Saving Face, Not Lives

While Chinese mothers were feeding poisoned milk to their babies , the state was suppressing any controversies that might tarnish the Olympics

In the last two weeks Chinese consumers have been in uproar over revelations that local officials, the central authorities, and a major Chinese dairy producer, San Lu - 43% owned by New Zealand dairy giant Fonterra - colluded to suppress information on a massive scandal involving tainted infant milk formula. The formula was adulterated with melamine, a substance used in the production of plastics and fertiliser, which has now been linked to the death of four babies.

Unfortunately for those ordinary Chinese consumers, strict propaganda controls on negative news relating to food safety and other politically sensitive issues have been in place in the two years leading up to last month's Olympics, meaning the story stayed suppressed.

But should Fonterra _ New Zealand's biggest company and the largest exporter of dairy products in the world _ have got to grips with the crisis sooner?

One father complained to San Lu in February this year that the formula had made his daughter sick, and discussion about the problem built in the following months.

Fonterra CEO Andrew Ferrier says it learned the formula was contaminated on August 2. But the company has three staff serving as directors on the San Lu board, and a manager based in China who was on the senior management team.

With such high level personnel working closely with San Lu, how is it that Fonterra senior management were not aware earlier of the controversy?

It is worth compiling a brief timeline of some of the events to track how Fonterra might have been alerted earlier.

In February a man named Wang Yuanping contacted San Lu's head office and told them his daughter had developed urinary problems after drinking San Lu formula. San Lu told Wang they would only refund or exchange the formula he had bought and would not let him know the results of their testing of the formula he sent them, as it was a "commercial secret".

Wang contacted local food safety authorities and was told getting the formula tested would cost him thousands of renminbi. In May, Wang posted his story on Tianya, a popular website in China, seeking media interest in the story. There was considerable online response to his posting, but after 10 days he asked Tianya to withdraw the post. He later admitted that San Lu had given him NZ$500 worth of milk powder in return for ending his public campaign.

In June Chinese health officials made an internal report on the alarming numbers of infants experiencing kidney disorders, and in July a San Lu whistle blower made a report about problems with San Lu formula to Chinese food safety authorities. In the same month, Hunan television made a program about the growing number of infants suffering from kidney damage. To avoid the censors they didn't mention that San Lu was linked to the controversy, but signalled the connection by using San Lu formula packets as a backdrop to the report.

According to San Lu CEO, Tian Wenhua, it was also in July that San Lu launched its own investigation into why infants were suffering kidney failure after drinking San Lu formula.

The first two baby deaths connected to the formula happened on May 1 and July 22, but it is not known when San Lu knew of the deaths.

On August 1, San Lu tests detected that its formula contained melamine. On August 2, it called a board meeting to inform the other directors of this. San Lu alerted city authorities and the local Ministry of Health office of their findings the following day and the next day stopped 2000 tonnes of their product entering the market and secretly withdrew 8080 tonnes of the formula from shop shelves. Six weeks later the cover up was exposed after Fonterra sought the New Zealand government's help in getting the Chinese central authorities to act.

The first two baby deaths connected to the formula happened on May 1 and July 22, but it is not known when San Lu knew of the deaths. The Gansu provincial health authorities reported to the central health bureau in July that sick babies in the region with kidney problems had drunk only Sanlu powder. It is inconceivable that this information was withheld from San Lu—indeed the company began its own investigation that same month.

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Promoting a new image internationally was one of China's key strategic goals in hosting the Olympics. This new image aimed to allay international fears about China's increasing political, economic and military power, at the same time as projecting awareness of China's renewed strength and prosperity.

The government's efforts to promote such an image have been closely co-ordinated with Chinese firms who hoped to use the Olympics to increase international awareness and acceptance of their products. San Lu supplied milk powder to the Olympic athletes and its managers would have been well aware of the Olympic-related propaganda bans on reporting on food safety issues.

Ms Tian Wenhua, chair of the San Lu board, was also the company's general manager and communist party secretary. As a senior party leader she would have received classified communist party publications informing her of the propaganda edicts. Party diktat is above the law in China. According to the Chinese constitution the Chinese Communist Party has a leadership role over the whole of Chinese society. Party discipline would have kept her from relaying this crucial information to her Fonterra business partners.

On 16 September Tian was fired from all her posts. The following day she was arrested _ 18 others have been arrested so far in connection with the San Lu scandal.

This tragic story is an example of the perils New Zealand companies face in trying to do business in a country where politics lays a very heavy hand on the market. Companies who do not understand the current political economy of China are doomed to repeat the mistakes that Fonterra appear to have made in dealing with their Chinese subsidiary.

The cost of this debacle to New Zealand manufacturers will be high. In media reports, Chinese consumers are being repeatedly reminded that a New Zealand company is a 43% shareholder in San Lu. The other 57% are not getting such negative press.

Chinese web censors have been going into overdrive to control the crisis, which is deeply challenging public confidence in the government. Web managers have been instructed to "guide public opinion" on the San Lu tainted formula scandal. Internet news sites are instructed that they should not feature the story prominently on their sites and that reports should emphasise that the government has the situation under control.

Before the crisis San Lu products were rated highly - they are the official supplier of milk powder to Chinese astronauts - and its advertising was famous for boasting that its formula underwent "1100 tests, safeguards the health care of babies and is trusted by mothers everywhere". Now the words "1100 tests" have become an ironic joke on the Chinese language internet. The Vice-Governor of Hebei Province has admitted that melamine was being put into San Lu milk as early as April 2005. Many netizens are now complaining bitterly about how the company which boasted of having so many checks could have ignored the obvious quality problems in the milk it was supplied.

Many in China are now speculating just what is safe to feed young infants who rely on formula as their sole source of nutrition. Breastfeeding has gone out of fashion in China. Most mothers return to work soon after giving birth. Few workplaces provide a private location for expressing breast milk. Even mothers who do breastfeed their babies often give formula as a supplement in the mistaken belief that their breast milk is not enough.

Hosting the Olympics was supposed to improve China's image. The two weeks of the August 2008 Olympics were indeed a sporting and PR triumph for Beijing. But what we now know about actions taken behind the scenes in the preparation for the Olympics take much of the shine off that triumph.