Economic Issues, Food and You

The Impact of the Melanin Scandal

in China on the Demand for Baby

Formula in Hong Kong

Overview

This presentation will consider:

● the impact of melamine in the production process of dairy

products in the Chinese baby formula market

● the subsequent impact on the baby formula market in Hong

Kong

From the JournalFrom: The Standard newspaper (Hong Kong)http://www.thestandard.com.hk/news_detail.asp?pp_cat=11&art_id=137933&sid=40474415&con_type=1 Hong Kong currently has restrictions on the amount of baby milk can be purchased and taken over the border to China. There are some that would like this restriction to be removed.

Questions 1. When two economies are integrated, what are the impacts of a supply side shock in

the first economy on the second economy in terms of:● availability of product● market functionality● demands of infrastructure

Melamine

Melamine is:

● An organic base and trimer of cyanamide

● Like cyanamide, it contains 67% nitrogen by mass

● If mixed with resins, has fire retardant properties due to its release of

nitrogen gas

● Melamine is harmful if swallowed, inhaled or absorbed through the skin.

A Simple Supply Disruption Model

1. Problems in the manufacturing process emerge

e.g. breakdowns, strikes, production faults, etc.

2. Supply falls to zero

Production is halted and the product is removed from sale

(either voluntarily or by legal compulsion)

3. Demand continues to exist but remains unsatisfied

Consumers seek substitutes or learn to forgo satisfaction

A Simple Supply Disruption Model

4. Supply recommences when problems are corrected

5. Demand either;

a. Equals pre-problem levels

b. Is below pre-problem levels because consumers have lost

confidence, found substitutes, learnt to forgo etc.

c. Is greater than pre-problem levels as consumers seek to

catch up with lost consumption

Stage 1: Problems in the manufacturing process emerge

● In 2008 over 300,000 babies fell ill in China due to the

contamination of melamine in milk and infant formula.

● 54,000 infants were hospitalised

● 6 babies died from kidney stones

● Melamine had been added to milk in order to cause it to appear

to have higher protein content

● This was the second milk scandal to hit China - in 2004 13

infants had died from malnutrition because they had been fed

fake formula

Stage 2: Supply falls to zero

● Chinese inspectors found the chemical melamine in 69 batches of baby milk powder produced by 22 companies nationwide

● The authorities ordered a halt to the sale of the tainted products which included such well-known brands as Sanlu, Mengniu, Yili and Yashili

● Four people in connection with the contamination were arrested by Hebei police.

Stage 3: Demand continues to exist but remains unsatisfied

● Family is an extremely important concept in Chinese culture

● Most Chinese are restricted to having one child under the

government's one child policy

● The deaths and illnesses related to this incidence resulted in

an almost absolute lack of faith in the brands involved

Stage 3: Demand continues to exist but remains unsatisfied

● Chinese parents subsequently sought alternatives that they

viewed as safe

○ Local milk powder is approximately half the price of imported

brands meaning the poor are left without alternatives.

○ Some families were able to get formula from a Taiwanese

archipelago near the mainland

○ Others bought formula in Hong Kong, stripping shelves bare

○ Merchant seaman began bring formula home

○ Demand for wet nurses soared

Stage 4: Supply Recommences when Problems are Corrected

● The main company involved in the scandal went bankrupt in

2008

● in 2010 the Chinese government seized more tainted products

but it is unknown if they came from the original tainted batch or

the problems still exist.

Stage 5: Demand is still low due to lack of confidence

● Confidence in Chinese milk brands has not been restored

● Chinese consumer will prefer overseas manufactured product

if it is priced affordably

Parallel Importing

● A parallel import is a non-counterfeit product imported from

another country without the permission of the intellectual

property owner

● Hong Kong is a viable location from which mainland Chinese

can parallel import overseas branded milk formula

Hong Kong Borders with the Mainland

● Air links to most major cities - luggage limitations and high cost

make this the least effective way of parallel importing of baby

formula

● Ferry links to a number of Pearl River Delta centres

● Rail links to Guangzhou - travellers go through customs on arrival

● Land borders with Shenzhen - travellers take buses or a local

train and walk over the border. Local trains to the Lo Wu

crossover is the most frequently used of all HK entrance points

and this is the major avenue for parallel imports.

