KEY POINTS:
Fonterra would have made a serious business mistake if it had issued a public recall of contaminated milk powder without co-operation in China, says a Massey University lecturer.
Chinese police have arrested two brothers suspected of adding the industrial chemical melamine to milk sold to Chinese dairy company
San Lu, which is 43 per cent owned by Fonterra. Contaminated infant formula made by San Lu has killed two babies in China and affected more than 1200 others.
Fonterra said the San Lu board, on which it has three directors, found out about the contamination on August 2, met officials and began a trade recall.
However, a public recall did not start until last week after Fonterra approached the New Zealand Government, which blew the whistle in Beijing.
Fonterra chief executive Andrew Ferrier said he was frustrated with Chinese authorities' handling of a situation he would have been happier to see in the public domain sooner.
Henry Chung, senior lecturer in marketing at Massey University, said Fonterra had to work within Chinese rules.
A Chinese tradition of face saving had existed for thousands of years, he said.
"You don't want to go public unless it is absolutely necessary. It's face saving that is a key issue in doing business in China."
Guanxi, which means a connection or personal relationship, was also important in business from the sales office to the boardroom.
A study by Chung into marketing decision-making strategies and performance of New Zealand businesses in China showed about 15 per cent of firms used joint ventures as the main entry mode, 7 per cent had fully owned operations and the rest chose to export.
Joint ventures had to follow guidance from the Chinese Government because of ownership by the state or its citizens, he said.
San Lu's employees own 56 per cent of the company, with the Chinese Government holding 1 per cent.
"If you can, go with the wholly owned [model] because you have whole control on your operation and you have a higher bargaining power with the host Government," said Chung.
New Zealand China Trade Association chairman Stuart Ferguson said Fonterra had probably acted as fast as it could but had been frustrated at a local bureaucratic level. Companies that moved into China knew there were local traditions and action plans to be honoured, he said.
"If that involves a degree of cloudiness, of obfuscation from local officials you have to live with that and you have to live with the frustration that that delivers."
Ferguson suspected local anger in China would be directed at the people who created the problem and local bureaucrats for not acting fast enough, rather than Fonterra.
Advising Government agencies here was the right approach by Fonterra and once aware of the situation Beijing had acted quickly, he said.
"They don't want anything to go wrong either, nobody wants babies dying, for goodness' sake."
TOXIC TRAIL
* Two babies have died in China and more than 1200 are affected by contaminated milk powder.
* Dairy company San Lu is 43 per cent owned by Fonterra.
* Two brothers have been arrested suspected of adding industrial chemical melamine to milk sold to San Lu.
* Public recall of products ordered after New Zealand Government blew the whistle in Beijing.