Yili Inner Mongolia Group

Team 5 - TierOne Consulting - MIB 2 Hangzhou Andreja Miletic| Bijan Nekoie | Kristin Hartlich | Maricarmen Gonzalez | Thabang Sekete

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TierOne Consulting Team

Maricarmen Gonzalez Kristin Hartlich

Thabang Sekete Andreja Miletic Bijan Nekoie

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Agenda

Objective & Overview

SCQ: Situations | Complications | Question

SWOT Analysis

Strategic Recommendations Short-term Strategy | Medium-term Strategy

Future Considerations & Takeaways

4

Company Objective

5

“Our goal is to become one of the Top 20 enterprises in the world dairy

industry by 2010, and Top 10 by 2015.”

Pan Gang (2007)Chairman and President Yili Inner Mongolia Group

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Overview

7

Yili Inner Mongolia Group

70% of Farmers’ income in Inner Mongolia was related to Yili

Proximity of Resources

Favorable Climate Conditions

“Green” Image of Inner Mongolia

8

Yili’s Product Mix Overview

Others

Yogurts

Milk powder and other dairy products

Ice cream

Milk beverage

UHT milk

0 5 10 15 20 25 30 35 40 45 50

4

2

12

13

22

47

%

1996 1999 2002 2003 20041993 2006 2007 … ...

Small SOE’s joined in Inner Huhhot, Mongolia

Yili reorganized into shareholder enterprise: major shareholder municipal government

Revenues grow 500% from 1992

+ IPO in Shanghai – 96.9 Million RMB raised

Mengniu is formed from former Yili employee

Foundation of Inner Mongolia Mu Quan Yuan Xing Animal Feed

UHT processing

Organic product research begins

Yili receives “Best Taxpayer” award. RMB 1.3 Billion paid to Huhhot between 1999-

2004Industry dominated by Yili & Mengniu

Yili ranked 3rd globally for production volume of over 30 million tons while accounting for US$12.3 billion in revenues

Top 20 of Dairy Industry by 2010

Top 10 of Dairy Industry by 2015

Timeline

10

Situations | Complications | Question

11

Situations

China

Expensive Considered luxury

product

Lactose intolerance

Available only in big cities

11 kg 18 kg 25 kg

2002 2004 2006

Milk & DairyProductsConsumptionPer Capita

12

Situations

Technology7-10 Days

BEFORE

Adequate Transportation to reach remote areas

Transportation

AFTER 4-6 Months

Situations

Dairy IndustrySupply Chain

Feed Mill Companies

Protein energy sources local/imported

Silage/substitutes Local/imported Individual farmers

Private farms

State-owned farms

Group of farmers

Milk stations

Middleman

Cooperatives

Own farms

Farming bases

Dairy Imports Processors

DistributorsRetailers/Food Services

Home DeliveryConsumers Consumers

Situations

“Locking in”Source milk

Coinvest in Farmland 10 %

Exclusive Supply Contract

Contract with Milk-stand Owners

40 %

50 %

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China’s Dairy Industry

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Complications

Consumer’s Distrust in Chinese Milk Product

China historically not a milk nation

Lactose intolerance

Government Regulations

Culture

Law

Competition

ResourcesDependence on farmers (no ownership of cows)

Manage Channel Relationships

No self-sufficiency

New market entrants Imports of Milk (international conglomerates)Local conglomerates

Core ValuesQuality and Safety Growth and Innovation Adaptation to International Standards

Unfavorable Tax & Property Laws

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SWOT Analysis: Strengths

Technology and Safety Marketing

Relationship Management Customer & Employees

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SWOT Analysis: Weaknesses

Products Government

Sources Costs

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SWOT Analysis: Opportunities

China is a growing market for the dairy industry• UHT milk• Baby milk powder

Lock-in cooperative

management structures

Obtain new sources of “green”

arable land

Expanding business through M&A or JV

SWOT Analysis: Threats

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Lactose intolerance

Consumer preferences

High dependence on government

Imitation of technology and production processes

Sensitive weather and environment

Competition from both local players and international conglomerates

Increased purchasing power in urban areas

Sociological

Technological

Economical

Environmental

Political

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Question

How can Yili increase its revenue to become the Top 20 in the dairy industry by

2010 and Top 10 by 2015, while maintaining its core values and competitive advantage?

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Methodology

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Linkages

Social Corporate ResponsibilityQuality and SafetyInnovation & Growth (“Going Green”)Research & Development

Core Values

Capabilities

Expected Outcomes

Resources

Experience in ManagementLong-term relationships with FarmersR&D in UHT processing Marketing Program

Current ContractsGovernment InfluenceProcessing PlantMarket Share & Brand Equity

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Strategic Recommendations

Short-term Strategy

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Short-term Strategy

International National

Both

Short-term Strategy Vertical Integration

Short-term Strategy Vertical Integration

Strengthe

ning

Relations

hips with

Farmers

Incentivization Program

Less cash

Farmer Lock-in

Incentive options

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Results of Vertical Integration

Core Values

Capabilities

Expected Outcomes

Resources

Yili’s supply is securedLong-term relationships with Farmers increasesMinimizes the effects of urban migration

✓

✓

✓

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Strategic Recommendations

Medium-term Strategy

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Medium-term Strategy

International National

Both

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Medium-term StrategyEnter Top 10 in Sales $ by 2015

Dec '05 Dec '06 Dec '07 [E]

Dec '08 [E]

Dec '09 [E]

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

Effective Tax Rate %: Yili vs Mengniu

Inner Mongolia Yili In-dustrial Group Co., Ltd.

