China’s 2008 tainted milk scandal laid bare some of harsher realities behind the country’s economic miracle – exposing the high price that can be exacted for entrenched, institutionalised corruption and inadequate oversight during times of rapid growth.

The contamination of milk and milk products with melamine – an industrial chemical used in fertilizers and plastics – left at least four babies dead and sickened hundreds of thousands more.

This article is based on a case study written by Associate Professor Vivien K.G. Lim, Rashimah Rajah and Smrithi Prasad, Dept of Management and Organisation to illustrate the interplay of individual, structural, cultural and political factors in contributing to unsafe business practices in an organisation’s pursuit of profit. The case had been accepted for publication by Ivey Publishing.

Melamine, because it is rich in nitrogen, can be used to disguise milk that has been watered-down by fooling tests for protein levels. Consumed by humans it can produce kidney stones and other potentially fatal conditions, especially in children.

That the contamination had occurred in the first place raised tough questions in China and overseas about the ethics of Chinese business practices. It was, after all, not the first such scare and dozens more have followed since.

Worse still, there were widespread reports that senior Chinese officials had known about the contamination for several months but had supressed it, in part because of fears of bad publicity at a time when China was in the global spotlight as host of the summer Olympics.

As we look for lessons from the scandal, acknowledging that there must be a certain culture that allows such conditions to exist, we must also analyse why such a culture can prevail.

As the world becomes more globalized and cross border trade relations deepen, it is also important to understand what factors motivate individuals to resort to questionable means for economic gain, why governments can allow such behaviour through attempted cover-ups, and examine the role that changing social and technological factors play in curbing such corruption.

‘Medieval system’

The melamine in milk scandal implicated parties throughout the food supply chain as well as those in positions of oversight, such as government and media. But it had its origins in the rapid and largely ramshackle growth of the Chinese dairy industry itself.

The consumption of dairy products is only a relatively recent feature of the Chinese diet – driven by rising incomes and supported by the government which has promoted the nutritional benefits of milk, especially for children.

As demand rocketed, the dairy industry has struggled to keep pace, relying on a poorly managed supply chain of thousands of small scale farmers, using low quality cattle feed, and selling their milk through countless independent and unregulated middle-men.

One Beijing-based analyst has described the situation as a “medieval farming system serving a product to a 21st century market“.

With such rapid growth the dairy firms placed huge pressure on their network of smallholders to produce more milk at lower prices, with no questions asked. The incentive to cut corners became ever greater.

The scandal ultimately led to the collapse of dairy firm Sanlu, the second biggest dairy producer in the world, and one that for over a decade had been one of China’s most-trusted brands.

A high-profile government investigation found that top Sanlu officials had known about the milk contamination and its health effects since late 2007. Despite complaints from consumers it took no action to highlight the issue or improve its product.

Toxic product

Instead, Sanlu sought to buy the silence of consumers, even going as far as to sign an advertising deal with, China’s biggest search engine, on the condition that negative news about the company was filtered out of searches.

ThinkAloud4Meanwhile Sanlu had continued knowingly selling an effectively toxic product until as late as September 2008.

The scandal though was not limited to Sanlu alone. Subsequent inspections found melamine in milk products from 21 other Chinese producers – or one in five.

At the time the head of China’s food quality watchdog said milk products had not been previously tested for melamine because no-one had even considered the possibility that it might be added in the first place.

But the government had itself played a critical and direct role in the development and proliferation of the melamine contamination.

Sanlu had previously been awarded the national inspection exemption label by China’s top safety body. The label was given to Chinese companies with a reputation for quality and large market share, effectively leaving the firm itself to police the quality of its own products.

Meanwhile, officials at both the local and national level collaborated either actively or passively in covering up the growing scale of the crisis.

As with the SARS virus a few years earlier, the government placed deliberate restrictions on media coverage of the melamine contamination to protect its political image – and, as with SARS, the result was a significant worsening of the situation.

Ultimately it was only when Sanlu’s New Zealand partner, Fonterra, heard about the contamination and reported its concerns to the New Zealand government, that pressure was brought on the government in Beijing to take action.China, of course, is not the only country to suffer from corruption and related safety scares.

But the scope and severity of cases such as the 2008 melamine scandal, coupled with China’s and growing dominance in global trade, means they have particular resonance.

Safety alerts

The melamine scare followed a series of other safety alerts surrounding the “made in China” brand – ranging from toys coated with toxic paint through to toothpaste containing poisonous diethylene glycol, a chemical usually used in anti-freeze.

And while the melamine case caused widespread outrage and was seen by some as a turning point, there have been dozens of further examples since.

Indeed, food and other product safety scares have become so prevalent in China that last year at least two separate smartphone apps were launched to help Chinese consumers keep track of which products to avoid.

While some of these scares might plausibly be categorised as accidental contamination, the melamine scandal as well as many cases before and since were deliberate cases of  in pursuit of profit.

In the wake of the 2008 scandal, China’s premier Wen Jiabao vowed to prevent anything like it happening again. But scares over contaminated foods remain regular occurrences, with the dairy industry in particular a frequent culprit.

In June 2012, for example, China’s Yili group recalled batches of infant formula found to contain what it described as “unusual” levels of highly toxic mercury.

Damaged trust

Such alerts have badly dented levels of consumer trust in China. As Tom Doctoroff, CEO for Greater China with advertising agency JWT, noted in a recent talk at NUS Business School one of top marketing touch points for targeting Chinese consumers is to focus on safety.

Another recent side-effect has been restrictions imposed by Hong Kong authorities on the amount of milk powder mainland Chinese visitors are allowed to buy in the territory.

Some have argued that the number of cases being reported since the melamine scandal is an indication of improved transparency in the industry, with the 2008 scandal having opened the door to better media scrutiny of dubious business practices.

There is also the growing power of social media. The growth of networks such as Weibo and Renren have allowed word of tainted products to spread more quickly and with broader reach than traditional media.

In 2008 several individuals, particularly worried parents, blogged about their experiences with Sanlu. But in most cases such information reached only a limited audience, in large part because of the agreement with which filtered out negative stories from search results.

There is also the argument however that the continued scandals are symptomatic of deeply embedded systemic problems.

In late 2008 the World Health Organisation blamed the melamine scandal on fundamental failings among agencies responsible for monitoring food safety, including poor staffing and a lack of resources.

At the time a spokesman warned the milk contamination was “clearly not an isolated accident”, adding that the case had been “a large-scale intentional activity to deceive consumers for basic, short-term profits.”

Four years later, in 2012, an investigation by Chinese business magazine Caixin found the situation little changed.

Food scandals are still regularly appearing in the press, the report noted, but those cases being reported represent “only a fraction” of unsafe practices in a food industry driven by razor-thin profit margins among producers.

In short, the Caixin report said, “it comes down to a simple cost-benefit analysis – the cost of violating food safety regulations remains low compared to potential profits.”