Category Archives: Product Safety

Another Day, Yet Another Food Safety Scare

IT IS AN embarrassment for a company that says “food safety and quality assurance are guiding principles in delivering products that go above and beyond our customers’ requirements” when it is accused of supplying meat to fast-food chains that has gone past its sell-by date and other food safety violations. The Shanghai Municipal Food and Drug Administration is investigating Shanghai Husi Food, the local unit of OSI Group, a food supply group based near Chicago in the United States, for the “alleged use of expired raw food material production and the processing of it in food.” The allegations were first made in a report on Dragon TV.

McDonald’s and KFC’s owner Yum, the two top brands in China’s $174 billion fast-food market, are among the global fast-food franchises that OSI supplies in China. McDonald’s buys beef, chicken and lettuce from Shanghai Husi. Like KFC, it has immediately stopped buying from it.

For both chains, it is another food-safety setback following one in 2012 involving chicken pumped with excessive amounts of antibiotics. KFC’s owner Yum has also hand to contend with the reputational challenge of an outbreak of bird flu. This Bystander also recalls Wal-Mart being caught up in an incident in 2011 involving out-of-date duck meat. And we won’t even mention the case of fox allegedly being passed off as donkey meat.

OSI says it is dealing “directly and quickly” with what it says it believes is “an isolated event”. Most of all, this latest food-safety scare highlights the difficulty for any multinational in enforcing strict processes to assure quality and product safety along its supply chain when that chain is dependent in large part on local staff.

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Corruption And Consolidation In China Pharma

This Bystander has been struggling to put the corruption investigation into GlaxoSmithKline in to a broader context. The U.K.’s largest drugsmaker stands charged with paying up to 3 billion yuan ($488 million) in bribes to prop up its sales and prices in China.

There is clearly more to all this than a simple matter of corruption — if indeed there has been that. For one, the number is relatively small on a global scale. The pharmaceuticals industry is well known for buttering up those who can prescribe its products. In the U.S., drugsmakers spent more than $24 billion in 2012 marketing drugs to doctors, according to a survey by Cegedim Strategic Data. Another, by Deloitte, found that more than one in three American doctors accepted food, entertainment or travel from the pharmaceutical industry, while one in seven accepted consulting or speaking fees. Chinese doctors, to whom payments is a common practice, would need the extra on the side more than their U.S. counterparts.

A sweeping tour of the horizon of China’s healthcare market shows the country facing a tripling of its annual healthcare costs to $1 trillion by 2020. (The forecast comes from the consultancy McKinsey.) Its citizens increasingly expect access to affordable health care as a right of passage into the ranks of middle-income countries — and they are increasingly getting the expensive-to-treat diseases of urban middle-class lifestyles. To reign in its present and future costs, Beijing, like India and Brazil, is imposing price controls on drug makers (particularly the western multinational pharmaceutical companies that are increasingly looking to emerging markets for the next phase of their growth), and encouraging the development of a domestic generics industry.

At the same time, it is toughening up on regulatory enforcement. In recent weeks, it has launched a crackdown on illegal medicines by the State Food and Drug Administration, and started its broadest investigation to date in to prices. Some 60 domestic and multinational drugs company have been asked to supply data. That the National Development and Reform Commission (NDRC) is conducting this audit suggest there is a high-level policy initiative behind it.

Then there is the widening corruption probe into the industry. Two non-Chinese nationals have been detained, including a well-respected consultant linked to GlaxoSmithKline. Four Chinese working for the company have also been detained. Two Chinese nationals working for AstraZeneca have been questioned by police, and 39 Chinese hospital staff in Guangdong are to be punished by the health ministry for taking bribes from drug companies.

GlaxoSmithKline first denied the charges against it. Then it said that some local executives may have broken some local laws and acted in contravention of company policies. (Wednesday’s scheduled announcement of the company’s quarterly financial results may provided a clearer picture.) At this point, we are in no position to make a judgement either way. This may be a case of one man’s marketing expenses being another’s bribes. It may simply be a case of a company being in the wrong place at the wrong time. Or there may indeed have been corporate malpractice and the company is guilty as charged.

