Milk powder scandal and demise
In September 2008, Sanlu came to international attention due to product concerns regarding its infant formula, which was discovered to have been contaminated with melamine, a non-alimentary chemical which causes kidney stones.[18] An estimated 300,000 babies became ill, and six cases resulted in death.[19]
The Xinhua News Agency reported that Sanlu received its first complaints about baby formula in December 2007.[20][21] Fonterra was allegedly only alerted to the contamination on 2 August. There was no immediate trade recall. Fonterra said that local administrators refused an official recall.[22] Fonterra notified the New Zealand government on 5 September after the scandal had already hit the Chinese press and after Fonterra directors left China. Three days later, Prime Minister, Helen Clark had Beijing officials alerted directly.[22][23] Clark accused the company and officials of covering up to avoid an official recall.[24]
On 15 September, the company issued a public apology for the contaminated formula;[25] Sanlu was ordered to halt production, and to destroy all unsold and recalled products. Authorities reportedly seized 10,000 tons of product.[26]
After testing samples from 491 batches of products sold by all 109 companies producing baby formula, the National Administration of Quality Supervision, Inspection and Quarantine said that all 11 samples from Sanlu failed the melamine test.[27][28] Sanlu, whose products sell at half the price of equivalents on the market,[29] recorded the highest levels of contamination among all the samples tested, at 2,563 ppm.[30]
Tian Wenhua (田文華), Chairman and general manager of Sanlu and Chinese Communist Party Committee Secretary was stripped of her party and functional posts during an extraordinary meeting of the Hebei provincial standing committee of the Chinese Communist Party. Four Shijiazhuang officials, including vice mayor in charge of food and agriculture, Zhang Fawang, were reportedly removed from office.[28][31][32] Mayor Ji Chuntang reportedly resigned on 17 September;[18] Tian was charged under Articles 144 and 150 of the criminal code.[33]
Since Sanlu, the region's largest purchaser of milk, was ordered to halt production, many small dairy farmers were put into hardship.[34] On 24 September, Fonterra announced that it had written down the carrying value of its investment by NZ$139 million (two-thirds), reflecting the costs of product recall and the impairment of the 'Sanlu' brand "as a direct consequence of the criminal contamination of milk in China".[35][36] Chairman Henry van der Heyden said that the contamination was a criminal act which Fonterra could not have prevented.[35] On 26 September, Fonterra CEO denied that Fonterra is selling its stake of 43% of Shijiazhuang Sanlu Group Co.[37]
Bankruptcy
On 27 September 2008, China Economic Net reported that Sanlu may have been bankrupted and soon be taken over by Beijing Sanyuan Food Company Ltd.[38] In November, it was announced that the Sanyuan Group would acquire 4 of Sanlu's Shijiazhuang plants, and plants in Tangshan, Shandong and Henan, and would assume some of Sanlu's debt. Consideration was not disclosed, but sum is said to be of the order of ¥800 million.[12]
On 19 December, Sanlu secured a loan of ¥902 million to pay medical expenses of and compensation to children affected by tainted powdered milk it produced. It was announced on 25 December that Shijiazhuang court accepted a creditor's bankruptcy petition against Sanlu, which reportedly had net debt of ¥1.1 billion. Shijiazhuang city, the controlling shareholder, hopes to sell its distribution network as a going concern.[39]
Trial of executives
Four Sanlu executives went on trial on 31 December 2008 charged with producing and selling fake or substandard products.
