Business Driven Technology 6th Edition by Paige Baltzan

Exercise 13

Got Milk It's Good for You-Unless It Is Contaminated!
Dong Lizhong, a farmer and migrant worker dairy farmer in China, bet that being a dairy farmer was his golden ticket out of a factory job. Unfortunately, a contamination crisis shattered his dairy business when babies mysteriously started developing kidney stones from contaminated baby formula. A chemical called melamine-an additive used to make plastic-was discovered in the milk supply of China's third-largest dairy producer. Tragically, four infants died from the contamination and at least 53,000 fell ill. According to the official Xinhua news agency, officials knew about problems with the milk for months before informing the public.
China's four largest dairy organizations, accounting for nearly half the country's milk market, pulled their goods off shelves. More than 20 countries, including France, India, and South Korea, banned not only dairy products from China, but also candies, cookies, and chocolates. "This is a disastrous setback. I estimate that it will take one or two years to rebuild confidence in dairy products," says Luo Yunbo, dean of the College of Food Science and Nutritional Engineering at China Agricultural University.
The local milk-collection station in Dong Lizhong's village has discontinued purchasing milk. Farmers are continuing to milk their cows, but they now drink the milk themselves or "feed the cabbages"-pour the milk in their cabbage fields. Dong estimates that he has already lost $1,461, or a quarter of his annual income last year, in expenses to feed corn and fresh grass to his 20 dairy cows. "Unless someone starts buying milk, we're going to see a lot of cows being slaughtered very soon," states Dong.
Cutting Corners
Chinese do not traditionally drink milk. However, as the country has grown more affluent over the past few decades, the domestic dairy industry has skyrocketed. China's two largest dairy companies have greatly benefited from this new trend: China Mengniu Dairy and Inner Mongolia Yili Industrial Group. Simultaneously, numerous entrepreneurs-from dairy farmers to milk-collection station owners to milk distributors-have jumped into the supply chain of dairy products to make their fortunes. Due to the fierce competition within China's dairy industry a few companies decided to cut corners to reduce costs, regardless of the consequences.
As Mengniu and Yili expanded at breathtaking speed, they found themselves in the unique position where supply could not keep up with demand. According to KPMG, China consumes 25 million tons of milk yearly, putting its dairy market ahead of France and Germany. In their quest for more raw milk, Mengniu and Yili have expanded outside their base in the northern province of Inner Mongolia and set up milk production facilities in other parts of China. Not surprisingly, most of the quality problems in milk have been found in dairy farms in Hebei and Inner Mongolia provinces, where the competition for raw milk supplies has been the fiercest.
Most dairy farmers in Hebei province traditionally sold their milk to milk-collection stations established by local heavyweight Sanlu. In recent years, new privately owned milk-collection stations to buy raw milk for Mengniu and Yili started popping up next to existing stations. These new entrants captured raw milk supplies by offering dairy farmers slightly higher prices. "This competition broke the rules. As milk buyers fought over milk supplies, their standards for quality fell," says Roger Liu, vice-chairman of American Dairy (ADY), a Heilongjiang province-based powdered milk company.
Additives to Boost Protein
Many of the milking stations do not have the equipment to test milk for additives. At the Nanxincheng station, 16 households bring their dairy cows in the area to be milked in the red brick farmhouse. The farmers hook up the cows up to a milking machine, which pumps the milk directly into a big vat. "They didn't test the milk here. They sent it to Sanlu for testing," says Du Yanjun, a government inspector posted to monitor the Nanxincheng station after the contamination crisis broke.
The milk is collected from the stations and shipped by middlemen to big dairy companies like Sanlu, which do their own testing and grading. It now appears that unscrupulous middlemen commonly add melamine into the raw milk to increase protein levels in their milk samples, so their milk will be graded higher. Ingesting melamine can cause kidney stones or kidney failure, especially in infants.
Matthew Estes, president and CEO of BabyCare, had looked into switching from Australian and New Zealand sources of milk for the company's infant-formula business in China. Baby- Care did extensive testing of possible suppliers and realized it could not locate a suitable supplier in China. "We couldn't the find quality that met our standards. We chose to not sell rather than take the risk," he says.
Going to Jail
A Chinese court sentenced two of the primary middlemen to death and a dairy boss to life in prison for their roles in the milk contamination scandal. The swift trial and harsh sentences show Beijing's resolve in tackling the country's stubborn food safety problems and an eagerness by the communist leadership to move past the embarrassing scandal.
Going to Starbucks
Starbucks Corp. has launched a new brand of coffee grown by farmers in China and says it hopes to bring the blend to stores all over the world. The Seattle-based company, which has been closing stores in the U.S. to cut costs, says its new blend is made in China's southwestern province of Yunnan, bordering Vietnam, Laos, and Myanmar. "Our intention is to work with the officials and the farmers in Yunnan province to bring Chinese coffee not (only) to China, but Chinese coffee to the world," Martin Coles, president of Starbucks Coffee International, told the Associated Press. "Ultimately I'd love to see our coffees from China featured on the shelves of every one of our stores in 49 countries around the world," he said. A launch date for foreign distribution hasn't been announced and will depend on how soon farmers can grow enough beans to ensure local and overseas supply.
The company has been working for three years with farmers and officials in the province before the launch, and the coffee will initially combine Arabica beans from Latin America and the Asia-Pacific with local Yunnan beans. But Coles said they hope to develop a source of superpremium Arabica coffee from the province, expanding it to new brand offerings in China, and then internationally. The new blend will be called "South of the Clouds," the meaning of Yunnan in Chinese.
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