Starting with just 32 cows and 170 milk goats pooled by 18 farmers in Shijiazhuang, the Sanlu Group began its journey as a small dairy producer. The CEO of the company, Tian Wenhua steered the company through milk shortages and tough economic times. To meet rising demands for milk, she implemented a system that allowed villagers to supply Sanlu with the bulk of their raw milk supply. The demand grew at such a rapid pace that Sanlu could barely keep up and so began sacrificing quality for quantity.
Complaints of Melamine tainted baby milk from Sanlu began circulating in late 2007 and in August of 2008 when the board met to discuss the issue, the decision was made to cover up the scandal. As a result, two managers were sentenced to death and four executives received prison sentences. The root of the issue stemmed from China’s government breaking from ancient Chinese values set into motion by Confucius’ teachings. Confucius taught righteousness over personal gain but once the Chinese Communist Party took power in 1949 that message changed the value system.
The new message was self-sacrifice for collective interests. The value system further deteriorated when the capitalist, Deng Xiaoping, took over the CCP and encouraged materialistic approach to economic development. This caused the affluent members of society in urban areas to become richer while poor farmers in rural areas remained poor. Business people from the city would go to rural areas to sell fake drugs and in retaliation farmers sold the city poisoned vegetables, hormone-fed fish and contaminated milk.
Ultimately, this perversion of morals led up to the corruption found in China’s business environment and set in motion the bankruptcy of Sanlu which totaled 161 million dollars in net debt. The individual ethical issue most prominent occurred with the farmers and the individuals who made up the supply chain for collecting raw milk to process at milk stations. Chinese safety standards required that fresh raw milk be processed immediately after extracted from the cow but these standards were not met due to lack of refrigeration equipment.
Cow farmers were also guilty of practices like mixing urine with milk to increase its weight and adding poisonous levels of melamine to give the illusion of high levels of protein. At an organizational level, there were ethical issues surrounding the board members who agreed to cover up the scandal for capital gain. Once Sanlu confirmed there were high levels of melamine in the milk they did not stop production. They decided to sell products with less than 10 milligrams of melamine, temporarily withhold anything with more than 10mg and replace product with more than 20mg out on the market.
As a result, the tainted milk scandal caused a total of 290,000 infants sickened, 51,900 hospitalized, 11 suspected deaths and three official deaths. As discussed briefly in the problem analysis portion, Chinese traditional moral values weakened as the Communist party led by Deng Xiaoping taught materialistic values of gaining riches. Societal standards plummeted as people began justifying the means with the ends. Government corruption led to weak food regulation laws. Officials would allow favorable companies to pass safety inspections on food that did not meet the required standards.
Once the U. S Food and Drug Administration shined the light on quality control issues with pet food that resulted in many cats and dogs dying, the humiliated Chinese government decided to completely overhaul its safety inspection system. The biggest ethical framework present in this case was the Cost-benefit analysis approach. When the board of director met to discuss the contaminated milk the final decision was made to cover up the issue. They did not halt production and instead contacted the government to investigate the source of their milk which puts the blame on the farmers.
There would be financial and reputational costs to recalling their product. The benefit of the cover up was to save money and save face which is extremely important to Chinese business men. Chinese culture traditionally valued virtues and righteousness over personal gain. Virtue ethics played a part in how the scandal came to light. Board members at Fonterra, Sanlu’s joint-venture partner, notified the New Zealand government about the milk scandal which prompted the Chinese government to investigate shortly after. As a result of its association with Sanlu, Fonterra suffered serious financial loss and the usiness’ reputation was completely ruined.
The 3 board members from Fonterra knew the repercussions that the scandal would cause yet these individuals showed virtuous moral character by going against the majority to do what was right. Individual Rights do not play a large part in Chinese culture since the emergence of the Communist Party led by Mao Zedong. Social norms evolved into a collectivist way of thinking where individuals are encouraged to sacrifice their own well-being for the greater good of society. Once Mao died, his successor did away with these virtues and planted the seed of capital gain.
This led to the deterioration of moral business practices because the focus shifted to the outcome and not the methods used to achieve these results. In recent weeks the milk crisis in China has resurfaced in the media. As recent as December 2011 and July 2012, two Chinese companies, Mengiu and Ava Dairy recalled their baby formula because they contained high levels of carcinogens. Last June, Yili Group also issued a recall after high levels of mercury was found in their infant milk powder.
The result of this is frantic mothers in China resorting to importing and smuggling milk from Australia, the U. S and Hong Kong. Hong Kong’s government has put a limit on purchasing no more than 2 cans of formula per day and anyone found breaking these rules faces two years in prison and a $64,500 fine. The Chinese government is attempting to solve the baby formula problem by strengthening their food monitoring systems. In the United States, the quality and safety of food is very important to consumers and as a result there are numerous laws that deal with the packaging and labeling of food products.
The Fair Packing and Labeling Act as well as the Nutrition Labeling and Education Act are both laws that would apply in this case. Both laws emphasize disclosure on a product’s label that details the contents including ingredients, nutrition facts, manufacturer etc. Sanlu Group, had it been an American company would be in direct violation of these laws and would have face harsh penalties. Once the CEO became aware of melamine contamination issue, it was her job to notify the public immediately, recall all products and find ways to lower melamine to safe levels for consumption.
Consumers distrusted local dairy companies, even those that had passed inspections, and turned to international brands like Nestle, Mead Johnson and Abbott Labs for their infant formula supply. Companies like Lotte Group, Cadbury, Heinz, Starbucks and KFC all recalled and disposed of products they suspected to be contaminated with the Melamine tainted milk. Chinese consumers lost confidence in the dairy industry while international consumers developed distrust for all things made in China. In the end, Sanyuan Dairy acquired Sanlu assets for $90 million dollars and the brand itself for 1. million. The Chinese government is still attempting to reform the food monitoring system. I recommend the following solutions for any company seeking to learn from Sanlu’s case: 1) Bolster the food monitoring system by implementing strict labeling requirements and random inspections. 2) Employ new and safe ways to meet the demand i. e. prairie farms and more milk stations. 3) Put an efficient system in place for reporting production issues. 4) Offer more transparency when handling ethical matters to boost Western and local consumer confidence.