As we say, we have no idea at this point. We do, though, take note of a Reuters analysis that eight of the world’s top 10 drugmakers have warned of potential costs related to charges of corruption in overseas markets. At least two companies to our knowledge have made settlements under the U.S.’s Foreign Corrupt Practices Act involving payments in foreign markets including China. We understand more cases are pending.

Beijing may well be using GlaxoSmithKline as a stick to beat other western pharma multinationals, who are seen as giving a new — and expensive — lease on life in developing economies to their blockbuster drugs that are coming off patent in the U.S. and Europe. China has had some success in beating down prices in the food industry. Nestle, Danone and most recently Fonterra announced price cuts after Beijing launched an investigation into the dairy industry. GlaxoSmithKline is already hinting it will be passing some cost savings along in lower prices.

As Dan Harris noted on his China Law Blog, China cracks down on foreigners for political reasons whenever the economy slows. This time, the stars may have aligned to give it a motherlode of benefits: championing lower drugs prices for its citizens by standing up to foreign multinationals, and advancing its policy agenda for developing the domestic industry.

Biomedical  is identified as one of China’s strategic industries under the current five-year plan. This covers a broad range of healthcare businesses from medicines and vaccines to medical devices, diagnostics, and even traditional Chinese medicine. Collectively, these are expected to account for 8% of China’s GDP by 2015 and for 15% by 2020, up from 5% in 2010.

The government also is encouraging rapid consolidation of the some 7,000 small Chinese pharmaceuticals producers  that exist today; it hopes that the top 100 pharmaceutical companies will account for 50% of total pharma sales in the country by 2015, and the top ten wholesalers for 95% of drug distribution.

Consolidation  has been used in a variety of other industries from coal mining to solar power as a way of  improving the productivity of an industry, developing technological capabilities to move it up the value chain, and tackling industrial safety and product quality concerns, a persistent issue across a range of industries. Product safety is a particularly pressing concern for the pharmaceuticals industry, which, like the food industry, has had problems with tainted and counterfeit products.

Beijing is also fostering the emergence of large generic-drug companies, which as India has shown it, is key to holding down drugs costs in the long-term. It is pushing local generics makers to partner with multinationals, to invest more in R&D, and to develop specialities in generics and biosimilars.

That is also a way of tying the multinational drugmakers more closely to the Chinese industry, and to bring their pricing practices  more under the authorities’s sway. No multinational wants to be blacklisted in China, still the global industry’s great hope for its future. Most are deepening or expanding their presence in the country through such partnerships. Beijing is taking every opportunity to see that that is being done on its terms, not theirs.

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Synutra Again In Eye Of Storm Over Infant Formula And A Baby’s Death

This may turn out to be nothing, or not. Nasdaq-listed Synutra International is again under investigation for its infant formula. First involved in the melamine-tainted baby formula scandal in 2008, in 2010 its formula was accused of triggering sexual precocity among baby girls, though the health ministry found the allegations to be baseless. Now it is products have been reported to be the cause of the death of a baby boy in Jiangxi.

Liang Zhang, the company’s chairman and chief executive, has denied that Synutra’s products were responsible (full statement), and welcomed the investigations now being conducted by provincial and local authorities. All local distribution of Synutra’s baby formula has been sealed. The boy died last Saturday after drinking the formula. His twin sister was hospitalized but survived. The company’s shares fell 25% on the news, but have since regained half that in New York trading.

Product safety scandals just won’t go away. Last month, Mengniu Dairy said it destroyed dairy products found to have contained a cancer-causing fungi. The dairy industry is still under the long shadow caused by the 2008 melamine-laced powdered baby milk scandal in which at least six children died and nearly 300,000 fell ill.