Impact of the Scandal on the Hong Kong Market (1)

● Chinese melamine scandal begins in 2008 and its impact on

demand in China continues to the present day

● Chinese consumers seek alternatives including parallel importing

from Hong Kong

Impact of the Scandal on the Hong Kong Market (2)

● Hong Kong is an attractive markets because:

○ Ease of carrying product over land borders - no restrictions on either product

category or quantity

○ Rail transport to land borders

○ Immediate access to Shenzhen and southern mainland China

○ Access to international brands in quantity and at affordable prices that allow

resale profits - product category is not taxed as it is in China

○ Limited restrictions - Shenzhen citizens can cross daily, some restrictions on

other parts of China.

Impact of the Scandal on the Hong Kong Market (3)

● Demand for milk formula from mainland consumers outstrips supply

- the market is in a state of disequilibrium

○ Overseas based supplier are unable to increase supply to meet

demand

○ Local suppliers cannot increase production to meet demand

○ Retailers have limited shelf and warehousing space

Impact of the Scandal on the Hong Kong Market (4)

● Hong Kong consumers are unable to meet their own needs and call

for government action

○ Lack of production in stores

○ Overcrowding on streets in retail areas

○ Overcrowding on local trains going towards the border

● Counter complaints from retailer organisations

○ Worry that big spending mainlanders who shop for other products will

stay away

Overcrowding on streets - At the Sheung Shui station in Hong Kong, near the Chinese

border,

Overcrowding on trains - Chinese parallel importers returning home

Impact of the Scandal on the Hong Kong Market (5)

● Hong Kong government imposes restrictions in 2013

○ Luggage on KCR greater than 190cm must be checked in - this

additional cost inhibits parallel importing

○ Two can (1.8 kg) limit per person with HK$500,000 and/or two year jail

penalty for offenders

● An uneasy equilibrium returns to the Hong Kong market

● The possibility of removing restriction is considered if local

producers can show that they can continue to satisfy local demand

○ Issue 6 coupons to mothers every month

○ Produce to exceed this demand

Conclusion

● This presentation has outlined the impact of a supply side shock in one market

(China) on another (Hong Kong)

● The impact however is not limited to Hong Kong as this outline shows

References● Slide 2: http://www.infoplease.com/atlas/country/china.html

● Slide 3: http://en.wikipedia.org/wiki/Melamine

● Slide 4 -5: Model is self created

● Slide 6: http://en.wikipedia.org/wiki/2008_Chinese_milk_scandal http://www.theguardian.

com/world/2008/dec/02/china http://news.bbc.co.uk/2/hi/asia-pacific/3648583.stm

● Slide 7: http://en.wikipedia.org/wiki/2008_Chinese_milk_scandal

● Slide 8: http://en.wikipedia.org/wiki/2008_Chinese_milk_scandal

● Slide 9: http://en.wikipedia.org/wiki/2008_Chinese_milk_scandal http://www.thestandard.

com.hk/news_detail.asp?

pp_cat=20&art_id=72250&sid=20779713&con_type=1&d_str=20080929&sear_year=200

8http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=10536591&ref=rss

References● Slide 10: http://news.xinhuanet.com/english2010/china/2010-07/09/c_13392414.htm http:

//blogs.ubc.ca/elizabethguan/files/2013/09/Sanlu.jpg

● Slide 11: http://www.scmp.com/news/hong-kong/article/1224035/milk-formula-

manufacturers-plan-end-export-restrictions

● Slide 12: http://en.wikipedia.org/wiki/Parallel_importing https://www.google.com.

au/#psj=1&q=map+of+hong+kong,

● Slide 13: N/A

● Slide 14: N/A

References● Slide 15: http://motherboard.vice.com/blog/hong-kong-is-now-jailing-chinas-baby-

formula-smugglers

● Slide 16: http://motherboard.vice.com/blog/hong-kong-is-now-jailing-chinas-baby-

formula-smugglers

● Slide 17: http://www.thestandard.com.hk/news_detail.asp?pp_cat=11&art_id=137933&sid=40474415&con_type=1 http://www.scmp.com/news/hong-kong/article/1224035/milk-formula-manufacturers-plan-end-export-restrictions

References

● Slide 18: http://motherboard.vice.com/blog/hong-kong-is-now-jailing-chinas-baby-

formula-smugglers

● Slide 19: http://www.nytimes.com/2013/07/26/world/asia/chinas-search-for-infant-

formula-goes-global.html?_r=0

● Slide 20: http://www.scmp.com/article/508083/kcrc-tightens-its-grip-luggage http://usa.

chinadaily.com.cn/china/2013-07/15/content_16775276.htm http://www.scmp.

com/news/hong-kong/article/1224035/milk-formula-manufacturers-plan-end-export-

restrictions

● Slide 21: http://motherboard.vice.com/blog/hong-kong-is-now-jailing-chinas-baby-

formula-smugglers