Milk scandal taints foreign firms in China

China's tendency to let problems fester has allowed the baby formula affair to amplify, according to market experts.

The tainted milk scandal has raised an ethical debate about business practices in China.

BEIJING // The milk scandal in China has spread beyond country borders, affecting the products and reputations of several of the world's most successful food and beverage companies, and focusing attention on the perils of doing business in the People's Republic.

With senior Chinese Communist Party (CCP) officials so adverse to negative news or any form of criticism, fears that there will be more such incidents continue, despite repeated promises by Hu Jintao, the president, to clean things up. The tainted milk, which has killed four infants and has left as many as 90,000 ill, according to Reuters, was caused by baby formula that was contaminated by melamine, an industrial chemical.

James McGregor, the chief executive of JL McGregor and Company, a China research firm, and author of One Billion Customers: Lessons from the Front Lines of Doing Business in China, said the Chinese were sincere in wanting to deal with product safety issues, but they still had a dangerous tendency to limit information. "The Communist Party likes to discuss problems in the context of how they are solving, or have solved, them, rather than in terms of being a problem," Mr McGregor said.

"The CCP likes to control things and it doesn't want reporters and lawyers running around. This is how they do things. But it lets problems fester longer then they should." Access Asia, a China-based consulting company, wrote an article in which it said foreign companies in China often feel "culturally obliged to turn a blind eye to corruption, nepotism and outright criminality that can leave the tiny gap in concentration that is all that is required for a disaster like this to happen".

Access Asia said the scandal was a model example of why it was time for foreign companies to stop treating China as special and to behave responsibly as they do in other countries. One company caught up in the scandal was Fonterra, a New Zealand dairy products company and a partner in the Sanlu Group, the company at the centre of the event. Critics say Fonterra was naive about the China market. Although Sanlu told the company that it only learnt about the problem in early August, there had been rumours of the problem going back to December.

Many Chinese reporters were hearing stories of infants being afflicted with kidney stones, but the central government had last year ordered the media not to report on anything negative in the run up to the Olympics - product safety issues were specifically named. Although the media would not touch the story, a handful of journalists began churning out information on their websites. The problem did not come to light until Sept 11, when the New Zealand government went over the heads of local officials to bring it to the attention of the central government on behalf of Fonterra.

Fonterra has also been criticised for opting to work through the system while lives of infants were at stake, to avoid ruffling Beijing's feathers. Both Fonterra and Sanlu declined to be interviewed for this story, but a source familiar with the story said company officials came under heavy pressure from their Chinese partner - and also from the local city government, which owned the majority shares of the venture - to keep quiet.

"You can't imagine the threats they faced from local officials," the source said. "They were between a rock and a hard place." Fonterra has since come under heavy criticism for not going public sooner, but it argues that it "did the right thing". The company said had it gone public immediately, the central government might have been angry and may even have denied there was a problem, preventing the necessary resolution.

The incident is an example of how things can go terribly wrong when doing business in China. "China is a very murky environment in which foreign companies are frightened of having politics turned against them," Mr McGregor said. "So they are way too deferential to their partners. "What this proves is that you can't be clueless in China. You have to know what your partner and employers are doing." [e-mail]