CONSUMER: Meat Scandal Freezes Out OSI, Tyson

Bottom line: Foreign-owned meat companies could lose their premium image over Chinese rivals after a Shanghai-based scandal over the summer, as foreign firms remain vulnerable to high scrutiny.

Tyson China expansion on hold

Just yesterday I wrote how foreign food makers generally enjoy a better reputation in China over their domestic rivals, but one glaring exception to that rule is the processed meat industry. The meat processors also used to enjoy a strong reputation, until a major food safety scandal erupted over the summer involving Husi Food, a unit of US meat processor OSI Group. Now the latest headlines are quoting OSI saying 6 of its China workers have been arrested in connection with the scandal. It has also confirmed layoffs of most workers at its Shanghai plant that has been idled since the scandal first broke.

But the scandal hasn’t only affected Husi and OSI, and another new report quotes US chicken giant Tyson Foods (NYSE: TSN) saying it’s putting its China expansion plans on hold due to soft demand following the scandal. The huge impact of this particular scandal has surprised me a bit, as we’ve seen many similar scandals in recent years, often involving big foreign companies like Yum Brands’ (NYSE: YUM) KFC fast food chain and retailing giant Wal-Mart (NYSE: WMT).

Some of the previous scandals involved the selling of food products that had passed their expiry dates, which is the main transgression in the OSI case. Others have involved similarly troublesome allegations such as excessive antibiotics in some meat products, while still others have been less worrisome involving issues like misleading advertising. But the reaction in this particular case seems a bit far out of proportion for a transgression that hasn’t resulted in any reported illness or other health problems yet.

I’ll return to the subject of why this case is getting such big attention shortly, and what it may mean for the broader food products sector. But first let’s review the latest headlines, starting with OSI’s confirmation that 6 of its Shanghai-based employees were arrested for making substandard products. (English article) The arrests were officially announced by the Shanghai People’s Procuratorate. OSI had previously said in August that 6 of its workers were detained in relation to the case, which first broke in July. (previous post)

According to another report, OSI has laid off 340 workers at the Shanghai plant, which has been idled since the scandal first broke. (English article) The company added that most of the workers have been on paid leave since production ceased in July, and that it was unlikely that production would resume anytime soon. These particular layoffs were first reported in September, but now it looks like the move is official. (previous post)

While the fallout for Husi and OSI was relatively expected, I was a bit surprised to see a related report citing Tyson’s CEO saying his company was temporarily halting its China expansion plans due to soft demand as a result of the scandal. (English article) In the case of Tyson, it’s unlikely the company itself is being punished since it should theoretically see a jump in business from former Husi customers looking for new suppliers.

Instead, Tyson’s comments seem to indicate that the entire industry may be suffering a slowdown in demand from wary consumers. In this case, Tyson’s comments could also reflect a new reality that foreign suppliers may no longer enjoy a premium image over their Chinese peers after the Husi scandal. That could depress business for foreign-owned meat suppliers in the medium term, and the phenomenon could eventually spread to other sectors.

As to why this latest scandal has captured so much attention, I suspect that much of the reason is related to internal politics in Husi’s hometown of Shanghai rather than any national campaign against OSI or foreign firms. Accordingly, foreign firms probably don’t need to worry too much about this particular case, though it does underscore the fact that big multinationals often come under greater scrutiny for their business practices than their Chinese peers.

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