Integrity of Management. Case of Sanlu Group (Milk scandal in China 2008)

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In 2010-2011, China has faced the fact of high inflation substantially the caused the credit fuel program for economy priming.
The government has taken more drastic measures, for fight against inflation, but at the same time GDP growth was slowed down to 8% in 2012. [1]
In general conditions for business in China remain unsatisfactory as there is no possibility of full quality check of production. In thecountry corruption has grown and officials allow production of low-quality goods in domestic market of China. The export market represents a better segment in economy of China. However if large Chinese corporations don't begin to work by rules of social responsibility domestic market of China and will remain is filled with the foreign companies because their goods are more bette ...

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Introduction:
In the modern world the question of social responsibility of business – and especially in large international corporations – has a vital impotence. Receiving profits by the company shouldn't be a main objective of corporation activity - the management of such firms has to bear a direct criminal responsibility for its production quality. Also the company has to consider social consequences of its activity.[1]
If the company turns out low-quality or poisonous products which cause to irreparable injury health of the nation, then the question of social responsibility of such company has to be controlled by the state. A striking example of a case of the irresponsible relation of the company to the made goods is the well-known dairy scandal of Sanlu Group in China.

Tian Wenhua, then the CEO of SDC, became the president and the CEO of Sanlu. Tian Sanlu has given the Chinese powder market of 13 years in a row from the sales amount point of view. Tian Sanlu was considered one of the most successful businessmen in China for his role in company foundation. Tian Sanlu was called the vice-chairman of the Chinese Dairy Branch association and chosen in National committee of the Chinese National Political Advisory Conference. The company was collective; managers and workers both stocks Sanlu which are in property.Sanlu became the largest taxpayer of Shijiazhuang as it became the largest seller of a formula in China during the continuous 15-year period. Richard McGregor, the author, has told that Sanlu became "an invaluable asset for the city, differently verymuch trying to attract the industry and investments on an equal basis with the main capitals of China".In December, 2005 the agreement on joint venture has been signed which has involved the New Zealand cooperative of a dairy Fonterra taking the 43% equity stake in the Chinese dairy, having entered ¥864 million. The joint venture has begun to trade in 2006. The share of 56% of the majority belongs to Shijiazhuang Three Deers Limited. [2]In February, 2006 the group has opened dairy plant in Tangshan with an annual power of 200 000 tons of powdered milk formula. During signing this contract of joint venture with Fonterra the company declared that it invests 3 billion yuans for external growth, for the purpose of a national industrial network formation for the next three years. In April, 2006 Sanlu has got a liquid basis of production of milk in Weifang, Shandong capable to production of 300 000 tons of watery milk every year, in expenses of 400 million yuans. In October of the same year the company has invested the capital in production object with a power of 100 000 tons of drink with lactic bacteria acid and yogurt in Sinsyan, Henan, at the cost of 120 million yuans.[3]In 2007 compony sales have reached ¥10 billion. Sales of powdered milk of group have estimated number shares in the market of 18 %. The company was proud of the strict procedures of quality control having its extremely strict tests on products. "Made in China" - special release of a cable television program for "Quality Reports Weekly", transferred on September 2, 2007 and concentrated on the company. It claimed that more than 1 000 various tests have been executed before its products leave factory. For this purpose, on January 8, 2008, it have awarded the second prize in 2007 National Scientific Awards of Methods in category of 'Innovative infantile research of a formula and other connected methods'. Many its products have been exempted from government control for the fact that three times in turn have transferred government quality checks. Sanlu - one of the largest employers in Shijiazhuang which has about 10 000 people on its pay-sheet.In September, 2008 Sanlu has drawn attention of the international community because of product problems concerning its infantile dairy formula which has been polluted by melamine, nonfood chemical which causes nephritis. About 300 000 babies have got sick, and six cases have led to death.The Xinhua news agency has reported that Sanlu has received the first complaints about children's milk in December, 2007. [3]On September 15 the company has let out a public apology for the polluted powdered milk; Sanlu have been ordered to stop production and to destroy all not-sold and reserved products. The authorities