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For All The Tea In China

Unilever, the soaps to Slim-Fast packaged consumer goods group, has a well-established presence in China for both its international and local brands. It has had a global R&D headquarters in Shanghai for a couple of years. Earlier this year, it became the first European multinational to issue renminbi-denominated bonds. So the discovery of unusually high levels of toxic rare earths in a batch of one of its Lipton brand teas is a poke in the eye for it, albeit one that  a number of multinationals, including Wal-Mart and Johnson & Johnson, have experienced recently.

The General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ) says that in a check of 58 brands of oolong teas around the country, it found 19 samples in which traces of rare earths were higher than the permitted 2 milligrams per kilogram. In Lipton’s case, it was 3.2 milligrams per kilogram; the highest concentration found was 5 milligrams per kilogram in a tea from Fujian. Lipton’s sample, a 50 gram box of Iron Goddess of Mercy tea, was tested in Anhui.  (AQSIQ news release).

Oolong tea producers sometimes add fertilizers containing rare earths to the soil as they are believed to enhance flavor and raise yields of oolong teas. A parallel test by AQSIQ of 90 black teas turned up no higher than permitted concentrations of contaminants, and the only two samples that failed appear to have done so for passing themselves off as higher grades of tea than they really were.

Excessive fertilization risks transmissions of toxins in damaging concentrations to tea drinkers. Unilever has said it believes its offending oolong tea picked up its trace amounts from the soil; and that it wasn’t a case of adulteration during production. The batch in question, which was produced last January, has already been recalled and destroyed, the company says.

AQISQ officials in Sichuan, who have been investigating tea production there since September, say some local producers were adding substances such as lead, chromium, talc and glutinous rice paste to their teas. Slipshod, unhygenic and ill-regulated production has emerged as a common theme behind many of the product safety concerns that have been such a touchy issue with consumers since the deadly melamine-tainted infant formula scandal of 2008. Beijing has made strides in improving food and product safety quality controls, but the sheer size of China’s food and consumer goods industries – and the persistence of cosy links between local companies and officials – makes it an overwhelming task for regulators. For political reasons, Beijing has been reluctant to allow the growth of grass-roots consumer movements to share the load, just as for other political reasons, the odd pop at multinationals – Lipton is the only well-known foreign-owned brand fingered this time –  is irresistible to show that there are no clean hands anywhere, so to speak.

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Safer Food, Trust Me

China’s Communist Party worries greatly that popular distrust of the safety of the country’s food supply may turn into distrust of its right to rule. Ever since the melamine-tainted infant formula scandal of 2008, its administrative might has been directed at calming and cajoling a disconcerted citizenry on this point, with at best mixed results as one tainted food scandal has followed another. The General Administration of Quality Supervision, Inspection and Quarantine (Aqsiq) shut down great swathes of the dairy industry in April. It also said it would continue to step up its inspections, on the lookout for both health risks and officials who turn a blind eye to food safety violations, a significant problem at local level. In addition, the food safety law has been amended to impose harsher punishments, including the death penalty, in such cases.

The result of those investigations has been 2,000 arrests and 5,000 businesses shuttered, mostly all small enterprises. The numbers sound impressive until set against the scale of China’s food industry. Nearly 6 million food producers were inspected. Yet only one in a thousand was found to have been adulterating food with illegal additives? Little wonder that consumers’ confidence that their food won’t sicken or kill them remains so low.

Little wonder, either, that citizens who can afford to are taking matters in to their own hands. The China Law Blog reports processed food being carried across the border from Hong Kong in prodigious volumes, with custom officials apparently turning a blind eye to it’s well-heeled porters; the BBC reports middle-class professionals–lawyers, programmers, teachers and the like–taking to allotments at weekends to cultivate their own fruit and vegetables. Neither development will sit well with a Party that, for all it’s efforts, can’t keep a basic bargain with its people to keep their food supply safe.

