Blog: Katy AskewChina's infant formula probe still in the headlines

Katy Askew | 27 August 2013

Chinese regulators have reportedly rebuffed the wide-spread suggestion that it targeted foreign infant formula companies through its competition probe into infant formula pricing.

According to reports in the Chinese press, the recent government investigation into the infant formula sector did not single out foreign brands. "There is no such thing as specially targeting foreign companies. Our investigations focus on monopolistic conduct, not the entities behind it," the China Daily quoted an unidentified official from the National Development and Reform Commission, China's antitrust watchdog, as saying.

The NDRC probe drew in almost all the leading international formula makers operating in China, including Nestle, Mead Johnson, Danone, FrieslandCampina, Abbott Laboratories and Japan's Meiji. Hong Kong-listed Biostime and Chinese firm Beingmate were also examined by the regulator.

The NDRC found the eight companies carried out "various forms of resale price maintenance". The regulator said "specific measures and means" varied between enterprises, but included the imposition of direct fines, disguised fines, deduction rebates and limiting supply to downstream operators who sold products below the company's minimum price. This, the NDRC argued, lessened competition in the market and kept formula prices artificially high.

Concluding the probe earlier this month, the NDRC imposed fines totalling CNY669m (US$109.3m), the largest antitrust ticket in China's history.

On the one hand, Beijing's reasoning that the investigation was prompted by escalating infant formula prices seems highly plausable. According to government statistics, Chinese infant formula prices have increased by 30% since the melamine contamination scandal of 2008.

However, the fact that it comes at a time when it is pushing for the consolidation of domestic formula manufacturers does make the probe seem a little suspect. The Chinese government reportedly aims to reduce the number of domestic infant formula manufacturers to between three and five companies with revenues of over CNY50bn (US$8.17bn) by 2018.

In the long term, regulators believe that fewer, bigger companies operating in an arena that has had more than its share of safety scares will boost safety. The government is simultaneously stepping up its food safety oversight of the sector. Higher safety standards should lead to improved consumer confidence, which should grow demand for home-grown formula and lessen the country's reliance on foreign formula makers. So the argument goes.

It is difficult to see the pricing probe as divorced from the government's ambition to consolidate the domestic sector. By forcing international formula makers to reduce prices, the Chinese government has increased the completive pressure being exerted on Chinese firms, who are already operating under margin pressure. This could, potentially, squeeze smaller firms out of business.

That - almost a month on from its completion - the formula probe is still making headlines in China says a lot about the importance that the public gives the controversial category. But this level of ardent denial does rather make one wonder if the lady doth protest too much.

For just-food's detailed analysis of the fall-out from the formula probe click here.

 

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