CASE STUDY 2

FOOD FOR THOUGHT: THE 2008 CHINA MILK SCANDAL

FOOD FOR THOUGHT: THE 2008 CHINA MILK SCANDAL

Contents
Major Issue....................................................................................................................... 1
Background...................................................................................................................... 2
Parties Involved................................................................................................................. 2
The Role of the Company: Sanlu Group.............................................................................2
The Role of the Government............................................................................................ 2
The Role of the Media..................................................................................................... 3
Remedying The Situation.................................................................................................... 4
Government Reaction and Recall...................................................................................... 4
Case Analysis................................................................................................................... 4
The Contract View of Business Firms Duties to Consumers..................................................5
The Due Care Theory...................................................................................................... 5
The Duty to Exercise Due Care........................................................................................ 6
The Social Costs View of the Manufacturers Duties............................................................6
Assignment Question......................................................................................................... 7

Major Issue
In 2008, more than 290,000 infants were affected by milk scandal in China. The
scandal brought Sanlu and other dairy manufacturers in Chine unwanted international
intention. Immediately after the incident was made public, Chinas Health Ministry
announced that it would launch a nationwide investigation into the infant kidney stone
cases. It found that water had been added to dilute the milk, which has been sold to
Sanlu for grater profit. Melamine was subsequently added to the diluted milk to maintain
the products standard protein content.
There are several entities that inflicted by this scandal with include the company,
Chinese government and the media.
The company, having deliberately adding dangerous ingredient into the milk for
greater profit ignored the early warnings and did not take steps to highlight the situation
to consumers. In fact the company tries to hide the actual situation by engaging the
media, including biggest Chinas search engine Baidu.
The Chinese government played a critical role in the development and
proliferation of the incident. By providing Sanlu with the national inspection exemption
label, not taking immediate action to address a potential national epidemic and silencing
the media, the Chinese government was directly as well as indirectly implicated in the
milk incident. The Chinese government and Sanlu also at the same time try to contain
the news.
This case study examined the issue by looking into the ethics of consumer
production and marketing.

Background
The low cost strategy under the pressure of increasing price competition, made
worst by lack of quality control by government as well as the company. Sanlu reduce
cost by adding melamine into diluted milk to inflate the protein content
Parties Involved
The Role of the Company: Sanlu Group
Sanlu ignored early warnings and did not take action to highlight the situation to
the customers. Instead of taking action on the complaint from the customer, the
company engaged in the practice of private settlement to appease consumers who
publicly questioned the quality of its products. In 2008, after receiving confirmation that
its product was tainted, the Sanlu Group engaged in a series of actions to conceal the
incident from the public. One of the initiative was to collaborate with Baidu.com, by
signing an advertising agreement of RMB3 million (US$474,000) on the condition that
negative news related to the company was removed.
Sanlu Practice in addressing this issue shows the lack of corporate governance,
transparency and social corporate responsibilities in the company policy.
The Role of the Government
The Chinese government played a critical role in the development and
proliferation of the incident as it was directly as well as indirectly implicated in the milk
accident as a result of their policies and practices.
Sanlu group was awarded with the inspection exemption label, a form of special
reward designed by the General Administration of quality Supervision, Inspection and
Quarantine (AQSIQ). As a result of the absence of state inspection, quality control was
left to the manufacturers discretion, which provided opportunities for companies to
engage in questionable cost-cutting measures.

