China’s old meat is a corporate health warning

July 24, 2014

By John Foley 

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Old meat in China’s fast-food chain brings a health warning for foreign companies doing business in the country. After getting fat on rapid growth, some are discovering nasties hidden within their ample folds.

Kentucky Fried Chicken parent Yum Brands and McDonald’s have been tainted by stale meat that slipped through the apparently strict controls of U.S.-owned supplier OSI. There’s no sign that the companies knew about the dodgy practices revealed at OSI’s Shanghai subsidiary by Chinese TV journalists, or that other plants are affected. But it’s especially embarrassing for Yum, whose guard should have been up after an antibiotic-laden chicken scandal just two years ago.

Past success makes such crises worse. Big, foreign companies make convenient political targets – even if driving them out would hardly benefit their thousands of Chinese employees. For consumers it’s a case of dashed expectations. Perceived safety enables foreign companies to charge a premium, as shown by China-based WH Group’s takeover of U.S. pork producer Smithfield.

But growth can also mean lapses get missed. GlaxoSmithKline, the UK pharma giant, plunged into a legal abyss when Chinese prosecutors accused some employees of paying bribes – something the company said took place outside of its systems and controls. It’s easy for bosses back at headquarters to miss warning signs, given the difficulty of decoding China’s elaborate bureaucracy.

Others with high profiles should beware. Consider JPMorgan, the bank facing U.S. investigations into whether it inappropriately hired relatives of Chinese officials to win business. A settlement with American regulators is the likely outcome, but that might put the bank in line for closer scrutiny in China, where authorities are keen to show disdain for anything that smacks of corruption.

Even successful companies with no issues so far, like carmaker General Motors, which reported a 13 percent increase in its China deliveries during the first quarter, should be on their toes. China’s government seems intent on challenging longstanding bugbears, like product safety. And growth is slowing, which is exactly when corners get cut. Few say so publicly, but for some, now might be a good moment to consider slimming down.

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