China’s Dairy United: Organization, Governance, and Safety

Dairy United is one of China’s fastest-growing and most innovative milk producers. Dairy United’s unusual business model has propelled it from underdog to main player during the industry's reshuffle after the 2008 Chinese milk scandal. Instead of making farmers shareholders of the company, or members of a cooperative, Dairy United leases their cows, the main asset used in production. Contracting with small dairy farmers for use of their cows, the firm raises farmers' cows using modern facilities, technologies, and management practices. Farmers receive fixed biannual returns but give up control, cash-flow, and residual-claimant rights to Dairy United. The leasing model is not only an unique governance choice for an industry moving from dispersed, small-scale production to larger-scale, capital-intensive methods, but also raises interesting questions about how to apply agency and property rights theory to organizational structure. We explain Dairy United's governance choice by comparing costs and benefits of leasing contracts, cooperatives, and corporations.

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 Record created 2017-04-01, last modified 2018-01-22

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