cent.
But despite some consumer concerns about the quality of Chinese-made formula, local producers have managed to attract some new custom, especially from less affluent consumers in rural districts, according to Euromonitor.
"The dissolution of many unreliable manufacturers created a supply gap for affordable milk formula in less developed, rural markets. Domestic dairy players including Sanlu Dairy, Inner Mongolia Yili Industrial Group and Xi'an Yingiao, for example, are expected to step up efforts to develop their milk formula business and offer less expensive, reputable products in these markets," Euromonitor said.
The market research group said it expected less affluent consumers, who cannot afford to buy foreign brands, to trade up to these domestic brands.
Euromonitor said that the expansion of distribution networks and supermarkets throughout less developed regions will also create opportunities for domestic players, who are now able to launch affordable milk formula products in rural supermarkets, making them accessible to a new set of consumers.
"Following the scare, government investigations uncovered that fake milk formula was generally distributed through retail outlets designed for bulk goods, while better quality milk formula was found in large reputable supermarkets. This further strengthened the perception in China that goods sold through large supermarkets are likely to be authentic, with an assurance of quality," Euromonitor said.
"With better accessibility to less developed areas, domestic players now have the opportunity to build brand loyalty with a new and much larger consumer group."
As a result of all these factors, Euromonitor expects the market for milk formula to experience dynamic growth in the next five years. Between 2004 and 2009, that the market is expected to grow by 95 per cent - a much stronger performance than the previous five years.
"This growth will largely be underpinned by further market penetration by domestic players and large domestic dairy players. The growing awareness for babies' nutritional needs and the quality of products they require is also expected to have a positive impact on growth," the analysts said.