China's Milk Scandal: Unharmonious Rumblings

After the success of the Beijing Olympics, "brand China" was on the rise, both domestically and internationally. Now, however, those gains are threatened by one of the most dramatic product tainting in China's history, one that has shaken local consumers much more than 2007's recall of toy, pet food and toothpaste exports.

There's no question the melanine milk scandal, one that caused 60,000 cases of kidney stones in babies, is another set back for the perception of Chinese brands.

International Scorn

Globally, this is just one more (gigantic) question mark regarding the safety of anything Chinese. It will further handicap any local company which seeks to establish a branded presence abroad. Chinese brands have never boasted the credibility and cool necessary to compete in developed markets but the sheer unseemliness of poisoned milk will push the day they are able to compete (at a price premium) further into the future. To boot, Chinese products' expansion into emerging markets will be slowed, at least in the short-to-medium term.

In Western countries, the impact of this crisis is incremental rather than a negative inflection point. Simply put, while children in the U.S., Europe and Japan play with Chinese toys, they do not drink Chinese milk. So the impact on moms' concerns for her kids' safety is, this time, indirect. Until we see headlines about American babies developing kidney stones, I don't think we will see an international panic akin to the 2007 crisis.

Domestic Public Relations Disaster

In China, the setback is more severe. True, Chinese have always had deep reservations about the quality and reliability of local brands, hence the popularity -- and active preference -- of international trademarks in practically every category, from soy sauce and paint to mobile phones and automobiles. Local brands' dominance (i.e., high market share) in key categories such as beer, cigarettes and appliances is largely driven by price-value considerations, rather than robust brand equity. Even value-added dairy items such as yogurt and ice cream, despite an inherent "purity" advantage, have historically been vulnerable to multinational brands' in-roads once the affordability issue is addressed.

Nonetheless, this setback is critical in a variety of ways.

First, it is viewed as a national "shame," a systemic breakdown, a by-product of incestuous, co-dependent managers and officials, all Communist Party members, who feed from the same trough. It's an indictment of an entire "system" in which checks and balances do not exist. The dairy industry was supported and promoted by the central government. Industry leaders such as Yili, Bright and Mengniu benefited tremendously not only from capital investment but also active government promotion of dairy as an essential element of daily nutrition. (Chinese were, traditionally, not big dairy consumers.) The government achieves much of its legitimacy by extolling its role as a patriarchal protector, consistent with Confucian imperatives, and guardian of public interest. As fourth generation leaders such as Hu Jintao and Wen Jiabao promote their role in forging a "harmonious society," the milk scandal makes policy makers look hypocritical and manipulative.

Second, Chinese hope for the future is invested in the child, the single child, precious and fragile. Because milk is digested, rather than merely touched, worn or played with, the perceived threat to national well being is immediate, even shocking. So the population will be even more vigilant in its buying decisions, not just in food products, but practically any commodity.

Third, Chinese manufacturers -- and the government -- will have to work harder than ever to reestablish the tentative trust in local goods that, heretofore, had been building. (In 2005, approximately 80% of infant formula were international brands. In 2007, domestic players Sheungyuan, Yili and Yashili were, respectively, the second, third and fourth largest brands.) The government recognizes this risk, and the threat to its credibility, hence a sudden propaganda about-face; news reports have lurched from strident proclamations that guilty cadres, managers and farmers will be dealt with "severely" to ads featuring apparatchiks drinking milk and reassuring the public that all dairy items have been tested for safety.

A Dreary Impact

What will be the impact of all this? In financial terms, we advertising folk are optimistic that spending behind local brands will continue, primarily because the public will require further quality reassurance, particularly in categories such as food, beverages, personal care and pharmaceuticals - i.e., products ingested into or applied on the body. Sadly, advertising messages will become even more prosaic than they already are, more "me too," less rooted in emotional benefits, since basic reliability needs to be reestablished.

