China's dairy industry took an enormous blow with the Sanlu tainted milk scandal, which led to the deaths of three babies, the hospitalization of tens of thousands of others and an international scandal that shamed China.
However, looking back over the wreckage of the affair, there is one dairy producer which stands clear of the scandal, Sanyuan, and it is hoped that it can show the way where Chinese enterprise and government at all levels has failed.
Test results announced publicly on Sept. 17 and 18 by the General Administration of Quality Supervision, Inspection and Quarantine showed the problem was bigger than expected. Many leading domestic brands were tarnished in the scandal, but one firm's reputation remained intact. It was Beijing-based Sanyuan.
"I learned of the test results from the media," said Wang Dan, a marketing manager of Beijing Sanyuan Foods Company Limited. "I'm not surprised that our products have stood the test."
The samples were drawn directly from stores. The second test focused on liquid milk, with 53 batches from Sanyuan and 121 batches from Mengniu. "Mengniu has a much bigger market share than us. The ratio is not in proportion. The check on Sanyuan is stricter," Wang said.
She was surprised that so many domestic brands were involved in the melamine scandal. As a marketing manager she realized the big opportunity which lay ahead for Sanyuan.
Sales of Sanyuan milk soared after the announcement of test results. In the evening of Sept. 21, a Xinhua reporter found in Wal-Mart at Xuanwumen, Beijing, empty shelves where Sanyuan milk had been. Colorful fresh milk and yogurt products from other brands packed the neighboring shelves. A saleswoman said Sanyuan milk was sold out when she came to work at 1 p.m. The store had asked for more, she added.
Similar accounts came from Carrefour, Merrymart and other supermarkets in Beijing. According to the company, Sanyuan sales jumped threefold in Beijing, mainly of liquid fresh milk. Panic buying was reported in some other cities and provinces. Sanyuan milk was sold out for a while in Shanxi Province.
Prior to all this, Sanyuan matched output to sales. Now employees worked extra hours. The capacity was exploited to the full. Machines ran 18to 20 hours a day, with the remaining hours given over to maintenance.
Logistics were reinforced, too. Delivery in Beijing increased, in general, from once to twice a day. For the above-mentioned big stores, the surge in supply required four to five deliveries a day.
At a press conference held on Sept. 20, Sanyuan Foods general manager Niu Liping promised stable prices for all its milk products. He also pledged to boost production to secure supply, intensify quality checks, and pleaded with consumers not to lose faith in domestic products.
The general manager looked not at all happy with the advantageous position his company was placed in the wake of the melamine scandal. Instead, he expressed a deep regret. "It's not easy for the country's milk industry to develop in the current state. It's an outcome of generations of effort. Sanyuan was deeply concerned about the damaging effect of the latest incident," he said.
Engaged in the milk business for more than 45 years, Sanyuan had market strongholds in northern China region including Beijing and Tianjin municipalities and Hebei, Henan, Shandong, Shanxi and Anhui provinces. The company was cautious in enlarging its business. As a result it was losing ground to aggressive later-comers such as Mengniu, Yili, and Sanlu. Sanyuan's market share in Beijing dropped to below 40 percent last year from the 80percent of about a decade ago.
Sanyuan Foods business division chief Ma Guowu said the current market share in Beijing climbed to about 50 percent. "It could have jumped further, if the company was not short of capacity," he said.
"Honest operation will be rewarded in the end," said Auntie Wang, a loyal Sanyuan milk consumer at Jingkelong Supermarket in Tianshuiyuan, Beijing.
SAFE MILK SOURCE WINS THE BATTLE
The extensive dairy scandal exposed flaws in China's whole milk and milk products supply system - flaws which killed babies, sickened tens of thousands of others and led to an embarrassing international scandal, the effects of which on China's reputation and the reputation of its goods have not yet been fully played out.
According to official accounts, toxic chemical melamine was put into milk products at an early stage. To begin with, milk producers procured raw materials using a standard that graded fresh liquid milk by its protein content. Varied grades of milk were paid different prices. However, the test method commonly used couldn't distinguish milk proteins from other proteins. If melamine was added to milk, it produced proteins that could cheat testing.
It was assumed that dairy farmers might have a motive to cheat by using melamine. But in most cases, farmers sold milk directly to the milking station -- agencies run by all sorts of people. The latter paid the farmer and sold truckloads of fresh raw milk to companies like Sanlu. Milking stations were the major culprit in this scandal, the official report said, because in order to cheat the milk company, melamine must be mixed into milk shortly before the test. Earlier addition would be detected.
In Hebei Province, where Sanlu was based, police had by Oct. 19rounded up 43 suspects who had worked at milking stations or been engaged in illegal production of a melamine compound known as "protein powder". A couple of suspects reportedly had confessed their guilt. Xue Jianzhong, 55, who had produced and sold protein powder, said he knew melamine was poisonous. He was doing it to make money and he himself did not drink the milk mixed with melamine.
The official story explained why Sanyuan escaped the melamine scandal. The company had a nearly self-sufficient production chain. Its raw milk came largely, or 80 percent, from dairy farms that the company owned or had a stake in.
