By Kazunori Takada
SHANGHAI, July 6 Swift responses from Swiss food
company Nestle and French rival Danone to
Beijing's announcement that it was investigating possible
price-fixing of instant milk formulas are textbook examples of
how firms should deal with such crises in China, executives and
Just a day after official Chinese media reported the top
economic planning agency had launched the probe into six firms,
including Nestle and Danone, the two companies said on Wednesday
they would cut prices of some instant milk products.
It was not clear how long the companies had known they may
become the subject of investigation. But once it became public,
they had to respond quickly before negative reports were
circulated on Chinese social media, which could harm reputations
The strategy seems to have worked - there has been limited
comment on the subject so far, both in state media and online.
"The media environment here has absolutely changed. Social
media has revolutionised what companies do in a crisis
situation," said Kent Kedl, in charge of Greater China and North
Asia for risk consultancy firm Control Risks.
"It needs to be taken into account because the chatter out
there really creates a voice of its own."
KFC-parent Yum Brands came under heavy fire from
both mainstream and social media after the official China
Central Television (CCTV) reported in late December that some of
the chicken supplied to KFC and McDonald's Corp
contained excess amounts of antiviral drugs and hormones used to
McDonald's responded by saying its chicken and raw materials
pass through independent, third party tests. Analysts said KFC
was dealt a heavier blow because it sold mainly chicken products
and its bigger presence in China made it a bigger target.
The company made its first public apology nearly a month
after the report but it failed to quell the widespread backlash,
which left many KFC outlets in China empty and prompted the
company to warn of a drop in profit this year. Yum was not fined
by food safety authorities.
In another example, Apple Inc came under fire from
another CCTV report in mid-March that said Chinese customers
were not given the same post-sales service as users in other
Until Apple apologised to Chinese consumers for poor
communication over its warranty policy and changed some of the
terms nearly a month later, it came under near-daily assault
from mainstream media.
In contrast, Volkswagen AG, which in the same
CCTV programme was criticised for a long-standing gearbox issue,
announced just three days later that it would recall vehicles to
fix the problem, sparing it from the heavy barrage of negative
publicity that hit Apple.
Jack Perkowski, an American who founded one of the first
foreign auto parts makers based in the country in 1994, said
there was little that companies, both foreign and domestic,
could gain by fighting back against the government, including
"Foreign firms have to realise that they don't set the rules
in China. In China, everyone has to play by Chinese rules,"
Perkowski, who now heads U.S.-based bank JFP Holdings, told
Reuters during a recent visit to Shanghai.
Apple, in its initial response to the CCTV report, said it
respected Chinese consumers and that its warranty policies were
roughly the same worldwide with specific adjustments to adhere
to Chinese law.
However, criticism from state media only intensified
following the comment, with even China's market regulator
telling state radio that Apple needed to strengthen supervision
of its policies.
Executives and consultants say publicly refuting allegations
can be tricky in China and should be only done when proper
evidence can be provided.
A China-based executive at a major Japanese carmaker said
his company takes even a more cautious approach when the
accusation is made directly by the government.
"We would never publicly deny what the government says even
if it's 100 percent wrong," said the executive who declined to
be identified due to the sensitivity of the issue.
"In one case, we simply said 'no comment' for the record
while we directly spoke with the government on the issue to sort
out the misunderstanding."
Kedl, from Control Risks, said an essential part of crisis
management in China was building relationships with various
wings of the state before any crisis took place.
"The worst time to have to get to know people in the
government is when you are in middle of a crisis," he said.
"It's like building an airplane while you're flying it. It
just doesn't work. If you have relationships, it creates a road