Dairy giant contends with new scandals

(Ecns.cn) -- June was up and down for China Mengniu Dairy Co, the country's leading dairy producer, which welcomed a potential foreign boost to its business while also weathering new scandals, according to the Beijing Youth Daily.

On June 15, Denmark's Arla Foods said it would acquire a Chinese private-equity fund's 5.9 percent stake in Mengniu, making Arla the second-largest shareholder in the company.

The deal was big news after Mengniu's new CEO Sun Yiping took office, as Arla's involvement is expected to bolster product innovation at Mengniu and raise its confidence.

Only days later, Xi'an university students who had interned at Tianfu Dairy, an ice cream supplier in Inner Mongolia and a Mengniu subcontractor, disclosed that the factory had very poor sanitation and a messy production environment.

After an investigation, Mengniu admitted that safety irregularities existed, and ordered the ice cream factory to solve its hygiene problems within 48 hours.

In recent years, Mengniu has been the subject of repeated scandals, including melamine contamination and high levels of aflatoxin in dairy products.

The dairy giant said it has strengthened efforts to address food safety issues by tightening product quality control and establishing more "comprehensive" systems.

Dirty farms

On June 20, reporters from the Beijing Youth Daily visited a small farm in Horinger County in the Inner Mongolia Autonomous Region, where more than 10 local households raise milk cows.

The farm is an "epidemic-prevention area" where most people are not allowed to enter, yet there was no one guarding the entrance and no one was in charge of the sterilizing equipment, the reporters found.

After entering the area, reporters found that the farm was covered with cow excrement and that the feeding troughs were full of mud and limescale.

It is difficult for purchasers to detect such safety risks when buying raw milk, the newspaper said.

Mengniu responded to the problem by saying it plans to spend 30 million yuan ($4.7 million) this year to build eight to 12 of its own large-scale dairy farms, where it could better ensure the quality of its milk supply.

Most of the company's dairy safety problems have been traced back to small farmers who do not meet the standards of the company's farms.

Currently, Mengniu buys about 82 percent of the milk it processes from large-scale farms, and the rest comes from small farmers, according to a company microblog post.

Focus on quality?

The appointment of Sun Yiping as Mengniu's new CEO has brought about changes to the company that some say are good signs for its future development.

Sun has rich experience in the beverage industry; her last post was at Mengniu's largest shareholder, the state-owned commodities giant Cofco Corp.

Since taking over at Mengniu, Sun has worked to readjust and optimize its quality management system; in the past Mengniu overemphasized sales volume, but, according to Sun, in the future the company will not choose profit growth over quality.

Without quality, the company's brand image cannot be maintained or enhanced, and sales will decline despite any kind of promotion or public relations work, Sun added.

Sun said at an internal conference that departments should try to appreciate each other's performance, not criticize by looking for flaws that do not exist.

In the future, the company will establish a positive motivation system with more incentives but less criticism, and turn the staff's attention more to quality control, said Sun.

No end to OEM

After the Tianfu Dairy scandal broke out, Mengniu began reassessing its original equipment manufacturing (OEM) model of production.

According to the Beijing Youth Daily, most of Mengniu's factories across the country are OEM providers, which produce dairy products for the company under contract.

Currently, Mengniu supervises the product quality of OEM providers based on national food safety standards, which means it is largely unaware of the production environment at its source factories.

Although the scandal has made Mengniu realize that the OEM method cannot guarantee consistent quality of products, it is unlikely to be replaced in the near future.

To avoid such problems, Sun Yiping has decided to step up supervision of the company's OEM production lines around the country.

In the new plan, an OEM factory must pass 10 project evaluation reviews, set up nine process control points and meet 388 management standards, according to the Beijing Youth Daily.