Time to Tackle Subprime Supply Chains (Le Monde)

A link between the credit crisis and Chinese toxic milk potentially affects us all

18 Oct 2008 – Article

Quickly. Think. What is the link between the credit crunch, the poisoning of thousands of Chinese children by toxic milk and the growing risk of abrupt climate change? In today’s complex world, there may be a number, but for us the answer is clear. Junk mortgages and melamine in milk may seem worlds apart, but they are both caused by blind spots in our supply chains and their consequences can reach out and touch much greater numbers of people than we might initially imagine.

In the wake of what has happened to major companies like Lehmann Brothers, AIG and Fortis, we hardly need to explain the first of our examples, except to say that the roots of the credit crisis can be traced back to increasingly opaque supply chains that even bankers admitted they no longer understood.

Bankrupt financial giants and poisoned children are both the inevitable results of an economic system that extends around the world and, in the process, ensures that risks are chopped into thin slices and then distributed between the different layers and players in the value chain. The final — if not always intended — consequence is that few people, in anyone, can understand or control the full extent of those risks.

In both cases, greed and a lack of responsibility and accountability on the part of some intermediaries, be the raw material manufacturers or mortgage lenders, have created market havoc.

Just as there are common causes of such crises, there are common consequences. For one thing, what start out as local decisions can end up having systemic effects. And in both cases, too, innocents are affected, whether they are Chinese babies or US taxpayers.

But there are differences, too. Whereas some of the key players (and a number of major brands) in the credit saga have paid the ultimate price, being taken over and absorbed by others, the case is rather different in the food example. Here, at least to date, brands may have been bruised, but — even as the scandal has sent shock-waves around the world, brands have not been wiped off the board.

Take Cadbury, the British confectionery giant, which also found itself a victim of the tainted milk scandal. After the deaths of at least four babies from milk-related products, the company withdrew 11 chocolate products made in Beijing. It said that tests on items sold under the label Cadbury Eclairs or in bulk packets of Dairy Milk had raised concerns, so sweets sold in mainland China and in Taiwan, Hong Kong and Australia were recalled as a precautionary step.

A Cadbury spokesman in London told The Times that: “The withdrawal is due to concern about the possibility of melamine contamination in our chocolate.” By this point, the scandal had widened rapidly across the world since Fonterra, the New Zealand partner of the Chinese dairy producer Sanlu Group, prompted its Government to blow the whistle on an attempted cover up of the tainted milk.

An estimated 53,000 children across China had fallen ill after being fed Sanlu milk powder and some 13,000 had been treated in hospital for kidney stones and other kidney and organ problems.

Chinese reporters discovered that Sanlu knew about the problems with its baby formula months before the scandal erupted, but tried to avoid a recall. Matters were made worse when the state-run media ducked reporting the story because of strict rules issued by China’s censors on preventing bad news during the Beijing Olympics.

Now the consequences for Sanlu, which may never recover, are amplified by the impact on many other companies — and by yet another dent in China’s reputation for quality. These controversies underscore the growing need for transparency in global supply chains. On current evidence, consumers are likely to become more confused and less trusting.

In today’s world, the value of corporations is increasingly related to the value of the supply chain network they have created — or operate within. Thanks to technology, the internet and financial markets, large corporations are the chief orchestrators of a myriad of competencies and skills disseminated around the globe. But too often such supply chains are only as strong as their weakest critical link.

Procurement executives working in large corporations face the daunting task of making sure that their company’s supply network is sound, reliable and competitive. Governments are likely to do what governments do, pushing for more regulation and more state intervention — both in the financial and food supply chains. But there is already a huge variety of rules and regulations, often spurred by concerns around issues like lead in the paint used to make toys, glycol in toothpaste, poisonous pet-foot or children used to sew sweatshirts. Regulation is certainly necessary, but the risk is that too much will disempower executives and corporations, with unexpectedly negative effects.

Stalin believed that the Depression of the 1930s proved that capitalism was on the road to extinction — and didn’t like it when economist Nikolai Kodratiev said that capitalism had shown that it could recover from collapses like an economic phoenix. Stalin sent Kondratiev off to the salt mines, where he died, but he was right. And if he were alive today he would probably tell us that rather than writing capitalism’s obituary, we should be developing the blueprints, the genetic code for the forms of capitalism worthy of the twenty-first century. Whether you think of credit, Chinese babies or carbon, transparency, responsibility, accountability and sustainability will be key to ultimate success.