MComm5001
SanLu-Fonterra Milk Scandal
Jacqui Check
Donna Ngo
Caroline Fruitet
Wendy Lin
May 2009
1. Executive Summary
Fonterra, New Zealand’s dairy giant invested US$107 million for a 43% stake in
China’s SanLu group to form a new joint venture project which would undertake the
manufacture, marketing and distribution of consumer dairy products within mainland
China.
In September 2008 Fonterra blew the whistle on SanLu and the world
became aware of a country-wide practice of milk tampering. Since then over twentytwo dairy companies throughout China have since been implicated.
Victims of the
tainted milk scandal include babies who have died as well as hundreds of thousands
of sick children, their immediate families, the innocent farmers whose livelihood has
stopped because of product bans and the Chinese export market economy as the
world watches more closely their food production practices.
The primary reasons for this systemic failure is due to unethical behaviours and poor
management decisions that led to insufficient product testing, a conspiracy to cover
up, a widening gap between wealth and poverty throughout the country, and a small
power distance ratio of a culture led by a central government not scrutinised by its
people. For example, victims may have been saved had there been adequate
healthcare for poorer families. Recommendations in this report will demonstrate that
the tragic outcomes could have been avoided. Better management decisions
implemented at all stages including quality control standards with tough penalties
enforced for violation, open communication channels and an overall respect for
human life. The joint venture between Fonterra and SanLu has also revealed poor
international management with particular focus on the minimal shared knowledge of
cross-cultural behaviours, weak internal and external communication channels and a
lack of consideration for all stakeholders inside and outside the organisations.
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2. Table of Contents
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3. Literature Review
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4. Introduction
“What kind of civilisation would poison its own children?” (Zhai, 2008, pp. 19)
In September, 2008, after the success of the Beijing Olympics and its festive
atmosphere still lingering in the air, the world woke to the news of melamine tainted
milk in China. The purpose of this report is to investigate the human behaviours
behind the deliberate sabotage by analysing the SanLu and Fonterra joint venture in
terms of two ethical frameworks: consequences and duties. Due to the complexity in
the nature of this case, all parties that include the melamine manufacturers, the dairy
farmers, the milk peddlers, the dairy manufactures, including SanLu and Fonterra as
well as local and central Chinese governments contributed to the harm which
escalated out of control. This report will reveal each of the stakeholder issues
relating to these two ethical frameworks and provide recommendations to minimise
the risk of such a catastrophe repeating. As Sha Yexin wrote (cited in Zhai, 2008, pp.
19), the scandal not only shows the limitations in the Chinese political system, but
the “entire culture and moral system has decayed to its very roots.”
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5. Body
5.1 The Chinese Government
China, under its one-party rule is a country governed by fear and intimidation. The
local government’s inaction and initial attempt in covering up the scandal was a
consequence of their selfishness and greed. They fear for their own job and position
if the scandal came into light. “Local officials preferred to risk other people’s lives
than their own careers” (Magistad, 2008). “Our entire cultural and moral system has
decayed to its very roots” (Zhai, 2008)
The central government typically handle high profile cases swiftly with harshly, often
imposing the death sentence. One example is the food and safety crisis, where the
head of China’s Food and Drug Administration was sentenced to death for corruption
(Yardley & Barboza, 2008).
Corruption was prominent within the local government where local industries are
frequently linked with local officials. SanLu’s chairwoman was in fact appointed by
the Hebei Province Communist Party and she, was also a party official(Yardley &
Barboza, 2008). Their duties, thereby was the wellbeing of the company because
quite often “they’re profiting from the businesses in question” (Magistad, 2008)
At the top of this high degree power distance hierarchy sits the Chinese Communist
Party (Figure 1). This inequality in power is destructive because it allowed the
Chinese government to cover up the scandal and control the media. The reason was
due to their duties to protect China’s global reputation in the midst of the Beijing
Olympic Games. “Utilising the efforts of the entire nation to successfully host the
Olympics” was the slogan the Chinese Communist Party used for the Olympics. It
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only permitted success, not failure; good news, not bad news. Their top priority was
to hold a ‘harmonious’ Olympics. The result of it was cover up of the scandal to avoid
embarrassment. It is a nation where the government “puts its own interest above
those of the nation” (Yardley and Barboza, 2008). “Parents who tried to act as
whistle-blowers were thwarted by unresponsive bureaucracy…journalists were
blocked by censorship...during the prelude to the Olympics” (Yardley and Barboza,
2008).
Figure 1. Hofstede’s rankings for China (ITIM International, 2009)
The Chinese Communist Party feared that the effect of the scandal will result in a
national political movement. Their duty lies in the maintenance of the one-party rule
established by Chairman Mao. This is evident throughout the Communist party
history of thwarting out large groups for example, Falungong, driving HIH The Dalai
Lama into exile and banning large religious gatherings. This is also true for the milk
scandal because of the scale of the affect citizens “Chinese authorities ordered a
cover-up of a tainted milk scandal …because they feared social unrest if the news
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was made public” (Spencer & Foster, 2008). “It seems to prefer to keep victims
isolated” (Magistad, 2008) because they know that collectiveness is power.
During the launch of Deng Xiaoping’s economic reform, he said that “development
was our highest national principle” (Zhai, 8008). He declared that local GDP growth
rate as the standard for measuring the accomplishment of local government officials.
Three decades later, China continued to have double-digit growth year after year
(Hilton, 2009). SanLu was China’s first and largest powdered baby formula supplier
and was “a source of particular pride to the local authorities in Shijiazhuang” (Moore,
2008). To the local government, it would be in their best interest to protect this rich
source of income in order to report their successful duties to the central government.
They will thus often turn a blind eye to the problem or help covering it up with their
powers in censorship.
5.2 Fonterra
If ‘business ethics is nothing less than the full awareness of what one is doing’
(Solomon 2004) then Fonterra is guilty of breaching its ethical responsibility to ‘food
safety’. ‘Food safety is absolutely and utterly non-negotiable’. (Fox, 2009).
Fonterra failed to do their due diligence before investing in China. Had they been
fully aware of the cross-cultural differences and the differing business practices that
pose potential problems to business management they could have minimised the
risk not only to their own organisations image and reputation, but also the reputation
of the dairy industry as a whole. The ‘physical dimensions of cultural behaviour’
(Chaney, 2007) in dealing with a country with apposing values to that of their own,
may have revealed the widely known unethical tampering that would eventually
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effect their situation. There was evidence to prove that adding melamine to raw milk
was an ‘open secret’ (Zhe, 2009) in China and a practice that was also encouraged.
Throughout the contamination period the SanLu board, which included members
from Fonterra ignored this steady pattern of inappropriate behaviour because of
disregard of the consequences of these practices.
Fonterra failed to set up an
effective corporate communication structure and take responsibility for the
communication channels.
Their decision not to structure this into their strategic
management was a narrow focused utilitarian approach and it could be regarded as
having only a concern for capitalising on a rapidly growing market sector regardless
of the harmful actions taking place by those in the supply chain. A recommendation
would be for Fonterra to have had a combination of New Zealand and ethnic
Chinese staff involved in all operational matters to ensure the veracity of the
information as it flowed to the board.
The failure to detect levels of melamine adulteration in the processes has highlighted
weaknesses in the ability to protect the public health as food supply becomes
increasingly global.
The lack of regard to the poor practice and issues of farm
management and improving raw milk quality demonstrate that joint ventures such as
SanLu and Fonterra are not equipped to deal with the Global economy.
Fonterra
should have had greater scrutiny in dealing with China who doesn’t have a ‘21 st
Century regulatory system keeping the industry honest and operating to high
standards’. (Kuehn, 2009)
To their credit, as the extent of the harm became apparent the Fonterra board felt it
was their duty to blow the whistle on SanLu and risk their reputation as a global
organisation. In response to global scrutiny Fonterra is defending their involvement
to the public:
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I am appalled that the four individuals deliberately released product containing
melamine. These actions were never reported to the San Lu Board and
fundamentally go against the ethics and values of Fonterra. (Ferrier, 2009).
They needed to prove that they were ethically opposed to the harm caused by the
tampering. This action is typical of the duty bound responsibility or deontological
behaviour as Fonterra had no concern for their financial consequences, rather the
act of going public on the scandal what was right in itself and thus was morally the
right thing to do at the time. Their reaction to the crisis, demonstrated that Fonterra
wanted to prove to the global community that they were willing to risk their own
reputation to protect the interests of the Chinese victims.
It is difficult to judge
Fonterra as innocent on all levels as we now know the first instance of
communication that lead Fonterra to react was an informal grapevine style of
communication, which only leads to further questions as to why there was the lack of
a communication structure within the organisation.
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6. Conclusion
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7. Recommendations

