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  • Melamine in Milk - Update Tainted Chinese Dairy Products

    China Current Affairs Report 10 October 2008 Note: This is an update of the original report that was published on 22 September 2008

    Emerging Strategy Limited

    Contact: info@emerging-strategy.com

    +86 (21) 6191 1101 www.emerging-strategy.com

  • Emerging Strategy Limited (www.emerging-strategy.com)

    Emerging Strategy

    Limited

    Melamine in Milk: Tainted Chinese Dairy Products Current Affairs Report

    22 September 2008

    Background In mid-September, about 1,700 Chinese infants were diagnosed with kidney stones and other renal disease. A government investigation determined the cause was melamine contamination in milk formula manufactured by the Sanlu Group, a state-owned company and one of the top domestic brands. Melamine is normally used in plastics and fertilizers, but was used by Sanlu to boost watered-down milk's apparent protein content. It appeared unlikely that the problem was limited to one company, so the General Administration of Quality Supervision, Inspection and Quarantine tested samples of milk formula produced by other companies. The results showed the widespread presence of Melamine in most major Chinese brands. Additional testing of liquid milk and milk products such as yogurt showed that infants and toddlers were not the only victims, and that adults have also been consuming Melamine-laced products manufactured by the top Chinese dairy companies including the 2008 Olympics Sponsor Yili Industrial Group. No products involving foreign brands whether manufactured in China or imported have yet tested positive for Melamine. Once a growth success story, the Chinese dairy industry is in disarray and China is once again in the news for the wrong reasons. To date nearly 13,000children have been hospitalized. It is important to note that breast-feeding rates are low in China, and formula milk is used widely, at all socio-economic levels of society. Domestic Brands Involved

    According to test results posted as of 19th September, the government has tested 491 batches of baby milk formula from 109 brands. The results show that 69 batches of milk formula from 22 brands contain melamine

    Sanlus products that tested positive are the most toxic, containing an average of 2564 mg/kg, which is sufficient to cause renal disease amongst children

    Sanlu is a state-owned company founded in 1956, and a minority stake is owned by Fonterra, a

    New Zealand company

    As the largest Chinese milk formula manufacturer, Sanlu had about 18% of the total market share

    before the contamination news broke

    Its products dominated the medium and lower-end market thus its victims are typically those

    children whose families are unlikely to be able to afford high medical bills

    Products from another 21 brands were found to contain melamine in quantities between 0.09mg / kg to 619mg / kg and many famous brands such as Yili, Saint, Mengniu, and Yashili etc., are involved

    It is estimated that the total market share of these brands before this crisis was 50% - 60%

    The government also tested liquid milk samples from 5 major brands: Mengniu, Yili, Guangming, Sanyuan and Nestle, which together account for a 70% share of the liquid milk and dairy products market

    24 batches of liquid milk from Mengniu, Yili, and Guangming were found to contain melamine in

    quantities of 0.765mg / kg to 8.4mg / kg

    According to the results posted as of 30th September, the government has tested 265 batches of other

    milk products from 154 companies

    The results show that 31 batches of products from 20 companies contain melamine

    All Sanlu products were found to contain melamine between 1.3mg/kg to 6196mg/kg

    Products of localized brands such as Shijiazhuang Baocheng and Tangshan Longyuan also contain

    very high melamine, up to 5600 mg/kg

    A few products of famous brands such as Mengniu and Yili were also found to contain melamine

    of between 6mg/kg to 25mg/kg

    Since 24th September, the government has test 212 batches of milk powders and 2093 batches of milk

  • Emerging Strategy Limited (www.emerging-strategy.com)

    Emerging Strategy

    Limited which produced after 14th September. The results show that none of the products contained

    Melamine. Foreign Brands Involved All the milk products of foreign brands are free of melamine according to tests conducted so far by the

    Chinese (PRC) government However, some products by these brands were found to contain minor traces of melamine

    according to tests conducted in Hong Kong, Singapore and Korea On 22nd September, a Nestle dairy product produced in China tested positive for melamine

    in a test by an institution in Hong Kong, but this has not been confirmed by Nestle or the Hong Kong government

