China dairy brand won't survive tainted formula
New Zealand dairy trader says China's Sanlu brand won't recover from tainted milk scandal

(Associated Press New Zealand)
By Ray Lilley


China's Sanlu milk brand -- the company at the center of China's tainted baby formula scandal -- won't recover from the damage it has suffered, its New Zealand partner said Wednesday as it slashed the value of its holding in the company.


Tens of thousands of Chinese children have sought medical care, nearly 13,000 have been hospitalized and four infants have died because of Chinese-made infant formula contaminated by the industrial chemical melamine.


The Chinese government has taken control of Sanlu Group Co., 43 percent owned by New Zealand's Fonterra Cooperative, and shut down its operations, Fonterra Chief Executive Andrew Ferrier said at a briefing.


Fonterra was meeting with Chinese central government officials from the ministries of Health and Commerce "to try to work through what are the next steps for Sanlu," he said.


Told that Chinese authorities had now reported Sanlu received complaints about its infant formula as early as December 2007 but failed to alert authorities until Aug. 2, Ferrier said, "If these allegations prove to be true, then I'm appalled."


Ferrier said there was "no indication" that Sanlu had lied to either Fonterra or the Chinese central government about when it first heard of the problems.


"We will go back as far as we can go to get to the bottom of this," he said.


Chairman Henry van der Heyden said he would be "absolutely disgusted and appalled" if Sanlu executives had held back such information.


"That Fonterra was not informed earlier is frankly appalling," van der Heyden said, clearly indicating Fonterra's changed attitude toward its Chinese partner.


Announcing Fonterra's annual result, Ferrier told reporters, "Sanlu has been damaged very badly by this tragedy." "The (Sanlu) brand cannot be reconstructed," Ferrier said, adding he "can't see clearly at this point" whether Sanlu group "will stay intact."


He noted melamine contamination "is in dairy products across the whole country," with 22 Chinese companies caught up in the scandal.


If it was true that local Chinese officials didn't report the contamination to the central government until Sept. 9 as Beijing now claims, "then I am shocked," he said.


"We were under the belief that people were aware at all levels" by early August, he said, adding, "It could have been that people were fooling us ... at the local authority level.


He said he would not speculate when asked whether there had been a cover-up of the scandal because the Olympic Games were about to start in Beijing at the time the contamination was first reported by Sanlu on Aug. 2.


Ferrier again insisted that Fonterra "pressed" for an immediate public recall of Sanlu infant formula from that time -- a step only taken on Sept. 9 after the New Zealand government alerted Beijing authorities to the poisoned formula.


"We pushed as hard as we could in the system," he said Wednesday.


Fonterra, which trades dairy products in 140 countries, would now introduce "more comprehensive testing for every conceivable poison ... round the world" in milk it purchases, he said, adding, "You can never be 100 percent absolutely certain against a criminal contamination of your supply chain."


Ferrier said "we don't know" when asked if Fonterra retains confidence in Sanlu's board and management.


"You can bet Fonterra is gun shy about this whole thing and we need to get to the bottom of it," Ferrier said. "There will be material changes to management and governance of this investment."


While Sanlu had been profitable in 2007 and 2008, Ferrier said Fonterra had slashed the value of its investment in the Chinese dairy group by $139 million to an estimated $62 million.


Fonterra has poured nearly $200 million into the joint venture since buying a 43 percent stake in December 2005.


Company Chairman Henry van der Heyden said the melamine contamination "is a criminal event," but added his board was unanimous that Fonterra remain "committed to China." 9-24-08


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