Milk’s Message: Know What You Are Buying (And What You Are Selling)

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We have been here before with baby milk, pet food and Sudan Red (see more here). Not to mention the execution of the former head of the State Food and Drug Administration. But the current baby milk powder crisis shows that there is still a serious supply chain risk, and that companies need to proactively protect their brands – and their consumers. The current, Sanlu, scandal has now become front page news around the world. Reuters reported on 17 September:

    “China’s quality-control regulator ordered the recall of 69 infant-milk products made by 22 dairy companies after samples were found to be tainted by melamine.

    The General Administration of Quality Supervision, Inspection and Quarantine ordered the “immediate” destruction of the products, it said in a statement on its Web site.

    Infant formula contaminated by the industrial chemical has been linked to 1,253 cases of infant kidney stones, killing two.

But how did it happen. Just like our firm found when investigating the background to the Sudan Red crisis on behalf of big foreign brands, it seems to have come down to a dangerous mixture of desire for profit and lack of risk management process, and too much trust. Reuters notes:

    “Farmers or dealers supplying milk to Sanlu may have diluted it with water and then added melamine, a substance used in plastics, fertilizers and cleaning products, to make the milk’s protein level appear higher than it actually was.”

Imagethief has provided background to the case in this post: Melamine in Sanlu milk powder? Now that’s a crisis!

    …”On September 11th… initial reports emerged that an unusual outbreak of kidney stones in about sixty infants had been linked to tainted milk power.

    …Genuine Sanlu product has been revealed to be culprit. There’ll be no palming it off on counterfeiters. A recall of over 8000 tons of product is under way. Sanlu apologized in a news conference yesterday. Heads are now rolling, but only at a suitably low and distant level in the great chain of scamming and incompetence.”

From the foreign investors’ prespective it is interesting to note that Sanlu has a foreign joint venture partner, Fonterra of New Zealand. Apparently they may have known of the problems but (while moving behind the scenes) did not go public. And Imagethief gets right to the point:

    “…Here’s the million-RMB question: Did Fonterra have a responsibility to go public in China based on what they knew? To someone not directly involved (such as me) it looks an awful lot like Fonterra sat on its hands despite knowing that customers were at risk, possibly to protect its business and relationships in China. Minority shareholder they may be, but 43% is a big minority and they have three board seats. Their reputation is hostage to the behavior of their partners and right now they look complicit in a sketchy situation.”

We all know about the potential risks of joint ventures. But this is no longer a theoretical issue for Fonterra which, according to China Law Blog, invested US$153 million for 43 percent of the business in 2005. China Law Blog goes straight to the law, with Steve Dickinson being quoted, in an article from the Dominion Post, as saying:

    “The reality is if you’re a 43 per cent shareholder in a joint venture in China you’re nothing,” he said. “You don’t know anything, you don’t have any power.””

So much for the joint venture! Of course it could be argued that anyone (local or foreign) involved in the business had the (moral) power to make the dangers public. And of course communications, politics (and the “harmonious society” – if not the Olympic timing – makes this political), and business can be complicated in China. But try telling that to the parents of a sick baby.

A Chinese mother on TV the other day said she was not worried as she had fed her baby with foreign baby milk powder – and pretty much the whole local dairy industry in China is suffering the fallout leaving, according to the Economist, “not much but Nestle”. Perhaps that mother has faith in foreign regulation of food or foreign brands. But if brands can be undermined by what the supply chain secretly adds to them, those brands can suffer serious consequences – though economic loss is the least of anyone’s worries in the current case.

One moral of the story here is that, in a crisis, consumers need to be protected ahead of the company that serves them. Another is that lack of control creates business risk.

But for all those wondering what might happen (or might be happening) in their own supply chains, a process review, regular testing, due diligence on suppliers (and suppliers of suppliers), as well as a regular reality check on costs (which cannot always go down), might be some things to put on the “to do” list on Monday morning.

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2 Responses to “Milk’s Message: Know What You Are Buying (And What You Are Selling)”

  1. Administrator Says:

    The death toll is now four. And Nestle may also have problems, although this is denied by the firm:

  2. Archive » Top Ten Tweets…From the Environment to Environmental ODI, Rejected ODI, Odious Autos and Dodgy Data. And a Bit of Economics & Politics.| China Business Blog Says:

    […] After all the scandals over milk powder, this is timely and welcome news. China CSR notes: “According to the new law, any food […]

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