Business

Behind the ongoing milk scandal is the history of a troubled industry. Regulators and dairy enterprises should look at many potential problems to protect the public and regain customers scared away by tainted milk.

Sanlu Group acknowledged on September 11 some of its baby milk formula was contaminated with melamine, after at least one baby had died of kidney stones caused by the banned chemical in northwestern China’s Gansu Province.

Investigators found 22 dairy enterprises were involved in the contamination scandal, including such giants as Yili Industrial Group, Mengniu Group and the Bright Dairy & Food. Melamine was also detected in liquid milk produced by Yili and Mengniu.

Many customers have lost confidence in domestic dairy products since the scandal broke, dealing a heavy blow to the country’s dairy sector.

According to a Monday report by China Business News, an executive with a well-known dairy company already warned in 2007 and earlier this year of problems in raw milk supply that could “wreak havoc on the whole industry”.

Cheaters see chances

The Hebei provincial government said on September 14 that 19 suspects in the Sanlu formula scandal had been detained, among whom 18 were from milk collecting stations.

Unlike developed countries, where dairy companies purchase raw milk from large farms and thus have good control over the quality of supplies, Chinese dairy producers usually buy raw milk from individual milk farmers or from milk collecting stations, the newspaper reported on Monday.

In both supply modes, backward technology and poor management have a negative impact on ensuring a good quality of the raw milk. Worse, both modes contain loopholes that can be taken advantage of by cunning dealers, the report said.

Dairy enterprises only conduct routine tests on the raw milk, such as the levels of water, protein, fat, bacteria and antibiotic residue.

Take the protein test for example. It registers only nitrogen levels without specifying which types of protein the milk contains.

Melamine, rich in nitrogen but banned in food processing, was then illegally added to the raw milk, which had been diluted with a large quantity of water, for protein tests.

According to police, melamine had been added to milk since at least 2005. However, quality regulators as well as the public didn’t pay attention to the problem until recently, when it was long overdue.

An investigation team sent by the State Council, China’s Cabinet, discovered that Sanlu lied about its tainted baby formula for eight months. The company began receiving complaints about suffering infants in December 2007.

The Ministry of Industry and Information Technology has launched an investigation into the country’s melamine producers, and required the labels to carry “forbidden in food processing and feed processing”.

Huiyuan Juice sits beside Coca-Cola on a supermarket shelf. Wu Changqing. [China Daily]

The surprisingly high premium offered by Coca-Cola for soft drink maker Huiyuan Juice has redefined Chinese brand value and focused the local corporate sector’s attention on the question of what it is that’s making foreign suitors swoon.

The short answer, analysts agreed, is market share. This is of particular importance to the high-volume soft drink business. In some cases, market share has continued to elude foreign producers in the thousands of small cities and townships in China’s vast rural areas.

Acquisitions of this type will not be limited to the food and beverages sector, analysts said. They expect foreign investors will also zero in on catering, retail, logistics and other sectors.

“We are going to see more foreign companies, which have saturated the large cities and coastal region with their goods or services, going after the domestic brands that have penetrated the secondary cities and towns in the relatively less developed central and western parts of the country,” Yu Ming-yang, head of the Institute of Branding Research at Shanghai Jiaotong University, said. “Coca-Cola’s offer represents an increased recognition of the value of Chinese brand names by foreign companies,” he said.

The proposed transaction has stirred up a storm of protest from Huiyuan’s domestic competitors, who have expressed fears of potential market domination by the Coca-Cola/Huiyuan combination, which is under review by the commerce ministry.

Beijing-based Huiyuan is the largest juice beverage company on the mainland with a 46 percent market share in 2007, according to market research firm ACNielsen. The company’s sales totaled 2.7 billion yuan in 2007.

In fact, Huiyuan was targeted by foreign investors long before Coca-Cola made its offer. The Chinese company is 21 percent owned by French food and beverage producer Danone, with 6.37 percent held by US investment bank Warburg Pincus.

“There is room on the stage for foreign investors to acquire Huiyuan’s rivals, such as Uni-president and Master Kong, which are producing more healthy beverages, including sugar-free tea, pure fruit juice and bottled water to meet growing demand from customers,” Hu Chunxia, a beverage industry analyst at Guotai & Junan Securities in Shanghai, said.

Huiyuan, of course, is not the only Chinese brand that has caught the eye of foreign investors. Some of the world’s largest investment funds have been quietly building up equity interests in choice Chinese brand assets for years.

For some foreign investors, mainly banks, they acquire equity interests in Chinese brands as an investment to be resold later at a profit. Others are seeing their investments in established Chinese brands as a quick and effective way of expanding share or penetrating new markets.

