Fonterra - Sanlu Milk Scandal

Sanlu Milk Scandal

Main article: 2008 Chinese milk scandal See also: International Reaction to the 2008 Chinese Milk Scandal

In September 2008, one of the biggest dairy companies in China, the Shijiazhuang Sanlu Group, 43% owned by Fonterra, recalled more than 10,000 tonnes of infant milk powder after a food safety scandal involving the criminal contamination of its raw milk supply with melamine . Court papers showed the company first began receiving complaints of children becoming sick after drinking its milk in December 2007, but only stopped production when Fonterra blew the whistle in September 2008. After the initial focus on Sanlu, China’s quality watchdog said that inspectors had also found the chemical melamine in baby milk powder produced by 22 companies nationwide. An estimated 300,000 Chinese babies were affected, and six died after developing kidney problems as a result of drinking milk powder formula containing melamine.

Fonterra first became aware of problems on 2 August 2008, when the Sanlu board, which had three Fonterra directors, was advised there was a problem with the contamination of infant formula. A trade recall began shortly after Fonterra was first notified. Prime Minister Helen Clark later said Fonterra had been lobbying for a public recall since 2 August, but that "local authorities in China would not do it. At a local level … I think the first inclination was to try and put a towel over it and deal with it without an official recall." Ms Clark said she first heard of the contamination on 5 September and three days later ordered that Beijing be told directly, bypassing local and provincial Chinese authorities.

On 21 September 2008, an editorial in The New Zealand Herald questioned the "moral courage and leadership" of Fonterra chief executive Andrew Ferrier. Citing Fonterra's number one corporate value, the journal questioned why it took nearly a month after it had become aware of the contamination before it notified the government. It said Fonterra's press release had been "minutely scrutinised by lawyers and spin doctors, and that the company was far less interested in 'moral courage and leadership' than it was in preserving its own position." The next day, Helen Clark, agreed that the company had been too slow to speak out. Ferrier was also condemned by Business Day for his "silent hand-wringing", when he should have immediately blown the whistle. Ferrier denied Fonterra knew that Sanlu lied for eight months to hide complaints about its baby formula causing illness. He said if one partner did not tell the truth to the other "you have a critical breakdown in that relationship". He admitted people deeper down in their organisation in China could have been "fooling us". However, Access Asia, a Shanghai-based consumer consultancy, said Fonterra was a classic example of western executives in China "believ advice in business books that they must avoid making their local partners 'lose face' at all costs." It suggested Fonterra paid a heavy price in write-offs, a wrecked business and public condemnation.

In a video press conference with reporters in September 2008, Ferrier said Sanlu's milk supply may have been sabotaged. He added the company did not come forward with the information earlier because it was waiting for the recall process to move through the Chinese system.

David Oliver, a New Zealander who works as a corporate advisor to companies in the Chinese agricultural industry, feels that while Fonterra had board representation in Sanlu, it is unlikely they had much influence within the company as they only had a minority stake.

Said Ferrier, "I can look myself in the mirror and say Fonterra acted absolutely responsibly in this one. If you don't follow the rules of an individual market place then I think you are getting irresponsible." Ferrier later said the feedback he received from both government and business contacts in China was that Fonterra was seen to have acted with integrity.

On September 2008, Henry van der Heyden, chairman of the board, said the scale of the tragedy has been "truly shocking". "As a direct consequence of the criminal contamination of milk in China, Fonterra has recognised an impairment charge of $139 million against the carrying value of its investment in SanLu." "Following this impairment charge, Fonterra's best estimate at this point of time, of the book value of its investment in Sanlu is approximately $62 million", which was 69 per cent below its previous carrying value. "We’ve learnt an incredibly painful lesson through this and we will be much, much more suspicious worldwide on ensuring the safety and integrity of our supply chain everywhere in the world," said Ferrier. But he also pointed out that the company can never be 100% certain against a criminal contamination of the supply chain, which is what happened in this incident.

On 17 September 2008, Fran O'Sullivan noted that Fonterra had already set "up a 3000-head dairy farm in China itself to provide quality product and demonstrate best practice."

On 10 October 2008, Ferrier announced in Beijing that Fonterra will "donate NZ$8.4 million to the Soong Ching Ling Foundation over five years for a co-operative charity project to provide medical care and advice to pregnant women and the mothers of infants in rural communities." Andrew Ferrier said Fonterra was "shocked by the degree of tragedy" and the donated fund is set up to "help over the long-term in infants and maternal mother health." Andrew Ferrier said Chinese consumers have lost confidence in Sanlu, not Fonterra, and Fonterra is working towards rebuilding a safe supply chain of dairy products.

In April 2009, during a state visit by New Zealand Prime Minister John Key to Beijing, Chinese Premier Wen Jiabao asked Prime Minister Key for help in developing food safety standards for China. Mr Key said the Chinese Premier considers 2008's contaminated milk scandal a one-off incident that can be put behind both countries. A report by Fran O’Sullivan in the New Zealand Herald said that Fonterra had learnt some heavy lessons from Sanlu and the company would have to have confidence in the safety of its milk supply chain in China before reinvesting significantly in the local production of dairy products.