The Story Behind China's Tainted Milk Scandal

A mother and a father hold their babies as they wait for treatment in a children's hospital in Beijing during China's toxic milk scandal.

In the meantime, Fonterra executives are said to have agonized over what to do. They studied the history of previous such incidents, in which the central government repeatedly tried to cover up the truth, including the deadly SARS epidemic and a spate of product safety scandals in which whistle-blowers got in trouble. They were not sure whether or not they would be backed up if they went over the heads of the local Chinese officials.

They decided to try to "work through the system" while they awaited clearer information from lab reports and word from the central government. "They were between a rock and a hard place," says the source.

But when more weeks passed by and the Chinese partner continued to refuse to tell the public about the risk—though it did pull the product from shop shelves—Fonterra sought help from the New Zealand government. Wellington went through diplomatic channels to inform senior central government officials of the problem on September 11, two weeks after the Olympics ended, and a little over five weeks after Fonterra was first notified.

At that point, Beijing jumped to action, going public with the story, ordering a recall, and arresting farmers and Sanlu and Shijiazhuang officials.

Fonterra has since come under heavy criticism for not going public sooner, but it has said that it behaved responsibly. Fonterra officials have expressed the view that had they gone public immediately, the central government might have reacted angrily and might even have denied there was a problem.

Critics say that Fonterra was naive about the China market. Although Sanlu told the company that it only learned about the problem in early August, there had been rumors of the problem going back to last December.

Many Chinese reporters were hearing stories of infants being afflicted with kidney stones, but the central government had last year ordered the media not to report on anything negative in the run-up to the Olympics. The media wouldn't touch the story. Journalists turned to their blogs and began putting information out, but censors eventually erased much of this.

"What this proves is that you can't be clueless in China," says McGregor. "You have to know what your partner and employers are doing."

Fonterra has been criticized for opting to work through the system while lives were at stake, and for doing so in an attempt to save face in China and to avoid ruffling Beijing's feathers.

"If you have a product that's making people sick, or that is killing them, you should not care about your business here," says McGregor. "You should care about human life."

In an article, Access Asia, a China-based consulting company, blamed the incident on what it called "China is somehow different excuse-mongering." Access Asia said this attitude created an environment where foreign companies feel "culturally obliged to turn a blind eye to corruption, nepotism, and outright criminality that can leave the tiny gap in concentration that is all that is required for a disaster like this to happen."

Access Asia said the Fonterra-Sanlu scandal was a model of why it's time for foreign companies to stop treating China as special and to behave responsibly, as they do in other countries.

With China still averse to negative news of any sort, the chances are that there will be further product safety scares. As soon as the news broke, the central government ordered that the Chinese media use only the official spin provided by state news organizations such as Xinhua News Agency and the People's Daily. Wwebsites began to erase any mention of the incident.

Officials from the two companies declined to be interviewed for this story. Another dairy company that says its products were not contaminated confirmed that the government had ordered it not to speak with any media.

McGregor says the Chinese were sincere in wanting to deal with product safety issues, but they still had a dangerous tendency to limit information. "The Communist Party likes to discuss problems in the context of how they are solving, or have solved, them, rather than in terms of being a problem," he says.