Quality control investigators in China have announced they had found a dangerous protein substitute in dairy products produced by 20% of the Chinese companies that make infant formula. Reports are that more than 12,000 children had been hospitalized, most with kidney ailments, and 40,000 with less severe symptoms have been treated without admission. At least three have been killed.
Melamine, a protein imitator that is toxic, was used as a cheaper fill, and was found in the test samples. Melamine is the same protein replacement used in the Chinese-made pet food that killed thousands of cats and dogs last year.
What is the impact for readers of MassTortDefense? Several major Chinese dairy companies involved have international investors. But none of the formula products were exported to North America. The FDA said there is no known threat of contamination in infant formula manufactured by companies that have met requirements to sell the formula in the United States. However, FDA is investigating whether infant formula manufactured in China is being sold in markets here that serve the Asian community. And the FDA is alerting consumers that seven “Mr. Brown” instant coffee and milk tea products are being recalled by a Taiwanese company, due to possible contamination with melamine.
The developing food safety scandal has called into question, yet again, the effectiveness of China’s quality control system in general, and the country’s new food safety regime in particular. Last year’s spate of product recalls, including drugs, toys, pet food and tires, placed the spotlight on China’s quality control problems. MassTortDefense has posted on this here and here. Now comes the news that the newly enacted food safety recall system was not activated for at least two weeks after the problem became known to local officials, and the prime minister of New Zealand (an importer) charged the matter was covered up for several weeks while the Beijing Olympics were underway. Thus, thoughts naturally turn to efforts importers may mitigate the risks. A recent article in Risk Management Magazine offers a broad perspective on this. (Kent Kedl, Risk Strategies for the Chinese Market , published by the Risk and Insurance Management Society, which targets corporate risk managers.) At bottom, it is risk management to avoid a potential mass tort.
First, plan Strategy before Structure. In recent years, the Chinese government has changed its investment regulations to allow –and even encourage– a variety of business arrangements, from strategic partnerships to wholly foreign-owned enterprises, to full acquisitions. RM suggests that companies coming to China must first ignore the “how” of structure and first focus on the “why” of their strategic intent for China: What products will have the most play? What segments of the market should they target? What distribution channels should they use? Who will be the major competition and how can they structure a defensible and sustainable value proposition?
Second, they advise companies to Get Close to the Market. Clearly, there are Chinese factories that have had quality issues, but the fact remains that there are millions of products coming out of China every month, most of which have no problems whatsoever. Maybe, then, the question should be how best to manage product quality, because someone is doing it right. Kedl and RM suggest that foreign companies need to manage their vendors on an ongoing basis. Meet with suppliers; validate the supply chain; don’t worry about price and on-time delivery to the exclusion of all else. Companies sourcing from China should consider putting their own people on the ground to manage their supply chain, establish and monitor their own quality systems, and maintain ongoing relationships with the vendors. This approach may raise a company’s fixed costs but, in the long run, may greatly lower the risk associated with having products made in an emerging market.
Third, recognize that Relationships Matter. Early successful foreign entrants to China worked hard to build a relationship network for themselves. As China has developed a more credible legal framework and a more predictable market environment, however, foreign companies too often have believed they no longer need that social network and that, instead, they can do it on their own. RM suggests that may be a mistake.
Ongoing events put a premium on efforts by both China and the U.S. in implementing the 2007 Memorandum of Agreement (MOA) on food and feed safety. The MOA established a bilateral mechanism to provide greater information and other assurances to enhance the safety of food and feed products traded between the two countries. The countries have improved the exchange of information on food safety and on the relevant regulatory systems. The U.S. has agreed to conduct training for Chinese officials on U.S. regulatory standards. Each has designated new emergency contacts and notification thresholds for import safety issues. The two countries have also been working towards an electronic certification system between the FDA and China’s General Administration of Quality Supervision, Inspection and Quarantine to ensure that Chinese exports meet FDA standards for safety and manufacturing quality. The countries also agreed to increase their focus on inspection, supervision and laboratory testing of Chinese imports. Finally, the report described the establishment of a cooperative mechanism to notify each other of significant risks to public health related to product safety or the gross deception of consumers, and to share information to facilitate each other’s investigation.