Foreign investment banks had shown particular interest in leading Chinese companies in the dairy industry. For example, Morgan Stanley, together with two other foreign investors, in 2002 bought a 32 percent stake in Mengniu Dairy for 216 million yuan. A year later, Morgan Stanley topped up its commitment, buying US$35 million worth of Mengniu’s convertible bonds.

The capital injection by Morgan Stanley and others has turned Mengniu from an insignificant dairy producer to one of the three leading players in the domestic dairy market over the past six years. Shortly after introducing a strategic investor, Mengniu’s annual sales in 2002 and 2003 jumped 131 percent and 144 percent respectively. Mengniu’s market share has also been largely improved since then and the company went public in Hong Kong in 2004.

Since then, the growing value of Chinese brands has caught the fancy of foreign investors, whose interests have been widened from food and beverage to cafes, restaurants, cosmetics and home electronic appliances.

In August 2006, well-known Chinese kitchenware brand Supor based in Hangzhou of Zhejiang province, was acquired by French firm SEB, the world’s leading producer of small home electronic appliances.

In April, Goldman Sachs bought a 20 percent stake in Hangzhou-based C.straits Caf. Other well-known restaurant chains that have been targeted by foreign investors include Diocoffee, Chamate and Christine Bread House.

Other Chinese brands that have wooed foreign investors include Zhonghua toothpaste, Huoli 28 shampoo, Robust beverage, Maxam and Mini Nurse skincare products.

As in the case of Huiyuan, the sale of well-known domestic brands almost always touches a raw nerve.

Many household names have disappeared from the marketplace, substituted with foreign owners’ own brands.

A case in point is the beverage brand Robust, popular in Guangdong province in the 1990s.

As one of the two best known non-alcoholic beverage brands in China at that time, Robust used to enjoy an overwhelming market share.

But after it was bought by Danone in 2000, the brand simply faded away from the public eye.

Maxam, a cosmetics brand first established in 1962 by Shanghai Jahwa, one of the nation’s largest cosmetics producers at that time, accounted for more than 20 percent of the domestic market in the 1990s.

Other Chinese brands that shared the same fate after an ownership change include Nanfu Battery, Mini Nurse skincare products and Dabao cosmetics products. Nanfu Battery was purchased by US Gillette in 2003, while Mini Nurse went to L’Oreal in 2003.

(China Daily September 24, 2008)

Foreign companies are taking a punt on China’s dairy industry as the tainted milk scandal takes its toll on local producers.

Japanese beer maker Asahi Breweries on Sunday entered the nation’s dairy sector with a high-end liquid milk product targeting Beijing, Shanghai and Qingdao.

The new product, priced between 2.1 and 2.5 yuan per 100 ml, is almost twice the cost of the country’s existing milk products.

But as incomes and consumption power rise, Chinese consumers are putting greater emphasis on food safety and health, rather than price, according to Okuhara Nobumasa, general manager of Shandong Asahi Green Source Milk Products Co, the Asahi milk producer founded by Japanese firms Itochu and Sumitomo.

“We believe the liquid milk market, and particularly the high-end sector, has great potential in China,” Nobumasa said.

According to UK-based market research firm Euromonitor International, sales of liquid milk products in China grew by 14 percent to 108 billion yuan in 2007, on rising health consciousness and demand for convenience.

These sales are expected to increase by an average 8 percent a year.

Analysts said Asahi’s dairy move is wise at a time when the domestic beer industry is becoming saturated.

“The earlier entries of several international beer giants have left little space for Asahi to expand. It has therefore had to find other growth areas,” Shi Jiangang, an analyst at TX Investment Consulting Co, said.

The premium liquid milk market is a niche area with fewer competitors compared to the low- and medium-end dairy sectors, Yang Fan, an analyst with Euromonitor, said.

Asahi said it will ensure quality by getting raw milk from its joint venture Asahi Green Source Farm in Shandong province.

“Consumer confidence has been severely rocked by the milk scandal. That has created a good opportunity for foreign brands to enter the high-end market,” Yang said.

The bulk of the tainted products were low-end items, according to Yang. High-end milk product consumers are less affected by the scandal and will continue to buy dairy products, he said.

Shijiazhuang-based Sanlu Group, partly owned by New Zealand dairy giant Fonterra Cooperative Group, remains under public scrutiny after the chemical melamine was found in its infant milk formula on Sept 11. Other brands’ products were also found to be contaminated in the ongoing investigation.

(China Daily September 24, 2008)

Customers return tainted milk powder at a supermarket in Hefei, Anhui province last week. [China Daily]

Melamine-tainted powdered and liquid milk has triggered a series of negative effects for China’s dairy industry, and is expected to be a potentially fatal blow for many domestic dairy businesses.

