Private equity company KKR, China Modern Dairy Holdings Ltd, and CDH Investments are going big in the dairy industry—a joint venture bringing the three companies together means $140 million will soon be invested in milk products.
What makes milk such a big deal in China? In 2008, a melamine tainted milk powder scandal caused the deaths of at least six babies, with thousands more becoming sickened. The contamination was the result of fragmented supply chains, poor oversight, and a lack of countrywide regulations. Now, the Chinese government is looking to consolidate the dairy industry and get it up to global operating standards. Hopefully with more consolidation, regulations will be easier to control, track, and grow.
This venture into China’s market is just one more push by KKR to expand its global presence. This year, David Petraeus joined KKR as Head of KKR Global Institute, giving the company new expertise in global relations. This will be extremely important as KKR seeks to enter other markets, primarily in China and Southeast Asia.
The consumption of regular milk has been growing in China, though the annual per capita consumption rate there (10 kilograms) is lower than other countries, such as the U.S. (78 kilograms) and Japan (32 kilograms).
“What they lack is some reliable milk source. The main issue is that consumers are still lacking confidence in the products,” said Steve Chow of Sunwah Kingsway Research. “You either find a way to secure some good quality milk sources from overseas or you buildup your own farm.”
And that’s exactly what KKR and the Chinese companies plan to do. Two 10,000-cow farms will be built in the Shandong province within two years, providing raw milk that will be easier to quality control than many smaller farms.
KKR and CDH originally invested in China’s milk industry just after the 2008 scandal, when they bought holdings in Modern Dairy with the intent of bringing operations up to global snuff. Experts from the U.S. and Australia were brought in. KKR’s Capstone, founded by Dean B. Nelson, went to China for nearly a year-and-a-half to up operational efficiency and improve regulations for feed purchases, breeding, disease reduction, risk prevention, and more. Since then, Modern Dairy’s cow herd has grown from just 24,000 cows on three farms to more than 180,000 cows on 22 farms.
Hopefully, this continued investment by KKR CDH, and Modern Dairy means that China’s milk industry will continue to grow in a way that can be monitored and managed well, avoiding future scandals like the one in 2008 and delivering fresh, premium milk to domestic consumers.