Danone Boosted by China's Distrust of Local Milk

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July 29 (Bloomberg) -- Jonathan Fenby of Trusted Sources explains how China's distrust of local milk products has boosted Danone's second-quarter sales which beat estimates as baby nutrition products and milk sales in China rose more than forecast. He speaks on Bloomberg Television's "The Pulse."

A smart response or does this set a bad precedent?

Overall, does danone have the right formula to do business in the second-biggest economy?

Let's ask the director at trusted sources.

Thank you so much for joining us.

Talk to us a little bit.

Danone was expected to say something on china.

They beat estimates there.

Are we going to see more companies trying to go into china?

What is the regulation concern there?

We saw what happened to glaxosmithkline.

Is there an anti-western sentiment overall?

China has a problem with milk.

People have gotten used to eating milk formula and everything like that in china.

Chinese domestic milk's get tainted with melamine, a chemical put into it to increase the protein.

They water down the milk.

The result is a lot of chinese people, particularly young parents, do not trust chinese milk products.

They have gone for foreign brands.

Nestle, danone, all of the others.

At the moment, there is such a shortage, that they are bringing suitcases full of milk formula.

As a result, the price has gone up.

We have price-fixing allegations against danone and three other baby milk formula producers.

That is part of a wider berth with glaxo.

In china, people think of it as the wild west.

Actually, the legislation against bribery, safety, pollution, is actually very strict.

They started applying it and guess who they are applying it to?

Foreign firms rather than chinese firms.

Danone responded by dropping the price.

If we look at the elasticity of the story, resume elite that will further bolster the volumes that danone will shift, therefore almost undermining the domestic providers.

How problematic is that going to be for the authority?

They will face a problem.

The other problem is the shortage of cornstarch at the moment.

That goes into a lot of baby food ruddock.

A shortage of supply, a huge demand from china.

The whole thing could result in almost a logjam in the system there.

For the authorities to take steps which stop middle-class parents adding what they desire for their babies -- it will make the problem bigger.

Absolutely.

The aim is to get between 100 million and 200 people into the cities over the next years.

That will increase this kind of demand.

This applies not just milk powder, but also meat and all sorts of other products.

What i call it in my book is the trust deficit in china.

A lot of the chinese do not trust their own products.

If danone plays it right and completely buy the books, it will be absolutely fine and continue growing market share and revenue in china?

I think that is the case.

Danone has not had an altogether wonderful record in china because of a joint venture there, they went into a lawsuit and got out of a lot of the yogurt activities.

Certainly, milk powder will be a boom area.

Strategically, if you think about what is going on over there, glaxo is having pressure applied.

The danone story, which resulted in a price drop.

Our western companies playing this correctly?

Is the strategy that they are pursuing the right one?

Resume elite, the end marked, as urbanization increases, drugs and things like that will only increase.

Particularly with the glaxo case, because selling is a notoriously corrupt area.

Hospital depend on selling drugs for their revenues.

It is not surprising.

If foreign to many do not go along him a a could be put in real trouble by imposing legislation.

What they probably need to do is establish relationships with the relevant regulators and authorities so that they know it and how the regulations will be imposed.

Otherwise, they are in no man's land.

Thank you so much for that.

Jonathan van the -- fenby.

Still to come, we get some insight into the publicis- omnicom deal.

David jones will talk to bloomberg first.

That is coming up at 10:00 a.m. london time.

This text has been automatically generated. It may not be 100% accurate.

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