Fran O'Sullivan: Soul-searching for Fonterra

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Fonterra has a lot of soul-searching ahead over contaminated infant formula produced by its Chinese joint-venture, which has already cost the lives of two babies and made another thousand very sick.

San Lu - in which Fonterra has a 43 per cent stake - was gearing up to be publicly listed before year's end.

Instead, it will face Beijing inquiries - two criminal brothers who have already admitted to dumping poisons in raw milk will no doubt be executed - and years of trying to recover sales as Chinese consumers go elsewhere.

Some 97 per cent of 25,000 respondents to a Chinese internet survey say they will not "buy San Lu" any more.

If that's not enough, last night, Fonterra China announced it was "voluntarily" recalling one batch of prenatal milk sold in China under the Anmum Materna brand, which had been manufactured and distributed under licence by San Lu using "what we believe to be contaminated local raw milk".

It emphasised that all other Anmum and Anlene products (another Fonterra brand) distributed in the Chinese market had been produced from 100 per cent fully imported New Zealand milk and were thus free from contamination risk.

Fonterra China had to move quickly - but the voluntary recall will raise more questions about why this process wasn't followed by San Lu itself with the contaminated infant formula.

Fonterra needs to delve deep and work out whether it all along had faced a disaster waiting to happen.

San Lu typically sells its infant formula to Chinese mothers in the poorer rural areas at up to one-third the price of competitors in richer urban areas. This means the margins are (at best) slim.

Its farmer suppliers are often smallholders with a few cows, not "industrial" type operators as in New Zealand. Milk quality is frequently poor and unreliable, which is one of the reasons why Fonterra is setting up a 3000-head dairy farm in China itself to provide quality product and demonstrate best practice.

Given the industry's track record it was probably only a matter of time before unscrupulous middlemen tried to recover some profit by falsifying protein levels by adding chemicals.

China is like that.

It's not clear to what extent Fonterra's directors on the San Lu board sought commercial intelligence over the security of the supply chain - which they should have, given China's lamentable track record in this area.

Bright Dairy - in which French company Danone used to have a stake - took years to recover profitability after one of its acquisitions was caught re-processing expired milk in 2004.

The following year Swiss giant Nestle faced problems when its own Chinese formula-milk was found to have excess iodine levels.

It's not as if San Lu has been immune itself. Reports say 13 infants died of malnutrition in 2004 in east Anhui Province after consuming substandard milk powder.

Illegally manufactured milk powder falsely labelled with the brand of San Lu and other major dairy companies caused 171 babies to be hospitalised.

So, the potential not only for brand damage - but more importantly damage to human life - was always there.

Here are some big questions the Fonterra parent board needs to face up to:

Firstly, why did Fonterra not go public the moment it was clear that its San Lu representatives were getting nowhere in their attempts to promote a formal recall?

This has not been adequately answered despite the Prime Minister's statement that she "blew the whistle" to Beijing four days after being informed (Fonterra executives briefed Government officials on September 5, but the company knew about the contamination on August 2).

Secondly, how can Fonterra trumpet "food safety" as its major selling point on the world stage if it does not take a more aggressive approach to ensuring that its joint-venture partners also place a prime value on product safety?

Chinese news reports suggest that while San Lu was mouthing platitudes about how the contaminated products were merely "counterfeits", it was all the time trying to carry out an informal product recall.

Fonterra was (typically) in lockdown mode yesterday.

Neither of the two woefully anodyne press releases the company issued when it first fielded media requests were even posted on its company website by 3pm yesterday.

There was nothing - repeat nothing - reinforcing Ferrier's verbal sentiments about the plight of the many Chinese babies affected by the poisoned milk formula. The latest release was a September 9 statement shouting how Fonterra probiotic reduced eczema in infants. How ironic.

Fonterra's first statement issued on September 11 - more than a month after it had confirmed inside knowledge that the baby formula was contaminated - began, "as a 43 per cent investor in San Lu, Fonterra has been advised that San Lu is managing a quality issue related to its products."

Its September 14 statement went deeper: "From the day we were advised of the product contamination issue in August, Fonterra called for a full public recall of all affected product and we have continued to push for this all along."

These statements read as if Fonterra was merely a passive investor in San Lu, rather than a joint-venture partner with three directors on San Lu's board: Bob Major, who heads the company's China operations; Patrick Kowk and Mark Wilson - and two executives assigned to the Chinese operation which was gearing up to follow competitors like Mengui by offering Chinese yuan-dominated A class shares.

The New Zealand company is adamant that the only technology transfers it has made to San Lu have been in areas like management systems, budgeting, financial, quality auditing, manufacturing and packaging.

Responding to my written questions last night, Fonterra emphasised San Lu already had an established infant formula business when it bought into the business, and its brands were well known in China.

But it did note that it had assisted San Lu with testing systems and methods.

Fonterra's media strictures suggest legal eagles are running their eyes carefully over any statements issued under the company's name to remove the possibility of a comeback.

Already, the Taiwanese authorities are asking questions over a June shipment of some contaminated milk product via a Fonterra intermediary which has since found its way to destinations like Macau in the form of Taiwanese produced drinks.

Reports suggest that Taiwan traditionally seeks recompense from importers in such cases.

This leaves the boundary line between San Lu and Fonterra unclear, which is why the New Zealand company will stick steadfastly to the line that it did not have any knowledge of the contamination until early August.

But Fonterra needs to smarten up.

Its attitude to some woefully neglectful suppliers in New Zealand also needs to be challenged.

Our waterways continue to be despoiled as a few ruthless dairy farmers ignore the principles of the Clean Dairying Accord that Fonterra signed up to - yet the dairy company continues to buy their products.

The answer is in Fonterra's hands.

It should immediately use its commercial clout against those of its shareholders who blatantly ignore New Zealand's environmental laws, and refuse to take their product as local authorities have suggested.

The politicians who pussyfoot about to protect Fonterra's name - even National's shadow trade minister Tim Groser was lamenting a possible risk to the New Zealand economy if there was too much focus on this score - should instead pressure the company, not prevail upon their parliamentary colleagues to stay silent.

The reality is that if Fonterra can't or won't use its moral suasion at home to protect the common good - what hope has it on the world stage?

- NZ Herald

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