Mengniu Dairy Co. Ltd.

Dec '05

Dec '06

Dec '07 [E]

Dec '08 [E]

Dec '09 [E]

$-

$200.00

$400.00

$600.00

$800.00

$1,000.00

$1,200.00

$1,400.00

$1,600.00

$1,800.00

Net Income Figures: Yili vs Mengniu

Inner Mongolia Yili Industrial Group Co., Ltd.Mengniu Dairy Co. Ltd.

Key Weakness:

Competitive Disadvantage due to tax breaks for JV

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JV AgreementHorizontal Integration

JV with New Zealand

Close proximity

Asia Pacific Region

Source of arable land and cows

Strong perception of safety and high quality products

Westland is known for its green processes and R&D

Westland is a cooperative based company

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Westland JV

35% Tax break before 2012

International Brand Exposure

Increase Brand Awareness & Equity in China

Tax reduction reinvested into Marketing, Tech & Land

Boost in Revenues by 50% & Resources by 25%

Access to R&D Technology, Training, Land & Cows

Import Westland products (cheaper cost)Milk Powder & Other Dairy ProductsYoghurt & OthersStreamlining Yili’s production Reducing Yili’s COGS by RMB 2.5bn

Advantages

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JV Product Mix

47%

22%

13%

18%

Yili & WestLand Product Mix

UHT MilkMilk BeverageIce CreamMilk Powder, Soy, Yoghurt & Others

47%

13%2%

22%

12%

4%

Yili Product Mix

UHT Milk (141M tons)Ice Cream (39M tons)Yoghurt (600k tons)Milk Beverage (6.6M tons)Milk Powder & Soy (3.6M tons)Others (1.2M tons)

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Results of Horizontal Integration

Core Values

Capabilities

Expected Outcomes

Resources

35% Tax BreakFocus on the UHT production and R&DCOGS savings from importsMarketing program expansion

✓

✓

✓

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Future Considerations

2004 2006 2007 2008

Top 20 of Dairy Industry by 2010

Top 10 of Dairy Industry by 2015

Forecasted Timeline

2012 2013 2014

Tainted Milk Scandal milk, infant formula, animal feed affected. 11 countries completely halt foreign, Chinese imports

Yili sole-sponsors Beijing Olympics: 100 million RMB + seven additional plants.

Tax benefits are lifted from foreign and domestic joint ventures, given grace period to transition to appropriate tax bracket

$214 million to acquire Oeania Dairy, NZ

Strategic Partnership with Italian Sterilgarda Alimenti Spa, acquiring filtration technology creating a new liquid milk product

Overseas R&D center in Wageningen University, Netherlands

Agreement with Dairy Farmers of America

Global Ranking:

12

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Takeaways

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Strategy

International National

Both

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Takeaways

“We have a responsibility to help the development of the industry and focus more on

green production and brand development with environmental protection. We want to make sure all parties – consumers, farmers, and government

work together.”Pan Gang (2007)Chairman and President Yili Inner Mongolia Group

Top 20 in 2010 ✓ Top 10 in 2015 ✓

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谢谢！

你们有问题吗？…MOO MOO…

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Appendix

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Buying Cows?

Net profit is 14 times larger than from

growing 1 acre of corn. Breeding dairy cows are expected to recover four per

cent to 75,000 head.

Imported nearly 250,000 live heifers.

Spent more than $250 million on 100,000 foreign heifers. Live hog imports will reach

12,000 head.

−

+

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Cows: Yes or No?

✗

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Milk Scandal

2002 EU bans imports from China

Imports halted. China’s system to control residues of veterinary medicines in farmed animals to be too lax. Animal imports banned.

2004 Avian Flu

Avian Flu + Foot in mouth disease causes EU to halt imports of poultry, pork, mutton, beef and dairy products from China.

2008 Chinese milk scandal

Melamine incidence to appear to have a higher protein content. 11 countries stop all imports of Chinese dairy products completely.

2009 Leather milk

Leather-hydrolyzed protein, boosts protein-content ratings of milk.

2013 Fonterra scandal

Bacterial presence in unsterilized pipes used to move whey during the production process. Fonterra recalls all products

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JV Financial Implications

Dec '070.00

2,000.00

4,000.00

6,000.00

8,000.00

10,000.00

12,000.00

14,000.00

16,000.00

Yili COGS comparison JV expected effects

Cost of Goods Sold (COGS) incl. D&ACOGS incl D&A excl. 18% Production Cost

Dec '04 Dec '05 Dec '060.00

2,000.00

4,000.00

6,000.00

8,000.00

10,000.00

12,000.00

14,000.00

16,000.00

18,000.00

Yili Income Statement

SalesExponential (Sales)Cost of Goods Sold (COGS) incl. D&AGross IncomeSG&A ExpenseEBIT (Operating Income)Income TaxesNet Income

18% of Yili products now produced by Westland

Estimated COGS reduction of RMB2.5bn