Fonterra has run out of lip gloss to apply to its $774 million investment in Beingmate, which has smoked a huge amount of shareholders' cash since CEO Theo Spierings formed a joint venture through the Chinese company's charismatic founder three years ago.
Both Spierings and Fonterra chairman John Wilson will have some tough questions to answer when they finally front shareholders over the management of the joint venture - particularly, because of what I see as the clear failure at governance level in Beingmate.
That became alarmingly apparent this week when four directors including its vice-chairman (who is also the third largest shareholder), the chair of the company's audit committee and Fonterra's two director representatives, broke ranks and revealed that, in effect, they had no confidence in the integrity of the financial information which had been presented to them as the basis of projected losses of $171m-$214m for the December 2017 financial year.
This is the headline reality. But nothing in China is straightforward, as will become painfully clear as Wilson and Spierings endeavour to protect Fonterra's strategic footprint to the extent that is now possible.
What is important is that the pair endeavour to extract as much value as possible as they deal with the crisis.
Fonterra has an 18.8 per cent stake in Beingmate, acquired in March 2105 at 18 RMB (Chinese Yuan) a share. Yesterday, the price was around 6 RMB a share. At face value this is a $500m paper loss (although Fonterra's net investment in Beingmate is $90m less thanks to a side deal in Australia).
When Fonterra and Beingmate announced their intention in August 2014 to form a "global partnership", it appeared to be based on sound strategic grounds.
Fonterra had tried and failed before with its disastrous investment in Sanlu, which it lost as a result of the melamine crisis. A series of biosecurity mishaps had resulted in it losing the potential opportunity to marry up with other dairy giants like Mengniu.
Beingmate was China's largest infant formula manufacturer and distributor. Its founder, food scientist Sam Xie, was highly respected in China. The atmospherics and personal vibe between the two men were overwhelmingly positive.
From a strategic viewpoint, the Chinese company offered Fonterra a huge network for its own infant formula, Anmum, to be distributed within China as the NZ company sought to make up for its slow start in penetrating the Chinese consumer market with its infant formula and maternal brands.
The joint venture was also to acquire Darnum, with Fonterra managing the plant and Beingmate having effective 51 per cent ownership.
At the strategic level, Fonterra's 18.8 per cent stake in Beingmate gave it two board seats. Founder Xie's 34.4 per cent stake and Fonterra's 18.8 per cent holding meant the two largest shareholders effectively had control of Beingmate.
Importantly, Spierings and Xie formed a co-operation committee to ensure the joint venture ran smoothly and the strategic intent to grow a global partnership was fulfilled.
According to Fonterra's PR, this was to allow "the two shareholders to meet from time to time to further common business objectives and resolve any issues in good faith". Fonterra's China managing director, Christina Zhu, had also attended.
The problem is that management of the joint venture has been problematic.
Xie does not sit at board level. Neither is he an executive. But he appears to exert considerable influence within the company - to the point where he has become labelled by my sources as "the tiger on the hill".
What has brought Beingmate to its knees is its failure to optimise the shift from "bricks and mortar" distribution in the infant formula market to e-commerce platforms.
There is, according to my sources, some internal opposition to distributing Fonterra's Anmum brand along with Beingmate's multiple offerings.
Beingmate has also failed to capitalise sufficiently on the consolidation of the Chinese infant formula market.
Relationships are clearly strained.
Fonterra is locked into the joint venture through various agreements. But these don't last forever. There are options.
First, it can sell its 18.8 per cent stake in Beingmate: crystallise the losses on its balance sheet and write off the investment. But Fonterra would be reluctant to lose face in the Chinese market when regulators are already suggesting solutions be found.
Second, it can endeavour to gain control by forging an agreement with Xie to acquire his 34.4 per cent stake. Chinese takeover laws play a role here - it is not straightforward. Fonterra has already taken issue in China with reports suggesting it has a game plan to oust Xie.
Third, it can forge a deal with Alibaba or another e-commerce platform to market Anmum directly to consumers once an exclusivity clause in the joint venture agreement expires around April.
There will be other options.
The Beingmate debacle came to public attention in New Zealand this Monday, when Fonterra issued a statement saying it was "extremely disappointed" after the Hangzhou-headquartered company issued a forecast earnings downgrade for the financial year ended 31 December 2017. That revised the previously announced forecast loss of 350m-500m RMB to a forecast loss of 800m-1b RMB ($171m-$214m).
On January 21, Beingmate had revealed that its board had been seriously split over a proposal to sell a wholly-owned asset (which was defeated at a vote); there were serious reservations by four directors over the reliability of the company's financial information, and there was potential that the company could be delisted.
According to translations of public Beingmate announcements, four of the directors said they could not guarantee the truthfulness, accuracy and completeness of the information disclosed and that there was no false record, misleading statement or material omission.
The four directors were Beingmate vice-chairman He Xiaohu, independent and audit committee chair Liu Xiaosong, and Fonterra's two representatives Christina Zhu and Johannes Priem.
The fact that the company's vice-chairman could not guarantee the authenticity of the announcement caused widespread concern in the market, resulting in 10 per cent of value being carved off the share price on Monday.
A report in China's Daily Economic News said He had approved the downward forecast, but had not been provided with relevant information to confirm the 800m-1b RMB loss range. Liu felt there were significant risks in the effectiveness of the company's internal controls.
Zhu and Priem are reported to have said Fonterra's reservations were two-fold. First, directors' inquiries about the operation and financial condition of the company were not promptly and completely answered. Second, the company had repeatedly suffered significant deviations in performance forecasting, indicating that its internal control system and financial management had flaws.
Late Monday night (NZ time), Beingmate confirmed it had been asked to reply to an inquiry by the Shenzhen Stock Exchange and provide documents to the China Securities Regulatory Commission's Zhejiang Bureau of Supervision.
The Zhejiang bureau wants Beingmate to explain the reasons why the four directors had concerns and, more broadly, the reasons for the forecast downgrade and the measures the company intends to take.
The crisis at Beingmate was brought to a head when a proposal to sell a wholly-owned subsidiary to help offset growing operational losses was lost at a vote, with several directors including chair Wang Zhengtai in favour, four opposed (including the two Fonterra representatives) and two abstentions.
Fonterra has been super-cautious in its public responses this week.
Its Monday statement is notable in that it is a "company response". No comments have been attributed to either Wilson or Spierings, nor have they made themselves publicly available for comment.
To me, the statement has clearly been written with an eye to future skirmishes.
Fonterra appears to this columnist to believe it is constrained by insider rules over what further detail it can add to that which has been effectively outlined by its representatives on the Beingmate board within the Chinese company's statements.
Fonterra's own position is likely to become clearer as Beingmate (and the four dissenting directors) respond to the Chinese regulators' queries.
A delisting of Beingmate appears inevitable unless the Chinese authorities can guide an outcome.
But it is blatantly obvious to me that Fonterra will have to recognise a significant impairment on the carrying value of its Beingmate stake when its own interim financial results are released in the second or third week of March.
The Fonterra board will have to get a game plan in place. Wilson and Spierings should front sooner than later.