The notion of "too big to fail" is becoming prevalent in the Chinese dairy industry. Pushed by increasing demands for quality and safe baby food, the government and industry members have encouraged mergers and acquisitions to create dairy giants, who are pressuring their foreign rivals in pricing power and market competitiveness.

On Tuesday, China Mengniu Dairy Co Ltd agreed to acquire privately owned Yashili International, one of the country's leading makers of infant milk formula and baby food, for $1.6 billion, making it the largest merger in the domestic dairy industry.

The merger unveils the beginning of a series of consolidations in an attempt to revive the troubled industry.

An industry insider told China Daily the Inner Mongolia Yili Industrial Group also intends to acquire Feihe Dairy and Wondersun Dairy Inc. The three companies have denied the rumor, but the insider said the offer is to secure milk suppliers of the latter two companies who have quality dairy farms in Northeastern China.

After such mergers and acquisitions, the line between Chinese and foreign brands is blurring, said Song Liang, a dairy industry analyst at the Distribution Productivity Promotion Center of China Commerce.

"The integration with international standards and levels will greatly improve the quality and safety of domestic milk powder," he said.

A number of small producers are expected to be axed in such moves. Cheng Qunshi, a nutrition and food safety expert, said that of about 120 milk powder manufacturers in China, some small enterprises have found loopholes in implementing industrial standards. Many without fresh milk suppliers and farms have difficulty in controlling the quality and safety of the raw milk they use.

However, industry analysts said making the country's dairy industry bigger does not necessarily make it stronger. Stricter quality control and supervision are keys to improving the dairy industry, Song said.

[email protected]