Inner Mongolia Yili Industrial Group Co's competition with China Mengniu Dairy Co in the $52 billion Chinese dairy market is going upscale, centering on a premium, organic segment that makes up just one percent of the country's milk consumption.

Yili is paying 4.6 billion yuan ($680 million) for 37 percent of China Shengmu Organic Milk Ltd. The Hohhot, China-based company could lift its stake further, giving Yili majority control of the largest Chinese organic milk producer and the only one in the country currently certified to meet European standards.

China's milk companies have been struggling to win back the trust of customers after a series of food safety scandals, including a 2008 case involving melamine-tainted milk that was blamed for the death of infants. That's led Yili and Mengniu, the country's top two dairy producers with about 40 percent of the market, to introduce new products and enter collaborations with overseas suppliers and brands.