Fatal Fonterra

There’s a very ugly story today about contaminated milk in China. At least one baby has died and 432 others have kidneys stones from infant formula that has been contaminated with melamine. The HOS reports on this more fully. This is a classic case where greed over-rides any moral sense and, indeed, any common sense. Sanlu, the makers of the formula, now have to recall tonnes of milk powder; they will experience massive consumer backlash and some of their profiteers may well be encountering prison bars in their future. Contaminating your own product in order to make more profit has to be the dumbest move in the history of short-sighted stupidity. And Fonterra is right in the middle of it.

Fonterra own a 43% share in Sanlu and have three directors on their seven-man board. This means they can’t wriggle out from accepting some responsibility for this debacle. Fonterra release a statement today saying:

““From the day that we were advised of the product contamination issue in August, Fonterra called for a full public recall of all affected product and we have continued to push for this all along. Consumer safety has always been our number one priority.””

This is well and good, but begs the question how this happened in the first place. Did Fonterra not put in place adequate quality control measures in Sanlu? Or did they just accept the existing chinese measures? If the latter, their claim about consumer safety rings hollow and their reputation may be severely damaged. As it is, the company seems to have known there was a problem in March, or, at the latest, June:

“A Sanlu manager quoted by the newspaper Beijing News said the dairy received complaints in March and June but could not track down the problem.

““We finally imported foreign equipment in August and finally found the milk powder contained melamine,” said the manager, identified only by the surname Wang.”

So it seems the company continued to sell their contaminated milk for months, while they were tracking down the problem. Did Fonterra object to this dubious practice?

Some further questions for Fonterra:

• Why did they not insist the infant formula was recalled immediately, while Sanlu were trying to locate the problem?
• Why was there such a delay once they knew what the problem was in August?
• Why were adequate quality control measures not in place (especially given the history of phony formula production in 2004)?
• Why did it take so long to analyze the tainted formula properly?

Damage control PR and spin will not help here. The only way Fonterra can protect its reputation is to give clear answers to the above questions and clean house at Sanlu. 

With the free trade agreement, trade with China will increase substantially over the next few years. But the last thing New Zealand needs is to have its otherwise good reputation for honest dealing to be tarnished by cowboys. Counterfeiting is rife in China, so it is doubly important that New Zealand companies ensure that the companies they are dealing with in China are reputable and have proper quality control measures in place. Otherwise we will lose more than we gain.

As may well happen to Fonterra in this ugly mess…

Additional:

Today’s news confirmed what I suspected – that Fonterra has little control over Sanlu, despite having a 43% interest. It seems that the management of Sanlu and the local Chinese authorities have been dragging their feet until central government intervened at the behest of the NZ government. This illustrates perfectly the dangers of doing business in China. Control is maintained centrally, in chinese hands. If you have a valuable brand, you may well be putting it at risk, doing business in China. Caveat Emptor, indeed.

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