A University of Sussex DPhil thesis Available online via Sussex Research Online: http://sro.sussex.ac.uk/ This thesis is protected by copyright which belongs to the author. This thesis cannot be reproduced or quoted extensively from without first obtaining permission in writing from the Author The content must not be changed in any way or sold commercially in any format or medium without the formal permission of the Author When referring to this work, full bibliographic details including the author, title, awarding institution and date of the thesis must be given Please visit Sussex Research Online for more information and further details The Party-state, Business and a Half Kilo of Milk: A study of the dynamics of regulation in China’s dairy industry Sabrina Snell PhD Development Studies University of Sussex May 2014 3 UNIVERSITY OF SUSSEX SABRINA SNELL PHD DEVELOPMENT STUDIES THE PARTY-STATE, BUSINESS AND A HALF KILO OF MILK: A STUDY OF THE DYNAMICS OF REGULATION IN CHINA’S DAIRY INDUSTRY SUMMARY This thesis examines the challenge of regulation in China’s dairy industry—a sector that went from being the country’s fastest growing food product to the 2008 melamine-milk incident and a nationwide food safety crisis. In this pursuit, it attempts to bridge the gap between analyses that view food safety problems through the separate lenses of the state regulatory apparatus and industry governance. It offers state-business interaction as a critical and fundamental component in both of these food safety mechanisms, particularly in the case of China where certain party-state activities can operate within industry chains. Using this framework, it traces party-state involvement in the dairy value chain from the industry’s initial takeoff in the late 1990s and early 2000s through the years leading up to and following the melamine-milk incident. It reveals that the realities of upstream dairy production diverged significantly from party-state and industry demands, creating space for food safety issues. At the same time, state- business interaction—particularly at the local level—limited the ability of actors to address these vulnerabilities. It constrained coordination and control between lead firms and their suppliers, between chain actors and party-state institutions and within the operations of vertically integrated enterprises. In sum, dairy’s regulatory challenges stemmed from structural issues in the way that the party-state interacted with business, and not necessarily from a lack of appropriate legislation or value chain models. The thesis draws on fieldwork conducted from 2009-2010 and incorporates material from relevant government policy as well as from a set of internal documents detailing the operations of a particular Chinese dairy processor, here called “Company X,” one year prior to the melamine-milk incident. 4 Table of Contents Abbreviations and Acknowledgements .………..........................………………........... 6 1 Chapter One: Introduction ...................................................................................... 7 2 Chapter Two: Literature, Frameworks and Methods ......................................... 12 2.1 Introduction .................................................................................................... 12 2.2 Literature review ........................................................................................... 13 2.2.1 State-market relations in reform era China ............................................... 14 2.2.2 Value chain governance ............................................................................ 24 2.3 State-market relations, value chain governance and food safety in China’s dairy industry: an analytical framework ...................................................... 32 2.4 State-market relations, value chain governance and food safety in China’s dairy industry: a methodological framework ............................................... 36 2.4.1 The Chinese field ...................................................................................... 36 2.4.2 Methods .................................................................................................... 37 3 Chapter Three: Contextualizing the Chinese Dairy Industry ............................ 41 3.1 Introduction .................................................................................................... 41 3.2 From barbarian product to sunrise industry: dairy in China ................... 41 3.2.1 Kublai Khan to Mao to the early reform era ............................................. 41 3.2.2 China’s agricultural industrialization: enter the dragonheads .................. 45 3.2.3 Dairy goes west and the rise of Inner Mongolia ....................................... 47 3.2.4 Inner Mongolia’s dairy dragonheads: Yili and Mengniu .......................... 53 3.3 Building the dairy value chain in reverse .................................................... 55 3.3.1 Market first, then factory (先建市场，后建工厂) ................................... 56 3.3.2 The outsourcing model ............................................................................. 60 3.3.3 Reinventing dairy: healthy children, healthy nation ................................. 65 3.4 Conclusion ...................................................................................................... 72 4 Chapter Four: From Takeoff to Melamine – Dairy’s “9.11” .............................. 76 4.1 Introduction .................................................................................................... 76 4.2 The melamine incident .................................................................................. 76 4.3 The party-state responds ............................................................................... 80 4.3.1 Disciplining cadres and business .............................................................. 80 4.3.2 Restructuring the dairy value chain .......................................................... 82 4.3.3 Strengthening regulatory institutions ........................................................ 85 4.4 Rethinking melamine and the challenge of regulation ............................... 87 5 4.4.1 The dairy industry’s “open secret” ........................................................... 87 4.4.2 The return of dismissed officials and melamine ....................................... 90 4.4.3 Consumers’ reaction to melamine ............................................................ 93 4.5 Conclusion ...................................................................................................... 99 5 Chapter Five: Sanhua and the Modernization of Rural Production ............... 100 5.1 Introduction .................................................................................................. 100 5.2 Sanhua and the liberation of farmers ........................................................ 101 5.3 Scalization (规模化) .................................................................................... 104 5.4 Standardization (标准化) ........................................................................... 113 5.5 Integration (一体化) ................................................................................... 119 5.5.1 Cooperatives ........................................................................................... 119 5.5.2 From one village, one company to “stealing milk” ................................ 124 5.6 Conclusion .................................................................................................... 130 6 Chapter Six: The Fish-Water Relationship (鱼水关系) ................................... 134 6.1 Introduction .................................................................................................. 134 6.2 Cadre compliance and defiance .................................................................. 135 6.2.1 Political incentives: the cadre evaluation system ................................... 135 6.2.2 Economic incentives: on government subsidies and investment ............ 137 6.2.3 The phantom dairy industry .................................................................... 141 6.3 On industry associations ............................................................................. 147 6.3.1 Welcome to the leaders’ playground ...................................................... 147 6.3.2 “It’s a system problem” .......................................................................... 150 6.4 Party corporate governance ........................................................................ 153 6.4.1 Mengniu’s first order of business: establish a “fourth party” ................. 153 6.4.2 Company X and the party as disciplinarian ............................................ 156 6.4.3 Which hat? Distinguishing company party priorities ............................. 161 6.5 Conclusion .................................................................................................... 163 7 Chapter Seven: Drinking the Northwest Wind .................................................. 166 Bibliography .………..........................………………................................................ 175 6 Abbreviations General Administration for Quality Supervision, Inspection and AQSIQ Quarantine CCAP Center for Chinese Agricultural Policy CDIA China Dairy Industry Association COFCO China National Oils, Foodstuffs and Cereals Corporation CASS Chinese Academy of Social Sciences CPC Communist Party of China DAC Dairy Association of China DAIM Dairy Association