Entrepreneurs as Society’s Experimenters

When my family and I spent a month in China, traveling up and down the east coast with Shanghai as our anchor, I was appalled to see the extent of the contaminated food problem. At a practical level, the person on the street cannot be bothered, frankly because he or she does not have much recourse to alternatives. The well-heeled, however, go through extraordinary lengths to pay for uncontaminated food.

The contamination is usually an indirect consequence of the unwitting costs of helter-skelter development. But more occasional, and much more egregious, is the occasional blatant contamination, for example, the contaminated milk scandal starting in Gansu province in 2008. For those who didn’t have reason to follow it – though it really was all over the news at the time – the crux of the matter was that, in a very fragmented industry, lots of intermediaries ‘touched’ milk as it made its way from cow to grocery shelf. Somewhere along the way, unscrupulous vendors diluted the milk – as happens in many developing countries sadly – and also added substances like melamine that boost the apparent protein content of the (diluted) milk, and cause serious organ damage that is sometimes fatal (to kids especially). Needless to say, a scandal erupted that the government could not sweep under the rug.

This topic came up in an executive education course I co-taught at HBS earlier this week, Building Businesses in Emerging Markets, drawing executives from dozens of countries around world. I asked them how society would respond to this milk problem, and how long it would take to resolve.

As it turned out, responses came from both the government and from the private sector. Among government responses were the following: forced consolidation (state run Cofco took over some companies implicated in the problem), induced consolidation (tough compliance rules were too costly for little guys to comply who then were absorbed by bigger players, or failed and shut down), and severe punishment. One private sector player created a so-called contaminated milk ‘heat map,’ by crowd-sourcing information about problem-milk instances. Multinationals like the wholesaler Metro Cash & Carry from Dusseldorf invested in food-traceability, big ticket cost items, embracing a range of food products from ‘farm to fork’ (though I can’t recall if it included milk at the time). And entrepreneurs invested in high end farms with traceability, like Huaxia dairy on the east coast, betting both that a well-heeled customer segment would pay for reliably better milk, and that their own costs would decline over time. Other locals, like Beingmate in Hangzhou, invested in developing brands with reputation for purity.

Seven years after the scandal unfolded, the problem is still there, despite the fact that several efforts have met some success. I know this since Chinese colleagues leaving for the mainland still take powdered milk with them, and people I meet in China are still wary of these issues. My students saw value in all the experiments, and had trouble ranking them in order of cleverness or utility. That’s fair. I would, too. It takes time to learn the outcomes of society’s experiments. Indeed, that’s the point of experiments, isn’t it!

 

 

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