By Richard Welford

Continued from Part 1

China’s President Hu has called for lessons to be learned from the scandal. So in keeping with his request, here are my top ten lessons and forecasts from the perspective of CSR:

1. The Crisis Was Not Intended And There’s The Risk

Those who contaminated the milk may not have known what the risks were when they added melamine to increase protein levels to pass tests. There was probably no malicious intent but rather a practice was adopted to enable a little more money to be squeezed out of milk processors by poor farmers. So what are the supply chain risks associated with cutting corners, cheating a little bit here and there and trying to extract just a little bit more money when prices are rising and incomes falling? If people’s incomes are squeezed in an inflationary environment so much that they cannot longer make a living, don’t be surprised if they start finding ways to recoup some of their losses. If large brands continue to want cheaper and cheaper products, when costs are rising, something has to give somewhere. It did, and this time had disastrous consequences. Wake up to the inevitability of having to pay higher prices for goods.

2. This Is A Whole New Level Of Community Protest

For years, people in China have put up with rising levels of pollution and impacts on their health as a trade-off for higher incomes, better housing and access to more products. But making adults sick is one issue, making people’s (one child policy) babies sick is something altogether different. The outrage coming from the Chinese public is probably unsurpassed by any other recent event and that is not going to go away any time soon. And as one father of a sick baby said, “this is now just too much to tolerate.” Some journalists have even gone so far as to argue that this could be a tipping point in terms of public dissatisfaction because this is one case where the public panicked and did not receive the information they needed to take action. Engaging the Chinese public has probably never before been as important. In fact, I would argue that you no longer have a choice. Engage your stakeholders or face the consequences: The parents of a Chinese infant allegedly sickened by tainted baby formula have launched what could be the first (but not the last) lawsuit in the nation’s escalating milk scandal. Product liability lawsuits have become more common in recent years and look set to increase.

3. You Cannot Silence The Social Media

Many mainstream Chinese websites are being questioned about the manner in which they are handling the keywords related to companies in trouble in the Sanlu milk scandal. Among the doubts, the biggest one is about Baidu, the search engine with the largest market share in China. Ever since the Sanlu milk powder affair broke, some think that the number of pages found on Baidu is far less than its competitor Google. A document released online by one blogger claimed that Sanlu had promised 3 million yuan (in advertising) to get Baidu to filter out all negative news about the scandal. In the end, Baidu admitted that a public relations company acting for milk producer Sanlu asked it to screen out negative news about the contaminated milk scandal. Attempts to control online sources of information do have a habit of backfiring. Honesty and transparency is the name of the game and some public relations companies would do well to remember that.

4. The “Made In China” Brand Is Again Damaged

Whether it is milk products, toys, dog food, toothpaste or whatever, the China brand is once again looking tainted. Many countries have decided to suspend imports of Chinese milk products or to withdraw them from their market. Consumers are now increasingly scrutinising the sources of products on the shelves of supermarkets (and that does not only include milk products). The China brand may have rebounded quickly after lead paint was found in toys but many more scandals on this level are going to have longer-term repercussions – and the government knows it. But more damaging, in the longer term, than the tainting of dairy products with melamine is the cover-up of the scandal by Chinese authorities, a number of journalists have argued. If there is no confidence in the governance of the regulatory system, how can there be any confidence in Chinese supply chains?

5. Product Responsibility Is High On The Agenda Now

The milk problem shows how big food companies struggle to impose food-safety standards on suppliers in the developing markets they increasingly rely on for sales growth. A lot of attention has now switched from manufacturing processes that might be described as sweatshops, to processes (and the products themselves) that can cause harm to human health. This is going to require increased attention by brands not only to first-tier, supply-chain processes but also those further down the supply chain where, in the case of both milk products and toys, the problems occurred. One might now ask whether only conducting first-tier audits will be sufficient to manage product responsibility risks in the future. And ensuring product responsibility in poorly regulated environments is going to be expensive.

Continued in Part 3

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