KEY POINTS:
Fonterra has repeatedly been caught napping over the ongoing mishaps involving its now officially bankrupted Chinese joint venture Sanlu.
The Christmas/New Year holiday period proved no exception, with last week's embarrassing volte-face by chief executive Andrew Ferrier on whether Sanlu's chairwoman, Tian Wenhua, had pleaded guilty to producing and selling infant formula tainted with the toxic chemical melamine.
It has also been revealed that Sanlu continued to manufacture and sell melamine-contaminated infant food well after August 2, the date that Fonterra's three representatives on the Sanlu board were first made aware of the scandal - a factor which ought to be raising big concerns around the Fonterra board table but wasn't public until Tian confessed to the practice at her provincial trial.
The Chinese authorities are now moving swiftly to draw a line under the biggest food safety scandal to dog China in recent times. Six infants have died and a further 290,000 Chinese (mainly children) have fallen ill after consuming melamine-contaminated dairy products - much of it sourced to Sanlu.
Chinese state media have strongly promoted Tian's guilty plea over the role she and three other former Sanlu executives played in the tainted milk scandal.
But a Fonterra spokesman (Ferrier had been caught unawares by the event) who checked the reports on the CEO's behalf, declared to the Herald that Tien had "absolutely and unequivocally" pleaded not guilty to the charges she faced.
The next day's clarification made it clear that the only confusion that existed relating to Tian's plea was in Fonterra executives' minds. Fonterra admitted to being under the impression that Tian had not pleaded guilty, "However, there were other reports that she had pleaded guilty. Fonterra was not present at the trial. It is not appropriate for Fonterra to make any further comment while the Chinese court is deliberating its verdict," its press release stated.
When I called Fonterra's media relations hotline to find out how the communication lines became so confused, Baldwin Boyle's managing director, Steve Fisher, couldn't immediately say as he was on holiday when the incident happened. Ironically, it was another Baldwin Boyle director, Greg Shand - acting on Fonterra's behalf - who had given the Herald the confusing information in the first place.
Late yesterday, Fisher emailed: "The Fonterra China management team were relying on secondhand information and there were also conflicting reports in Asian media. The information Fonterra had was not reliable, which is why we issued the clarifying statement the following day."
This statement ought to concern Fonterra shareholders as it calls into question just how exacting Fonterra's stewardship has been during Sanlu's downfall.
Fonterra's legal representatives in China, the well-regarded Baker & McKenzie, have been keeping a watching brief on the huge legal minefield of Sanlu's collapse.
At issue is whether their legal eagles did make sure that Fonterra's China management team was well-aware of just what happened at the Shijiazhuang Intermediate People's Court on December 31. The trial had been foreshadowed just days earlier - and there are suggestions that Baker & McKenzie did indeed have a representative there.
It is an issue that the Fonterra board should also question when they meet later this month to take stock of the company's overall business plan.
But the critical issue which has so far received little attention within New Zealand is the Chinese media summaries of Tian's trial which confirm that Sanlu continued to manufacture melamine-contaminated products well after the August 2 date at which Fonterra's three representatives on the Sanlu board first became aware of the issue.
The production also took place well after the August 6 date which Ferrier earlier told media was when the affected-product trade recall went into effect in China.
Tian reportedly told the court that she received a notification on August 13 from Fonterra citing EU standards which said the highest permissible level in milk products was 20mg/kg. All four defendants admitted that after the Fonterra notification, Sanlu started reselling products that had up to 10 mg/kg of melamine. The Chinese Government has since issued an edict setting a maximum allowable limit of melamine at 1mg/kg in baby milk food and 2.5mg/kg for liquid milk.
China Daily reports that the indictment against the Sanlu management showed that between August 2 and September 12, Sanlu produced 72 batches of tainted baby milk food that added up to 904 tonnes, and sold 69 batches of these products for 48 million yuan ($12 million).
From a Fonterra perspective, the board ought to be asking whether any of their China representatives on the Sanlu board knew this had happened, and, if not, why not?
Tian's admissions undercut the media assurances given by Fonterra chairman Henry van der Heyden and Ferrier that the contaminated production stopped in early August. They also call into question whether anyone in Fonterra knew that Sanlu intended to keep on producing melamine-contaminated products, and if Tian felt she had been given a tacit all-clear to go ahead as long as the products fell within the so-called EU levels.
Fonterra wrote off its 43 per cent stake in Sanlu last year at a cost of $201 million.
The Chinese authorities declared Sanlu bankrupt on December 24 after receiving a successful petition from a banking creditor of the Chinese dairy company and Fonterra put out a press statement noting the move.
But the bankruptcy was clearly not the outcome that Ferrier had expected when the affair initially became public. He dismissed the prospect outright when an Asian-based journalist - using the analogy of what happened to a Chinese food company that sold contaminated moon cakes - put that to him at a Singapore media briefing last September.
The bankruptcy is just another of the carefully orchestrated moves by the Chinese authorities to put this affair to bed.
Fonterra was initially hopeful it might be able to utilise the company's assets. But right now it looks as if the authorities' intention is to clear the way for another Beijing-based dairy company to take over the Sanlu assets at a knockdown price in just the fashion the Chinese media have all along foreshadowed, but Fonterra has tended to (publicly) disbelieve.
These repeated incidents suggest Fonterra is not on top of things in China.
It may be time for the company to demonstrate good faith by once again tendering an offer to send China high-quality milk powder at a knockdown price to produce safe infant formula. The Sanlu disaster and similar problems at major dairy companies Yili and Mengniu led to a big production shortfall late last year.
Fonterra - which has been building a huge stockpile of milk powder in New Zealand - yesterday suggested China had knocked back its October offer.
It noted the Chinese Government was managing the compensation process for the victims.
Instead Fonterra had donated US$5 million ($8.5 million) to the Soong Ching Ling foundation's maternity and infant healthcare community programme.
Fonterra has hoped its status as a whistleblower in this affair will ultimately see it cast in a good light by Chinese authorities.
But the company is going to have to demonstrate a lot more commercial on-the-ground savviness if it is to fulfil a stated ambition to re-enter the Chinese market as a manufacturer in its own right.
For Fonterra's 12,000 shareholders - who are right now focused on whether the floor is falling out from under their industry due to questionable management of the company's online milk powder auction system - the about-face is just another headache.
But until the spillover from the tainted milk scandal at Sanlu is finally put to bed - or management learns to manage the fallout more adroitly - the embarrassing headlines will continue.
