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August 07, 2013

China Fines Baby Formula Companies for Price-Fixing

by William Ide

China has fined six largely foreign infant formula firms a total of $108 million in one of its biggest anti-trust penalties. The companies were penalized for price-fixing and anti-competitive practices following a massive investigation into the rapidly growing industry.
 
China has fined infant formula companies from the United States, France, New Zealand and one Chinese firm, following a five-month investigation into their business practices by the country’s top economic planning body, the National Development and Reform Commission.
 
Those penalized include U.S. firm Mead Johnson, which was fined $33 million, Dumex, a subsidiary of France’s Danone was fined nearly $28 million and New Zealand’s Fonterra, $645,000.
 
In comments to China’s state broadcaster CCTV, investigators say the fines were based on the companies’ sales last year and their cooperation with the investigation. The fine was waved for three of the nine firms that were investigated, says Xu Kunlin, director of the investigating commission’s anti-trust division.

“The reason why three of the companies were not fined is because according to China’s anti-trust law, if you voluntarily provide important evidence, cooperate with the investigation and take steps to reverse any negative impact and stop all illegal activities, then fines can be waived,” he said.
 
Although most of the companies that were targeted were foreign firms, the fines are part of a larger effort by the government to protect consumers and tighten enforcement of regulations, says Ben Cavender, a senior analyst at the China Market Research Group in Shanghai.
 
“I do think we are seeing a very strong message from the government and this is true for infant formula, this is true for pharmaceuticals, its true for gold, a variety of different industries," Cavender said. "They are really making sure that laws aren’t being broken and so if you are a company doing business here it is better to factor a lot more into your planning than the past.”
 
China’s powdered milk market is already a multi-billion dollar industry that is expected to expand to as much as $50 billion by 2016.
 
Imports are a big part of that market, partly because consumer confidence in local brands was damaged in the 2008 tainted milk scandal that led to the deaths of six infants. Since then, analysts say companies with products that are thought to be safer have had a lot of elasticity in their pricing here.
 
Just days before the government announced the results of its investigation into the price-fixing scheme, New Zealand dairy company Fonterra - the world’s largest distributor - began recalling its infant formula and other products after discovering they were possibly tainted.
 
The recall spooked parents from China to the Middle East as the company said its products that use whey protein contained bacteria that could cause botulism - a potentially fatal food poisoning.
 
The company has recalled all potentially contaminated products, but in Beijing, the recall left few at ease.
 
Xia, a college student who is caring for her five-year old nephew during the summer break and was out buying formula on Wednesday says the Fonterra recall only adds to consumers’ worries.
 
“There’s no doubt that this will have an impact on consumer confidence in the quality of powdered milk. Whether it is the case a few years ago, when domestic producers put that stuff in infant formula, or this recent one, its hard to feel at ease when buying any product be it domestic or foreign made.”
 
However, when asked if she had to make a choice herself for her nephew, she said she would still choose foreign over domestic brands.

Business analyst Cavender says that although New Zealand milk brands may struggle for a while over the contamination scare, most consumers are likely to stick to foreign made formula because they do not trust domestic manufacturers.
 
“The big thing here is fear," Cavender said. "Consumers are very worried that the products they buy will be safe…I don’t think this is a case where they will be saying, oh, products coming out of New Zealand are bad so we’re going to buy domestic. It is more likely that what we’ll see happening is that products that might be sourced from northern Ireland or northern Europe or somewhere like that, might then become some of the more popular items.”

Consumers say the price of formula has already dropped in recent weeks, by as much as 20 percent in some cases, but some were skeptical how long the dip in prices would last.  On average, imported infant formula can cost as much as two times more in China when compared to prices in the United States and other countries.