A decade on from the 2008 tainted formula scandal, food safety remains the number one concern for China’s consumers. Could blockchain technology be the key to bringing transparency to the country’s scandal-ridden food industry?

On a remote farm nestled deep within the mountainous region of Daozhen, in China’s southwestern Guizhou Province, thousands of chickens are being watched very closely.

Aided by surveillance cameras and distance-tracking ankle tags, every step, meal and sip that the chickens take inside their free-range paddock is uploaded in real time to an online platform. The Guizhou farm, along with hundreds like it across China, is part of GoGo Chicken, a program that gives consumers a direct data trail from egg to plate. Launched by the technology arm of online insurer ZhongAn in 2017, it aims to boost transparency in China’s food supply chain.

The technology behind GoGo Chicken is blockchain—decentralized digital logbooks that record data, such as the many steps in a complex supply chain. More and more companies, including e-commerce giants Alibaba and JD.com, are developing blockchain-based supply chain solutions in a bid to shore up customers’ trust in the source and contents of their products.

In China, where public confidence has been damaged by a string of high-profile food safety scandals in recent years, consumers are willing to pay a high premium for peace of mind. GoGo chickens sell for RMB 238 ($35) each.

“China is the best place to apply blockchain to solve food safety issues, says Billy Chan, CEO of DropChain, a blockchain solution startup. “The scale of the food industry, combined with the country’s general tech readiness, is making this an exciting space to watch.”

In the Shadow of Sanlu

Chinese companies have good reasons for embracing new supply chain solutions. Despite significant investment by government and firms in recent years, public trust in the food industry remains close to rock bottom.

According to an annual survey run by Tsinghua University and Xiaokang magazine, food safety has ranked as the number one concern among Chinese citizens for the past five years, topping environmental pollution, social security and medical safety.

To a large extent, China is still dealing with the legacy of a devastating safety scandal in 2008, when six infants died and 300,000 others were hospitalized after drinking milk formula contaminated with the chemical melamine.

The scandal encapsulated the chronic issues plaguing the Chinese system. Poor technology, huge pressure to cut costs, inadequate regulation and local corruption combined to create the conditions for a huge crisis.

Staff at dairy company Sanlu Group added melamine to raise the protein level of the formula to comply with government standards. The firm’s senior managers then colluded with officials to cover up the scandal for weeks after becoming aware of the contamination.

“Had the technical capacity of the domestic industry been up to par with global competitors, the issue wouldn’t have occurred,” says Paul O’Brien, Regulatory Analyst at ChemLinked, a consultancy that focuses on China’s food and chemicals sectors.

Beijing has taken real steps toward cleaning up the food industry in the decade since. In 2013, the government created China’s first ministerial-level food safety authority, the China Food and Drug Administration. This was merged into the State Administration for Market Regulation in 2018.

The new body has streamlined China’s dense food safety regulatory framework, cutting thousands of overlapping standards. “The mess of the previous system stymied rational enforcement and hindered industry compliance,” says O’Brien. “Now, it’s more coherent, but finishing this reform campaign is vital.”

Private companies have gone to great lengths to shore up their own safety standards. After KFC was accused of using chickens from suppliers that had injected birds with high doses of growth hormones and antiviral drugs in 2013, the fast-food chain’s parent company, Yum China, culled over 1,000 suppliers from its network. It also made huge land purchases to establish its own network of farms.

But much work remains to be done. China currently ranks 46th on the Global Food Security Index, which is produced by The Economist. There are also vast areas of the country where enforcement of regulations remains inadequate.

“There is a huge disparity between the capacities of authorities in the top-tier cities in the East, and the third- and fourth-tier cities in the West,” says O’Brien.

Meanwhile, fresh scandals continue to emerge, further denting consumer confidence. In July, parents across the country erupted in anger when a major drug producer, Changchun Changsheng, was found knowingly to have issued 250,000 sub-standard child vaccines.

Consumers have become so sensitive to food scandals that it has even spawned a fake news industry devoted to spreading “food rumors” on social media in order to drive web traffic. In 2017, a bogus video claiming that snack makers were making “fake seaweed” out of plastic bags caused the wholesale price of seaweed to tumble 50% within days.

Backing Blockchain

Blockchain evangelists believe that they can bring the transparency and trust that consumers and retailers crave to China’s food industry.

Companies have been using track-and-trace technology to oversee their supply chains for decades. But the systems are far from perfect. Each member of a supply chain normally only has access to data from its immediate supplier or customer. This means that if a problem emerges, it can take a company days or weeks to identify the source, especially in a large global supply network.

Blockchain has the potential to solve these issues. “There are three key elements of blockchain technology that are going to separate blockchain-based supply chains from traditional supply chains: immutability, traceability and transparency,” says Chan, of DropChain.

The journey of a product can be monitored in real time via blockchain. The system is also neutral, rather than being controlled by a central intermediary. When a new “block” of information is entered onto the shared ledger, it first needs to be cleared by the parties involved. Once cleared, the block is stored forever and cannot be altered. This makes it much more likely that issues will get flagged quickly.

“Imagine it like this: a group of people record some data and they all compare their findings with one another,” explains Tomaæ Levak, a co-founder of Origin Trail, a blockchain startup. “If there is a discrepancy in one person’s data, this will get spotted by everyone else and it will get rejected or corrected.”

