Outsourcing and lack of government oversight provided a fertile environment for tampering in Hebei’s dairy industry.
By staff reporter Gong Jing - Caijing Magazine 22 September 2008
Using additives to manipulate the apparent quality of milk had become the norm in Hebei Province’s dairy industry long before September, when baby formula tainted with the chemical melamine caused the death of at least four infants and sickened nearly 13,000 others. The practice can be traced back to as early as 2005.
While many fingers now point to the “milk stations” – middlemen on a chain that connects farmers to big dairy – as the major source of contaminated milk, the convoluted supply channel that takes milk from the countryside to the supermarket has been a time bomb ticking for years. This autumn was merely its breaking point.
China’s dairy industry was in its nascency in the 1980s. It began with self-sufficient companies that owned both farms and cows. The system was inefficient, and expansion was limited by low supply.
But in 1987, Sanlu, the now infamous producer whose baby formula caused death and mass illness, enacted a reform that gave cows to farmers and let companies focus on marketing and churning out more products.
Tian Wenhua, the chairman of Sanlu who was arrested September 19 for her responsibility in the tainted milk incident, was the innovator and major promoter of the scheme that split farming and processing into two separate operations. To boost production, Tian invented new cooperation models such as lending cows to farmers and letting them clean their debts with milk.
Tian’s reforms paid off big. Lured by the high profits, many farmers in Hebei flocked to Sanlu and started rearing cows on their own. Sanlu in turn joined hands with farmers and local governments to create another link, the milk station, that operated as the middleman and a logistics center that brought milk from farmers and to Sanlu’s factories.
In the beginning, local governments provided land, Sanlu was responsible for training, and the farmers – with some subsidies from Sanlu and governments – funded these stations.
The chain was an instant success. Sanlu’ production jumped, farmers upped their profits and new jobs were created in the region. Dairy companies across China followed suit and finally made the model the industry norm. Today more than 80 percent of dairy cows are in the hands of individual farmers.
Quality control wasn’t a problem in the beginning. Dairy companies were few enough to make it a buyers’ market. With milk stations eager to sell, the factories were able to keep a tight grip on quality. Sanlu, for instance, dominated the Hebei market and could refuse to accept unqualified milk from local stations, pouring it down the sink on spot.
Over the following decades, however, more players have come to the scene and tilted the balance. In 2005, private and state-owned dairy companies mushroomed across in China. The total production capacity in Hebei in 2005 exceeded the province’s milk supply. Soon it became a sellers’ market.
Individual farmers didn’t have collective bargaining power, so milk stations, as the major suppliers, had the say. The quality controls that had been exerted by factories were diluted in the fierce scramble for supply. Governmental supervision was practically nonexistent.
To make things worse, 2006 brought a supply crisis.
Farmers were no longer making money by raising cows. The price of milk was set by dairy companies and kept low. Market competition, which had grown fervent in 2005, further reduced the price of dairy products and transferred the pressure to upstream production. Compounding the farmers’ problems was the rising price of dairy feed, which drove up costs. According to governmental statistics, in 2006, 40 percent dairy farmers lost money, 30 percent broke even, and only 30 percent slipped by with a slim profit.
As a consequence, some farmers killed cows and turned to other businesses. That added more pressure on the already-tight supply chain and pushed up the price of milk products in early 2007. Chinese State Council was aware of the problem and passed a measure in the same year to subsidize dairy farming. But before the subsidies took effect, farmers suffered another setback. In order to contain inflation, Chinese National Development and Reform Commission enacted a price control in January 2008 that kept a lid on milk prices.
Caught between a tight supply and price controls, the Chinese dairy industry descended into chaos. The big dairy companies competed for privately-owned milk stations to secure supply and lost control over quality. Milk stations, on the supply side, controlled farmers by delaying their payment for as long as half a year. On the demand side, the stations began tampering with the milk before selling to the factories.
What’s in the milk? Industry insiders told Caijing that it started with adding water and alkali, and later progressed to animal and plant protein powders that contain melamine, a chemical that can cause kidney stones. When the price of dairy products slid further in 2008, milk station workers started to add melamine directly to the milk.
But one industry source told Caijing that the high portion of melamine in Sanlu’s milk powder, 2.3 gram per kilo, can’t be blamed solely on milk stations. More likely is that at every link in the chain – from farmers to milk stations to companies – melamine was added.
The regulation vacuum that gave free reign to Hebei milk stations came to a head in the September crisis. The scandal declares the failure of the outsourcing model that initially brought Sanlu huge success and later an irreversible disaster. Some companies, including Mengniu and Yili, are in the process of firming up their supply chain. Many now own or are building their own dairy farms, showing a new trend in the industry.
Prosecution of greedy milk station workers is ongoing. So far Hebei police have arrested 12 staff members from milk stations and six, illegal sellers of melamine. But the industry, with its messy supply chain, calls for a new system and, more critically, more oversight.