The Chinese government also failed to react to the early warnings posted by
various public groups even before the case was formally exposed in March 2008,
however it was not taken seriously by the Chineses government.
The Sanlu incident also provided evidence of the prevalence of institutionalized
corruption in China, where companies engaged in unethical practices in pursuit of
profits.
The Chinese government placed restrictions on media coverage to protect its
political image, which subsequently led to a worsening of the incident. In the case of the
tainted milk incident, the Propaganda Department put out a 21-point directive to the
nations media during the Olympics period. The eighth point said: All food safety
issues, such as cancer-causing mineral water, are off-limits, which prevented early
exposure of the incident.
There was speculation regarding corruption and inefficiency in the local
government. Although the municipal government in Shijiazhuang was informed of the
melamine contamination by the Sanlu Group, it neither took immediate action to contain
the situation nor informed the central government, which was informed of the crisis by
foreign diplomats. The local officials did not corporate Sanlus New Zealand Partner,
Fonterra on the request to recall the product forcing Fonterra to report the case to New
Zealand government which then bypassed local officials and reported directly to the
Chinese central government and the case was then brought to light.
The Role of the Media
The extent of Chinese government control over the media becomes evident
when examining the timeline of the publication of the media reports on the Sanlu
incident. Newspapers, television, radio and even the Internet were able to actively
conceal and downplay the severity of the incident.
This did not prevent social media from discussing the food scare, as individuals
(e.g., affected parents) blogged openly about their experiences with Sanlu milk powder
and their dealings with the company.
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Such information, however, remained restricted as those websites did not appear
in search results on the Internet. This was primarily due to the agreement between
Sanlu and Baidu.com, which removed negative information and stories about Sanlu
from Chinas most powerful search engine.
Remedying the Situation
Government Reaction and Recall
Chinas Health Ministry announced that it would launch a nationwide investigation
immediately after the incident was made public. Seventy-eight suspected individuals
were questioned by Chinese police including dairy farmers and milk dealers. It was
found that water had been added to dilute the milk, which was then sold to Sanlu for
greater profit. Melamine was subsequently added to the diluted milk to maintain the
products standard protein content. On September 13, 2008, an order was decreed by
the authorities to halt all production at Sanlu plants. The Health Ministry initiated
warnings and informed the public to control the situation and issued a treatment scheme
on its official website to help local hospitals treat such sick babies.
To manage international opinion, The Health Ministry promised to notify WHO
and affected countries of any development in the case.
Case Analysis
To properly study the case of 2008 Sanlu Milk Scandal, The paper looked into the
issue of consumer product injuries and the responsibilities of manufacturers 1.
Market and Consumer Protection
The Contract View of Business Firms Duties to Consumers 2.
According to the contract view of the business duties to its customers, the
relationship between a business firm and its customer are those created by this
contractual relationship.3 When a consumer buy a product, the consumer voluntary
enters into a sales contract with the business firm. Accordingly, there are four major
1 Manuel G. Velasquez (2014). Bussiness Ethics Consepts and cases, Seventh Edition.
2 Manuel G. Velasquez (2014). Bussiness Ethics Consepts and cases, Seventh Edition, p 332.
3 Thomas Garret and Richard J (1986). Klonoski, Bussiness Ethics, 2nd Edition, p 88.
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moral obligations taken by enterprises: obeying their contracts, disclosing and never
misleading or forcing customers.4 Sanlu on the other hand add Melamine, a chemical
used in producing plastic in diluted raw milk to inflate the protein content. The raw milk
was supplied by the dairy farmers and milk dealer where the water had been added to
dilute the milk to be sold to Sanlu with greater profit. The ingredient was never make
known to the consumers and later caused health problem among the babies that
consume the product.
The Due Care Theory
The due care theory of the manufacturers duties to consumers is based on the
idea that consumers and sellers do not meet as equals and that the consumers interest
are particularly vulnerable to being harmed by the manufacturers who has a knowledge
and an expertise that the consumers lacks. Because manufacturers are in a more
advantaged position, they have a duty to take special care to ensure that consumers
interest is not harmed by the products that they offer them. 5 Sanlu failed to oblige to
their duty as manufacturers to ensure the safety of their product and that their product
shall provides the benefits to the consumers as it supposed to. Sanlu take advantages
on the knowledge and expertise their consumers lack of.
The Duty to Exercise Due Care
According to the due care theory, manufacturers exercise sufficient care only
when they take adequate steps to prevent whatever injurious effects they can foresee
that the use of their product will be used and after having attempted to anticipate
possible misuses of the product. Sanlu did not take any step to ensure that their
products are safe for the consumers and in fact deliberately add dangerous ingredient
into their product to save cost and

