China's Image Takes Another Punch With Sanlu Scandal

Three Infants Have Died and Thousands More Are Ill from Tainted Milk Powder; China's Top Two Dairies, Yili and Mengniu, Also Implicated

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Tian Yaowen, 15 months old, suffers from kidney stones caused by tainted Sanlu milk in a ward of Tongji Hospital in Wuttan City in Hubei Province
Tian Yaowen, 15 months old, suffers from kidney stones caused by tainted Sanlu milk in a ward of Tongji Hospital in Wuttan City in Hubei Province Credit: Getty Images
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Editor's Note: A fourth infant died on Sept. 18, 2008 and by Sept. 22, nearly 13,000 infants were ill because of tainted milk formula.

BEIJING (AdAgeChina.com) -- China has been hit with yet another deadly scandal.

By Sept. 17, three infants had died and over 6.000 were seriously ill after consuming a contaminated milk powder brand, Bei Bei Infant Powder, produced by Sanlu Group Co. The product contained the chemical melamine, which can cause kidney stones.

The Chinese dairy company based in Shijiazhuang, the capital of Hebei province, is 43%-owned by New Zealand dairy giant Fonterra. Sanlu works with local creative agencies such as Firstell Communications in Beijing.

Sanlu's vice president, Zhang Zhenling, read a letter of apology at a news briefing Sept. 16 in Shijiazhuang.

"The serious safety accident of the Sanlu formula milk powder for infants has caused severe harm to many sickened babies and their families. We feel really sad about this," he said. Two people have already been arrested and may face the death penalty. Dozens more have been detained in the investigation.

His words are unlikely to stall the domino effect of the scandal, which now extends far beyond Sanlu, previously thought to be one of the safest dairy companies in the mainland.

Its products were cheaper than high-end brands made by multinationals such as Nestle but were popular with poor rural consumers, partly because the company had foreign investors and was therefore regarded as safer than other local brands.

As a result of the Sanlu scandal, other companies have come under scrutiny by the government, which ordered a nationwide probe into all infant milk powder products last week.

According to state news reports in China, melamine has been found in 69 brands of baby milk powder nationwide made by 22 different companies, nearly 20% of China's 109 dairy firms.

Yili and Mengniu also implicated
The government has ordered a halt to all sales of the affected products. The list of offending companies, according to news reports on state-run CCTV, includes China's top two dairy companies, Mengniu Group and Inner Mongolia Yili Industrial Group. Yili was a national sponsor of last month's Olympic Games in Beijing.

Most of the companies named in the government report are now recalling their infant milk products from store shelves, and Fonterra's management team has also issued a public apology. But the crisis will likely harm Sanlu's brand -- and Fonterra's business aspirations in China -- for years, partly because the public was not informed of the health problem more quickly. Sanlu's board, which includes three Fonterra directors, learned of the contamination in early August, but a public recall didn't happen until mid-September.

The current milk scandal is the second involving melamine. Pet food sold in the U.S. last year, also containing melamine, caused widely-publicized animal deaths. Over 100 kinds of contaminated dog and cat food, such as Procter & Gamble Co.'s Iams and Eukanuba brands, had to be recalled in North America, Europe and South Africa because they caused renal failure in pets.

A cheap additive with no nutritional benefits and harmful side effects, melamine often turns up in tainted products in China because in product tests it resembles costlier protein additives.

Previous scandals have hurt China's image
The current safety scare involving infants has created "pandaemonium" in China, said Greg Paull, a principle at the marketing consultancy R3 based in Beijing. "This is a major issue. A mother's love is not easily compromised. Many consumers may now move to foreign brands or even avoid the category altogether. Nestle is still suffering fallout from the Anhui counterfeit product two years ago."

Other problems with product quality and safety have plagued China's reputation even more recently. In 2007, U.S. toy giant Mattel recalled Fisher-Price preschool toys that contained excessive levels of toxic paint.

Cheap Chinese tires missing a safety feature were blamed for a fatal traffic accident in New Jersey. And U.K. retailers discovered children's jewelry imported from China contained dangerous levels of lead.

In May 2007, over 10,000 tubes of Chinese-made toothpaste sold under the Excel and Mr. Cool brands were recalled in the Dominican Republic after it was found they contained diethylene glycol, a lethal chemical used in antifreeze and brake fluid.

In the wake of these discoveries, many consumers around the world have lost confidence in products made in China, prompting the government to launch its marketing efforts.

This month, the country's Ministry of Commerce selected DDB Guoan, a joint venture between Omnicom-owned DDB Group and one of China's largest state-owned companies, Citic Group, to create a Made in China campaign designed to change the perception of Chinese-made goods in western markets.

After the latest product contamination episode in China, that's likely to be an uphill battle.

"Something like this is devastating to a brand in this category, which is so dependent on a mother's trust in the product. When you violate that trust, there is almost no recovering from it, certainly not in the short term," said Jonathan Chajet, Interbrand's managing director, China based in Shanghai.

Sanlu's problems will impact other companies in China that are trying to build credibility overseas, he added. "There was a long delay before they made announcements about the problem at a time when China is spending so much on things like Olympics to build its image overseas and domestically."


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