Dairy firms hit with fines of $108m

China Daily (Hong Kong) - - FRONT PAGE - By LYU CHANG and LI JI­ABAO

China meted out its big­gest fine for price fix­ing on Wed­nes­day, the lat­est ef­fort by au­thor­i­ties to pro­vide a level play­ing field for in­dus­tries.

The National De­vel­op­ment and Re­form Com­mis­sion, a top eco­nomic reg­u­la­tor, has levied fines of nearly 670 mil­lion yuan ($ 108 mil­lion) against six milk pow­der com­pa­nies ac­cused of price fix­ing and anti-com­pet­i­tive prac­tices.

The six com­pa­nies are Mead John­son, Dumex, Ab­bott, Fries­land, Fon­terra and Bios­time, ac­cord­ing to a state­ment by the com­mis­sion.

The an­nounce­ment, which dealt a heavy blow to the dairy in­dus­try, fol­lows a re­call of milk sup­plies from Fon­terra this week due to pos­si­ble con­tam­i­na­tion.

The fines, an­nounced more than a month af­ter the NDRC said it was con­duct­ing the an­titrust re­view, co­in­cide with sep­a­rate pric­ing in­ves­ti­ga­tions into phar­ma­ceu­ti­cal firms as well as com­pa­nies in­volved in gold trad­ing. Those probes have yet to con­clude.

The in­ves­ti­ga­tions are a re­flec­tion of China’s in­ten­si­fied ef­forts to fight price fix­ing and to reg­u­late the busi­ness mar­ket.

In re­sponse to for­eign me­dia ac­cus­ing China of tak­ing aim at for­eign brands to ben­e­fit its do­mes­tic in­dus­tries, Com­merce Min­istry spokesman Shen Danyang said it is ground­less to say China’s re­cent in­ves­ti­ga­tion into for­eign com­pa­nies spe­cially tar­gets for­eign brands.

“Each com­pany in China, whether for­eign or lo­cal, will re­ceive pun­ish­ment if it breaches Chi­nese laws,” Shen said. “In­stead, th­ese probes will strengthen the in­vest­ment con­fi­dence of transna­tional com­pa­nies in China, rather than vice versa.”

All dairy com­pa­nies un­der in­ves­ti­ga­tion have ad­mit­ted they vi­o­lated the anti-monopoly law by set­ting min­i­mum prices that dis­trib­u­tors were re­quired to charge, said Xu Kun­lin, head of the price depart­ment of the NDRC.

The NDRC said in a state­ment that the fines were for re­strict­ing com­pe­ti­tion, set­ting curbs on min­i­mum prices for dis­trib­u­tors and for us­ing a va­ri­ety of meth­ods to dis­rupt mar­ket or­der.

Among nine com­pa­nies un­der in­ves­ti­ga­tion, six were fined be­cause they didn’t co­op­er­ate with the govern­ment in­ves­ti­ga­tion and failed to “ac­tively take cor­rec­tive ac­tion”, Xu said.

Bios­time was fined 163 mil­lion yuan, or 6 per­cent of its sales rev­enue in 2012. Mead John­son was fined 204 mil­lion yuan, or 4 per­cent of its rev­enue last year.

The re­main­ing four com­pa­nies re­ceived fines equal to 3 per­cent of their 2012 rev­enue. Dumex was fined 172 mil­lion yuan, Ab­bott 77 mil­lion yuan, Fries­land 48 mil­lion yuan and Fon­terra 4 mil­lion yuan.

Three other com­pa­nies, Wyeth Nu­tri­tion, a unit of Switzer­land’s Nes­tle SA, China’s Be­ing­mate and Ja­pan’s Meiji Dairies Corp, were spared fines be­cause “they co­op­er­ated with the govern­ment in­ves­ti­ga­tion, pro­vided im­por­tant ev­i­dence and ac­tively took cor­rec­tive mea­sures”, ac­cord­ing to Xu.

Mead John­son, based in Glen­view, Illi­nois, told China Daily in an e-mail that it ac­cepted the pun­ish­ment and will pay the fines.

“It will not af­fect our fu­ture strat­egy in China,” the state­ment said. “We are proud of what we achieved in the past two decades and will con­tinue to in­vest in the Chi­nese dairy mar­ket.”

The com­pany trimmed the price of its dairy prod­ucts by 7 to 15 per­cent fol­low­ing the in­ves­ti­ga­tion.

Wyeth Nu­tri­tion also said in a state­ment that the com­pany re­spects the NDRC’s de­ci­sion and will con­tinue to im­ple­ment price re­duc­tions.

The com­pany said it has as­sessed its pric­ing prac­tices and de­cided to im­prove cer­tain sales and mar­ket­ing prac­tices.

Chen Lian­fang, a se­nior an­a­lyst in the dairy sec­tor at Bei­jing Ori­ent Agribusi­ness Con­sul­tant, said the govern­ment’s in­ter­ven­tion will lead to in­dus­try con­sol­i­da­tion, as it cre­ates a level play­ing en­vi­ron­ment in the mar­ket.

“High-end con­sumers wor­ship for­eign brands, who knew well that they could main­tain prices at a high level,” he said. “But it re­stricted com­pe­ti­tion in the mar­ket and harmed the in­ter­ests of con­sumers.”

China is an im­por­tant growth mar­ket for dairy com­pa­nies and one of the world’s largest for in­fant for­mula. Sales of dairy prod­ucts are ex­pected to climb to $46.5 bil­lion by 2016, up 66 per­cent from 2011, ac­cord­ing to mar­ket re­search firm Euromon­i­tor In­ter­na­tional.

Con­cerns about the safety of do­mes­tic milk pow­der, es­pe­cially af­ter a melamine-tainted milk pow­der scan­dal in 2008 that killed at least six chil­dren and sick­ened about 300,000 oth­ers, have fu­eled Chi­nese de­mand for for­eign in­fant for­mula.

The de­mand for for­eign brands has sent rip­ples through mar­kets around the world. Main­land tourists have swept Hong Kong, Aus­tralia and Bri­tain for baby for­mula.

John Ross, a se­nior fel­low with the Chongyang In­sti­tute for Fi­nan­cial Stud­ies at Ren­min Univer­sity of China, warned that it will take a long time for China to con­sol­i­date the in­dus­try and cre­ate a small num­ber of large play­ers in the in­dus­try.

“China’s food pro­duc­tion in­dus­try is, how­ever, not yet con­sol­i­dated enough,” he said. “It cre­ates both greater qual­ity of main­tain­ing its own stan­dards and cre­ates fa­vor­able open­ings for for­eign com­pa­nies which they are tempted to ex­ploit — as seen in the price fix­ing scan­dal.”

“There will be a long-term strug­gle to both im­prove its qual­ity and pre­vent for­eign com­pa­nies ex­ploit­ing the sit­u­a­tion,” he said. Con­tact the writ­ers at lvchang@chi­nadaily.com.cn and li­ji­abao@chi­nadaily.com.cn

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