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Hebei Dairy’s Messy Supply Chain
Outsourcing and lack of government oversight provided a fertile environment for tampering in Hebei’s dairy industry.
By staff reporter Gong Jing - Caijing Magazine
22 September 2008
Using additives to manipulate the apparent quality of milk had become the norm in Hebei Province’s dairy industry long before September, when baby formula tainted with the chemical melamine caused the death of at least four infants and sickened nearly 13,000 others. The practice can be traced back to as early as 2005.
While many fingers now point to the “milk stations” – middlemen on a chain that connects farmers to big dairy – as the major source of contaminated milk, the convoluted supply channel that takes milk from the countryside to the supermarket has been a time bomb ticking for years. This autumn was merely its breaking point.
China’s dairy industry was in its nascency in the 1980s. It began with self-sufficient companies that owned both farms and cows. The system was inefficient, and expansion was limited by low supply.
But in 1987, Sanlu, the now infamous producer whose baby formula caused death and mass illness, enacted a reform that gave cows to farmers and let companies focus on marketing and churning out more products.
Tian Wenhua, the chairman of Sanlu who was arrested September 19 for her responsibility in the tainted milk incident, was the innovator and major promoter of the scheme that split farming and processing into two separate operations. To boost production, Tian invented new cooperation models such as lending cows to farmers and letting them clean their debts with milk.
Tian’s reforms paid off big. Lured by the high profits, many farmers in Hebei flocked to Sanlu and started rearing cows on their own. Sanlu in turn joined hands with farmers and local governments to create another link, the milk station, that operated as the middleman and a logistics center that brought milk from farmers and to Sanlu’s factories.
In the beginning, local governments provided land, Sanlu was responsible for training, and the farmers – with some subsidies from Sanlu and governments – funded these stations.
The chain was an instant success. Sanlu’ production jumped, farmers upped their profits and new jobs were created in the region. Dairy companies across China followed suit and finally made the model the industry norm. Today more than 80 percent of dairy cows are in the hands of individual farmers.
Quality control wasn’t a problem in the beginning. Dairy companies were few enough to make it a buyers’ market. With milk stations eager to sell, the factories were able to keep a tight grip on quality. Sanlu, for instance, dominated the Hebei market and could refuse to accept unqualified milk from local stations, pouring it down the sink on spot.
Over the following decades, however, more players have come to the scene and tilted the balance. In 2005, private and state-owned dairy companies mushroomed across in China. The total production capacity in Hebei in 2005 exceeded the province’s milk supply. Soon it became a sellers’ market.
Individual farmers didn’t have collective bargaining power, so milk stations, as the major suppliers, had the say. The quality controls that had been exerted by factories were diluted in the fierce scramble for supply. Governmental supervision was practically nonexistent.
To make things worse, 2006 brought a supply crisis.
Farmers were no longer making money by raising cows. The price of milk was set by dairy companies and kept low. Market competition, which had grown fervent in 2005, further reduced the price of dairy products and transferred the pressure to upstream production. Compounding the farmers’ problems was the rising price of dairy feed, which drove up costs. According to governmental statistics, in 2006, 40 percent dairy farmers lost money, 30 percent broke even, and only 30 percent slipped by with a slim profit.
As a consequence, some farmers killed cows and turned to other businesses. That added more pressure on the already-tight supply chain and pushed up the price of milk products in early 2007. Chinese State Council was aware of the problem and passed a measure in the same year to subsidize dairy farming. But before the subsidies took effect, farmers suffered another setback. In order to contain inflation, Chinese National Development and Reform Commission enacted a price control in January 2008 that kept a lid on milk prices.
Caught between a tight supply and price controls, the Chinese dairy industry descended into chaos. The big dairy companies competed for privately-owned milk stations to secure supply and lost control over quality. Milk stations, on the supply side, controlled farmers by delaying their payment for as long as half a year. On the demand side, the stations began tampering with the milk before selling to the factories.
What’s in the milk? Industry insiders told Caijing that it started with adding water and alkali, and later progressed to animal and plant protein powders that contain melamine, a chemical that can cause kidney stones. When the price of dairy products slid further in 2008, milk station workers started to add melamine directly to the milk.
But one industry source told Caijing that the high portion of melamine in Sanlu’s milk powder, 2.3 gram per kilo, can’t be blamed solely on milk stations. More likely is that at every link in the chain – from farmers to milk stations to companies – melamine was added.
The regulation vacuum that gave free reign to Hebei milk stations came to a head in the September crisis. The scandal declares the failure of the outsourcing model that initially brought Sanlu huge success and later an irreversible disaster. Some companies, including Mengniu and Yili, are in the process of firming up their supply chain. Many now own or are building their own dairy farms, showing a new trend in the industry.
Prosecution of greedy milk station workers is ongoing. So far Hebei police have arrested 12 staff members from milk stations and six, illegal sellers of melamine. But the industry, with its messy supply chain, calls for a new system and, more critically, more oversight.
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