Nestlé Combats China Food Scandals

As the food safety crisis in China escalates—the latest news reports suggest that fish, pork, and chicken, along with milk and eggs, could be contaminated with the industrial chemical melamine, which has already sickened tens of thousands and killed at least four (BusinessWeek.com, 9/26/08)—multinationals are beginning to realize that simple reassurances are no longer sufficient. Indeed, in an effort to calm ever more skittish consumers, companies are now starting to trumpet what they call major measures aimed at ensuring food safety.

So on Oct. 28, Wal-Mart (WMT) rushed to pull Hanwei-brand Chinese eggs off its shelves in China following reports that they might be tainted (BusinessWeek.com, 10/30/08). This followed its Oct. 22 announcement of a major overhaul of its mainland supply system (Wal-Mart sources almost $10 billion annually from China), aimed in part at better ensuring the safety of its products. "Cheating on the quality of products is the same as cheating on customers. We will not tolerate that at Wal-Mart," said Chief Executive H. Lee Scott in Beijing on Oct. 22 (BusinessWeek.com, 10/24/08).

Now one of the biggest moves to date: On Oct. 31 the head of Swiss food products giant Nestl (NESR.DE) announced the opening of a $10.2 million Beijing research and development center, complete with advanced product testing machines that can detect chemicals including melamine (melamine has been used to fake higher levels of protein in Chinese dairy products). "The safety of consumers is quite clearly our top priority," said Nestl CEO Paul Bulcke, whose company has invested about $1 billion in Greater China over the last 20 years. "This center will serve as the base and the reference in food safety for Nestl in Greater China."

Protecting a Key Market

It's no surprise Nestl is now at the forefront of talking up efforts to ensure food quality. Despite its insistence that its mainland-made products—including powdered milk, Kit Kat chocolate bars, and Nestl ice cream—are safe, there are widespread fears in China that use of melamine may affect much more of the dairy and meat industry than so far has been revealed. And China is a key export manufacturing base as well as market for Nestl, the world's largest food company. The Swiss giant last year had revenues of close to $2 billion in Greater China. Earlier this month, Taiwan authorities banned sales of China-made Nestl infant formula and powdered milk after reportedly finding traces of melamine in the products. (Nestl insists that all its China-made products are safe.)

Nestl's new center, which along with a second one in Shanghai brings total China R&D spending up to more than $16 million, will be key in ensuring mainland-produced dairy products are safe, the company says. (The Beijing center also will do traditional product research and development.) "Two highly sophisticated analytical tools for detecting trace amounts of residues and undesirable compounds like melamine or veterinary drugs or natural toxins are currently in operation here at R&D Beijing," Nestl Chief Technology Officer Werner Bauer said in Beijing. At the center's opening, Nestl also announced that since the milk crisis broke, it has sent 20 specialists from its Swiss headquarters to 5 of its 20 China plants to strengthen chemical testing for dangerous substances like melamine.

Consumer Confidence Collapsing

Despite the latest corporate measures, confidence in the mainland food industry is hardly growing. Besides Taiwan's recent move against Nestl products, over the last month the Hong Kong government has banned baby food and wafer crackers made by Heinz (HNZ), British candy maker Cadbury (CBY) has pulled its chocolate off mainland shelves, and on Oct. 30 the Financial Times reported that the Indonesian government destroyed 2,000 boxes of China-produced Mars, Snickers, and M&M chocolates. In all cases, there were fears the food products had been contaminated with melamine.

The latest news reports that the melamine problems could affect China's entire meat, fish, and poultry market are sure to shatter already fragile consumer confidence. In response to the reports, the Shanghai government has begun inspecting more than 100 fish farming operations in that city. "The feed industry seems to have acquiesced to agree on using the chemical [melamine] to reduce production costs while maintaining the protein count for quality inspections," the official English-language China Daily wrote in an Oct. 31 editorial.

"We cannot say for sure if the same chemical has made its way into other types of food. We hope it has not. But if fodder can be confirmed as the source of contamination for both eggs and milk, action must be taken to check how widespread the use of this chemical is."