KEY POINTS:
They say a week is a long time in politics - so too for dairy giant Fonterra.
Just over a week ago Fonterra was still basking in the after-glow of a commodity price boom which boosted returns to farmers by billions - injecting about $9 billion into the
economy in the last season.
Good news for Fonterra, its farmer owners and the rest of us living in New Zealand Inc. during these troubled financial times.
Then came the devastating news that infant formula made by Fonterra's 43 per cent owned Chinese dairy company San Lu was responsible for deaths and illness of babies in China.
San Lu received complaints about sick babies as long ago as March but tests showed no quality issues at that time.
The San Lu board was told of the complaints and contamination from the industrial chemical melamine on August 2, authorities were contacted and a trade recall began on August 6.
Fonterra wanted to go public sooner but decided it would have more influence if it worked within the Chinese system.
However, on August 14 Fonterra informed the New Zealand Embassy, which reported on August 31 to our Government, which blew the whistle in Beijing.
That triggered a public recall that is now revealing the extent of the tragedy: four babies dead, 6244 ill, 158 with acute kidney failure.
As the Chinese investigation gathers pace, the crisis has broadened beyond San Lu, with products from 22 companies testing positive for melamine.
Eighteen people have been arrested, including people suspected of adding melamine to milk sold to San Lu, while the chairwoman of San Lu has been sacked and detained by police. All San Lu products have been recalled and the Chinese Government has stopped production.
How much lasting damage has been done to Fonterra and New Zealand is hard to judge from the eye of the storm, but when the worst of the crisis is over, the commercial devastation will become clearer.
Fonterra says it's not counting the cost. But it will have to at some point - and what are the implications for Fonterra's wider global strategy?
China was a key plank of that strategy and therefore also the board's argument for capital restructuring of the co-operative.
In November, Fonterra's board launched a capital restructuring process with a preferred option to create a company for all assets which would be listed on the stock market.
Its aims included ensuring capital for global growth.
Farmers did not like what they saw, the process was stopped and Fonterra's directors went back to the drawing board.
At some point capital restructuring will resurface and the board will again try to sell the idea of change to support a global growth strategy.
Except that global strategy has now embroiled the farmer-owned co-operative in an unmitigated disaster.
Federated Farmers president Don Nicolson says farmers are loyal to Fonterra.
"They're feeling this, I know, but they just know that they've got a company that they're very loyal to and they will stand by them.
"They know generally that if Fonterra had stayed within the boundaries of New Zealand as a company and couldn't grow, they wouldn't be as internationally competitive as they are."
Fonterra's management and directors can expect some tough questioning from farmers. The annual meeting is approaching in November, by which time the cost of the disaster in China will be clearer - in both human and commercial terms.
BRAND DAMAGE
Anne-Marie Brady, senior lecturer in political science and a specialist in Chinese politics at the University of Canterbury, says the crisis could damage Fonterra's image.
"Certainly it's doing damage to New Zealand's clean, green image in China because we're being linked to this scandal," Brady says.
However, James Bickford, director and head of strategy at branding agency Interbrand (whose Australian branch has worked for Fonterra), says the spotlight from partners will be on how Fonterra manages the crisis.
"I don't think it's a question of Fonterra as a brand any more," Bickford says.
A lot of food companies will probably be getting on planes to China with concerns that the same crisis does not happen to them, he says.
"So in the long term it will have shaken up the market and, hopefully, I think Fonterra will come out as the ones that actually stepped up to the plate and opened it up."
Chief executive Andrew Ferrier said last week that Fonterra was not adding up whether there was damage to the Fonterra brand.
"We had genuinely felt we were making good progress in improving quality systems in the country. I hope that that gets acknowledged.
"We have been obviously selling New Zealand-based milk products around the world for many years with the top quality reputation."
The reputation is still very strong, Ferrier says.
"We had a criminal issue in China and we're dealing with that criminal issue in China. I think ultimately people will understand that."
Federated Farmers president Don Nicolson says the New Zealand brand will stand the test.
"I'd be disappointed if it did [have a negative impact] because the Fonterra story and that absolute, great integrity that New Zealand food products have is a story that is easy to defend around the world."
New Zealand and Fonterra may have a strong international image and reputation, but there will be implications from China.
As Fonterra stretches its global reach, people will want to know that the standards it ensures in New Zealand are applied to its joint ventures, partnerships and investments overseas, even if San Lu has been a victim of criminal negligence by suppliers.
Guaranteed standards are a requirement of being a global brand, and part-ownership is not going to be enough to excuse a lapse in standards by the world's biggest dairy exporter.
WHY NOT GO PUBLIC
The question has been repeatedly asked: Why did Fonterra not go public sooner, with or without Chinese co-operation?
Chief executive Ferrier says the number one issue for Fonterra is the health of the children.
"The decision was made at the beginning we would have more influence on this situation if we worked within the Chinese system."
Ferrier would have been happier to see it in the public domain sooner and was frustrated with how Chinese authorities handled the situation.
But the question is not going away.
Henry Chung, senior lecturer in marketing at Massey University, says Fonterra had to observe Chinese rules.
"If they do that [go public in New Zealand] then I think Fonterra might be asking for some troubles because, again, Chinese are very face-saving," Chung said. "To me that would be a huge [business] mistake if Fonterra actually make a public announcement here in New Zealand saying, 'We're going to make a recall, but our partner in San Lu is not going to do it."'
New Zealand China Trade Association chairman Stuart Ferguson said holding a press conference without Chinese involvement could have been counter-productive.
"If you tend to jump the gun in terms 'I can't get any sense out of the local bureaucrats, they won't allow us to have a total product recall', that puts people's backs up," Ferguson says.
Had Fonterra forced the issue - and the Chinese - into the public arena sooner, there might have been implications for its business, but would it have been worse than the situation it faces now?
As Ferrier says, the number one issue is the health of children. Hindsight provides 20/20 vision, but with lives at stake the scrutiny of events would always be in days or even hours, not weeks.
Lecturer Brady says many people do not understand how politics mixes with business in China.
"It's called a market economy, but the hand of the Chinese Communist Party is very heavy on the market."
All Chinese media outlets had been given strict instructions on what they should and should not cover in the two-year lead-up to the Olympics, including not publishing stories on food safety concerns, Brady said.
"It's like the top said 'don't tell us bad news', so the bottom didn't."
We cannot tell China how to run itself any more than we would accept them telling us how to run New Zealand.
But Fonterra is a New Zealand company, and rules sometimes need to be broken.
