By Richard Welford

The scandal that has already claimed the lives of four babies and sickened some 60,000 after they were fed the powder, made by the once-prestigious Sanlu Group, has huge implications for corporate social responsibility. The milk, which had been laced with the industrial chemical melamine, used in plastics and glue, gave children kidney stones.

The Chinese government has said that officials in Shijiazhuang, where Sanlu is based, had covered up the extent of the problem for more than a month while China was hosting the Olympic Games. There, a local government spokesman, revealed that Sanlu (43 percent owned by New Zealand’s Fronterra Group) had approached them for help in managing the media response on August 2nd, six days before the games opened.

In fact, local media had known that problems were being reported by parents of babies across China who had been fed Sanlu formula. However, the reporters were unable to publish their findings because of strict media controls imposed by the government during the games.

Industrial experts are now predicting the bankruptcy of Sanlu. It is unlikely a single company will be able to take over Sanlu as its debts total more than 700 million yuan, not counting massive compensation claims.

But as well as highlighting yet another cover up, the scandal has also revealed, once again, the deficiencies of industry oversight and the weakness of regulatory bodies and ongoing problems associated with corruption. Despite orders from China’s central authorities to recall all milk produced before September 14th, banned milk from two of China’s biggest dairies was still being sold this week at a discount to students in the southern city ofGuangzhou through stores and milk dealers. The incidents call into question whether China’s central government can deliver on its promise to clean up the country’s dairy industry after contaminated infant formula sickened tens of thousands of children.

The government has now admitted that although contamination of milk had occurred at dairy companies, the government was responsible for monitoring the industry at the heart of the crisis. The important steps in the dairy industry, including production of raw milk, collection, transportation, processing, formulation and manufactured goods, will all need to have better standards and testing requirements, according to the government.

A nationwide check has now found melamine in 31 milk powder products. Large brand name companies including Cadbury’s, Heinz, Nestle and Unilever have had to recall products where milk was watered down by farmers who then added melamine to raise the protein levels.

But milk contamination, it seems, is nothing new in China. In 2004, the China Dairy Product Quality Inspection Report found that adulteration was very widespread and found urea, soap powder and starch being added to milk. It also found high levels of antibiotic residues in milk.

Just who is responsible for the mess we are now seeing is still far from clear. At first, milk processors such as Sanlu were in the spotlight for spiking the milk. It now seems that much of the adulteration was being done by farmers. But a number of media reports have pointed out that much of the problem might be associated with the fact that Sanlu had lowered the prices being paid to farmers at the same time as the price of animal feed was going up substantially.

Continued in Part 2

Tags: China, csr, csr asia, milk, richard welford, scandal