Choose your joint venture partner with care

The entire Chinese dairy sector is under scrutiny as 158 babies have acute kidney failure, and products from 22 companies – including three from Arla’s joint venture partner Mengniu Dairy – have now been found to contain the toxic chemical.

It is too early to attribute the full share of blame for the contamination, which has killed four kids so far and sickened more than 6200. Some 1300 remain in hospital.

For now, the Chinese authorities are investigating the belief that the melamine was added to milk at collection depots, which operate separately from the dairies. To date eighteen people have been arrested.

Even so, there is a stiff lesson for all international companies keen on doing business in the Chinese market – not just Fonterra and Arla.

Sure, joint ventures can be a convenient vessel into a high potential market where newly well-off consumers are clamoring for high protein milk and meat they can now afford. The Chinese side typically brings lower-cost manufacturing and knowledge of the local market, while the international partner brings know-how and marketing capabilities.

But one of the first questions a food firm should ask of a potential partner, before they pick up the pen to sign up, is: “Are they equipped to respond in a quick, decisive and transparent way to a food safety scare – just as we would expect in Europe?”

To all appearances Fonterra seems to have been applying pressure on its partner, Sanlu, to take action for weeks before NZ prime minister stepped in and forced the issue with Beijing.

Fonterra has a 43 per cent stake in Sanlu, and three of its executives sit on Sanlu’s board. And yet it says its cries of ‘foul!’ went unheard – or at least the urgent note was not picked up.

If a company does not have a big enough stake in the venture, it risks being a cabin boy and not the captain when it comes to big decisions such as food safety. Who wants to be gritting their teeth below decks and not at the helm if problems are spotted on the horizon?

In the Fonterra-Sanlu case, some of the initial blame has been put on the shoulders of local authorities. A Chinese joint venture is a Chinese legal entity, and has to operate under Chinese rules. International companies need to think very carefully about whether they trust the local structures – because if the worst happens, they have a collective responsibility to work with them.

Fonterra and Arla are by no means the first to have problems with their Chinese partners. Danone’s dispute with Wahahah was well-publicised, and Remy Martin, Fosters and Peugeot are amongst the ranks of those who have gotten themselves into something they later regretted.

For them, though, the upshot was troublesome deals that were costly and complex to resolve. What can be worse than dead and sick children? No company wants to have that on its conscience or on its public record.

For however slight their involvement, the incident will be remembered internationally. It makes no difference whether the sick kids happen to live in China, New Zealand or Denmark – nor really that it is only products sold in China that have been affected.

The scale of the crisis means that Fonterra and Arla will be associated with the problem for a long time.

So before any joint venture bound for Chinese shores is showered with champagne, do make sure it is water-tight.

please pay attention!!!!!!!!!!!!!!!!!!!!

varsha mishra