Inner Mongolia Yili Industrial Group, China’s largest maker of dairy products, fell to the lowest in more than two years in Shanghai trading after rival Sanlu Group Co’s products were tainted by the chemical melamine.

As of Thursday, Yili fell to 10.88 yuan (US$1.59) and Bright Dairy &Food was down to 4.07 yuan. Both were shut for trading on Friday.

Yili had fallen as much as 10 percent, the daily limit, and traded down 5.5 percent to 13.50 yuan at 11:29 am local time last Tuesday. That’s the lowest since March, 2006. Bright Dairy &Food Co fell by as much as 10 percent to 4.58 yuan, and was at 4.76 yuan.

Contaminated milk powder made by Sanlu was linked to at least four child deaths and more than 6,244 infants who have been diagnosed with various urinary tract problems, including kidney stones, by last Friday. Consumers may cut purchases of domestic infant powder and switch to imports, Morgan Stanley says.

China’s biggest dairy makers, including China Mengniu Dairy Co, Inner Mongolia Yili Industrial Group and Sanlu Group Co were among those with products linked to tainted milk. Mengniu stopped trading last Tuesday. Melamine was first found in Sanlu’s products.

China Mengniu Dairy Co fell as much as 11 percent to HK$17.96 (US$2.31) last Tuesday in Hong Kong before it closed to trading.

The General Administration of Quality Supervision, Inspection and Quarantine said last Thursday that the tainted product crisis has extended to liquid milk as its test results show nearly 10 percent of samples taken from Mengniu and Yili contained up to 8.4 milligrams of melamine per kilogram. Liquid milk from Shanghai-based Bright Dairy also showed melamine contamination.

The Chinese dairy market was worth US$19 billion last year, Merrill Lynch &Co says, citing Euromonitor data.

Rumors that maggot of fruit lies had been found millions of tangerines have left thousands of tonnes of fruit rotting unsold, toppling the whole industry chain across China, according to fruit farmers.

As with many other tangerine farmers, Lin Xuezhen in a remote county in central Hunan Province sighed when staring at her trees.

“The tangerines are definitely going bad on the trees because no one buys,” she said.

Her county, named Shimen, one of the famed tangerine producing areas in the province, used to attract more than 3,000 dealers during harvest time.

The province, a major producer of tangerines, expects a direct economic loss of 400 million yuan (about US$60 million) as mountains of tangerines sit in the market without buyers, said the local agricultural bureau.

The case is the same in the neighbouring Hubei Province, where 70 percent of its tangerine harvest remains unsold and farmers look set to take a hit of up to 1.5 billion yuan (US$219 million) if the scare continues, the local agricultural bureau said.

Customers are driven away by fear of finding maggot in the fruits.

“It’s disgusting,” said Lan Yanghang, 28, who works for a Shanghai-based finance consulting company, “even thinking of squirmy maggot in tangerines.”

He saw some pictures on the Internet showing that some tiny white maggots were hiding in the tangerines; after that he stopped eating them.

The panic was blown up by fast spreading rumours in reports and text messages since September 13, saying that all tangerines had been affected in a small county in southwest China’s Sichuan Province.

The remote county is called Wangcang County of Guangyuan City. The Sichuan provincial government confirmed the existence of the maggots but denied the spreading of the infected tangerines, saying that the county was not one of the major tangerine producing areas in the province and only provided fruits for local customers.

Government officials announced its effort, saying that more than 1,200 tonnes of fruits had been disinfected and buried under ground to prevent further spreading and only 12 tonnes of them were found to have pests in them.

The pests had been contained and the situation is under control, said Mou Jinyi, an engineer of the provincial agriculture department.

However, the panic spread nationwide soon, while fear hit fruit-growing peasants in main producing areas in southern China provinces, which triggered investigation by China’s Ministry of Agriculture, which was followed by market saving efforts.

But new cases have broken out in another province.

Guangdong provincial authority said on Wednesday that 15 boxes of tangerines from one batch were confirmed to have maggots and had been destroyed.

More than 250 check points had been established by the agricultural administration to monitor the situation in Guangdong while many other provinces had also built up examination system to guarantee food safety.

Prices have been lowered nationwide. Tangerine wholesalers in Xinfadi, a major fruit wholesale market in Beijing, said they cut the price by half to only 0.5 yuan (about 7 U.S. cents), but orders were few and tonnes of tangerines had already rotted.

“If you all don’t eat tangerines this year, what are we going to live on next year?” a farmer from Hunan cried in his blog on sina.com. The article has got more than 36,000 viewers and close to 2,300 comments.

