By staff reporter Gong Jing and intern reporter Liu Jingjing
At the nascent stage of
All that changed in 1986, when a
Under Chairwoman Tian Wenhua, the company shifted its focus from farming to churning out and marketing products, building a new business model based on a division of farming and processing. Sanlu loaned cows to farmers, who later repaid their debts with milk deliveries.
Production jumped, farmers profited and new jobs were created. Dairies across
But in September, Sanlu’s business crashed – and Tian was stripped of power and detained by Communist Party authorities – after a contaminated milk crisis rocked
Sanlu as well as market leaders Yili, Mengniu and Bright Dairy were among the 22 dairy companies that officials said sold foods laced with the industrial chemical melamine. Chinese health authorities blamed tainted milk powder for kidney stones and other ailments that sickened tens of thousands of babies across the country, killing four.
Its public image shattered, Sanlu is now on the verge of bankruptcy. The company faces huge expenses for victim medical care. It was ordered to recall more than 10,000 tons of tainted milk powder and compensate customers.
What went wrong? To find an answer, Caijing interviewed dairy farmers, industry sources and government officials. They described a system wracked by illegal business practices and lax supervision.
“You just need to make a call, and then someone will send the stuff (melamine) to your home,” said one farmer.
Sanlu claimed it applied strict quality inspections to all the fresh milk it bought. However, Caijing found that the company’s inspection system went awry as early as 2005 and allowed milk collection stations to adopt unscrupulous business practices.
Some industry observers said the distorted development of the milk industry and vicious competition had forced Sanlu to loosen controls. But others wondered how a company that was
An official investigation pointed to milk stations – middlemen in the chain that links farmers and big dairies -- as the major source of contaminated milk. City officials in Sanlu’s hometown
Police uncovered a melamine sales network in
A suspect surnamed Su told police he sold 200 bags of melamine powder to milk stations between February 2007 and last July for 218 yuan a bag.
But Sanlu wasn’t alone. A milk station source in
When Sanlu started its new business model in the 1980s, quality control was not a problem. Newly formed milk stations were eager to sell and had every incentive to provide a clean product to Sanlu, one of the few dairy companies operating at the time. Sanlu could afford to refuse milk that failed quality tests, even pouring it out on the spot.
But more market players arrived, titling the balance to a seller’s market. By 2005, private and state-owned dairies had popped up like mushrooms across
Individual farmers lacked bargaining power, so milk stations, as the major suppliers, had an upper hand in the market. Quality control was diluted in a fierce scramble for milk. And government supervision was practically nonexistent.
Authorities also took into custody several responsible dairy employees, including top officials such as Sanlu’s Tian. Local government officials connected to the incident were ousted.
But lower level officials apparently were aware of a problem long before the news reached central authorities in
The company claimed it received the first complaint no earlier than March 2008 – the same month that, according to a Sanlu source who spoke with Caijing – a company quality inspection department started taking action. Sanlu later confirmed that melamine was found in its products in June 2008. State Council investigators confirmed that claim.
However, the company waited until August 2 to report the contamination to the Shijianzhuan city government. Afterward,
A source told Caijing that investigators have tried to recover melamine purchase records at Sanlu. So far, they have found no evidence that the dairy actually added the chemical to its formula during production.
However, investigators faulted Sanlu for failing to report the problem sooner. Apparently, the company tried to resolve the incident alone before reporting to the government, even halting production of the baby formula July 1 and starting to test for melamine in raw milk August 6. Sanlu also sent sales representatives to visit victims who drank tainted formula, but refused to link the illness to Sanlu’s products. Instead, the representatives claimed the milk powder was safe.
“Sanlu management attempted to cover up the incident and hoped the crisis would disappear after awhile,” a source said.
As the situation worsened, Sanlu found it could no longer cover its tracks. Finally, company officials reported the case to the government August 2.
The State Council investigation team later said Sanlu’s delayed report violated government regulations, which require organizations and government agencies to report any emergency situation within two hours to their superiors at a higher government level. The State Council also criticized the Shijianzhuang city and
But higher authorities may have sensed danger as early as June, when the media in
The first official report suggesting kidney illnesses among babies may have been tied to Sanlu milk powder reached the Ministry of Heath in July. The report came July 16 from
But the direct connection between Sanlu milk powder and the illness was not confirmed until September 9 when the New Zealand Embassy in
Holes in Supervision
The crisis has pointed a powerful spotlight on inadequate government supervision of the dairy industry and food security conditions in
National statistics show more than 54 percent of the milk stations that collect fresh milk from dairy farmers and sell it to dairy producers are private operations. However, government supervision of milk stations is virtually nonexistent. Minister of Agriculture Sun Zhengcai said
Meanwhile, critics have asked why AQSIQ failed to discover the tainted, and seemingly ubiquitous, milk products much earlier. Criticism led to the resignation of Li Changjiang as head of AQSIQ. Before stepping down September 22 amid the crisis, Li said
But Caijing learned that, since a global pet food scare in 2007 that revolved around melamine contamination in Chinese exports, tests for the chemical have been conducted on all food products exported by
Another problem revolved around the “inspection-free” status AQSIQ granted to certain companies, including several dairy producers such as Sanlu, Yili and Mengniu. Exemptions from government inspection controls were granted to “famous brand” companies for years before the milk crisis prompted
Until the regulatory vacuum is filled, dirty tricks in the food industry are likely to continue. One industry insider said that, unless government supervision can be implemented efficiently, another crisis is “inevitable.”
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