Fonterra Co-operative Group, the world's leading dairy products exporter, has signed a joint venture agreement with the Shijiazhuang San Lu Group after four years of negotiations.

The two companies initialled the agreement, which is still subject to regulatory approval, yesterday in Beijing.

Under the deal, the New Zealand-based company will buy a 43 percent stake in San Lu, based in Hebei Province, for 864 million yuan (US$107 million).

It is one of the largest investments by a foreign company in the country's fast-growing dairy industry.

China's dairy consumption has been growing by 10 to 20 percent annually over recent years.

However, "there is still a lot of potential with per-head dairy consumption in China's urban centres currently less than half that of Japan and South Korea," said Andrew Ferrier, Fonterra's chief executive officer.

"In rural areas, consumption is only around 10 percent of the average for Asia," he said.

He expects the new venture will complement Fonterra's current import and consumer businesses in China because San Lu has access to local fresh milk supplies and a sales network in over 600 cities.

Fonterra has been doing business in China for over 20 years and imported about US$200 million-worth of products into the country last year.

However, its business is mainly focused on importing raw materials to make dairy products, with only a small amount of finished consumer products.

"The joint venture will continue with the manufacture, marketing and distribution of nutritional milk powders and liquid dairy products on the Chinese mainland," said Sanjay Khosla, managing director of Fonterra Brands.

Initial focus will be on developing the San Lu brand, but the venture will also look at various opportunities, including introducing other brands, Khosla said.

The venture will also consider a public listing either on a domestic market or on an overseas market at an appropriate time in the future, according to Liu Chengde, San Lu's vice-chairman.

But he said there is currently no timetable for such a move.

"The alliance will help San Lu strengthen its leadership in milk powder manufacturing," said Dong Junfeng, an analyst from Galaxy Securities.

"And Fonterra will be closer to consumers through a local partnership."

However, the new venture is unlikely to have a big impact on the domestic dairy industry in the short term, Dong said.

(China Daily December 2, 2005)