Christopher Adams

The Business Herald’s markets and banking reporter.

Formula for trouble

New Zealand companies have been accused of sending unsafe baby milk products to China - the latest in a string of recent clashes with our largest trading partner. Christopher Adams investigates what has gone wrong

Unicef says around 16 million babies are born in China each year and only 28 per cent of them will be breastfed, meaning a huge market for infant formula. Photo / Getty Images
Unicef says around 16 million babies are born in China each year and only 28 per cent of them will be breastfed, meaning a huge market for infant formula. Photo / Getty Images

The fears and anxieties shared by millions of Chinese parents can be summed up in the story of baby Yi Kaixuan.

First came a powdery substance in his urine. Then there was blood.

Soon Yi wasn't producing any urine at all and he died shortly after his parents took him to a hospital in Lanzhou, the capital of China's northwestern Gansu province.

He was only six months old.

The culprit: a brand of infant formula made by a company with a now notorious name, Sanlu.

Yi was one of at least six Chinese babies who died in 2008 after melamine, a toxic industrial chemical, was illegally added to milk products to boost their protein levels.

Around 300,000 children fell ill.

Five years on from the scandal, many Chinese parents are yet to regain their trust in domestic brands.

And despite this country's close connection to the melamine disaster - local dairy giant Fonterra had a joint venture with Sanlu - the crisis has created a thriving branded infant formula industry in New Zealand that barely existed a few years ago.

Hundreds of baby milk brands - many of them with links back to Chinese businesspeople and names like "New Bay Bay", "Ioland" and "Orkloland" - are now being exported from a number of contract manufacturing facilities around the country.

But progress has stumbled in a rocky year for New Zealand-China business relations, which has so far featured embarrassing advice on China to local businesses from former Fonterra chairman Sir Henry van der Heyden ("Don't ever trust them"), a Chinese court ruling that kiwifruit exporter Zespri's invoicing practices amounted to smuggling, and the meat hold-up fiasco at Chinese ports.

Late last year Chinese newspapers reported that "substandard" New Zealand-made baby milk had been rejected at the country's border, including 26 tonnes of Ioland formula that was found to have insufficient iodine levels, a potential health risk for babies.

And last month a series of critical news stories about Kiwi infant formula was broadcast on the state-run CCTV network to a potential audience in the hundreds of millions.

After decades of New Zealanders looking down their noses at supposedly shoddy Chinese goods, the tables appeared to have turned. One news item questioned why some brands here used contract manufacturers instead of making the formula themselves, suggesting this made it difficult to ensure the products were safe.

Another story exposed the false claims a number of brands have been making in their Chinese marketing. Several have claimed to be well-known in New Zealand, despite being produced solely for export.

The People's Daily newspaper reported that CCTV also sent a can of New Bay Bay for testing by the Government import authority in China, which found the product had selenium levels below Chinese standards.

One mother from Inner Mongolia summed up Chinese parents' acute worries over food safety after news of substandard imported infant formula from several countries, including New Zealand, broke last year.

"Now that expensive foreign milk powder products are also flawed I wonder if there is any milk powder that is safe enough to feed my one-year-old daughter," she reportedly told the state-run news agency, Xinhua.

Gregg Wycherley, managing director of Fresco Nutrition, which sells an infant milk product in the New Zealand market, says though the CCTV stories were politically motivated by a Chinese Government looking to rebuild its domestic formula industry, they also covered genuine problems this country needs to address.

His views are shared by many who say the rush to supply a seemingly insatiable Chinese demand for imported formula has attracted some questionable operators, who threaten New Zealand's lucrative reputation for high quality food - the driving force behind more than $2 billion in annual dairy exports to China.

"You cannot underestimate the absolute paranoia of Chinese parents when it comes to food safety and feeding their children," says Wycherley, a former journalist who has worked in China for CCTV and Xinhua. "If New Zealand infant formula is perceived as unsafe then that will have a massive flow on effect to all other dairy sectors as well like milk powder and yoghurt - everything you can imagine.

"In New Zealand we're quite relaxed about food safety. We just think that if it's in the supermarket it's safe and 99 per cent of the time that's absolutely correct. We don't realise how different it is in China, where products being in the supermarket is no guarantee of their safety."

Wycherley believes it would be a good idea for some kind of audit to be conducted by the Ministry for Primary Industries to establish how many formula brands are being exported, who the businesspeople behind them are and how much product they're selling.

"The most common customer for many of the contract manufacturers is the small customer who buys one or two containers of formula, fails [to sell it in China] and then that's the end of them."

Until now, the ministry hasn't been able to say how many brands are being exported to China. However this week it announced that from June 20, contract manufacturers will have to register with the department information about the brands they produce.

The opaque nature of some firms involved in New Zealand's baby milk trade became evident when the Weekend Herald tried to track down a company named in one of the CCTV news stories.

The firm is understood to have acted as an agent in this country for New Bay Bay formula and its address was listed on cans of the product.

When a CCTV journalist showed up at the address, however, it turned out to be an auto repair shop on Great South Rd and staff at the business had never heard of the company supposedly involved in formula trade.