4 Meiying Song (Sep 2009) Business Ethics Reflected in Sanlu Milk Incident, International
Journal of Bussiness and Management.
5 Manuel G. Velasquez (2014). Bussiness Ethics Consepts and cases, Seventh Edition, p 338.
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The Social Costs View of the Manufacturers Duties

According to Theory of Social Cost, enterprises should be responsible for all the
costs caused by their products defects, which will lead to more effective use of social
resources by internalizing all these costs into their product prices. 6 These theory
however may be applicable to the unforeseen defect of the product and in the case on
Sanlu, the defect in the product are intentional in order to maximize the profit and the
added ingredient were not make known to the consumers

6 Meiying Song (Sep 2009) Business Ethics Reflected in Sanlu Milk Incident, International
Journal of Bussiness and Management.
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Assignment Question
1.How do you view Sanlu Groups response to consumers complaints that the
milk was affecting infants health? Would you respond differently if the tainted
milk did not cause any injury or deaths? Would you respond differently if the
affected victims were adults instead of young children?
Sanlu groups failure to response to consumers complaints can be regarded as
violation of Legal Rights as well as Moral Rights.
Our response wont be different even if the tainted milk did not cause any injury
or deaths since its still considered as violation of moral rights ( can be violated even
when no one is hurt), where the milk did not bring any nutritional value
2.
In your opinion, who is responsible for producing the tainted milk? Explain
your answer.
a.
Senior management in Sanlu Group
Sanlu management ignored early warnings and did not take steps to
highlight the situation to consumers. Instead, it engaged in the practice of private
settlement to appease consumers who publicly questioned the quality of its
products. The situation occurs due to lack of corporate governance, transparency
and social corporate responsibility. Sanlu management concentrates on profit
instead of working towards producing good quality and safe products and ignored
the complaint from customer and tries to hide the crisis.
b.
Plant managers and workers
Despite knowing the effect of the ingredient add to the milk, the plant managers
and workers continue the practice to secure their job and to ensure their company profit.
c.
Dairy milk farmers
These individuals included dairy farmers and milk dealers. It was found
that water had been added to dilute the milk, which was then sold to Sanlu for
greater profit. Melamine was subsequently added to the diluted milk to maintain
the products standard protein content.
d.
Government
By providing Sanlu with the national inspection exemption label, not taking
immediate action to address a potential national epidemic and silencing the

media, the Chinese government was directly as well as indirectly implicated in

the milk incident.
There were early warnings related to the milk scandal posted by the
public, professionals and the media, even before the case was formally exposed
in March 2008. However, the government did not take these warnings seriously.
In both situations, the Chinese government placed restrictions on media
coverage to protect its political image, which subsequently led to a worsening of
the incident. In the case of the tainted milk incident, the Propaganda Department
put out a 21-point directive to the nations media during the Olympics period. The
eighth point said: All food safety issues, such as cancer-causing mineral water,
3.

are off-limits, which prevented early exposure of the incident.