Recognizing the industry wisdom that "secure milk sources win the battle", the company had invested heavily in building up dairy farms. Its Luhe Dairy Cattle Center owned 27 dairy farms with 35,000 heads of cattle, mostly Holsteins, which yielded 160 million tonnes of quality fresh milk a year.
The farms were run with a strict quality control system that covered all phases of operation, from procurement of animal feed, to the checking and caring of the animal's physical conditions, to hygienic milking, to cooling and swift delivery of raw milk to processing plants.
Sanyuan milk products were free of antibiotics, the company claimed, and in terms of the numbers of somatic cells and bacteria, and contents of milk fat and milk proteins, the Luhe-sourced raw milk not only passed national norms, but also met European Union standards.
The raw milk Sanyuan procured from external sources, about 20 percent, was supplied by dairy farms of varied scales. Since 2001 Sanyuan had contracted only with cattle farms for its raw supply. That was because they believed a farm of scale could afford quality control. And the raw milk underwent two tests before being accepted.
The practice had also to do with industry wisdom that "milk was best in the cow's breast", which made processors skip unnecessary intermediate links in operation and bring milk to consumers in the shortest time possible.
Sanyuan milk was not 100 percent safe, though. Internet sources mentioned a melamine case uncovered in Qian'an, Hebei, which involved a subsidiary of Sanyuan. A company source confirmed the rumor. The city of Tangshan, where Qian'an was situated, was heavily hit in the melamine scandal.
"Apparently something had gone wrong in the collecting of raw milk. Our own quality check had spotted the problem and the small amount of questionable products was kept in the warehouse, when government examiners arrived," he said.
Sanyuan's quality control system included third-party testing. And workers taste-drank every batch of milk products before the batch left the factory. Sanyuan attached great importance to quality, the company said.
Located in the capital city, Sanyuan had been, for more than three decades, a trusted milk supplier to many important places regularly, or on important occasions temporarily. This included Zhongnanhai, the seat of China's central government.
The Beijing Olympic Games was another example. Sanyuan lost to Yili in bidding for sponsor's supply. Yet, in mid-June it received orders for supplying dairy products to Olympics-related hotels, restaurants, media centers, and sports villages. Sanyuan apparently had not expected that. "Our reputation may be a factor," Wang Dan said.
FLAWED SYSTEM AND FOOD SAFETY LAW
In the melamine scandal, some people blamed the graded standard for raw milk collecting. It enticed or forced, because of low prices, milking stations or farmers into illegal activities. Sanyuan's Wang Dan defended the standard. Melamine dealing driven by the desire to make more money arose from the human weakness of avarice. The graded system should not be a scapegoat.
It was true that some cows raised by individual households produced milk of inferior quality that might be rejected, or paid a price not sufficient to cover the cost. But that was not an excuse for melamine dealing. The solution would be that for some areas where local environmental conditions were adverse for dairy farms, cows should be given up for other, more suitable investments; and where the environment was promising, large-scale operation should be encouraged to aid adoption of technology and equipment to ensure quality control.
"Scattered household cow raising poses a high risk to the safety of dairy products," said Sanyuan Luhe executive deputy manager Qiao Lu. Scaled and standardized operation of dairy farms are expected to get help from the central government's newly announced reform resolution to allow rural residents a freer use of land they leased from the state authority.
A new, dedicated method to detect melamine has been widely adopted by milk producers. But a question remains. Given the length of time and scope of melamine malpractice, it has virtually become an open secret in the industry. The testing and quality check personnel can't have been completely ignorant or innocent. An explanation is that the milk company's rapidly expanding business scales leads to a shortage of milk sources, which forces them to collect milk loosely, turning a blind eye to poor quality raw milk.
On Oct. 9 the government published a norm defining the contents of melamine acceptable in dairy products. Different from earlier accounts, which declared safe milk as melamine free. Now officials with the National Center for Health Supervision and Inspection said small amounts of melamine could get into the milk via the environment or packaging materials. A small amount of melamine might be tolerated. But deliberately adding the chemical to milk was prohibited and would be punished.
Products with melamine contents exceeding the set limits, 1 mg/kg for baby formula and 2.5 mg/kg for liquid milk and other general-purpose formula or powder, would suggest deliberate human addition. The norm was supported by the World Health Organization and the UN Food and Agriculture Organization, they said.
According to a China Daily report, the U.S. Food and Drug Administration (FDA) said in early October that 2.5 mg of melamine per kg would not cause health problems, but added that any infant formula sold to the United States must be free of melamine.
An ensuing emergency notice issued by the same Chinese authority ruled that products dated before Sept. 14 in production, if they met the above norm and pasted with the label stating "Passed test on melamine content limit", were permitted sales on the market. And standard-conforming dairy goods produced after the above date might be sold without the label.
According to a Xinhua report, up to Sept. 23 a total of 1,644 groups of quality check experts were assigned to factories across the country to help ensure dairy food safety. The group to Sanyuan initially consisted of four people. Two stayed on, working on shifts like staff workers, Wang Dan said.
Before the scandal, China had given reputable brands test exemption, which in turn bolstered the brands' images. Companies like Sanlu clearly failed that trust. The melamine scandal prompted the government to terminate the practice in the food industry.
