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Milk Scandal Leaves Sour Taste for Foreign Investors

Author: Jerome A. Cohen, Adjunct Senior Fellow for Asia Studies
October 2, 2008
South China Morning Post

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China's contaminated milk powder scandal, like its previous food safety problems, contains many lessons for foreign investors, as well as others. Those lessons also apply to foreign investment in other Chinese industries, and in other countries, too.

New Zealand's Fonterra Corporation, the world's largest trader in dairy products, has undoubtedly learned much from its 43 per cent ownership of a China venture with the Sanlu Group that became China's biggest producer of baby milk formula. Its Sanlu venture's sale of melamine-tainted products has led to horrific human suffering, financial disaster for the partners and further damage to China's reputation.

This latest food tragedy may make some foreign investors conclude that the risks of manufacturing in China outweigh the potential rewards. Yet, such is the allure of the China market, most multinational firms will probably want to maintain their interest. The challenge is how to do it better.

Fonterra's fiasco should stimulate foreign joint venturers in China to consider following the example of the many multinationals that have established wholly foreign-owned enterprises (WFOEs) there. Or, in situations where Beijing does not permit a WFOE, the foreign firm may seek to negotiate a dominant ownership interest and other arrangements that will allow it to control the joint venture's management.

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