Farmers and associations have been trying to figure out a way to save their industry.

The head of Pujiang County’s fruit industry association in Sichuan province, named Chen Weijun, has been crafting a proposal to the government, suggesting the peasants, dealers and the government should share the loss.

“I’m too worried,” Chen frowned and said. His county is near the core of the rumour.

More than 1,500 kilograms of tangerines lost buyers in one night after the rumour began.

“It was a big hit. If it continues, the fruit industry here cannot sustain any more,” he said.

Other businessmen in northern provinces like Shandong have handed out tangerines for free at a wholesale fruit market in Jinan, capital of Shandong, to win trust. More than eight tonnes have been taken by thousands of customers within two days.

“We would rather give them away as presents than see them going bad,” said Guo Jianxing, director of the information department of the market, where many venders lost more than 10,000 yuan (about US$1,470) per day.

“The tangerines even became cheaper than waste paper,” he said.

Sympathy has been given by some people to the farmers.

“It’s farmers’ blood and sweat, and buying their daily necessities largely depends on the income from tangerine sales,” said a netizen from southwest China’s Chongqing municipality.

“I think most tangerines are still good and safe. We just need to look it over before eating,” he said.

Science articles began to appear on the Internet to explain the flies and to persuade the audience to accept the fruit again.

An expert named Wan Fanghao, botanist of the Chinese Academy of Agricultural Sciences, said the snow disaster, which killed the natural enemies of the flies, such as insects and birds, might be the reason for the new boom.

“The flies are of an ordinary type in China and other Asian countries, and they came every year, some times more sometimes less,” wan said.

More trust was called on by Wan for the various breeds of tangerines in China.

A science writer named Liu Yang wrote in her article “Flies in Tangerines” that “the fruit flies do no harm to man and it is simply a psychological thing.”

“Many of my friends were freaked out but they had to say it was only a little bit disgusting but not harmful,” said the 26-year-old biology major, who identified herself as “Tangerine” because it is her favorite fruit.

“I hope we will soon be seen as people started to see the incident from scientific perspectives,” she said.

(Xinhua News Agency November 1, 2008)

The latest tests have found that Chinese liquid milk met the new temporary restrictions on melamine, the country’s top quality control agency said on Friday.

It was the 19th test on the industrial chemical following the tainted baby formula scandal that killed at least three infants and sickened more than 50,000 others, according to the General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ).

The latest test covered 659 batches of liquid milk from 72 brands in 27 major cities nationwide, the agency said.

At present, 9,551 batches of liquid milk from 187 brands in 41 cities produced after Sept. 14 were tested and all were in line with the limit, it added.

Melamine, often used in the manufacturing of plastics, was added to sub-standard or diluted milk to make the protein levels appear higher.

China set temporary limits on melamine content in dairy products earlier this month. The limits were a maximum of 1 mg of melamine per kg of infant formula and a maximum 2.5 mg per kg for liquid milk, milk powder and food products containing at least 15 percent milk.

(Xinhua News Agency November 1, 2008)

China’s quality watchdog said on Thursday that it found toxic chemicals in food products imported from Japan.

Tests conducted by Guangdong Entry-Exit inspection and quarantine institution found Japan-produced soy sauce and mustard sauce were contaminated by toluene and acetic ester, the General Administration of Quality Supervision, Inspection and Quarantine (GAQSIQ) said on its website.

The food products were produced by three Japanese factories. But GAQSIQ didn’t reveal the names of the producers.

Maximal toluene content was 0.0053 mg per kg, while acetic ester content was 0.537 mg per kg. This would risk people’s health, said experts.

Toluence and acetic ester are chemicals that can be used as dyeware, paint and solvent. It will lead to headache and vomit if people eat the food tainted with them.

The GAQSIQ has ordered Chinese importers to inspect and test products of the same kind and remove them from shelves, in a bid to ensure consumer safety.

No sickness were reported in China, but earlier Japanese media said some Japanese people felt sick after eating food tainted by the two chemicals.

(Xinhua News Agency October 31, 2008)

China has withdrawn 8,311.7 tonnes of unqualified milk products from market since the toxic baby formula scandal’s exposure, an official said on Thursday.

It was revealed by Wang Dongfeng, vice director of the State Administration for Industry and Commerce (SAIC), at a teleconference with senior governmental officials in Beijing.

The scandal was exposed on July 16 after 16 babies, who were fed milk made from powder produced by Sanlu Group, developed kidney stones.

In the scandal, melamine, often used in the manufacture of plastics, was added to substandard or diluted milk to make protein levels appear higher. At least three infants died and more than 50,000 were sickened after prolonged drinking the contaminated milk.

