By Richard Welford

Continued from Part 2

6. The Whole Supply Chain Is Affected

Spare a thought for people trying to run responsible businesses. Some farmers may have spiked their milk but many did not. Yet many dairy companies and farmers are now facing bankruptcy because of the scandal. Media reports are saying that many farmers can no longer sell their milk and are simply tipping it down drains. Others are said to be contemplating slaughtering their cows. It seems that the government is willing to step in to help, but what obligations do the makers of products have to those suppliers unwittingly embroiled in the scandal and possibly facing financial ruin?

7. Expect A Tougher Regulatory Environment

It is clear from what has already been said by the central government that the regulatory environment is set to become tougher. Laws are often good but not enforced for various reasons, including a lack of regulators, inept regulators and corrupt regulators. But if government is to be believed, much of that may now change and companies may face a stricter enforcement of the law. The milk industry could actually emerge much stronger, mirroring recent advances in the toy industry. Many brands may well welcome increased enforcement of regulations, but it still poses a threat where that brand’s products are made in facilities that also produce for the domestic market or non-branded goods. If a facility is closed for an infringement in its non-brand lines, where is the brand going to find the capacity to continue production? The likelihood of that happening has just become greater.

8. Investors Are Running Scared Of China

New Zealand’s Fonterra Corporation, the world’s largest trader in dairy products, has undoubtedly learned much from its 43 per cent ownership of a China venture which has created a financial disaster. This latest food tragedy may make some foreign investors conclude that the risks of manufacturing in Chinaoutweigh the potential rewards. Yet, such is the allure of the Chinamarket, most multinational firms will probably want to maintain their interest. The challenge is how to do it better. But ensuring that investments are safe might be even more problematic than ensuring products are safe in the sorts of joint venture arrangements we have see in the Sanlu case. Shareholders might be increasingly asking whether China is a safe haven for their money.

9. Expect Increased Testing

It is increasingly looking like many suppliers simply cannot be trusted to put the systems in place to ensure product safety, or if they do, fail to properly manage those systems. The inevitable consequence of this is that we are likely to see a return to more testing. That comes expensive and the inevitable question is who is going to pay and what will that do to product prices?

10. Another Nail In The Coffin Of Outsourcing?

This week the Wall Street Journal noted that the Chinese milk-safety scandal exposes one of the pitfalls of a key strategy of the world’s big multinational food companies: relying on local suppliers in emerging markets. Add to the scandal, the reality of increasing raw materials costs, increasing labour costs, increasing fuel and transportation costs and an increasingly worried consumer base and, all together, the future for the outsourcing model might not be looking so clear.

Source

This is a guest column by Professor Richard Welford, Chairman of CSR Asia.

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