The Weekend Herald spent two afternoons combing the streets of east Auckland trying to track down the directors of the company, using details filed with the New Zealand Companies Office.

The Pakuranga address listed for one of the directors turned out to be non-existent.

The following day the firm's accountant changed the details to another house on the same street, saying the previous address had been the result of a "typing error".

A woman at the second address said the director - who had an entirely different address listed on the shareholder information page of the Companies Office website - didn't live there.

Another shareholder is registered as living in an apartment block on Karangahape Rd, but the manager says no one of that name lives, or has recently lived, in the building.

New Bay Bay, which is based in the Chinese coastal province of Fujian, says the agent company had previously been based at the Great South Rd location and had stopped representing the formula brand last year when New Bay Bay opted to work directly with its manufacturer, Auckland's Sutton Group.

New Bay Bay says at that time the address was removed from the cans.

However the Chinese firm gave a different explanation for the Great South Rd incident on its Mandarin website, saying it had never worked with the agent as it hadn't been "qualified" to represent the brand. New Bay Bay then blamed its graphic design team for mistakenly putting the address on the cans.

Westland Milk Products chief executive Rod Quin, whose firm is New Zealand's second biggest dairy co-operative after Fonterra, says some serious issues need fixing, not least contract manufactured brands passing themselves off in China as "reputable New Zealand dairy processors".

"We've traded on a safe and secure supply chain and high quality dairy products for many years and these guys chasing short-term opportunity put a lot of that at risk," says Quin.

He says one infant formula brand even falsely claimed to be based across the road from Westland's dairy processing plant in Hokitika.

Another issue, Quin says, is a formula manufacturing process called "dry blending".

This is when all the ingredients are mixed in a dry form, as opposed to a "wet blend", which is mixed in liquid form and then spray dried into a powder.

Wet blends are viewed as superior to dry blends as the ingredients are combined more thoroughly through the finished product.

Quin, whose firm opened a multimillion-dollar wet blending plant in Hokitika this year, says dry blending could have resulted in some of the seizures of New Zealand formula in China.

"The composition of every spoon that goes into a baby's bottle needs to be the same from the start of the can to the finish and in a dry blend you get a lot of particle size differences and they will separate out over time as the can goes from New Zealand through to China," he says.

That means the proportion of nutrients at the top of the can differs from that at the bottom, potentially leading to the failed results in tests conducted by Chinese import authorities.

Sutton Group, the maker of New Bay Bay formula, declined to comment on the low selenium test results, saying it would prefer the Ministry for Primary Industries to explain why some New Zealand products have not met Chinese standards.

The ministry says products that have been rejected in China have later been found to be in compliance with Chinese and New Zealand standards when re-tested in this country, suggesting there are differences in the two testing regimes.

Food Safety Minister Nikki Kaye says she's confident New Zealand's food safety regime is solid, but a group of ministers are working on an initiative aimed at strengthening the country's "food assurance systems".

"That's basically to see if there are more things we can do - not at a food safety level but at a assurance level - to ensure that when any threats [such as the CCTV stories] arise we can either counter them and do more to strengthen our brand and reputation in some of these markets."

Despite all the challenges, Quin says infant formula offers a huge economic opportunity for New Zealand, as long as the country gets it right. Around 16 million babies are born in China each year and only 28 per cent of them will be breastfed, according to Unicef, the United Nations' children's agency.

The retail value of Chinese infant formula sales are projected to reach US$12 billion by 2016, double the US$6 billion they were thought to be worth in 2011, although gathering reliable data on the market is notoriously difficult.

And there has also been talk of China relaxing its one-child policy, which could result in a baby boom of epic proportions.

But though China offers a lucrative destination for this country's agricultural exports, the dairy trade is getting increasingly political.

A new leadership, which is taking a tough line on food safety, assumed control of the country in March.

Premier Li Keqiang revealed last month that the Chinese Government would step up its monitoring of imported formula and "nurture" the development of domestic brands, including through the restructuring of Chinese dairy corporations.

It's probably no coincidence that the CCTV stories about New Zealand-made infant formula had been broadcast just a couple of weeks earlier.

Some observers believe Beijing is still smarting over New Zealand's handling of this year's dicyandiamide (DCD) scare, when traces of the nitrate inhibitor were found in Kiwi milk products.

It's been suggested the Chinese Government wanted some kind of recall, which New Zealand couldn't provide, and the meat hold-up and CCTV stories were a kind of payback.

One industry source, who doesn't want to be named, speculates that the CCTV stories were intended to discredit this country's infant formula exports before large-scale, New Zealand-based formula plants planned by two Chinese corporations come online.

The Inner Mongolia Yili Industrial Group intends to spend more than $200 million establishing a formula factory in South Canterbury, while Yashili International Holdings plans to spend a similar sum setting up a plant in Pokeno, south of Auckland.

Wycherley says rebuilding the domestic formula industry is a matter of pride in China, which is expected to overtake the United States and become the world's biggest economy by 2016.

"The Chinese are very nationalistic and they're very proud - they don't like to have the embarrassment of their domestic dairy industry being shamed in the world market."

- NZ Herald

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