BRAND REPUTATION: Fonterra cast as fall guy

Just days before news of the Fonterra botulism scare broke, local press reports were suggesting China’s media had already been beating up a sustained storm over New Zealand-made dairy products.

Amid moves by the Chinese government to bring imported infant formula products under intense regulatory focus, major Chinese media outlets had run news stories critical of the marketing claims of some New Zealand manufacturers.

There had been the China Daily report about Shanghai quarantine authorities turning away 42 tonnes of imported Fonterra milk powder in May after it had been found to contain an excessive level of nitrite.

Then there was another China Daily exposé identifying the New Zealand infant formula brand Heitiki as being “discovered in 2011 to be registered by Chinese businesspeople and unknown to New Zealanders.”

If there was any suggestion that New Zealand dairy products were being singled out for criticism in China, then the botulism scare was to take things to a whole new level.

In a scathing report, China’s official Xinhua newsagency announced on Monday that New Zealand’s “100% pure myth” had been busted. Lambasting Fonterra’s “delayed” detection of the offending bacteria, the report called on Chinese consumers to rethink their assumptions in relation to food security and shed their “blind faith” in foreign food products.

By these accounts, New Zealand’s reputation as a source of safe, natural, high quality milk product has received a crushing – and potentially mortal – blow in what is a crucial export market.

Chinese consumers, like those in other affected markets, have had their confidence in Fonterra, New Zealand and foreign milk product genuinely shaken. However, despite – and indeed behind – the vitriolic media, there are strong reasons to suggest that Brand New Zealand will bounce back.

Underlying Chinese consumer demand for imported milk product is high, very high, driven by massive concerns over the safety of domestic brands after the 2008 melamine scare. According to a Pew Research Center survey, 41% of Chinese respondents last year rated food safety as a very serious problem, compared with 12% in 2008.

Neilsen statistics show that four foreign brands accounted for about half of the total sales of baby formula in China in 2012. Chinese who can afford it will tend to exercise their preference for foreign over Chinese brands.

It’s a case of “safety first” in what is a risk averse market segment where local brands have proven endemically difficult to trust. Many Chinese netizens have even expressed distrust in their media’s brackish handling of the Fonterra scare, with some praising Fonterra’s transparency.

“Chinese propaganda is belittling foreign milk powder in order to boost domestic brands,” one Weibo user says, ”but who will trust those deceptive domestic producers?”

Continuing distrust has led China’s parents to either turn to higher-priced imported infant formula or – increasingly – buy directly from an overseas source. A recent New York Times story noted that baby milk powder is now so high on the shopping lists of Chinese overseas tourists that per purchase limits are being imposed by retailers in some countries to avoid a lack of supply.

Indeed, it is this seemingly unbreakable popularity that is precisely the reason why foreign milk products have attracted the unwanted attention of China’s regulators and media mouthpieces. But it’s not just infant milk products and not just New Zealand products that have been targeted.

Recent months in China have seen a spate of calls for probes into the reportedly inflated prices commanded by certain imported goods. In addition to infant milk products, imported pharmaceuticals and luxury cars have been on the receiving end of inflammatory reportage and anti-trust murmurings.

Following on from the National Development and Reform Commission’s anti-monopoly investigation of five foreign producers of infant milk formula and probes into Western drug companies, Xinhua has pointed the finger at foreign luxury carmakers for rampant profiteering.

In a major scandal, UK drug giant Glaxo-SmithKline has sacked 100 Chinese sales representatives after four of its senior executives were detained by Chinese security authorities on the back of accusations the company had bribed officials and doctors to increase sales.

The common theme between infant milk formula, pharmaceuticals and luxury cars is that these are product lines in which overwhelming Chinese consumer distrust in domestic manufacturers is matched by an equally overwhelming preference for pricier foreign brands.

The spotlight on foreign producers of coveted imported goods will likely remain for the short term as the dust settles on the leadership transition that saw Xi Jinping assume the Chinese presidency in March this year. With the Chinese economy in protracted slowdown, President Xi has highlighted the need for deep market-oriented economic reform, although exactly what this means remains as yet unclear.

