China Dairies Salivate Over Fonterra Mess
Chinese milk makers must be quietly pleased about the country’s latest dairy scandal, since for once the news centers on a foreign and not a domestic firm. In this case the news has been flowing nonstop over the weekend, following a warning from New Zealand dairy giant Fonterra (New Zealand: FCZ) that some of its milk powder contains bacteria that can cause botulism, a rare but sometimes fatal illness. Fonterra discovered the bacteria in some of its powder that it sells to other dairy companies, including at least 5 Chinese companies. China has halted the import of all milk powder from New Zealand and Australia until the situation is resolved. (English article)
I’m probably being a little cynical with my view that Chinese companies are pleased at this latest scandal, since nobody wants to be seen as benefiting from this kind of a safety problem that could endanger lives. But at the same time, this scandal may finally help to take some of the shine off of foreign dairy companies, which generally enjoy a much better reputation in China than their domestic rivals like Mengniu (HKEx: 2319) and Bright Food. Nearly all of those companies have been caught up in a nonstop series of food safety scandals that began in 2008 with the revelation that many were selling products laced with the industrial chemical melamine.
It’s interesting that Fonterra is at the heart of this latest dairy safety scare, as the New Zealand company was also a key player in the original melamine scandal of 2008. That scandal began when Fonterra learned of the presence of melamine in products made by its local dairy partner Sanlu. Rather than agree to Sanlu’s request to keep the problem quiet and try to fix it internally, Fonterra insisted on openly disclosing the issue to protect public safety.
Since that initial scandal, Chinese dairy makers have been caught up in a number of other safety-related negative news that underscore the difficulties they face with quality control. One of those cases saw the Shanghai government fine local dairy giant Bright last year for a number of different safety violations. (previous post) As a result of all the scandals, Chinese consumers have become deeply distrustful of local dairy companies and often prefer to buy foreign brands, especially when buying infant formula.
That brings me back to my original point, namely that the Chinese firms must be secretly pleased that this Fonterra scandal will finally create some distrust toward the foreign brands, several of which are already under an unrelated investigation for charging high prices. (previous post) The Chinese media have been eagerly reporting on the story, with reports over the last couple of days citing consumers who say their confidence in foreign brands has now been diminished.
While food contamination is never a good thing, in my view Fonterra deserves at least some praise for its transparency in handling the matter, which reflects its strong concern for public safety — something we would probably never see from a Chinese firm. This kind of policy was behind Fonterra’s disclosure of the original melamine scandal back in 2008, which ultimately helped to save lives by alerting both the public and government to the problem.
This latest disclosure has a similar aim, even though no one has yet reported any cases of sickness or death resulting from the tainted milk powder. If a Chinese company had uncovered the same problem, I suspect it never would have made any public disclosure at all. Instead it probably would have quietly tried to handle the problem internally, prolonging the danger to the public. Perhaps the Chinese rivals will learn an important lesson from Fonterra’s positive example. But it’s far more likely they will simply gloat at the company’s woes and hope the scandal improves their own sales.
Bottom line: Fonterra’s dairy scandal will hurt Chinese consumer confidence in foreign brands, though it should also be praised for its transparency in the matter.
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