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Scandal raises question about future of OSI Group in China

OSI Group China Press Conference in Shanghai on July 28   Photo: image.baidu.com

The U.S.-based OSI Group LLC is put through the mill in China. Since the scandal about Shanghai Husi Food, one of its China units, using expired raw meat was exposed, all its big customers in China announced to cut ties with it and six executives from the embattled subsidiary were detained by the Chinese police.

Food safety has been a huge concern for Chinese consumers after dairy products tainted with the industrial chemical melamine sickened several thousands and led to the deaths of six infants in 2008. Other food scandals have hit the meat and dairy industries in recent years, and many Chinese see foreign brands as offering higher safety standards.

Now, Shanghai Husi scandal has shaken that confidence and people wonder how a reputable multinational generally regarded to possess high quality and good service could act “as bold as brass” in China.

Besides questions about the causes for such missteps, the people are also thinking about the future of OSI in China. Would it face severe punishments and would it recover from the now negative reputation in China?

Solid facts

The food scandal involving US-based OSI was triggered by an undercover local Chinese TV report on July 20 showing workers at Shanghai Husi using long-expired meat and mixing inferior meat with qualified products. Local regulators immediately closed the factory after the TV program went on air.

As the investigation progressed, local regulators also charged the factory with  forging the production dates on some expired items and taking liberty of labeling produce of other brands as their own.

Until now, OSI Group has failed to submit the full customer list of Shanghai Husi, although some household brands, including McDonald's, Yum Brands Inc., Starbucks Corp. and Burger King, have admitted to use it as supplier and have announced to cut ties with it.

One quality manager from Shanghai Husi has admitted using outdated raw material as a long-time policy of the company and said that the staff engaged in malpractices under instructions of the factory's top management.

Through internal investigation, OSI admitted that the Shanghai subsidiary have “issues that are absolutely inconsistent with our internal requirements for highest standards, process and policies.” But David McDonald, the president and COO of OSI, said that they failed to find out motives behind the wrong acts.

Who is the culprit?

Unlike previous food safety scares that broke out in China, this time, the leading role changes to a US-based company which counts many international top brands as its customers.

OSI opened its first family meat market in Chicago in 1909, and as it stated on the website, “for close to 60 years, the company has been a global leader in supplying value-added protein items and other food products to leading foodservice and retail brands.”

“They've always had a very good reputation,” said William M. Zarit, the former minister for commercial affairs at the US embassy in Beijing. Zarit has known the company for many years. He told sino-us.com that OSI has been a pioneer in China—when other companies were not brave enough to do business here in the 1980s, it came and shared much of its technologies and practices with China.

It's known to many Chinese local businesses that one of the many advantages of working with American companies is that they maintain very high standards.

Then, what happened to Husi's American standards?

Zarit believes that some dishonest employees caused OSI's quandary.

In his perspective, it is not an excuse, even if a company is supposed to manage everything. “You could have the best management, but if you have some dishonest employees, it's almost impossible to detect them,” he told sino-us.com.

Hao Junbo, the lawyer who represented Sany Heavy Industry in suing US President, however, is suspicious about OSI headquarters' innocence in the case.

“It's hard to determine the parent company was totally unaware of all the improper procedures, because they're sensitive issues for companies in the industry,” he explained. “If there is no message from the top level, it does not make sense that local management would dare to bear the responsibilities.”

Through China's social media like Weibo and Wechat, many netizens expressed their concerns that incomplete laws and lax regulations in the country may lead the foreign multinationals into wrongdoing.

And the American Chamber of Commerce in China (AmCham China) seemed to share same concerns.

The embattled Shanghai Husi is a member of AmCham China.Although AmCham China refused to comment on the specific case of Shanghai Husi. it referred to China's food safety regulations in an e-mail interview.

“From the perspective of foreign companies, there is a great deal of ambiguity in the application of laws and regulations at a local level, and few ways to clarify them. We also see that there is an emphasis on sample testing rather than supervision of the food production process, which in the experience of our members is a more effective way to ensure food safety,”the chamber thus responded in an e-mail reply.

Hao Junbo told sino-us.com that lax regulation and light punishment in the past did “persuade” big companies to apply “double standards”, meaning they would abide by lower standards in China because the laws and regulations here are not as strict as in developed markets.

“The US has a very basic principle for imposing a fine, which is to make the penalty amount big enough to awe potential perpetrators. While in China, the fine is calculated based on the amount of illegal gains. If the value of products involved is not quite high, the fine would be light,” Hao added, “Businesses seek profits. Considering the punishments are not hard for big companies to bear, it would be profitable for them to take a risk.”

At the beginning phase of China's opening up to the outside world, Chinese government issued a series of incentive policies for drawing in foreign capital. Although the laws may be the same, enforcements have been different in different periods. Over the years, China regulators have been applying lenient terms on foreign businesses.

However, recent years have witnessed an obvious reversal in the situation.

Based on AmCham China's 2014 Business Climate Survey in China, two in five surveyed foreign companies believe that they are being targeted by Chinese government campaigns.

And Zarit told sino-us.com that he believes there is a disproportionate amount of focus, cases, and enforcements against American and other multinational companies. “Although I do not have the exact numbers, but it seems to me that might be the case,” he said.

“Many multinational companies have been in China for a long time, and they've worked with their Chinese partners and employees to raise the food safety level in China,” said Zarit, who believed that China is now making great strides in dealing with food safety issues.

“I hope China goes forward with these regulations. But as China goes through this very valuable progress, my hope is the regulators and enforcers will treat all companies equally, equitably and fairly,” he added.

Bleak future for OSI in China

Zarit holds what's more important now is how OSI responds. “As far as I know, they are fixing all of their attention on the issue and working with outside companies to make sure the system becomes perfect, so nothing like this will happen again.”

For the US company, China is one of its most important markets, and its sincerity could easily be noticed.

According to statements made by David McDonold, OSI has invested over $500 million in China in the past five years, and to address the current issue, it has issued a series of rectification measures including setting up an OSI Asia Quality Control Center in Shanghai aiming to provide quality assurance for all OSI sites across the country.

Despite all that, it is commonly suspected by Chinese industry experts if the new efforts will change anything. “After the termination of contracts by big customers in China, it's hard for it to regain its position in the market. The management of OSI really should consider whether to invest more or not,” Chen Yu, a marketing expert in Shanghai, was quoted as saying.

In his view, the multinationals which misstep may face the risk of retreating from the big market of China now.


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