Beijing has become an enthusiastic backer of blockchain. Developing the technology was included in China’s 13th Five-Year Plan, along with other emerging fields such as artificial intelligence. The government has invested more than $3 billion in blockchain projects in 2018 alone, and is encouraging local authorities to establish their own initiatives.

China tops the global leader board for new blockchain patents. Chinese firms and institutions filed 225 of the 406 successful applications worldwide in 2017, according to the World Intellectual Property Organization, compared with 91 by the United States.

The government’s attention has created a bandwagon effect, with firms scrambling to be tied to what has been called “the next generation of the internet.” According to database site Qixin.com, over 3,000 companies with “blockchain” in their name registered in the first half of 2018, a sixfold increase from the year before.

“We’ve seen an amazing number of small firms start to build models based on blockchain, knowing that sourcing funds will be a lot easier if you have that buzzword somewhere in the description,” says Zennon Kapron, CEO of consultancy Kapronasia.

Many of China’s retail heavyweights are also pushing blockchain aggressively. Alibaba Group, which accounted for 10% of global blockchain patent filings in 2017, is piloting a tracking system in New Zealand called the Food Trust Framework in partnership with Fonterra, a dairy giant, and Blackmores, a health supplements maker.

Rival e-commerce player JD.com has launched several blockchain-focused research laboratories. The JD Open Blockchain Platform went online in 2018 and helps customers develop their own blockchain solutions. The firm is also using the technology to track all sorts of products, from diamonds to sea cucumbers. It even has a competitor to GoGo Chicken.

Foreign companies are increasingly playing a role too. In early 2018, Walmart and IBM began logging pork and mango shipments to China via blockchain as part of a collaboration with JD.com and Tsinghua University. A second pilot is being rolled out for the US market.

“There is a lot of convergence between China and the US,” says Æiga Drev, also a co-founder at Origin Trail. “China wants to learn from the US, and we have seen a lot of American food safety experts come to China to educate Chinese officials on how to properly regulate food products.”

Missing Links

Though many operating in the space are bullish about the future of blockchain-based supply chains, the industry still has a long way to develop.

Mitchell Weinberg, founder of food-fraud investigation company INSCATECH and a blockchain skeptic, warns that the technology still cannot accurately trace products that are chopped up or blended. This is a significant drawback given that so many food safety cases involve drinks or added ingredients.

The supply chains of many agricultural goods begin from hundreds of small farms, which pass on their products to middle-men nicknamed “coyotes,” Weinberg explains. They are then taken to a processing station, to be juiced or ground down, for example, before continuing on the supply chain. Blockchain solutions are not currently able to track such a complex system.

As a nascent industry, China’s blockchain industry is still a Wild West for new projects. The average life span of a blockchain startup is around 15 months, with over 90% of projects failing, according to the China Academy of Information and Communications Technology.

“Nothing you build is future-proof. The technology is always updating,” says Chan. “Whatever system you create today is going to be outdated by tomorrow.”

Despite the flood of companies labeling themselves blockchain startups, the scope of the technology is still poorly understood, according to Levak and Drev of OriginTrail.

“Many of our clients have an ‘I’ll take one blockchain, please’ mindset,” says Levak. “Only once those on the industry side fully understand not only the benefits of blockchain, but also its limitations, does the value kick in.”

The industry is also facing new regulations published by the Cyberspace Administration of China in October. The rules require all blockchain service providers to register with the CAC and take responsibility for their users’ data and identification.

“The rules will likely put too great a pressure on smaller blockchain startups, concentrating control in the hands of larger competitors and the government,” says Robert Van Aert, founder of China Blockchain Partners. “The eternal irony with China is that it wants to be a leader in innovation, but is reluctant to give the freedom to let this happen.”

“Businesses that are using blockchain for harmless purposes, such as tracking inventories across their stores, will face the choice of just working on existing databases or take on blockchain but have more dealings with the government,” says Kapron. “There are alternatives to blockchain to deliver on a business’s needs.”

Others believe the momentum is too strong to be stalled by the new regulations. Chan, of DropChain, agrees that startups will have “more headaches,” but insists that blockchain will march on, though in a different direction to the industry in the West.

“It’s much like the internet: China has decided to go its own way in how it operates the internet within its borders,” says Chan. “They’re doing the same thing with blockchain—using greater accountability to the government to build an isolated ecosystem.”

But most experts admit blockchain will not be a panacea for China’s food safety issues. The technology, once matured, may offer an additional tool for necessary verification measures. But this needs to be backed by firmer enforcement of existing regulations.

“By adding more layers with which you can cross-check data, you slowly chip away at the potential for human error or bad actors,” says Levak. “If you attach forensic results, such as DNA analysis, on top of this, you not only have a consensus check between points on the supply chain, but also between auditors and laboratories.”

“China needs to view food fraud as the crime that it is, and start holding food producers within its borders to a higher standard,” stresses Weinberg. “Food production has to be policed, and it has to be policed by human beings, just like any other crime.”

For now, at least, it looks like China is still testing the waters regarding blockchain’s wider applications. Most analysts believe that it will be another year or so before the first attempts to use blockchain in supply chains go large-scale, and several more until it is applied industrywide.

“The technology is not mainstream yet,” says Drev. “The existing companies are breaking the ice for smaller companies to follow. The true ‘Year of the Blockchain’ will come when we’re no longer hearing about it. We’ll just see it adding value to our everyday lives.”