have taken 10 000 tons of a product.After testing of samples from 491 parties of the products sold by all 109 companies making children's powdered milk, National administration of High-quality Supervision, Control and Quarantine has told that all 11 samples from Senlu haven't passed a test of melamine. Senlu whose products sell on a half of the price of equivalents in the market has made record of the highest levels of pollution among all checked samples in 2 563 parts on one million.Tian Wenhua, the chairman and the CEO of Sanlu and Party Secretary have been deprived of the party and functional posts during an extraordinary meeting of Hebei provincial standing committee of China communist party. Four officials of Shijiazhuang, including the vice-mayor who is responsible for food and agriculture, Zhang Favana have been removed from office. On September 17 the mayor Ji Chongtang has retired; Tian has been accused according to Articles 144 and 150 of the criminal code.[2]As Sanlu, to the largest buyer of area of milk, have ordered to stop production, many small owners of dairy farms have been placed in difficulty. On September 24 Fonterra declared that it has written down the book value of the investments for NZ$139 million (two thirds), having reflected expenses of a product and deterioration in the Sanlu brand "as a direct consequence of criminal pollution of milk in China". The chairman Henry van der Heiden has told that pollution was a crime which, perhaps, was prevented by Fonterra. On September 26 the CEO of Fonterra denied that Fonterra sells his share of 43% of Shijiazhuang Sanlu Group Co.On September 27, 2008 the Chinese Economic Network has reported that Sanlu, perhaps, has been ruined and to be accepted Beiijng Sanyuan Food Company Ltd soon. In November it has been declared that Sanyuan Group will get 4 of plants of Shijiazhuang Senla and plants in Tangshan, Shandong and Henan, and would accept part Senlu. The reason hasn't been opened, but the sum as speak, the order of ¥800 million.[2]On December 19 Sanlu has provided the loan of ¥902 million to pay medical expenses and compensation to the children affected by the spoiled powdered milk which it has made. On December 25 it has been declared that the court of Shijiazhuang has accepted initiation of proceedings about insolvency of the creditor against Sanlu which according to messages had a net debt of ¥1,1 billion. The city of Shijiazhuang, the holder of a controlling stake, hopes to sell the distributive network as the functioning enterprise.Four heads of Sanlu have appeared before the court on December 31, 2008 accused of production and sale of counterfeit or non-standard products. Tian Wenhua, the former CEO, the former Deputy CEOs Van Yulyan and Hang Zhiqi and At Jiusheng, the former unit manager of milk Senlu has appeared in court. Tian has pled guilty to the role in scandal, and has expressed repentance, and also has called that China has considered coverage of the European Union standards on melamine. Wang who has jumped from the building in suicide attempt has offered the apology and repentance: "When I think of children who were harmed... I feel extreme discrepancy to these sick children and their parents". On January 22, 2009 Tian has been sentenced to life imprisonment while other heads of Sanlu have received proposals of five - fifteen years. Two other men have been sentenced to death. Also have ordered to pay Tian a penalty of 20 million yuans (2,9 million US dollars). Sanlu has been fined 50 million yuans ($7,3 million) despite his bankruptcy.Sector overview Dairy consumption still is a new phenomenon in China. Only ten years ago children and elderly people drank milk generally in a powdery form. Since 1999 sales of UVT-milk have grown within five years on average by 89 percent so in urban areas of watery milk consumption - it is more now than consumption of powdered milk. Statistically in 2006 city dwellers of China drank on average 22,54 kg of dairy products pear year, including 22,04 kg of liquid (including 18,32 kg of fresh milk and 3,72 kg of yogurt) and 0,5 kilograms of powdered milk. But it hasn't changed the status of China as largest player in the dairy market where annual consumption still exceeds 1 million tons. [1]Before scandal with Sanlu melamine founded in 1956, it took the place in sector of powdered milk in China in 15 years and its share in the market was higher than 18 percent till 2007. Having begun business with small plant and having only 32 cows and 170 sheep, the company has turned into a conglomerate in about tens of branches across all China, and became the partner of Fonterra from New Zealand. Unfortunately now the companies have left as partners. Until quite recently 80 percent of the dairy market in China have been occupied by Mengniu and Yilio. But all of them have rather strongly suffered from crisis with melamine and foreign competitors promptly apply for their share in the market. At that time the large Chinese producers of dairy products have been busy with rescue of the damaged reputation. The Japanese brewery Asahi has begun on September 21, 2008 sale of the first brand of milk in China. Its production began in the increased demand in spite of the fact that cost was twice more than on average in the market.