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August 7, 2013

CHINA: Beijing hits formula makers with record fines

China has fined six infant formula companies - including Danone and Mead Johnson - for fixing prices in the country.

China has fined six infant formula companies – including Danone and Mead Johnson – for fixing prices in the country.

Beijing today (7 August) announced the results of its investigation into how prices of infant formula were set in China and concluded eight manufacturers operated vertical monopolies to fix prices.

Danone, Mead Johnson and four other companies – Abbott Laboratories, FrieslandCampina, Fonterra and Hong Kong-listed Biostime International Holdings – were fined. Beijing handed out record fines totalling CNY669m (US$109.3m).

Nestle’s Wyeth Nutrition unit, Japan’s Meiji Dairies and Zhejiang Industry and Trade Co all escaped fines. China’s National Development and Reform Commission said the companies were exempt for “taking the initiative to report the situation on monopoly agreement, provided important evidence and carried out rectification”. 

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.

“These measures and means are both punitive and restrictive,” the NDRC said.

By imposing a fixed resale price or minimum resale price, infant formula manufacturers limited competition in the market to the detriment of consumers, the NDRC said. Such actions were in breach of Article 14 of China’s Anti-monopoly Law.

The antitrust probe was launched in response to rising prices in China, authorities have insisted. According to government statistics, Chinese infant formula prices have increased by 30% since the melamine contamination scandal of 2008. Chinese consumers pay significantly more for infant formula products than consumers elsewhere and the price differential is more pronounced at the premium end of the market.

The melamine scare also resulted in growing demand for formula products manufactured by international companies. Prior to 2008, foreign companies accounted for around 30% of formula sales. Their share has risen to 50-60% of sales and up to 80% of the premium market.

The Chinese government has responded by introducing legislation designed to tighten safety controls in a bid to boost confidence and stimulate demand for domestic-made formula. Beijing is also pushing for consolidation in the crowded sector on the basis fewer, bigger domestic processors will be easier to regulate.

When the price fixing probe was launched, infant formula makers responded by cutting prices, some by as much as 20%.

Biostime International Holdings was fined 6% of 2012 sales totalling CNY162.9m. Mead Johnson was fined 4% of sales for the previous year or CNY203.8m. Danone’s Dumex business, Abbott Labratories, FrieslandCampina and Fonterra were all fined 3% of sales for last year, with fines totalling CNY172m, CNY77.3m, CNY48.3m and CNY4.5m respectively.

The total fine amount is the highest handed out by the NDRC as a result of a competition investigation. Previously, the highest fines delivered by the regulator totalled CNY449m levied against liquor producers Kweichou Moutai and Wuliangye in February.

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