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Behind China’s food scare: a US-owned meat plant

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Chinese manufacturers may have a worrying track record with product safety, but it seems a U.S.-owned meat processing plant is in fact at the center of the latest scandal to rock the country's fast-food sector.

Shanghai Husi Food – the company under fire for reportedly supplying expired meat products to major restaurant chains including McDonalds, Yum Brands' KFC and Pizza Hut – is owned by Illinois-based OSI Group, one of the world's largest privately-held food processing companies in the world.

"This is an interesting situation because quite a lot gets said about the failures of Chinese suppliers but less is said about how foreign firms manage their operations in other markets," Benjamin Cavender, Shanghai-based principal at China Market Research.

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This case highlights how important it is for companies to have a very firm grasp of what is going on in their global operations and how critical it is to have systems in place to ensure that they have good visibility into daily operations, Cavender added.

OSI Group, which first entered China in 1991, operates eight processing plants in mainland China and is the country's largest meat supplier, according to PrivCo, a financial data provider on privately-held companies.

The latest developments are expected to present major challenges for OSI, which is the sole supplier of chicken beef for McDonald's in China, PrivCo added.

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"I think the government will likely take a hard stance on this issue because there have already been some high-profile supplier scandals over the last two years and the government will want to show that it is serious about cleaning up food supply in China," Cavendar said.

"OSI Group is going to have to be very proactive in showing that it is taking steps to explain why the issue happened in the first place, and what it will do to ensure that it doesn't happen again," he added.

On top of OSI Group, its customers McDonalds, Yum Brands and Starbucks have their work cut out to restore public trust.

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"McDonald's and Yum Brands' fast growing China operations have been left badly damaged financially and reputationally as Chinese consumers are staying away," PrivCo said.

The scandal unfolded over the weekend when a report from Shanghai TV, a local television station under SMG Group, accused OSI Group's China affiliate of using expired meat and unhygienic practices.

The seven-minute long report from a journalist who went undercover for two months in OSI group's Shanghai factories showed a batch of chicken breast and chicken skin that had been expired for around 12 days at the time of the filming, being used to produce meat supplied to its customers

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Authorities in Shanghai subsequently ordered the suspension of operations at Shanghai Husi, according to state-owned news agency Xinhua.

OSI Group issued a statement on its website Monday saying it was "appalled" by the revelations and has formed an investigation team to conducts its own internal review. The company said it is committed to sharing the investigation results with the public and would take necessary actions based on the results.

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