Horace Greeley, newspaper editor, observed in 1838, “If any young man is about to commence the world, we say to him, publicly and privately, Go to the West.” Apparently this advice applies today; however, the West is so far west as to be the east or Far East. Many companies are seeking their fortunes and future interests through investments in China. The Carlyle Group, a U.S. investment firm, is no different as it seeks a foothold in the Chinese food system.
In 2009, the company chose to buy a 17.3 percent stake in Yashili Group Company, a Chinese infantformula maker. The numbers looked good. Yashili Group was the third-largest baby-formula firm in China in an industry with $5-6 billion (35–40 billion-yuan) in 2010 sales. With a new national Chinese policy away from one baby per family to more traditional family expectations, this industry is set for phenomenal growth.
This might have been your standard B-school success story, except for the events of 2008. In that year several thousand Chinese babies became ill, developed kidney stones and further complications. By the end of this crisis more than 300,000 babies would be sickened and six would die. The cause of this malady was not a viral epidemic but the milk powder used in the production of baby formulas. When authorities investigated this contamination, the story took a nasty turn. The contamination was not inadvertent or accidental but deliberate. Melamine was added to the milk powder to deceive food processors and garner a premium for their products with little regard for the food-safety consequences. There was no other way to explain the presence of melamine in the milk powder.
Melamine is a chemical; it is not natural. It was invented in 1830s by a German chemist and used for many things from plastics to fertilizers to a stabilizer for concrete—not food. It is not intended for consumption since it can cause kidney stones and kidney damage. It found its way into the milk powder because it was used to enhance the apparent “protein” content of milk powder. In the food industry, protein content is not measured directly but through the presence of a chemical bond that is unique to protein, the amide bond. The problem is that, when a compound is analyzed for protein, any amide bond may be counted as protein whether it originates in protein or a non-natural chemical. The original and standard test assumes no adulterants are present.
So why add melamine to baby-formula powder? The cost of melamine is far less than the cost of milk protein, and its addition to milk powder raises the apparent protein content of the powder and hence its value. It would not be recognized as melamine unless a very different test was used specifically looking for it. Since it is not natural and not a potential accidental contaminant in food processing, its presence indicates a deliberate addition or adulteration. The only time melamine and food were connected legitimately was during World War II when melamine was used to manufacture durable dishware for the U.S. Navy. It was durable, washable, unbreakable, but not edible. In fact, it found its way into American homes in the 1950s and 1960s as Melmac, and no doubt is making a retro return today.
The food safety authorities in China reacted to this crisis very slowly—to avoid “sullying China’s international image during the Beijing Summer Olympics.” It took prompt action by the food safety authorities in Hong Kong to spur their mainland colleagues into action. China’s central government took dramatic steps to mollify public anger. The government “sacked the mayor of Shijazhuang after allegations that the city government covered up the reports of contamination.” This is the home city of Sanlu, a Chinese dairy giant, partially owned (43 percent) by a New Zealand dairy cooperative, Fonterra. Sanlu was found to have tons of contaminated milk powder. Fonterra, its junior partner, knew about the situation one month before the Chinese government acted. The company, Sanlu, reported that it did not come forward with the information weeks earlier because it was waiting for the recall process to move through the Chinese system. Andrew Ferrier, CEO of Fonterra, said, “I can look at myself in the mirror and say that Fonterra acted absolutely responsibly.”
In the end it was determined that more than three million pounds of milk products were contaminated;
and because milk powder was an ingredient in many products other than baby formula, the contaminated products may have spread to Europe and Africa, and possibly the United States. Twenty-two dairies were involved or contaminated with this product. Of the 19 executives who were arrested, 15 received sentences between 2–15 years, one received a suspended death sentence, and three received life sentences. The two biggest culprits, Zhang Yujun and Geng Jinping, were executed. It may have taken time for the Chinese authorities to act but when they did act, they were decisive.
“The scandal in 2008 wiped out all profitability in the entire dairy industry of China,” said Patrick Siewert, Senior Director of the Carlyle Group. Yashili did not contaminate its products, but the contaminant crept into its supply chain. To prevent reoccurrence and to rebuild confidence, the Carlyle Group has appointed a six-person committee headed by the former director of the U.S. Food and Drug Administration’s Food Safety and Applied Nutrition Center to oversee Yashili’s food product-quality eff orts. However, according to Wang Xixin, professor of constitutional law at Peking University, not all of the culprits were in the dairy industry. Professor Xixin says that “The government (quality supervision bureaus, state and national) hid the truth from the public and behaved irresponsibly to public safety.”
Food safety situations are no longer a single country’s problem. Because of globalization one country’s problem may be inadvertently the problem of other countries. A good example is the United States. China is the fourth-largest source of imported agricultural products for the United States. In 2009 these imports amounted to $2.9 billion. While the FDA has three offices in China, it depends on China to do the policing.
“The Chinese government has enormously and effectively responded with new laws and new regulations . . .
but the sheer size of the Chinese economy and the number of people makes it virtually impossible to check everything,” said Rio Praaning Prawira Adiningrat, secretary general of the Public Advice International Foundation, a foundation that works on food-safety issues.

Times have changed; past is prologue? Not necessarily. Horace Greeley’s words of advice were also followed by caveats concerning danger. This history will force the Carlyle Group to consider everything before going forward with an IPO (Initial Public Offering) for Yashili Group, the question of profitability notwithstanding.

QUESTIONS
1. Detecting the presence of melamine would have required a test that was specifically looking for it, but no one would have thought about a manufacturer adding such a non-food ingredient to baby formula. So how much responsibility can we expect of our government for inspecting foods for all harmful ingredients? How much is enough?

2. Can you think of a better way for our government to oversee the inspection of imported foods rather than depending on another country to police its own manufacturers?

3. China acted slowly but eventually decisively. What might they have done to send an even stronger message that food safety should be a producer’s number one priority?