Foreign companies are taking a punt on China's dairy industry as the tainted milk scandal takes its toll on local producers.

Japanese beer maker Asahi Breweries on Sunday entered the nation's dairy sector with a high-end liquid milk product targeting Beijing, Shanghai and Qingdao.

The new product, priced between 2.1 and 2.5 yuan per 100 ml, is almost twice the cost of the country's existing milk products.

But as incomes and consumption power rise, Chinese consumers are putting greater emphasis on food safety and health, rather than price, according to Okuhara Nobumasa, general manager of Shandong Asahi Green Source Milk Products Co, the Asahi milk producer founded by Japanese firms Itochu and Sumitomo.

"We believe the liquid milk market, and particularly the high-end sector, has great potential in China," Nobumasa said.

According to UK-based market research firm Euromonitor International, sales of liquid milk products in China grew by 14 percent to 108 billion yuan in 2007, on rising health consciousness and demand for convenience.

These sales are expected to increase by an average 8 percent a year.

Analysts said Asahi's dairy move is wise at a time when the domestic beer industry is becoming saturated.

"The earlier entries of several international beer giants have left little space for Asahi to expand. It has therefore had to find other growth areas," Shi Jiangang, an analyst at TX Investment Consulting Co, said.

The premium liquid milk market is a niche area with fewer competitors compared to the low- and medium-end dairy sectors, Yang Fan, an analyst with Euromonitor, said.

Asahi said it will ensure quality by getting raw milk from its joint venture Asahi Green Source Farm in Shandong province.

"Consumer confidence has been severely rocked by the milk scandal. That has created a good opportunity for foreign brands to enter the high-end market," Yang said.

The bulk of the tainted products were low-end items, according to Yang. High-end milk product consumers are less affected by the scandal and will continue to buy dairy products, he said.

Shijiazhuang-based Sanlu Group, partly owned by New Zealand dairy giant Fonterra Cooperative Group, remains under public scrutiny after the chemical melamine was found in its infant milk formula on Sept 11. Other brands' products were also found to be contaminated in the ongoing investigation.

(China Daily September 24, 2008)