Fonterra and the Chinese contaminated milk scandal

In September 2008 the New Zealand-headquartered dairy co-operative, Fonterra, was implicated in a major milk contamination scandal in China.

Joint Venture with San Lu
In December 2005 Fonterra announced that it had reached agreement with the Shijiazhuang San Lu Group to invest US$107 million for a 43% stake in a new joint venture project which would undertake the "manufacture, marketing and distribution of consumer dairy products within mainland China." Fonterra announced that it would have three representatives on the seven-member joint venture board and that "a senior Fonterra representative will also join Shijiazhuang San Lu Group’s senior executive team." It also stated that Fonterra was advised on the project by Fonterra was advised on this transaction by Deutsche Bank, PricewaterhouseCoopers and Baker & McKenzie.

In the media statement announcing the joint venture, Fonterra Brands Managing Director Sanjay Khosla referred to the Shijiazhuang San Lu Group as a "professionally managed company that has a good track record for growth. It has an established sales and distribution network reaching more than 600 cities in China and also has some of the most modern milk processing facilities in China."

Timeline of the scandal

 * April 2004: Chinese government authorities launched investigations into the sale of fake baby milk formula in the province of Anhui. The BBC reported, citing the Chinese government newsagency Xinhua, that at least 13 infants had died and that in one province alone there were 45 types of substandard powder produced by 141 factories across China.


 * August 2004: The BBC reported that two men had been sentenced to prison terms as a result of the investigation into the sale of sub-standard milk formula in Anhui province. The BBC reported these "were the first convictions for a scandal that caused a national outcry." It also reported that "the emerging picture is of corrupt officials conniving with unscrupulous factory owners to continue selling the bogus powder, even though they had received complaints about it from parents of the infant victims."


 * December 2005: Fonterra buys a 43% stake in a joint venture project with the Shijiazhuang San Lu Group to manufacture and distribute milk products in China.


 * March 2008: San Lu received complaints about its milk powder.


 * June 2008: Beijing News reported that a Sanlu manager, Wang, confirmed that the company had received further complaints of problems with its milk powder.


 * June or July, 2008: San Lu imported equipment to identify the contaminant in its milkpowder.


 * July 16, 2008: Xinhua News Agency reported that health officials in Gansu province reported that 16 infants who had consumed Sanlu milk were suffering from kidney problems.


 * August 2, 2008: Fonterra stated on September 15 that this was when the "San Lu Board, on which we have three directors, was first advised on August 2 that there was a problem with the contamination of infant formula. This was the first Fonterra knew of this issue." The company claims that the San Lu board was told that "that the help line had received calls about sick babies from March and that the company had carried out "detailed testing of product" which indicated no melamine contamination. They also stated that Sanlu had three other centre's test the company's products and that "it is our understanding that melamine was not detected until August 1."


 * August 11, 2008: A document titled "San Lu Crisis Public Relations Proposal" was prepared and reportedly proposed doing "anything to pacify victims and accept all they want to keep them silent for at least two years". It also proposed a "PR protection" deal with the Chinese search engine Baidu, under which it was later reported that "San Lu agreed to buy NZ$640,000 worth of advertising in return for having negative stories blocked from search results." (The document was later posted onto on a Chinese blog site.) Fonterra spokesman, Graeme McMillan did not deny the authenticity of the document only that "it was never discussed at the Sanlu board or with any of the Fonterra related staff interacting with Sanlu ... The board were totally unaware of it." (This document was first posted to a Chinese blog on Sepetember 12 and then reported on by the Sunday Star Times in New Zealand on September 28. The story was subsequently picked up by the New Zealand Press Association wire service and other newspapers).


 * August 14, 2008: A New Zealand Embassy official was given an "informal indication" by Fonterra China that the joint venture was "receiving milk contaminated with melamine". The "informal" comment was at a social function.


 * August 22, 2008: Fonterra advised the New Zealand embassy that Sanlu milk was contaminated and that it had urged local authorities for a full product recall.


 * August 23-29, 2008: New Zealand Ambassador Tony Browne phoned the Ministry of Foreign Affairs and Trade stating that Fonterra had a "sensitive problem".


 * August 31, 2008: a report on the issue was sent to the New Zealand Trade Minister Phil Goff. It was discussed with him two days later.


 * September 9, 2008: New Zealand Government directed its embassy to inform Chinese food safety authorities in Beijing of the milk contamination.


 * September 10, 2008: 14 babies in Gansu province were reported to have become ill.
 * September 11, 2008: Contaminated milk products are recalled in China. The BBC reported that "the babies in Gansu had all been fed milk powder bearing the label of the Sanlu Group, but a spokesperson for Sanlu insisted that any substandard milk would have produced by counterfeiters."


 * September 12, 2008: First NZ media reports. The BBC reported that "the company was recalling milk formula made before 6 August". It also reported that calls by a BBC correspondent to San Lu "went unanswered.". However it reported that a statement from Fonterra emailed to the Associated Press stated that San Lu "has advised us that they have recalled product in China and have put new milk quality testing procedures in place."


 * September 13, 2008: Chinese government official announce that there were 432 babies that had become sick from contaminated milk. "The Sanlu Group should shoulder major responsibility for this," Health Minister Gao Qiang said. An Associated Press report also noted that "Vice Gov. Yang Chongyong of Hebei province, where Sanlu is located, said authorities have seized 2,176 tons of Sanlu baby formula and ordered a recall totaling 8,218 tons — far more than the 700 tons reported in the company's recall announcement Thursday."