ChinaUniform standards on food safety with tough penalties & fines for violation.

Allow education on ‘best practice’ such as allowing global/world influences &
training programs from land husbandry through to manufacturing. This could lift
skills to 21st Century standards.

International companies have more Mandarin speaking international representatives
on the ground in China working with organizations together.
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8. References (alphabetical order)
Chakraborty, Barnali 2009. “The Chinese Tainted Milk Scandal.” ICMR Case
Collection (BECG092): p10.
Chaney, L. and Martin, J. (2007), Intercultural Business Communication. 4th Ed,
Pearson, upper Saddle R., Ch 1, 5.
Ferrier A. 2009.
http://www.fonterra.com/wps/wcm/connect/fonterracom/fonterra.com/our+business/n
ews/media+releases/san+lu+judgement.
Fox, A 2009, ‘Quiet recall should not have been sanctioned’, The New Zealand
Farmers Weekly
ITIM International 2009, Geert Hofstede TM Cultural Dimensions, Sweden, viewed 17
May 2009, <http://www.geert-hofstede.com/hofstede_china.shtml>
Kuehn, Bridget M. 2009. "Melamine Scandals Highlight Hazards of Increasingly
Globalized Food Chain." JAMA 301(5):473-475.
Magistad, Mary K. (2008), “China’s Image Sullied by Tainted Milk”, Yale Global
Online
Moore, M. (2008), “China Milk Scandal: Families of Sick Children Fight to Find Out
True Scale of the Problem”, The Daily Telegraph (UK)
Solomon, R.C. (2004) It’s Good Business, In Shaw, W.H. and Barry, V. (Eds), “Moral
issues in Business”, Wadsworth, Belmont, pp. 35-34
Spencer, Richard & Foster, Peter (2008), “China Ordered Cover-up of Tainted Milk
Scandal”, The Daily Telegraph (UK)
Yardley, Jim and Barboza, David (2008), “Despite Warnings, China’s Regulators
Failed to Stop Tainted Milk”, The New York Times
Zhai, Minglei (2008), “Stones in Our Hearts”, China Rights Forum, No. 4
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