Dairy in the spotlight for the wrong reasons

It's been a hectic few days for dairy in China, especially for foreign companies, after New Zealand's Fonterra had to work frantically to contain a botulism scare surrounding its products and China's subsequent banning of all New Zealand milk powder imports.

Fonterra said contaminated whey protein concentrate had been exported to China, Malaysia, Vietnam, Thailand and Saudi Arabia, and used in up to 1,000 tonnes of products, including infant milk powder.

The Chinese infant formula market is enormous, worth some €9.25 billion last year and expected to double by 2016, according to Euromonitor. Foreign brands make up half of the market, and retail for more than twice the cost of local product, because Chinese consumers are willing to pay a premium for foreign brands they believe are safer.

It’s worth noting that Fonterra acted fast and took comprehensive action to make sure that the scandal, relating to possible contamination from a dirty pipe, was contained, and the New Zealand government got involved speedily and effectively.

Food safety, especially in infant nutrition, is a prominent issue in China, particularly since September 2008 when six children died and 294,000 were sickened from drinking domestic infant milk formula contaminated with the chemical melamine.

Price-fixing

But the difficult week for Fonterra didn't end there. A couple of days later the dairy giant was in the news again when it was one of six milk powder producers hit with more than €80 million in fines for price-fixing and anti-competitive
behaviour.

China's National Development and Reform Commission (NDRC), which is the country's top economic planner, imposed the penalties after a four-month
investigation.

"From now on, if we discover firms knowingly breaking the law, then fines will be increasingly severe," Xu Kunlin, head of the pricing unit at the NDRC, told the People's Daily newspaper, the official organ of the ruling Communist Party.

As well as Fonterra, the firms fined included Mead Johnson, Danone, Abbott Laboratories, the Dutch dairy cooperative FrieslandCampina and Hong Kong-listed Biostime International Holdings.

The milk powder companies were in breach of the country’s anti-monopoly law, introduced five years ago, by effectively setting prices at which retailers could re-sell their products. They used methods such as contracts, direct and covert fines and rebates, as well as controlling and cutting supply to get retailers to comply, said Xu Kunlin.

There has been speculation that the inquiry was aimed at giving a boost to the domestic industry. The government has not commented but a commentary on the state news agency Xinhua, says this is not the case.

There is currently a major crackdown on graft in China and this was part of the broader sweep against corporate
malfeasance.

“The case demonstrated that there are less and less loopholes for transnational companies to earn ‘easy money’ in China,” judge Xu Liming wrote in a commentary on the Xinhua news agency.

China is placing a heavy focus on corruption and various corporate malfeasances. Last month, Chinese authorities launched an investigation into international pharma giant GlaxoSmithKline on suspicions of bribery and tax-related violations.

When it comes to anti-trust issues, foreign companies were treated just the same as their domestic counterparts, Xu wrote.

"The latest anti-trust decision does not aim at boosting domestic brands as some foreign media speculated. Instead, it might help increase market share of international formula giants thanks to the ensuing price cuts," ran the commentary.

Irish food companies

Recent developments will surely have been watched closely by Irish food companies active in the infant formula market in China, as suppliers or as joint venture partners, and Ireland’s reputation as a high-quality supplier of food will stand it in good stead.

Dairygold is the leading supplier to the Chinese market of demineralised whey, and Kerry has a partnership with China's leading domestic baby formula brand, Beingmate, to supply dairy ingredients for the infant nutrition sector. Glanbia has had a premix manufacturing facility in Suzhou since 2008, where it produces a range of nutraceuticals for infant formula.