Executives at China Mengniu Dairy Co. were ecstatic when China's first astronaut, Lieutenant Colonel Yang Liwei, safely touched down on the grasslands of Inner Mongolia at dawn on Oct. 15, 2003. Sure, they were as proud as the rest of China that their country had put a man in space, and seeing him land on their home turf was a bonus. But Mengniu had a special stake in his safe return. Although Yang didn't drink any milk on his flight, Mengniu was the "official provider" of dairy products during his long months of training. So when Yang returned to earth, the company's marketing machine hit warp speed. Within days, Mengniu had blitzed the country with ads featuring men, women, and children in space suits drinking milk -- a campaign that continues today even as China's second manned space flight orbits the earth.
That kind of marketing savvy has helped Mengniu rocket into the ranks of China's best-known brands since its founding six years ago. According to AC Nielsen, it was the country's top seller of milk in 2004, with 22% of the market. Revenues last year jumped 77%, to $871 million, while profits soared 94.3%, to $38.5 million. Earnings in the first half of this year rose 34%, to $30 million, on sales that climbed 37%, to $578 million.
The company listed its shares on the Hong Kong Stock Exchange in June, 2004, raising $118 million with a roster of leading international investors including (MWD ) Fidelity Investments, Dreyfus, and ING picking up shares. In late August, Mengniu announced a $67 million joint venture with Arla Foods of Denmark to make powdered milk for distribution in China, Macao, and Hong Kong. As of early October, the stock was up 60% from its price at the initial public offering. Meanwhile, most recent Chinese offerings have fallen after initial jumps, including highfliers such as Internet search company Baidu.
Mengniu has built its business with no government help. And that makes it a model for a new breed of Chinese company. Unlike better-known giants such as CNOOC (CEO ) Ltd. and Lenovo Group, which have sold shares to outsiders but remain tethered to the state, upstarts like Mengniu have learned to fend off growing competition without the state subsidies or easy credit often enjoyed by China's corporate titans. Such companies can pounce on marketing opportunities that their more hidebound and hierarchical rivals are slow to exploit. Mengniu, for example, recently sponsored a musical talent show similar to American Idol -- something that would never have flown at a state-controlled enterprise.
Nimble upstarts like Mengniu are giving state-owned companies, as well as some foreign interlopers, a run for their money. Others in this group include Internet portals SINA.com, NetEase Services (NTES ), Sohu.com (SOHU ), and online gaming company Shanda Interactive Entertainment (SNDA ). Privately owned Minsheng Banking Corp. has the lowest level of nonperforming loans among Chinese banks: NPLs accounted for just 1.44% of Minsheng's outstanding loans in June, 2005. Wanxiang Group in Hangzhou is the country's largest maker of auto parts. And Geely Automobile Holdings, with its popular subcompacts, has become the country's second-largest purely Chinese carmaker, and the first to export its cars.
China today has nearly 3.5 million such private companies, according to the All-China Federation of Industry & Commerce, a Beijing trade association. Revenues in the private sector skyrocketed from $5 billion in 1989 to $241 billion last year, accounting for 15% of China's gross domestic product.
Consider Mengniu's steady ascent. It was founded by Niu Gensheng in 1999 after he lost his job as vice-president for sales at state-owned Yili Dairy in a power struggle. (Niu grew up with Yili Dairy, where his father worked for 38 years and he worked for 17 years.) Niu and several Yili colleagues pooled $12,600 of their own money and went head-to-head with their former employer in its home market of Inner Mongolia (Mengniu means Mongolian cow), selling sterilized long-life milk in local supermarkets and restaurants. Mengniu began expanding rapidly beyond the northeast, forging close ties with distributors to China's fragmented retail sector. Today the company works with more than 1,000 independent wholesalers from Shanghai to Tibet, offering some 200 products, ranging from long-life milk and liquid yogurt to baby formula and corn-flavored ice cream bars.
YOGURT WITH SOFT-DRINK BUZZ
Mengniu's rapid expansion attracted the attention of overseas investors looking for a way to get into China. Global private equity funds Actis China Investment Company and CDH China Fund teamed up with Morgan Stanley to invest in the company after a survey of supermarket owners found that Mengniu was one of their top performers. Niu, though, wasn't interested at first. "Normally it's enterprises who go after the investors, but we said no to them three times before we said yes," he recalls. Once Niu relented, the three foreigners in 2002 ponied up $25 million and another $35 million a year later. They owned 28% of the company before it went public.
Today, Mengniu is known as far more than just milk for astronauts. Suan Suan Milk, a flavored yogurt drink, has seen its sales double since March, thanks to Mengniu's sponsorship of a television show called Super Voice Girl, a local program loosely based on American Idol. "It's a huge hit tying in with the TV program," says Tom Doctoroff, chief executive of J. Walter Thompson Greater China. "They've brought a soft-drink buzz into yogurt targeted at teenage girls."
Mengniu has also put a new focus on quality and innovation in the dairy industry. Inside the company's headquarters, located in fertile countryside 50 kilometers from the Inner Mongolian capital of Hohhot, engineers monitor each production line from two-meter-wide computer screens. In the company laboratory, technicians in white coats work on new yogurt formulas. Inventory in Mengniu's warehouse is moved around by robotic forklifts with virtually no human intervention.
At its experimental farm a few kilometers away, the company offers cows 12 varieties of grass, including Canadian Alfalfa Violet Flower and Brazilian Bamboo. The facility resembles a bovine spa. In addition to the menu of specialty grasses, the cows enjoy soft music in the milking hall and are offered foam mats to recline on. They can groom themselves by rubbing up against a rotating brush on a swivel arm, and when their udders are full they can wander over to China's only robotic milking machine. The thinking is that a contented cow will produce richer milk. And richer milk adds up to richer shareholders -- including Niu and his partners. That's the kind of entrepreneurial thinking that's becoming the norm in the new China.
By Frederik Balfour in Hohhot, China