Bad Products: Mengniu Predicts CNY900 Million Losses In 2008

The effect of China's post-Olympic melamine scandal is still causing corporate ripples as China's leading dairy group Mengniu, a sponsor of the U.S.-based National Basketball Association, has published a report stating that according to the unaudited management accounts as of November 30, 2008 and other relevant documents, the group might see a CNY900 million loss in the year 2008.

Mengniu was riding high less than two years ago when it became an official sponsor of the NBA. In early 2007, Mark Fischer, vice president and managing director of NBA China, said the NBA had strict assessment criteria for choosing partners and sponsors. For partners in the food industry, NBA focused on food security and quality. Before the deal between Mengniu and NBA was signed, the NBA reportedly carried out an audit of Mengniu's cows, factories, and markets to ensure the company was producing a socially responsible and sustainable product. Obviously the NBA failed to do a simple test of the milk itself. Mengniu's Milk Deluxe also previously won the International Dairy Federation's Global Dairy Award, but it is unclear how the award was given to Mengniu or if safety and health was a criteria.

Mengniu now says the great losses in 2008 were mainly due to the melamine scandal. It brought negative effect to the performance of the group, especially to its sales. Extra costs caused by original milk handling and products promotion also contributed to the losses. Because the group has not computed its performance statistics for the entire year, the report is just an initial estimation by its board of directors based on the current documents. The estimated result is not the final result made by Mengniu's auditors.

The international investment firm Morgan Stanley previously predicted that Mengniu might lose CNY888 million in 2008, including those caused by products recalls and destructions, while another Chinese dairy giant Yili might lose CNY2.3 billion.

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