Follow the market, not government plans

In a recently drafted plan, the Ministry of Industry and Information Technology said it would actively encourage the merging of dairy companies in China. But the merging process should be accomplished by the market, not government agencies, says a column in the Beijing News. Here is an excerpt:

The merger of the Mengniu and Yashili dairy companies marks a new round of shuffling in the dairy industry. The Ministry of Industry and Information Technology has drafted a plan to accomplish the merging process, with a clear goal that only about 50 enterprises should stay in the industry, with 80 percent of the total production capacity being concentrated in the top 10 companies within five years.

Certainly, merging often helps relocate resources as well as improve the technology and management of production. However, the merging of enterprises should be done by the market, following economic principles; once it becomes a political mission to be accomplished, the justice of the market might very possibly suffer.

There are already lessons to be learned from other industries. From 2008, Shanxi province started the process of restructuring the coal mining industry under government guidance. Many companies had to sell their production facilities at lower than market price. There are still disputes today.

Decisions on the merging of enterprises should be made more carefully in the dairy industry, because it has higher requirements of safety. Bigger enterprises do not necessarily equal safer products. In the 2008 scandal, when the products of several dairy giants were found to contain melamine, it was Sanyuan, with a relatively small market share, that proved to be safe.

In a normal market, each player has its own role and they should perform them properly. The government's role in the dairy industry is to supervise product safety and regulate companies with regard to fair competition. It is improper for government agencies to propel the process of merging companies. Hopefully, they can learn a lesson from the Shanxi case.