What Fonterra didn't know

Fonterra appears to have been out of its depth and unaware of what was going on at its Chinese joint-venture partner SanLu as the milk contamination scandal widens.

Chinese authorities have begun a dairy industry investigation and pledged free healthcare for affected babies. Two babies have died and more than 1200 have developed kidney stones after drinking SanLu formula containing tainted milk.

Two brothers who ran a private milk collection station in Hebei province, where SanLu is based, have been arrested for putting melamine into raw milk, state-controlled Xinhua news agency says. Melamine is a chemical that can boost the apparent protein content of foods.

The South China Morning Post is reporting that the Chinese Government has ordered media to tone down coverage of the scandal as people become increasingly dismayed by perceived mishandling of the crisis.

According to earlier reports, consumers were raising questions about SanLu's infant formula as far back as February or March. Financial Times journalist Jamil Anderlini, based in Beijing, told The Dominion Post there were credible reports that a parent of an affected baby had started an online campaign about the milk powder but was hushed up by SanLu and the Chinese authorities.

"Apparently there were some Chinese reporters who started to investigate this months ago but were told to back off by the government. It looks like there were specific instructions given by China's propaganda department telling all Chinese media that during the Olympics there was to be no reporting on food safety issues."

Fonterra has said it did not learn of the problem till a SanLu board meeting on August 2. The fact that senior executives in SanLu had known there was a problem for months and not informed their 43 per cent shareholder raises issues about Fonterra's governance of SanLu and how much it knew about what was happening inside the company.

Fonterra paid $153 million for its 43 per cent stake in SanLu in 2005.

Steve Dickinson, a partner at law firm Harris Moure, has been based in China since the 1980s, and is heavily involved in the food industry.

"The reality is if you're a 43 per cent shareholder in a joint venture in China you're nothing," he said. "You don't know anything, you don't have any power."

- © Fairfax NZ News