Gloating no help to domestic dairy

The two incidents have boosted domestic producers efforts to win some of their lost share of the market, although the impact of the food scare on Fonterra will depend on how it responds to the crisis.

Until now, Fonterra seems to have reacted promptly, providing information to importers and have contaminated products taken off the shelves and returned by consumers who have already bought them. Fonterra's CEO flew to China within 48 hours of the discovery of the problem and claimed that in the next 48 hours all the contaminated batches would be located. A crisis, if handled well, can actually improve the image of a company, and Fonterra seems to know that.

Nevertheless, the Chinese government has asked importers not only to recall the products from stores and supermarkets, but also banned some foreign, including New Zealand, milk imports.

The Fonterra case shows Chinese dairy companies are not the only ones to be involved in food scandals. In fact, it offers them a precious opportunity to win back consumers' trust and, with it, their market share. But if Chinese companies fail to supply high quality products and regain people's trust, the Fonterra case could prompt consumers to look more desperately for safer foreign-made infant formula. After all, the earlier declaration of health authorities that there is "no significant difference" between domestic and imported dairy products did not have enough impact on the choice of Chinese consumers.

Three factors will determine whether Chinese companies can win back some of their market share in the aftermath of the Fonterra scandal. The first is Chinese consumers' reaction to the Fonterra case: Are they influenced only by the headlines of contaminated imported milk powder or do they look beyond them? Until now, no child has fallen ill after drinking Fonterra infant formula and the contaminated batches are being identified and isolated. Also, the cause of contamination is known and the plant in New Zealand has been shut down.

The second factor is the response of the Fonterra management to the problem. A lot will depend on whether all the contaminated batches are traced and destroyed.

The third factor is the duration of the ban on New Zealand milk powder imports. Since New Zealand supplies more than 80 percent of the milk products imported by China, the need for consumers to look elsewhere will grow if the ban continues long.

Fonterra's image has been temporarily damaged for sure, but the damage is not the same as that suffered by Sanlu and other domestic dairy companies. So instead of gloating over the Fonterra scandal, Chinese dairy companies should take immediate steps to really improve the quality of their products and win back consumers' trust.

The author is an economist and director of China Programs at CAPA International Education, a USA-UK based organization that cooperates with Capital Normal University and Shanghai International Studies University.

(China Daily 08/12/2013 page9)