Excessive capacity vs narrow profit margin

China's dairy industry has grown quite rapidly in the past decade. Excessive milk processing capacity was detected in Guangdong Province and Yangtze River Delta areas in 2003 and the problem gradually spread to other parts of the country.

Currently, China's annual dairy output is about 30 million tons, but the production capacity is as high as 50 million tons.

For example, the dairy sector of northwestern Shaanxi Province has tapped only 30 percent to 40 percent of its full daily processing capacity of 10,000 tons.

In the hope of seeking market share for their excessive capacity, dairy enterprises wage price wars and spend heavily on advertisements. Statistics showed the total profits of the country's dairy industry was 5.5 billion yuan in 2006, but product promotions resulted in "losses" of no less than 5 billion yuan in the same year.

According to China Business News, about one third of dairy enterprises are making profits, one third making ends meet, and the remaining ones suffering losses.

Meanwhile, the industry's profit margin has been shrinking in recent years. The profit rate has fallen from 6.8 percent in 2002 to 5.28 percent in 2006. With skyrocketing prices of raw materials, many liquid milk giants were simply "losing money to woo customers" in 2007, the newspaper reported.

Under such circumstances, enterprises first have to make sure they survive fierce competition. Without outside pressure, they will not voluntarily sacrifice their own profits to increase the profit margin for raw milk suppliers.