Photo: John Selkirk/Fairfax

Fonterra chief executive Andrew Ferrier says he is on a hiding to nothing in agreeing to talk about the reputational risk of doing business in China, but the head of the world’s biggest dairy exporter feels this way only because he is speaking in New Zealand.

Kiwis, he recalls, were the only people in the world to cane Fonterra for its handling of its part in the melamine-tainted milk scandal in China in 2008. Fonterra’s reputation in China was actually “enhanced significantly” by its performance in the scandal, in which babies died and thousands fell ill. The rest of the world was “neutral”, and the reaction at home was “negative”, he says.

Fonterra had to write off a $200 million investment in Chinese dairy company SanLu, one of 22 dairy processors found to be involved in the criminal addition of an industrial chemical to milk to artificially raise its protein readings, thus making it more profitable.

New Zealand’s biggest company did not have operational control of SanLu and, helped by Helen Clark’s Labour-led government, blew the whistle on the China-wide adulteration scandal, but Ferrier is still gun shy from Kiwi criticism about the time Fonterra took to react.

However, with 100 tonnes of melamine-tainted milk powder resurfacing in the China dairy market, and Fonterra hinting that it plans another processing venture in the world’s biggest and fastest growing market, he has agreed to come to the phone.

Ferrier says Fonterra’s reputation among its customers would be damaged if it did not re-engage in China. “They would openly question us if we did not do it. They see us as having the skills and the enhanced reputation in China to do it. They would question our strategy of growing with our customers if we did not.

“The same for the Chinese government. They respect our expertise in the supply chain and they have a huge problem across the country (with food safety). They want us to help fix that problem.”

Ferrier says he has had this message personally from senior central Chinese government officials.

“They understand our international capability and reputation and hope we can help them improve the safety of their food supply chain.

“There would be issues of us not living up to our reputation if we didn’t do it.”

But Ferrier acknowledges that Fonterra’s 10,500 farmer owners will keep him on a tight leash in the dragon economy.

“Through the eyes of shareholders, if we re-engage in China and get it wrong, it will be a serious dent in our reputation.

“We have been very clear since this whole disaster that we are going to have control (next time), so the odds of success would be very high and I don’t intend to re-engage unless I can keep those odds very high.”

Ferrier says criminal contamination of a food-supply chain is a risk in any country, but in China, that risk is now a “little bit” lower because it has happened.

Fonterra bought a 43% stake in SanLu, one of six dairy companies that controlled more than half of China’s fresh milk market, in 2006. It was one of the biggest foreign company investments China had seen. Ferrier says while doing due diligence on SanLu, Fonterra had assessed the risk of food-chain adulteration, considered it a “low percentage” risk, and had counted on having five to seven years to build its own “perfect” milk supply for SanLu.

“The low percentage risk actually happened. We didn’t have those multiple years. This time around, I have to reduce the risk even further, and that means we start by building safe farming right out of the farm gate.”

He means next time Fonterra will aim to control all parts of the supply chain from cow to packaging, although it will be unlikely to have full ownership of any part of the chain. The farmer co-operative this month announced plans to invest in two more dairy farms in China.