Dairy firms must im­prove qual­ity to re­gain trust

China Daily (Hong Kong) - - FRONT PAGE - COLIN SPEAK­MAN The author is an econ­o­mist and di­rec­tor of China Pro­grams at CAPA In­ter­na­tional Ed­u­ca­tion, a USA-UK based or­ga­ni­za­tion that co­op­er­ates with Cap­i­tal Nor­mal Univer­sity and Shang­hai In­ter­na­tional Stud­ies Univer­sity.

Few Chi­nese can for­get Novem­ber 2008, when six chil­dren died and thou­sands fell ill af­ter con­sum­ing in­fant for­mula that had been con­tam­i­nated with melamine to in­crease its pro­tein con­tent. Sanlu, the then mar­ket leader, was the fo­cus of the sub­se­quent in­ves­ti­ga­tion. Af­ter crim­i­nal pros­e­cu­tions, two Sanlu ex­ec­u­tives were ex­e­cuted, some oth­ers re­ceived life im­pris­on­ment and the com­pany went bank­rupt.

The rep­u­ta­tion of China’s dairy prod­ucts was se­verely dam­aged, ex­ports dropped, and Chi­nese con­sumers lost their trust in do­mes­tic dairy com­pa­nies. Worse, a govern­ment spokesper­son de­clared that the food scan­dal was “a large-scale in­ten­tional ac­tiv­ity to de­ceive con­sumers for sim­ple, ba­sic short-term profit”. As a re­sult, con­sumers out­side China now find it dif­fi­cult to get milk for­mula in rea­son­able quan­tity and at rea­son­able price, and con­sumers in China have to pay high prices for the im­ported prod­ucts they trust.

For a coun­try that has the world’s largest pop­u­la­tion, the long-term so­lu­tion to the prob­lem would be to build the ca­pac­ity to sup­ply safe milk prod­ucts to all from do­mes­tic sources. But since the is­sue in­volves con­sumer con­fi­dence that may not be the so­lu­tion for China. The State Coun­cil started a re­search and co­or­di­na­tion study to en­sure the safety of in­fant for­mula, but it has had no im­pact on con­sumers, be­cause sales of im­ported in­fant milk prod­ucts have in­creased and they now ac­count for more than half of the mar­ket share.

Ear­lier this month, how­ever, Chi­nese con­sumers learned that im­ported in­fant for­mula was not to­tally safe ei­ther. Tests on Fon­terra milk prod­ucts showed that it con­tained a type of bac­te­ria that could cause bot­u­lism — a rare but po­ten­tially fa­tal par­a­lytic ill­ness. Fon­terra is New Zealand’s lead­ing dairy com­pany, and there is no sug­ges­tion of de­lib­er­ate tam­per­ing with the prod­ucts. The com­pany has said the prob­lem was caused by “un­ster­il­ized pipes” in a fac­tory.

For­eign dairy com­pa­nies were dealt an­other blow when the Chi­nese govern­ment im­posed a record 670-mil­lion-yuan ($109.4 mil­lion) fine on six firms for price-fix­ing.

The two in­ci­dents have boosted do­mes­tic pro­duc­ers ef­forts to win some of their lost share of the mar­ket, al­though the im­pact of the food scare on Fon­terra will de­pend on how it re­sponds to the cri­sis.

Un­til now, Fon­terra seems to have re­acted promptly, pro­vid­ing in­for­ma­tion to im­porters and have con­tam­i­nated prod­ucts taken off the shelves and re­turned by con­sumers who have al­ready bought them. Fon­terra’s CEO flew to China within 48 hours of the dis­cov­ery of the prob­lem and claimed that in the next 48 hours all the con­tam­i­nated batches would be lo­cated. A cri­sis, if han­dled well, can ac­tu­ally im­prove the im­age of a com­pany, and Fon­terra seems to know that.

Nev­er­the­less, the Chi­nese govern­ment has asked im­porters not only to re­call the prod­ucts from stores and supermarkets, but also banned some for­eign, in­clud­ing New Zealand, milk im­ports.

The Fon­terra case shows Chi­nese dairy com­pa­nies are not the only ones to be in­volved in food scan­dals. In fact, it of­fers them a pre­cious op­por­tu­nity to win back con­sumers’ trust and, with it, their mar­ket share. But if Chi­nese com­pa­nies fail to sup­ply high qual­ity prod­ucts and re­gain peo­ple’s trust, the Fon­terra case could prompt con­sumers to look more des­per­ately for safer for­eign-made in­fant for­mula. Af­ter all, the ear­lier dec­la­ra­tion of health au­thor­i­ties that there is “no sig­nif­i­cant dif­fer­ence” be­tween do­mes­tic and im­ported dairy prod­ucts did not have enough im­pact on the choice of Chi­nese con­sumers.

Three fac­tors will de­ter­mine whether Chi­nese com­pa­nies can win back some of their mar­ket share in the af­ter­math of the Fon­terra scan­dal. The first is Chi­nese con­sumers’ reaction to the Fon­terra case: Are they in­flu­enced only by the head­lines of con­tam­i­nated im­ported milk pow­der or do they look be­yond them? Un­til now, no child has fallen ill af­ter drink­ing Fon­terra in­fant for­mula and the con­tam­i­nated batches are be­ing iden­ti­fied and iso­lated. Also, the cause of con­tam­i­na­tion is known and the plant in New Zealand has been shut down.

The sec­ond fac­tor is the re­sponse of the Fon­terra man­age­ment to the prob­lem. A lot will de­pend on whether all the con­tam­i­nated batches are traced and de­stroyed.

The third fac­tor is the du­ra­tion of the ban on New Zealand milk pow­der im­ports. Since New Zealand sup­plies more than 80 per­cent of the milk prod­ucts im­ported by China, the need for con­sumers to look else­where will grow if the ban con­tin­ues long.

Fon­terra’s im­age has been tem­po­rar­ily dam­aged for sure, but the dam­age is not the same as that suf­fered by Sanlu and other do­mes­tic dairy com­pa­nies. So in­stead of gloat­ing over the Fon­terra scan­dal, Chi­nese dairy com­pa­nies should take im­me­di­ate steps to re­ally im­prove the qual­ity of their prod­ucts and win back con­sumers’ trust.


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