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Gloating no help to China's dairy industry
Publication Date : 12-08-2013
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 (US$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 per cent 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.
The author is an economist and director of China programmes at CAPA International Education, a USA-UK based organisation that cooperates with Capital Normal University and Shanghai International Studies University.