Insight - In China food testing, safety inspectors are often one step behind

A man walks out of the entrance of Husi Food factory in Shanghai July 23, 2014.

(Reuters) - When inspectors visited Shanghai Husi Food Co Ltd earlier this summer, the production line at the plant now at the centre of an international food scandal appeared in good order, with fresh meat being handled by properly-attired workers and supervisors keeping a watchful eye over the process.

However, if they had arrived unannounced a day before, they would have found piles of blue plastic bags filled with out-of-date meat stacked around the factory floor, a worker at the facility told Reuters, adding the old meat was often added back into the mix to boost production and cut costs.

"The next day, that meat just disappeared - someone must have disposed of it. The manager said it was an inspection," said the worker, who wasn't authorised to talk to the media and so didn't want to be named.

On July 20, following an undercover local TV report that alleged workers used expired meat and doctored food production dates, regulators closed the factory, which is part of OSI Group LLC, a U.S. food supplier. Police have detained five people including Shanghai Husi's head and quality manager.

The scandal - which has hit mainly big foreign fast-food brands including McDonald's Corp (MCD.N) and Yum Brands Inc (YUM.N), which owns the KFC and Pizza Hut chains - underlines the challenges facing inspectors in China's fast-growing and sprawling food industry. China is Yum's biggest market and McDonald's third largest by outlets.

Behind the thousands of brightly-lit restaurants offering what Chinese consumers see as better quality food lie supply chains that rely on an army of poorly regulated and inadequately audited processing plants. Yum has around 650 suppliers in China alone.

China's government has struggled to restore confidence in its $1 trillion food processing industry since six infants died in 2008 after drinking adulterated milk. The head of China's Food and Drug Administration told the China Daily this week that the food safety situation "remains severe" and the existing oversight system "is not effective."

China's food testing industry is expected to top 8 billion yuan ($1.29 billion) by next year, with more than 5,000 companies offering food inspection services. Regulators overseeing the industry are thinly stretched, company executives say.

Laws on food safety are incomplete and responsibility in enforcing them is unclear, making it difficult for regulators to do their jobs, Gao Guan, deputy secretary-general of the China Meat Association, told Reuters.

"In developed countries people obey the traffic rules. You wait when the light is red and you walk when the light is green. But this is not the case in China. People walk when other people walk and no one cares about the light. So in this particular environment things like Husi are very hard to avoid," Gao said.

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OSI, ranked by Forbes at 62nd on its list of U.S. private companies with annual revenue of close to $6 billion, said this week it suspended operations at Shanghai Husi Food and would review all its China plants, which would now come under direct control of its headquarters in Illinois. [ID:nL4N0Q31OC] It said it would "assign a vigilant rotation of global experts to continuously survey these operations and implement exhaustive audit steps," including constant visual surveillance of production measures and document compliance.

The Shanghai Husi scandal exposes weaknesses in big foreign brands' ability to police their own supply chains and processing plants - whether in-house or through third-party auditors.

"The issue with quality control audits is that the factories usually know about it and get ready," said Max Henry, Shanghai-based executive director of the Global Supply Chain Council.

Driven by extreme price pressures and an ambivalent workforce, suppliers often try to hide dubious practices from inspectors, showing them only certain parts of a factory or taking them to "fake" plants, so reports rarely give a full picture of compliance, auditors told Reuters.

"They want to give the customer the best picture of the factory, so when something's going wrong, they have to hide it," said Evelyne Mazaleyrat, product manager, food service for food auditor Bureau Veritas in Asia.

Audits of the Shanghai Husi factory by the U.S. Department of Agriculture (USDA) in 2004 and 2010 to clear the way for potential Chinese poultry exports to the United States, gave the facility a clean bill of health. However, links to USDA audit forms show a one-page "checklist" format that some food safety experts have criticized.

"BANKRUPT SYSTEM"

To be sure, gaps in the auditing process are not limited to China.

"It's a bankrupt system," said Mansour Samadpour, microbiologist and CEO of IEH Laboratories & Consulting Group in Seattle, noting audits are normally scheduled ahead of time and organised around publicly available questionnaires. "It's become a way for people to abdicate their responsibilities for the safety of the food product they are selling."

Buyers such as Yum and McDonald's operate on huge volumes and demand very low prices from their suppliers, which compete fiercely for business on razor-thin margins.

Shanghai Husi is just the tip of the problem.

Last year, Yum shareholders filed four lawsuits against the company for failing to properly oversee its Chinese poultry suppliers and misleading investors about growth in China, according to U.S. court records. Yum says it audits each of its suppliers at least once a year.

"The Western firms have put in place regimes that clearly have holes in them, with KFC perhaps having the biggest problem because they have the most suppliers," said Richard Brubaker, an adjunct professor at the China Europe International Business School and founder of the Collective Responsibility consultancy.

A sample audit report from Silliker, which lists McDonald's as a client in some of its markets, covers basic information such as a facility's location and workforce, and asks, too, about cleaning, sterilization schedules and storage temperatures.

Pony Testing International, which lists McDonald's and KFC as clients, says it carries out physical and chemical tests including for nutritional make-up, additives, non-food substances, microbial indicators and pesticide residues.