Hunan Milk Powder Incident Sparks Memories of 2008

In May, news surfaced that a handful of babies had been exposed to harmful substances caused by a new protein-based milk powder drink, Bei An Min.  The accompanying Weibo hashtag #郴州大头娃娃事件 (Chenzhou big head baby incident) generated over 77 million views across various posts.

The milk powder formula was a top-selling product and supposedly tailor-made for babies that were allergic to regular milk formula, supplying nutrients essential to one’s early growth. The formula was sold at mom & baby product stores, as well as hospitals and pharmacies.

The parents of five children appealed to local authorities, claiming that their babies suffered from eczema, severe weight loss, and rickets, with some having inflated skulls. Some of the babies began drinking the substance as early as three years ago.

While local authorities announced that they would conduct a thorough investigation of the matter, the news sent shudders through parents in China, many of whom still remember the infamous melamine milk scandal in 2008.

At the time, over 300,000 babies was found to have consumed melamine-padded milk powder sold by homegrown brand Sanlu. Many of the children suffer kidney problems to this day, given the long-term debilitating effects of melamine, a highly harmful substance. Several of the executives at Sanlu Group were detained, put on trial, and executed.

Chinese Parents Rely on Daigou

Since the melamine milk scandal, many Chinese parents have turned to gray-market daigou sellers for imported milk formula. Such products are purchased from Hong Kong or abroad and brought back into the mainland to resell at a marked-up price. Many Chinese parents find inflated prices worth it, so as to avoid possible risks from a melamine-like food scandal.

Many of these daigou tend to be students studying abroad in Australia, while others are housewives traveling to Hong Kong for personal reasons. Some daigou sellers have formed larger organizations that coordinate large groups of couriers to bring back items in bulk, even forming partnerships with local freight forwarders to ship items back as personal items.

Daigou in Trouble?

But daigou sellers today are facing a serious problem as the Covid-19 crisis has crippled their ability to supply customers back home in China. The number of available cross-border passenger flights has been drastically curtailed, and those shipping cargo directly are also having major issues with logistics, citing increased delivery times and customs problems.

Even before the Covid-19 crisis, daigou sellers had been suffering from China’s new e-commerce law, which came into effect at the beginning of 2019. The new law proclaimed that all individuals selling on platforms such as WeChat and Taobao would have to register businesses, obtain the proper licenses, and pay business taxes. This would cut deep into their margins, given that they profit off of the markup of items purchased from abroad. In the past, items brought back into China were declared as personal items so as to avoid taxes.

Additionally, local crackdowns in Australia on daigou also threaten the trade. Many have criticized daigou sellers for hoarding milk powder supplies to the point that local Australian parents cannot obtain enough for their children. One particular daigou seller admitted to stealing over US$300,000 worth of milk powder with a consortium over the course of 2-3 years.

Cross-Border E-Commerce Benefits

Such incidents, in addition to the increased costs and risks of running a daigou business, mean that more business could be driven towards cross-border e-commerce, where international retailers and brands ship products one by one directly to Chinese consumers.

According to eMarketer, 25% of the population across China will shopping online for imported products via cross-border e-commerce channels.  Given this dramatic growth, the Chinese government approved the designation of 46 new cross-border e-commerce zones in April, bringing the total to 105. The CBEC industry is expected to grow by 30% annually over the next few years.

With the ongoing Covid-19 crisis crippling offline daigou activities, it’s likely that more and more sales will shift towards legitimate cross-border e-commerce channels going forward.

Key Takeaways 

1. The Chenzhou milk powder scandal spooked parents around China, reminding them of the 2008 melamine milk powder scandal in which over 300,000 babies were inflicted with kidney problems

2. Product quality scandals have led to many Chinese parents purchasing imported milk formula products from abroad over the past twelve years. Daigou sellers help bring supply back from place such as Hong Kong and Australia, albeit sometimes as gray market products

3. Due to the Covid-19 crisis and the new e-commerce law, daigou sellers may be exiting the industry altogether, paving the way for foreign retailers and pharmacies to sell to China through cross-border e-commerce.