China Milk Scandal

Vivien K.G. Lim, Rashimah Rajah and Smrithi Prasad wrote this case solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality.

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Copyright © 2012, National University of Singapore and Richard Ivey School of Business Foundation Version: 2012-11-14

In 2007, Sanlu, a Chinese milk manufacturing company based in Shijiazhuang, was recognized as a formidable force by its competitors as it had topped the list of local dairy producers for more than a decade. It was also the second biggest dairy producer in the world. Sanlu was the number one bestselling milk brand in China, responsible for 18.3 per cent of total national dairy sales in 2007.2 A year later, however, a scandal unfolded that brought not only Sanlu but other dairy manufacturers in China unwanted international attention. More than 290,000 infants were affected by this scandal, which involved deliberate tainting of milk powder. What motivated one of the most well trusted brands in China to engage in business practices that led to the deaths of innocent infants?

BACKGROUND INFORMATION

In 2008, an incident in China involving milk products brought regional and global attention to the country. At a time when international trade was important for the country's economic progress, the milk incident raised concerns about the safety of food products made in China and the ethics of business practices in Chinese companies.

China's dairy market had expanded to keep pace with the country's rapid economic development. Besides importing close to 300,000 tonnes of dairy products from Japan, New Zealand and other countries to satisfy the demand of high- and middle-income consumers, many local dairy producers had been established and expanded to meet the demand of the lower income group, which constituted the bulk of Chinese consumers. Sanlu was one example. Priced at RMB85 (about US$13) per tin (900 grams) -- almost half that of imported milk powders -- Sanlu's products were very popular among consumers in China's rural areas.

1 This case has been written on the basis of published sources only. Consequently, the interpretation and perspectives presented in this case are not necessarily those of Sanlu Group or any of its employees. 2 Chris Buckley, "Second Infant Death in China Milk Scandal," Asia One, September 16, 2008, www.asiaone.com/Health/News/Story/A1Story20080916-88026.html, accessed December 22, 2010.

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The low cost strategy allowed the company to be highly successful, and it was the market leader for more than 10 years. However, under the pressure of increasing price competition, coupled with the absence of quality control by both the government and the company, Sanlu engaged in cost-cutting by adding melamine -- a chemical used in producing plastic -- into diluted raw milk to inflate the protein content. This became a common practice in the dairy industry.3

Adding unapproved or banned chemicals to spice up the "quality" of food products in China was not new. For example, washing powder was added to flour to make you tiao (Chinese fried bread stick) fluffier and last longer, acetic acid and mineral acid were added to vinegar to increase its fixed acid content and talc powder was added to wheat powder to give a smoother texture. Just five years before the 2008 milk incident, a company sold baby formula with little or no nutritional value, leading to the deaths of at least 12 infants and causing malnutrition in hundreds more.4

INTERNATIONAL ATTENTION

The 2008 Chinese milk scandal was one of the most prominent cases involving food safety that the World Health Organization (WHO) had to deal with in recent years. In December 2008, China reported the number of victims to be more than 290,000.5 Among them, 51,900 were hospitalized, and four cases were fatal. In addition, 8,311.7 tonnes of unqualified milk products were withdrawn from the market as of October 31 that year.6 Although the incident drew international attention, the effect was predominantly confined to China with limited cases in Taiwan, Hong Kong and Macau.

On July 16, 2008, the Gansu local government officially reported to the Ministry of Health that 16 infants in the province were diagnosed with kidney stones after consuming milk powder produced by the Sanlu Group.7 After the initial focus on Sanlu, investigation by the Chinese government revealed that the problem existed to a lesser degree in products from 21 other Chinese companies, including well-known companies such as Monmilk, Yili and Yashili. Some of these had exported their products overseas. This issue raised concerns about food safety and political corruption in China. There was speculation that the Chinese government maintained silence about the incident during the Beijing Olympics to maintain a positive image. This silence led to delay in follow-up actions, which could have averted serious health consequences.

According to WHO, the crisis led to a significant decline in consumers' confidence in China's food products. WHO spokesperson and food safety scientist, Peter Ben Embarek, attributed the cause of the event to inadequate measures and lack of control among agencies responsible for monitoring food safety in the private sector. These agencies were often not well-staffed and lacked resources and equipment. As a result, they could not keep up with the rapid pace of food, agricultural and industrial production in China over the past few decades. He concluded by referring to the large scale of the incident as being

3 Dunce Lawrence, "China Says Sanlu Milk Likely Contaminated by Melamine," (Update 1), Bloomberg, September 12, 2008, www.bloomberg.com/apps/news?pid=newsarchive&sid=at6LcKJB6YA8&refer=asia, accessed December 22, 2010. 4 "47 Detained for Selling Baby-Killer Milk," China Daily, May 10, 2004, www.chinadaily.com.cn/english/doc/2004- 05/10/content_329449.htm,