"Food is very important. It's not like, say, a refrigerator. If we bought a wrong brand, the machine won't harm us. But food can," Wang Dan said. She hoped consumers would not be manipulated by ads or other media.
"Testing is not all about ensuring safe milk products," Wang Dan said. Ethical conduct must be promoted as a corporate culture. "Otherwise other problems that tests cannot detect may occur," she said.
Zhang Jingfang, who had worked in Sanyuan testing products for 17 years, said the concept of honest operation was deep rooted in every Sanyuan employee. "We would rather suffer a loss than make profits through cheating," she said.
Nevertheless, ethics alone was inadequate. China drafted its first Food Safety Law, which was under the scrutiny of the country's top legislative body. In late October the draft underwent the third round of examination. As a consequence of the milk scandal, amendments were proposed.
Punishment would be harsher. A company engaged in illegal operation would have its business license revoked and the fine could be as high as ten times the value of related goods, in addition to confiscation of its illegal income.
Professor Jiang Ming'an of Beijing University said a company should be forced by law to make punitive compensation to food poisoning victims. The current compensation for consumers was barely enough to cover the medical cost. A large part of it, in fact, was paid by the government or public institutions, with taxpayers' money.
"Punitive compensation will greatly raise the law-violating cost of the company. It will also encourage consumers to stand up for their own rights," said Professor Jiang, who was a deputy to the Beijing Municipal People's Congress.
The Sanlu milk incident was a bloody crime, if one thought of the infants killed by kidney stones developed from drinking melamine tainted milk, and the tens of thousands of babies hospitalized for the same reason, which numbered 10,666 across thecountry as of Oct. 8.
The suspects detained in Hebei, if convicted, would be punished. So would, probably, board chairwoman of Sanlu Group TianWenhua, who is alleged to have tried to cover up the issue and was detained by Hebei police on criminal charges in mid-September.
The incident had led to the dismissal of a number of officials from prominent posts in the government of Shijiazhuang, capital city of Hebei Province, including two vice mayors. And Li Changjiang, director general of the General Administration of Quality Supervision, Inspection and Quarantine, had resigned because of the organization's disappointing regulatory work.
SANLU DOOMED
Once a rising star in China's milk industry, Sanlu was devastated by the melamine scandal. Rumors flew in early October about the possible acquisition of Sanlu by Sanyuan. Although the latter refused to comment on the issue, the publicly listed firm stopped trading on account of that on Sept. 26. Both Sanyuan and Sanlu are state controlled. Sanyuan was better established, with a total assets of 1.3 billion yuan, while Sanlu's net assets reached1.2 billion yuan before the scandal broke.
Reports said the move was pushed by the government. Negotiation had been tough because the local government wished the potential acquirer to shoulder Sanlu's debts too, while Sanyuan was interested only in good assets. At least one other company, the Hangzhou-based Wahaha Group, a privately owned firm that produced drinking water and milk drinks for children and was expanding into liquid milk and powder business, had wooed Sanlu.
According to the 21st Century Economic Report dated Nov. 3, deals had been reached for Sanyuan to purchase seven Sanlu core factories. Sanyuan appeared triumphant in the bargaining. Sanyuan might issue additional targeted shares and apply for a state loan to complete the acquisition.
The same report said WonderSun, a dairy producer based in northeast China's Heilongjiang province, was to take over a Sanlu milk powder factory in Mudanjiang. However, WonderSun had repeatedly denied the intention and the acquisition.
This was not the end of the Sanlu story. Rapidly expanding through investments, acquisitions and mergers, Sanlu had lined up nearly 30 factories under its name. Earlier, on Oct. 28 it was reported that seven non-core Sanlu factories had changed names and resumed operation. The fate of the remaining enterprises was yet to be decided.
The melamine scandal caused more casualties than just the Sanlu Group. A report from the government of Inner Mongolia in north China showed the region's two leading milk producers, Mengniu and Yili, had recalled melamine related products worth 6.4 billion yuan. Orders decreased 80 percent, daily collection of raw milk dropped by similar rates and the future loss was estimated to be 3.6 billion yuan.
Statistics released by the Ministry of Industry and Information Technology showed, up to Nov. 2, 128 of the 638 dairy producers in China remained closed.
Although a survivor of the melamine scandal, Sanyuan Foods general manager Niu Liping said the company shared the pains, because the whole industry was damaged. "With the skin gone, what can the hair adhere to," he said. Niu said he was worried over the future of the domestic milk industry.
He did not believe there had been an unwritten rule relating to melamine dealing in the industry. With companies like Mengniu and Yili, he said, most of their products were still safe and good. He called on fellow companies to learn from the lesson. And he pleaded with consumers to retain confidence in domestic products. "It would take time for the dairy industry to overcome the difficulty," he said.
On another occasion amid the furore about the scandal, Zhang Fuping, board chairman of Sanyuan Group, which was Sanyuan Foods' parent company, was quoted as saying, "As a state owned enterprise, we have an unshakable responsibility to lead the industry to disciplined development and let consumers drink milk that is good for their health."
Source:Xinhua
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