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The Political Damage Of The Wenzhou Train Crash

Beijing’s top-level ordering of an investigation into the weekend’s fatal high-speed train crash at Wenzhou hard on the heels of a railways ministry decision to implement a two-month safety review of the whole troubled system reeks of crisis management badly handled by a government on the back foot. The leadership has not faced such public criticism for its handling of a disaster since the 2008 Sichuan earthquake.

Questions are being raised about Beijing’s competence to look after its people, which hits directly at the basis of the legitimacy of its monopoly rule. That is more serious for the Party than the shredding of national pride in the rapid development of a high-speed rail network, already tattered over recent months by the corruption and safety scandals surrounding it, or what looks like an immediate coverup by railway ministry officials by burying the evidence, pretty much to be expected.

The initial reaction of paying off the families of the victims in short order at 500,000 yuan ($77,600) and the sacking of three rail officials, even before rescue operations were complete, reflects an old-school attitude that government is about administration, silencing and punishment that is increasingly out of touch with the expectations of Chinese. So is the instruction to state media to focus on positive stories while the official investigation is carried out. Online discussion, by contrast, has been angry, and about transparency, the quality of economic growth and the value of prestige projects.

Adulterated food, melamine-tainted infant formula, chemical spills in rivers, the most dangerous coal mines in the world: the list of where China falls short in safety seems to grow daily, and the victims are its own. History shows that every industrializing society tends to have one disaster that triggers change in official attitudes to safety. The Wenzhou crash may or may not turn out to be that symbolic moment. But it is significant. High-speed trains are not mass transportation. They are used by the prosperous, urban, middle-class. Criticism by an educated, well-connected section of the population is of particular concern to the Party, as it is from there that any long-term challenge to its monopoly rule is likely to come. That is why the leadership is now scrambling to regain control.

Footnote:  The crash has also inflicted a body blow to China’s hopes to export its high-speed trains and the rails on which to run them. It confirms its critics worse fears of inferior equipment and shoddy construction that no amount of low cost can offset. Japan and South Korea are the likely beneficiaries, a further prick to national pride.

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Lead Poisonings Prompt Nationwide Shut Down Of Battery Factories

We have been reading reports since at least the beginning of this year that battery factories have been closed down because they are causing lead poisoning in children (this one via BBC). Now it appears the situation has deteriorated to the point where virtually the entire industry is being shut down. Bloomberg quotes Xu Hong, head of the lead-acid battery branch at the China Electrical Equipment Industry Association, as saying:

Regardless of the plants’ conditions, they’ve all been shut down, and there is no timetable now to resume operations.

Zhejiang and Guangdong are the two biggest battery-producing provinces, accounting for more than a third of the country’s output. There have been reports of lead poisoning incidents in both places. Plants in Sichuan and Henan, too, have suspended production, Bloomberg says. The BBC adds that more than 100 people around the country have been affected recently by lead and cadmium poisoning. These are likely to be both children living nearby and factory workers. In 2009 and 2010, thousands of children in several provinces who lived near metal smelters or battery factories were affected by lead poisoning.

Industrial pollution from heavy metals and environmental degradation have become highly sensitive social issues. In Inner Mongolia, after a herdsman was killed trying to stop coal mining trucks crossing traditional nomadic grazing pasture and another Mongolian died at a mine protest, it has turned into a full-scale political and security crisis, as the state media blackout testifies.

As with food safety, good intentions at national and increasingly regional level have not turned into effect policy implementation at local level. As with the attempted clean-up of the coal and steel industries before, a clamp-down on illegal lead smelters and hundreds of small, unauthorized electroplating and battery workshops has been underway since mid-month. The China Business News says that the goal is to reduce the number of battery makers to about 300 from the current 1,700.

In mid-May, the Ministry of Environmental Protection warned that “criminal penalties will be imposed upon the heads of the responsible businesses, and local chief officials will also be held accountable for pollution incidents.” The BBC says some 74 people have been detained this year in connection with lead poisonings. We are sure many of these are likely to be officials from local government, local environmental protection and health bureaus now being investigated for lax supervision. We are also sure they won’t be the last.

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