China Fines Milk Powder Suppliers Over Pricing

http://www.nytimes.com/2013/08/08/business/global/08iht-milk08.html

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BEIJING — The Chinese government has fined six infant milk powder companies a total of 668.7 million renminbi for anti-competitive behavior and price fixing, according to an announcement issued by the country’s top economic planning agency Wednesday. It is the largest fine China has ever issued for violations of its anti-monopoly law, according to Xinhua, the state-run news agency.

Five of the companies subject to the $109 million in fines are foreign, and one is based in Hong Kong. They are Abbott Laboratories of the United States; Biostime International of Hong Kong; Dumex Baby Food, a subsidiary of Danone of France; Fonterra Cooperative Group of New Zealand; Mead Johnson Nutrition of the United States; and Royal FrieslandCampina of the Netherlands, according to a statement from the Chinese planning agency, the National Development and Reform Commission.

The statement said three makers of infant formula — Meiji of Japan; Wyeth Nutrition, a subsidiary of Nestlé of Switzerland; and Zhejiang Beingmate Technology Industry & Trade of China — were exempted from the punishment because they “cooperated with the government investigation, provided important evidence and actively took self-rectification measures.”

The decision concluded an investigation into the infant formula industry for what the commission said was price fixing of baby formula in the Chinese market.

The statement said that the evidence gathered during the course of the investigation showed that the companies used various methods to ensure that distributors raised prices, including signing contractual agreements, imposing fines, cutting rebates and restricting the supply of goods. People’s Daily, the Communist Party newspaper, and at least one analyst of the China market for baby products have said that prices of foreign-branded infant milk powder had risen at least 30 percent since 2008, when Chinese began buying such brands in droves because of a wide scandal involving tainted, and in some cases fatal, Chinese-made milk powder.

The government statement said fines were levied according to what Chinese officials perceived was the degree to which the companies complied with and responded to the investigation. After the inquiry began, at least three foreign companies — Dumex, Mead Johnson and Nestlé — cut prices of their products in the China market by around 20 percent.

Mead Johnson was fined 203.8 million renminbi, or four percent of its 2012 revenue in China. In its announcement, the commission said the company did not actively cooperate with the investigation but was quick to take corrective measures. Though Mead Johnson said it did not intend to contest the agency’s decision, a company spokeswoman said in an e-mail Wednesday that “we believe our business practices were consistent with prevailing interpretations of regulatory requirements applicable to our industry.”

Biostime, which was fined 162.9 million renminbi, or six percent of its revenue from last year, was dealt the harshest punishment of the six companies for its “serious violations” of the anti-monopoly law and its failure to actively change. A statement by the company released Tuesday said it intended to pay the fine and would continue to work to ensure that its “various business decisions comply with the applicable P.R.C. laws and regulations,” referring to the People’s Republic of China.

Dumex, Abbott, FrieslandCampina and Fonterra were each fined three percent of their revenue from last year. The National Development and Reform Commission said they had cooperated with the investigation and had been quick to change. The fines were 172 million, 77.3 million, 48.3 million and 4.5 million renminbi, respectively.

While a statement from Fonterra pointed out that its fine was “in the lowest range,” the company has been mired in a separate food safety scandal in China related to potentially tainted ingredients used in baby formula products made by other companies. This week, a top Fonterra executive flew to China to issue an apology at a news conference. Chinese officials have banned imports of New Zealand milk products, and several foreign companies have said they would take precautionary measures and recall products with the Fonterra ingredients. The Chinese state-run news media have covered the story extensively, including running front-page stories and harsh editorials.

The Chinese milk industry has suffered severe losses since the 2008 scandal, when six babies died and more than 300,000 children fell ill after drinking milk products tainted with melamine, a toxic chemical. When Chinese officials announced the price-fixing investigation, they also said they would ensure stricter standards within the domestic industry. Chinese state-run newspapers ran editorials saying they hoped that the new standards would bolster the competitive ability of the domestic companies versus foreign rivals.

For various reasons, including aggressive marketing by the formula makers, many Chinese mothers prefer to give their babies formula rather than breast milk, though breast-feeding has grown in popularity since the 2008 scandal. The market for infant formula in China is enormous and growing fast — estimated to be worth about $12.7 billion in 2012, and projected to grow to $15.4 billion this year and $18.4 billion in 2014, according to data from Euromonitor, a research organization.

Chinese parents have gone to great lengths to buy foreign-made infant milk powder, and that has led to shortages in at least a half-dozen countries around the world. Some large retail chains have imposed a limit of two to four cans of milk powder per customer, and Hong Kong has made it a criminal offense to bring more than two cans of milk powder out of the territory. The law was imposed in March to crack down on smuggling of milk powder to the mainland.