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.