 * September 17, 2008: Fonterra makes its first statement to the media. New Zealand Prime Minister Helen Clark later noted that "Fonterra really didn't front for at least three days and then by video conference from Singapore, which was less than adequate."


 * September 16, 2008: Fonterra chief executive Andrew Ferrier stated that "Fonterra has very rigorous testing procedures worldwide, Sanlu has very rigorous testing procedures - but its impossible to totally exclude sabotage of a product. And in this case we frankly have sabotage of a product".


 * September 23, 2008: New Zealand Prime Minister states that "I think a concern that many would share is that Fonterra going into a joint venture in China did not have adequate supply-chain management over product that was marketed from its joint venture there".


 * September 24, 2008: Fonterra's Board met and "discussed the San Lu tragedy in depth and were fully supportive of the approach taken to date by Fonterra management and staff." The company stated that revelations that "an official Chinese Government investigation has revealed San Lu management was investigating complaints of sick infants as early as eight months before the San Lu Board and Fonterra were first informed on August 2 is deeply concerning. That Fonterra was not informed earlier is frankly appalling," the company's Chairman Henry van der Heyden was quoted as stating.


 * October 1, 2008: The Wall Street Journal reports that Zhang Xingkuan and Ji Cheng from the Deheng Law Office in Beijing have lodged a claim against San Lu "on behalf of the parents of a one-year old boy allegedly sickened by tainted milk powder." The claim is for compensation "of 150,000 yuan ($21,900) to cover hospital fees, travel expenses, time off from work and other costs."


 * October 7, 2008: The Wall Street Journal reports that "a Sanlu spokesman said Monday that the local government in the city where it is based is making the company increase its investment in imported melamine-testing equipment by five times to 5 million yuan ($731,000)."


 * October 9, 2008: Fonterra confirmed that it was in talks with the Chinese government over compensation payments for those affected by the company's tainted products. The New Zealand Herald reported that Fonterra CEO had flown to China for high level talks on October 8. ""We are talking, I think, to some people up there about how we could support it, what we could do to support those who are affected," Fonterra spokesman Graeme McMillan stated. "Until we can get some more visibility around what compensation has been offered and what else may be anticipated we are unable to comment on compensation to individuals."
 * October 10, 2008: Fonterra announces that -- in its "the first charity activity launched by Fonterra in China" in its twenty years of operation in the country -- it will contribute US$5 million (NZ$$8.4 million) over five years to the China Soong Ching Ling Foundation "to provide medical care and advice to pregnant women and mothers of infants in rural communities across China." "That's an amount which is going to create an enormous amount of goodwill and good work," said Fonterra chief executive Andrew Ferrier. Fonterra spokesman Graeme McMillan said that the company's board and management "wanted to provide some sort of tangible, practical assistance to China in the aftermath [of the contamination scandal] and they wanted something long term ... It shouldn't be confused in any way shape or form with compensation to the victims ... For us it's not a question of liability."

Fonterra's PR

 * Graeme McMillan, Fonterra's group director of corporate communications

Related SourceWatch Articles

 * Crisis management

Media Releases & Public Comments by Fonterra

 * Fonterra, "Statement by Fonterra CEO Andrew Ferrier to media conference", Media Release, September 15, 2008.
 * Fonterra, "Notice of voluntary product recall - ANMUM Materna", Media Release, September 16, 2008.
 * Fonterra, "Media conference audio - Andrew Ferrier on China milk contamination issue", Audio file, September 17, 2008.
 * Fonterra, "Media conference audio", September 24, 2008.
 * Fonterra, "Fonterra announces 2007/08 final payout and revised 08/09 payout forecast", September 24, 2008.
 * Fonterra, "Fonterra joins the China Soong Ching Ling Foundation in establishing the 'Fonterra Rural Maternity and Infant Healthcare Community Programme'", Media Release, October 10, 2008.

General Articles

 * "China investigates baby formula", BBC, September 11, 2008.
 * "China to punish baby milk makers", BBC, September 12, 2008.
 * "Chinese baby milk scare 'severe'", BBC, September 13, 2008.
 * "NZ firm warned of China milk risk", BBC, September 14, 2008.
 * "Toxic milk toll rockets in China", BBC', September 15, 2008.
 * Allan Swann, "Fonterra claims milk was sabotaged as another baby dies", National Business Review, September 16 2008.
 * "Timeline of China's tainted milk powder scandal", Associated Press, September 22, 2008.
 * Fran O'Sullivan, "Embassy officials slow to call toxic alert", New Zealand Herald, September 21, 2008.
 * Vaudine England, "Why China's milk industry went sour", BBC News, September 29, 2008.
 * Christopher Boden, "New Tests Find Melamine in 31 Chinese Milk Brands", Washington Post, October 1, 2008.
 * Sky Canaves and Juliet Ye, "Chinese Parents File Milk Lawsuit: Couple's Claim Comes as Officials Oppose Litigation", Wall Street Journal, October 1, 2008.
 * Karen Arnold, "Fonterra in the dark over compo claims", Sunday Star Times, October 5, 2008.