Behind bad baby milk, an ethical gap in China's business

Inspectors found that 13 percent of dairy firms inspected since last week had produced melamine-tainted formula, state TV reported Tuesday. Critics say state regulation alone won’t prevent more food scandals.

As Chinese officials warned Tuesday that contaminated milk powder may have sickened more than the 1,200 babies already identified, the scandal revealed more than a recurrent regulatory problem, Chinese and foreign experts suggested.

Rather, they said, it pointed to a deeper malaise in Chinese society where private profit often trumps the public good as the country races to create a market economy that has outstripped government regulators.

"China has the problems of any transitional economy," says Yanzhong Huang, a global health expert at Seton Hall University in South Orange, N.J. "But the deeper and more fundamental challenge China faces is a systematic lack of business ethics."

"You cannot fully police the whole food chain," adds Dali Yang, a politics professor at the University of Chicago. "A lot depends on changes in social norms. People have to recognize that integrity does matter."

A leading Chinese dairy company, Sanlu, admitted last week that its baby formula manufactured earlier this year was tainted by the chemical melamine. Doctors in several Chinese provinces have found more than 1,200 babies who drank the formula suffering from kidney stones and renal failure. Two babies have died as a result since May, officials say, warning that the number of cases could rise sharply.

State television reported Tuesday that 22 of 175 dairy producers inspected since last week were found to have produced melamine-tainted milk. They included major brands such as the Inner Mongolia Yili Industrial Group, a supplier for the Beijing Olympics.

Investigators say it appears that milk merchants, selling to Sanlu the raw milk they had bought from farmers, had added the chemical – normally used in plastics and fertilizers – to boost the milk's apparent protein content.

Two brothers who owned a milk collection center in Shijiazhuang, Sanlu's home base, were arrested Monday on charges of adulterating the milk they had sold to the company, the state news agency Xinhua reported. Two additional milk suppliers were also arrested later that day. Seventeen others have been detained, including one man suspected of illegally selling melamine.

The case is especially embarrassing to Sanlu – a majority state-owned joint venture with a New Zealand dairy cooperative – because it was allegedly such a paragon of virtue it has been exempted from government food safety inspections since December 2005.

The company's infant formula had been certified as an "inspection-exempt product" for three years by the General Administration for Quality Supervision, Inspection, and Quarantine (AQSIQ), according to the administration's website.

Such certification means that "the products are exempted from quality monitoring and inspection conducted by the government," the website explains. In return, it adds, "internal inspection should be reinforced."

Forty-seven Chinese dairy companies currently enjoy such an exemption, according to AQSIQ, after demonstrating that they have "a complete quality guarantee system," among other criteria.

Not only did Sanlu fail to detect the melamine in its milk powder, the company has also so far failed to explain why it did not publicly reveal the problem until Sept. 11, although it had received complaints from worried parents as early as last March, and identified the contamination on Aug. 6.

The incident became public only after Sanlu's New Zealand partner, Fonterra, which holds three seats on the company board, informed New Zealand diplomats who told Chinese government officials in Beijing of the problem.

Fonterra has "been trying for weeks to get official recall, and the local authorities in China would not do it," New Zealand prime minister Helen Clark told her country's state TV broadcaster on Monday. "At the local level ... I think the first inclination was to try to put a towel over it."

Last year, after a wave of food safety scandals involving pet food, toothpaste, and seafood, the Chinese government pledged stricter controls, especially of food destined for export.

A new food safety law was presented last December to the National People's Congress, the parliament, after three years of study, and last month the Chinese Food and Drug Administration was put under the wing of the Health Ministry.

Skeptics are not convinced by such moves. "Central regulatory reform is only part of the problem," argues Richard Suttmeier, a University of Oregon expert on Chinese product safety. "There is nothing you can snap your fingers at and solve."

With nearly half a million food producing and processing companies, according to official figures, "there are more individual producers than the government could ever regulate," Prof. Suttmeier adds.

The authorities "will be defeated constantly" unless "they begin to think how you make multiple producers responsible agents," he says.

A wide range of reforms is needed, he warns, from capital markets that would starve misbehaving companies of funds to a legal system that would allow aggrieved consumers to sue firms for damages.

"What is really needed is a cultural shift," Suttmeier argues. "That will occur if they make progress with institution building" as part of China's transition from a socialist to a capitalist economic system.

Prof. Yuang also attributes the Sanlu scandal, and others like it, to "the difficulty of transforming institutions from the micro-interference of a centrally planned economy to macro-regulation.

"There is a big question mark over how effective this is," he adds.

Some observers see a silver lining in the scandal. "One positive result is that people will become more aware of food safety," says Ren Fazheng, a professor at China Agriculture University in Beijing. "Government and society will pay more attention to this issue ... and more inspection agencies will use more methods, so the level of inspection will improve."

Yet public opinion, even outrage, has limited impact, as evidenced by the stunted efforts by angry parents who lost children in the Sichuan earthquake in May to demand government accountability. While officials are still investigating why so many schools in the quake area collapsed, protests have been curtailed and media coverage on the issue banned.

Still, with Sanlu closed by government decree and its future in doubt, two men charged with crimes that can carry the death penalty, and a government investigation widening, "this serves as an extremely strong cautionary tale for the whole industry," says Professor Yang.

"Lawsuits have not worked well in China, but the costs are escalating" for companies that cheat, he argues. "Producers realize now how precious their brand name is."

Yuang is less sanguine. "The problem is structural and systematic" he warns. "If it is not tackled we will see many, many more cases like this, and it will really hurt the Chinese economy, especially its export sector."