Bussiness Issue

bSanLu-Fonterra Milk Scandal

MComm5001

May 2009

Jacqui Check

Donna Ngo

Caroline Fruitet

Wendy Lin

1. Executive Summary

Fonterra, New Zealand’s dairy giant invested US$107 million for a 43% stake in China’s SanLu group to form a new joint venture project which would undertake the manufacture, marketing and distribution of consumer dairy products within mainland China. In September 2008 Fonterra blew the whistle on SanLu and the world became aware of a country-wide practice of milk tampering. Since then over twenty-two dairy companies throughout China have since been implicated. Victims of the tainted milk scandal include babies who have died as well as hundreds of thousands of sick children, their immediate families, the innocent farmers whose livelihood has stopped because of product bans and the Chinese export market economy as the world watches more closely their food production practices.

The primary reasons for this systemic failure is due to unethical behaviours and poor management decisions that led to insufficient product testing, a conspiracy to cover up, a widening gap between wealth and poverty throughout the country, and a small power distance ratio of a culture led by a central government not scrutinised by its people. For example, victims may have been saved had there been adequate healthcare for poorer families. Recommendations in this report will demonstrate that the tragic outcomes could have been avoided. Better management decisions implemented at all stages including quality control standards with tough penalties enforced for violation, open communication channels and an overall respect for human life. The joint venture between Fonterra and SanLu has also revealed poor international management with particular focus on the minimal shared knowledge of cross-cultural behaviours, weak internal and external communication channels and a lack of consideration for all stakeholders inside and outside the organisations.

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