Will there be a long-lasting backlash? Will consumers "boycott" locally-produced goods? I doubt it. As mentioned above, "tolerance" for substandard goods has always been high in the Middle Kingdom, the ultimate caveat emptor market. Furthermore, the sad fact is that, in many product categories, the Chinese, even within the burgeoning-albeit-penny-pinched middle class, are constrained by limited options and limited incomes. In most categories, multinational companies price their products two or three times higher than domestic competitors, so purchase options, particularly for daily essentials, remain limited for urban mass market consumers. This does, of course, present an opportunity for MNCs to introduce products at lower price tiers and grab a larger share of the "mass premium white space," a strategy that a few market leaders such as Procter & Gamble have pursued for the past several years. But the range of products (and price points) currently available is not broad enough to support a mad rush towards international goods.

In the end, the losers in this sorry debacle are Chinese consumers, a striving people who sometimes feel that odds are stacked against them. The will feel even less safe, a huge psychological blow for people who prize stability as a precursor to progress. Hopefully, the government will finally realize its fundamental, institutionalized lack of accountability precludes the nation from evolving into a modern society, a goal cherished by both ruler and ruled.

Comments

[sometimeshere]

Re:
"Simply put, while children in the U.S., Europe and Japan play with Chinese toys, they do not drink Chinese milk."

Hershey's outsourced manufacturing to China, and I'm sure other US food companies import from China, too. We are ingesting milk from China.

And right before Hallowe'en. Who's checking these things?

[wonderingstar]

2. In China, toxic milk appears to have resulted from a multitude of individual poor farmers supplying avaricious middle-men, in a poorly regulated market, who resold the bad milk to the big corporates who then repackaged and resold it in various forms into the consumer market.

In the U.S., toxic subprime mortgages resulted from a multitude of individual poor borrowers given loans by avaricious middle-men banks in a poorly regulated market who resold the loans to big financial corporation who then repackaged and resold the loans in various forms of securities into the investor market.

Disaster has resulted in both cases.

The challenge for both the U.S. and China is to establish wiser models of deregulation so that market efficiencies while maintaining safety and soundness. The dominance of Reagan-Thatcher ideology of "invisible-hand" regulation does not work (although there may be a few years of break-neck growth that covers up a lot of defects).

"Letting the market decide" is irresponsible if not regulated to protect safety and soundness.

[wonderingstar]

1. "China's Caijing, an investigative magazine that has ignored directives to restrict itself to official reports of the scandal, attributes the dairy industry's explosive growth to reforms in 1987 by Sanlu's now disgraced chairwoman, Tian Wenhua. Tian split farming and processing into separate operations, encouraging farmers to raise cows, leaving dairy companies free to process and market the milk. Millions of peasants, encouraged by the Government and cheap loans, became dairy farmers overnight. Sanlu and the Government later helped farmers set up another link - milk collection centres or brokers who could better organise the logistics of transporting the milk to the dairy factories....A bigger dairy industry was a long-held objective of Beijing because it promised to improve rural incomes and health....Caijing said that quality control was not a problem initially because there were so few dairy companies it was a buyers' market. Companies such as Sanlu could refuse substandard milk. But by 2005, private and state-owned dairy companies had multiplied and, in the scramble for milk supply, quality controls were abandoned. "Government supervision was practically nonexistent," Caijing concluded."

If Caijing's conclusions are true, then one lesson to be learned is that freedom for the market to take its course - without adequate government regulation - resulted in this crisis.

URL: http://www.smh.com.au/news/world/milked-to-the-degree-of-danger/2008/09/26/1222217517678.html?page=fullpage#contentSwap2

[Safetoy]

not sure how the links work on this site - the preview does not show www as a link but when posted it becomes a link which doesn't work.

So will http://safetoy.mobi work...

[Safetoy]

Why do you say this prevents China evolving into "a modern society"? isn't it already, or is that a matter of having approved consumer "brands"? China as a brand is thousands of years old. Traditionally Chinese don't drink milk, which is also an inefficient form of food that adult non-caucasians usually can't digest. I feel sorry for the pet victims, but www.safetoy.mobi does allow you to check pet food recalls, though of course pets are not toys.