Against this background, pricing investigations and media exposés into foreign brands may be viewed as symbolic bureaucratic responses to a series of crackdowns launched since the president took office. His “mass line campaign” hasn’t even spared elite members of the ruling Chinese Communist Party, requiring officials to win over the public by cutting extravagance and “lavish working styles.”

Unlike austerity policies in Europe, which have brought dissenting publics on to the streets in protest, this is a campaign aimed at dampening discontent. As China’s slowdown hits families through layoffs and pay cuts, Beijing has been focused on articulating a clear intolerance for frivolous consumption by party elite and by those who have benefited most from the P capitalist reforms.

Accordingly, imported premium consumer goods have become collateral targets at the hands of government and media bureaucrats keen to be seen publicly towing the mass line.

As for milk product imports, assuming things remain scandal-free for a while, there is no sign of Chinese demand softening, not least until consumer faith is restored in domestic product.

Chen Lianfang, a senior analyst with Beijing-based agriculture consulting company CnAgri, is quoted by the People’s Daily as saying, “the most effective way to boost the dairy sector is to improve the quality of its products and raise public confidence in domestic formula producers.” That prospect, it would seem, is way over the horizon.

In the meantime – and official probes and media scaremongering notwithstanding – Brand New Zealand’s hitherto reputation for quality and safety among Chinese consumers remains eminently salvageable.

Nicholas Dynon is an academic and former diplomat specialising in Chinese media and soft power. His research has appeared in the China Journal and Place Branding and Public Diplomacy. He coordinates the Line 21 Project, an online resource on Chinese state propaganda and public diplomacy

Media campaign hits others as well

Fonterra is not the only foreign infant formula supplier feeling the heat of a sustained Chinese media campaign, the Wall Street Journal reports from Beijing.

Chinese regulators say they asked a subsidiary of Abbott Laboratories to recall two batches of infant formula after New Zealand embassy officials said it could be tainted.

Abbott says the two batches didn’t use tainted ingredients and that its recall is precautionary.

Dumex Baby Food, a subsidiary of Paris-based Danone, and Coca-Cola China also announced recalls of some products, though both stressed they were precautionary.

The scare has given Beijing’s efforts to help its own dairies a rhetorical shot in the arm. Beijing this year has intensified efforts to bolster a domestic industry hobbled by a 2008 tainted infant-formula scandal that killed at least six babies and hospitalised thousands of others, in one of China’s most shocking food-safety scares.

“Some Chinese consumers hope that foreign brands are absolutely safe but recurring problems prove that famous foreign brands are not always safe,” says an editorial the People’s Daily, the mouthpiece of the Communist Party. The editorial said a number of foreign brands have had quality issues.

The official Xinhua News Agency says, “an increasing number of [Chinese consumers] have come to worship foreign brands.” Xinhua also quotes industry analysts as saying the scandal is a good opportunity for domestic producers to “gain the battleground back.”

The critical reception follows a push last month by China’s top economic planning agency to probe price-fixing allegations among foreign formula makers. Most, including Danone and Fonterra, have reduced prices.

Another, Mead Johnson Nutrition, says it will pay a $US33 million penalty tied to an antitrust review stemming from the investigation.

The demand for foreign brands has also sent ripples through markets around the world. Chinese tourists have swept Hong Kong, Australia and the UK, among other countries, for baby formula, prompting some countries or areas to ban Chinese consumers from buying more than a certain quantity of milk powder.

Infant formula bought by Chinese abroad and brought back home accounts for as much as 10% of the market.

Though domestic production has rebounded since the 2008 scandal, China’s dairy industry is still struggling to overcome its damaged reputation.

On Tuesday, citing China’s State Food and Drug Administration, Xinhua said China issued draft rules calling for domestic infant-formula producers to have a milk source built or controlled by themselves as well as research and development capability.