There is yet another interesting follow-up to the 2008 milk powder contamination incidents that occurred in China.  Supply Chain Matters readers may recall our commentaries related to this tragic incident involving the deaths of at least six individuals and sickening of over 300,000 people, many of which were infants and children.  Our Supply Chain Matters commentary, The Tainted Milk Scandal in China-One Year Later, noted that Sanlu Group, China’s largest producer of infant formula neglected to make full and timely disclosure of the melamine-laced contamination.  One year later, two Chinese citizens were convicted and executed as a result of their involvements in this incident, over 20 percent of the country’s milk collection stations were shutdown and despite massive subsidies from the government of China, dairy farmers on the mainland suffered from lack of demand and consequent low dairy prices.

One of the indirect participants involved in this incident was New Zealand based Fonterra, which is one of the world’s largest dairy producers.  The company had 43 percent joint ownership of Sanlu, and Fonterra officials were the first to inform Chinese governmental officials, via the government of New Zealand, on the potential existence of contamination.  Fonterra paid a dire price monetarily and in reputation. It had to liquidate its entire ownership of Sanlu, which incurred a NZ $200 million loss, and rebuild some of its credibility as a supplier to major confectionary and food producers such as Nestle and Kraft who relied on Fonterra for safe dairy related product.

In a new twist to this risk related story, an article published in the Financial Times (free preview sign-up or paid subscription may be required) notes that Fonterra is resolute to now return to China, but in a different role. Chinese consumers continue to lack trust in the Chinese dairy industry and have been electing to purchase from imported non-Chinese brands. This includes sales of New Zealand based dairy products. The article notes that Fonterra being a dairy cooperative, itself has 10,500 New Zealand farmer owners, and a near 40 percent share of global dairy sales.  Now Fonterra sees a vast opportunity to expand in China’s dairy market, and is actually looking to build more dairy farms within the country.  While the company continues to have a small brand presence within China, it now wants to elevate that image.

When I read of this development, I though about the Asian adage that crisis often brings opportunity.  The 2008 occurrence of the Chinese milk scandal will continue to be on the minds of Chinese consumers and dairy producers.  Safety is apparently being viewed as dairy products produced under non-Chinese control.   Fonterra is taking a bold but perhaps savvy move to turn a financial and potential brand crisis into a new market opportunity.

I wonder how may other firms would take such a risk?

 Bob Ferrari