New Zealand's infant formula industry is facing further upheaval as China moves to tighten the screws on regulations for exporters of the lucrative dairy product.
Under proposed new rules submitted to the World Trade Organisation (WTO) this month, companies will be able to export a maximum of three baby milk brands into the market.
Domestic firms in China will face the same restriction, which is expected to be implemented in the first half of this year and reduce the number of formula brands on sale in Asia's biggest economy by 80 per cent.
The proposal follows a major update to China's food safety laws enacted in October, which included a requirement for baby milk manufacturers to register their brands with the China Food and Drug Administration (CFDA), bringing formula into line with pharmaceutical products.
Following China's 2008 melamine scandal, which killed six babies and made thousands more sick, the number of brands being exported exploded in response to demand from Chinese parents who had lost confidence in the safety of locally-made products.
But tough regulations that came into effect in May 2014 put many small-scale exporters out of business.
Michael Barnett, chairman of the New Zealand Infant Formula Exporters Association, said some operators had simply given up on trying to do business in the notoriously difficult Chinese market.
"Most of the guys that were involved have either pulled the plug or walked away," Barnett said.
The Business Herald understands the three-brand limit would require manufacturers to register up to nine formula recipes with the CFDA, which is expected to carry out inspections of manufacturing facilities.
Simon Page, managing director of Auckland-based formula exporter Biopure Health, said Chinese media reports suggested the limit aimed to eliminate a proliferation of "sub-brands" in China.
That involved companies selling multiple versions of the same product under different packaging, which was difficult to regulate and confusing for consumers.
Page said the last round of regulatory change in 2014 had reduced the number of brands produced by most New Zealand factories to around five.
"We saw some factories get sold off as their entire business model became non-viable and for those remaining, it might mean they will have to trim another couple of brands which could then mean further financial pressure if the company is unable to fill that lost capacity somehow," Page said.
"It could be the last straw for a couple more New Zealand factories that scraped by last time."
With the next round of changes looming, he said Biopure - which operates a retail chain in China - had approached "every suitable factory" in New Zealand in the hope of securing a contract manufacturer for its products.
"Obviously our smaller volume meant that it was difficult for large players like Fonterra to look at us," Page said.
"In the end we had no choice but to look offshore and were lucky that we managed to partner with a state-of-the-art factory in Australia to produce our infant formula. Our focus now is aggressive expansion of our New Zealand Milk Bar stores in China."
The Chinese retail infant formula market is expected to grow to US$25 billion ($38 billion) by next year.
According to ChemLinked, a website that specialises in Chinese regulations, there will be a two-month period in which feedback on the proposed rule change is sought from WTO members.
A Ministry for Primary Industries (MPI) spokesman said officials were working with the industry to consider the implications of the proposal, and nothing was "set in stone".
"It's too early to establish what those impacts might be, other than to say New Zealand infant formula and young children products are still in significant demand by Chinese consumers," the spokesman said.
New Zealand exported $136 million worth of formula to China in the 12 months ended November, up from $118 million in the same period a year earlier, according to MPI.
More than $200 million worth of baby milk was exported into the Chinese market between 2012 and 2013.
The spokesman said MPI was preparing a submission on China's proposal and would request a "transition period" for the new rules to allow manufacturers to make any necessary changes.
A spokesman for A2 Milk, which has reported strong sales growth for its Platinum formula brand in China, said the company and its manufacturing partner, Synlait, were well-placed to respond to regulatory changes.
Fonterra markets its own infant formula brand, Anmum, in China.
The dairy giant also contract packs formula brands for other companies at its Canpac facility near Hamilton.
Rene Dedoncker, Fonterra's acting managing director for global brands and nutrition, said the company could not comment on the changes until they were finalised.
"We are working closely with the China, New Zealand and Australian governments to provide feedback on the draft regulations," Dedoncker said.
Synlait declined to comment.
Lei Yongjun, chairman of Beijing-based consultancy Proper Tao, told the South China Morning Post that major foreign infant formula brands would benefit from the changes.
"We estimate as many as 80 per cent of the thousands of baby formula brands currently sold on the mainland would be eliminated upon the enforcement of the law," Lei said.
"On the other hand, big international formula manufacturers, which usually operate no more than three brands in China, will have a chance to take the market share lost from local rivals."
NZ infant formula exports to China
12 months to November
• 2015 - $136m
• 2014 - $118m
Total exports of NZ milk powder, butter and cheese to China
12 months to June
• 2015- $2.3b
• 2014 - $6b
• Will restrict formula manufacturers in China and overseas to selling three brands in the Chinese market.
• Expected to be implemented during the first half of this year.
• Likely to reduce the number of brands on sale in China by 80%.