The SAIC has so far sent more than 7.59 million visits by law enforcement officials across the country to examine milk product dealers.

According to Gao Hongbin, vice Agriculture Minister who also attended the teleconference, China’s vets have checked more than 20,000 milk collecting stations in the country and shut down 238 unlicensed ones.

Pu Changcheng, vice director of the General Administration of Quality Supervision, Inspection and Quarantine, said that as of Oct. 30 more than 12,163 batches of milk products on sale had been tested and found to be safe.

Health Minister Chen Zhu revealed that 2,390 infants nationwide were still receiving hospital treatment for kidney diseases caused by tainted powdered milk as of Oct. 29.

The figure has declined from a daily maximum of 22,000 on Sept. 26, the minister added.

So far a total of 4,500 hospitals have examined poisoned babies, and another 8,000 medical staff have been sent to the country’s rural areas to help sick babies.

(Xinhua News Agency October 31, 2008)

One of the Chinese dairy companies implicated in the melamine contamination scandal says it lost millions in sales, refunds and recalls.

The Bright Dairy & Food Co., Ltd, traded in Shanghai, reported Thursday its losses and added costs by the end of Sept. amounted to 344.59 million yuan (about 50 million U.S. dollars).

“The melamine incident threw the whole dairy industry into a difficult situation and has caused rather big impacts on the company,” said Bright Dairy.

The company’s third-quarter net loss was 271 million yuan, compared to 390 million yuan in profits from the same quarter a year earlier.

It expects to post full year losses this year, compared to 212.88 million yuan in profits in 2007, the report said.

Melamine is a chemical used to make plastics. It was found in dairy products including baby formula made in China. It has been linked to at least three deaths and caused 54,000 babies to get sick with kidney stones.

By Wednesday, 2,390 babies were still in hospital, one in critical condition, according to the Ministry of Health.

The Chinese dairies, which include Bright Dairy, said melamine was added by middlemen to watered-down raw milk at collection stations to make it appear high in protein. At least 42 people have been arrested for making or dealing the illegal additive.

Yili and Mengniu, two industry leaders, have yet to publish their Q3 reports, but executives of both companies said whole-year losses are in sight.

“We have recalled all dairy products made before Sept. 14, according to the state order, and that amount alone has cost the company several billion yuan,” Mengniu executive Yang Wenjun told Xinhua on Thursday.

Sales of Mengniu and Yili plummeted by more than 90 percent in the first few days after the scandal went public. Although the market has been gradually climbing back up, the dairies are still stuck in a crisis, Yang said.

“The problem products have brought the whole industry to a standstill. We have been learning the lessons and paying the prices we had to pay,” said Yili chief executive Zhang Jianqiu. “We are doing a lot to correct ourselves and trying to pull the industry back on track as early as possible.”

The major dairies said thousands of their employees are working at milk stations checking quality. The companies produced new advertisements, took the public and media on tours of their production facilities and offered discounts in an attempt to boost fledging sales.

(Xinhua News Agency October 30, 2008)

Sales of eggs at the Xinfadi Wholesale Market in Beijing fell 10 percent on Tuesday, in the wake of the latest melamine contamination scare, the Xinhua News Agency reported Wednesday.

The slump has been blamed on recent reports of eggs contaminated with melamine being exported to Hong Kong from a farm in Dalian, Liaoning province.

Xiao Ying, a doctor from Beijing’s Chaoyang district, said he is becoming increasingly worried about where to get his protein, following food safety scares involving two of his staples, milk and eggs. The Dalian government yesterday issued a statement saying the melamine found in the eggs exported to Hong Kong might have come from contaminated poultry feed.

Officials from the city’s quality supervision, inspection and quarantine bureau have conducted a series of tests on the eggs produced on Sept 6 by Hanovo Foods, the statement said.

Initial findings suggest the contamination came from the poultry feed, it said.

A total of 72 batches of eggs from Hanovo have been tested, but only those produced on Sept 6 were found to be tainted, it said.

The company said earlier that it had recalled seven containers of eggs from Hong Kong and that two others bound for the region had been sealed and prevented from being shipped.

China Daily tried to contact Hanovo yesterday, but the company was unavailable to comment.

Wu Beiwen, a resident of Dalian, said: “I just don’t buy eggs these days. I doubt the ones produced by other companies are safe.”

“I’m a bit disappointed with the country’s food industry,” she said.

At a Carrefour store in the city, a sales assistant who refused to give her name, said that although the management had not issued a statement to take Hanovo eggs off the shelves, the products had not been selling well.

(China Daily October 30, 2008)