    In 24th September, a Nestle pure milk product produced in Qingdao tested positive for melamine in a test by the Hong Kong government, and Nestle subsequently recalled this product from Hong Kong

    A Nestle dairy product tested positive for very minor melamine traces in a test by the Taiwan government, and subsequently was removed from the shelves of supermarkets and shops in Taiwan

    These products are not mentioned on the list in China therefore the implied government stand is that all foreign branded products and still considered to be safe

    Therefore, these products are still available on the shelves in Mainland China

    Downstream Products and Brands Involved Test of Chinese-made downstream dairy products such as chocolate, cake, cream, biscuits, candies etc.

    in other countries have indicated that these are also contaminated These downstream products include foreign brands as well as well-known Chinese confectionary

    brands No test results for such downstream products have been released in China by the government or

    any other organization A famous candy brand- Super Rabbit was tested to contain melamine in both Singapore and

    Hong Kong, and was subsequently banned in those two markets and a number of others around the world

    Chinese-made foreign branded products found to contain Melamine in tests in other countries include Lotte cakes and biscuits , Cadbury cookies and chocolate and Heinz Formula Cereal (tested positive in Hong Kong and Korea)

    Lotte recalled the relevant products in Korea and suspended biscuit production in China Other involved brands include Lipton of Unilever, Pocky Men of Ezaki Glico and Nabisco of Kraft

    Government Reaction According to media reports, Sanlu and the Chinese government were slow to move and did so only

    after the New Zealand government went public

    Sanlu officials were aware of this problem for well over a month

    Fonterra, a New Zealand company, has a ~43% stake in Sanlu and three board seats, and had been

    trying to get Sanlu and local government officials to take action without success

    The government has arrested 22 executives of the Sanlu Group

    It is likely that the government will make a show out of prosecuting and possibly executing some

    officials to make a point, as it did after a similar product safety crisis in 2007

    Sanlu and 46 other dairy companies have had their exemption from government food safety inspections cancelled

    Sanlus infant formula had been certified as an "inspection-exempt product" for three years (since

    December 2005) by the General Administration for Quality Supervision, Inspection, and

    Quarantine (AQSIQ)

    Such certification meant "the products are exempted from quality monitoring and inspection

    conducted by the government," and that "internal inspection should be reinforced"

    The designation national famous brand has been revoked from Sanlu, Mengniu, Yili and

    Guangming

    The government has announced it will monitor the price of milk formula closely, and intervene if

  • Emerging Strategy Limited (www.emerging-strategy.com)

    Emerging Strategy

    Limited prices rise quickly due to the expected shortage in the market once all the affected brands and products have been removed from shelves

    Since 12th, September, the government is providing free testing and treatment for babies

    Adults do not receive the same benefits Market Reaction The Sanlu Group is likely to collapse because of this scandal and recent reports suggest a takeover of

    Sanlu by Beijing Sanyuan (see below)

    Reports from earlier this year suggested that Sanlu planned an IPO in the second half of 2008

    this is now impossible

    Sanlus production has been shut down and its key executives have been arrested

    Since most major Chinese brands are involved, many second tier brands not involved in the crisis have

    gained market share very rapidly

    Beijing Sanyuan benefited most from this crisis: it s brand was citied as the safest Chinese brand

    and sales increased by 300%

    With the help and coordination of the Central Government, Beijing Sanyuan will acquire Sanlu

    and turn itself from a mid-sized local company into one of the largest dairy companies in China

    The acquisition is still under negotiation and further details are unavailable

    Emerging Strategy predicts a deal that would remove any transfer of liability for Sanlus

    actions from the new owners, limiting prosecution to individual employees of Sanlu rather

    than the company as a whole

    Other relevant brands apologized officially, recalled all products that tested for Melamine, and committed to compensate consumers for problems caused by these products

    Besides the

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