What role did the institutional environment in China play in facilitating

employees and corporate wrongdoings? Refer to Ashforth and Anands The

Normalization of Corruption in Organizations to structure your answer.
Ashforth and Anands argue in The Normalization of Corruption in Organization
that three mutually reinforcing processes underlie normalization:
(1)
Institutionalization, where an initial corrupt decision or act becomes embedded in
structures and processes and thereby routinized The Sanlu incident provided
evidence of the prevalence of institutionalized corruption in China, where companies
engaged in unethical practices in pursuit of profits. The practice accepted by all level of
companys executives. The local government also involved in the scandal. ``Local
governments are always watching out for their local companies, and the bigger the
company, the bigger the sway they'll have,'' says Bruce McLaughlin, a Shanghai-based
consultant who investigates patent infringement in China. ``We never go to the local
government when we investigate a company. They're no help or they'll leak information
to the company.''7 This situation shows that the corruption has been institutionalized,
where the practice became embedded within the organization and routinized.
7 China Milk Scandal Shows Ties Between Companies, City Officials By John Liu - September
18, 2008 22:08 EDT http://www.bloomberg.com/apps/news?
pid=newsarchive&sid=aphp1fx8M0Mw
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(2) Rationalization, where self-serving ideologies develop to justify and perhaps even
valorize corruption; - the Chinese government placed restrictions on media coverage to
protect its political image, the local government try protect their industry, the company,
dairy farmer, milk dealer, plant worker and manager all try to protect their profit and
these excuse has become rationalized and justifiable disregards the breach of ethics.
(3)
Socialization, where naive newcomers are induced to view corruption as
permissible if not desirable. The new company will adapted to the same practice to
remain competitive. The new local government official will also continue the practice to
protect the local industries.
4.
Comment on the role of leadership and network of the heads of the
organizations in their management of the incidents in Sanlu.
The government is not transparent in dealing with the crisis because they never
take swift action to mitigate the situation and let the people keep on consuming the
contaminated product just because to safeguard the country image during the Olympic
Games. In fact, the delay in announcing the crisis to public attention was almost three
weeks.
The local government try to hide the crisis even though notified by New Zealand
partner Frontera to the extent that Frontera have to report to New Zealands official of
the situation which eventually alerted Chinas authority. The local government more
concern about their local industries over the interest of consumers (personal ethics vs
organizational ethics)
Despite delaying the release of the situation to the public, the stern action of
Chinese authority on the individual that found guilty shows that the government and the
leadership are really serious in dealing with malpractice.
5.
Analyze the steps taken by the Chinese government to manage the
problem. What are your opinions on the image-saving tactics that were adopted
post-crisis? Does the unique, personalized nature of the text message apology in
the milk scandal make the actions more forgivable? What are some useful
strategies to prevent corruption?
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Immediately after the incident was made public, Chinas Health Ministry
announced that it would launch a nationwide investigation into the infant kidney stone
cases. The Health Ministry also took action to keep the cases under control. Beside
that, the government also actively managed international opinion
To prevent similar incidents from happening again, the Chinese government also
implemented new policies and regulations on industry and lowering the dairy farmer
operating cost through subsidy.
The unique, personalized nature of the text message apology in the milk scandal
does not make the action more forgivable since it was too late and being in power, she
should tackle the situation at the early stage.
The workers and the local authorities should be adequately paid to prevent
corruption and self interest conflict, promoting whistle blower concept and educating the
industry and government authority in business ethic and responsibility towards
consumers.
6.

What can the new executives of the dairy companies and the Chinese

government do to regain local and global consumers and other parties trust and
support? How do these reports affect Chinas image, and will they affect the
Western perception of Asian countries as a whole? What lessons can we learn
from this case?
The dairy companies and Chinese government should engage in perception
management to regain public and international trust. New law shall be imposed to
strictly control the product in order to ensure that they are safe for the consumer. The
central government should play their part more aggressively in monitoring the industry
and limiting the power of the local government through transparent audit. The action
should be publicized to regain trust.
The scandal affect Chinas image but not necessarily Asian countries as a whole.
The scandal affect Chinas image since it was a consumer product that can cause
health problem for infant where at the other parts of the world, the safety of infant
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product is taken seriously for example in United State any product related to consumer
goods must undergo strict inspection and approval by FDA.
The lesson learn from this case is that the public trust is not easy to regain as for
this case, most international public were skeptical towards Chinas consumer goods and
will look for other alternative despite lower price offered.
The central government should priorities between profit of industry and political
image, as for this case the Chinese government delay in publicizing the issue and
taking the action in order to protect the political image which subsequently leads to the
worsening of the incident.

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