The Chinese government has reportedly suggested companies under investigation for allegedly fixing infant formula prices in the country have admitted they may have broken rules.

China’s National Development and Reform Commission (NDRC) has reportedly concluded its investigation into whether infant formula companies broke competition laws.

While the investigation’s findings are yet to be publicised, Xu Kunlin, director-general of the Bureau of Price Supervision and Anti-Monopoly under the NDRC, reportedly suggested infant formula companies have broadly admitted that their resale prices may have violated rules.

Kunlin told the official Xinhua news agency the formula case is a vertical monopoly, in which milk powder producers allegedly kept the prices of infant formula products high for downstream distributors. The action would have infringed the interests of the consumers, he said yesterday (4 August). The NDRC is set to publish its findings soon, he added.

Beijing has already claimed companies at the centre of the investigation were knowingly breaking the law and had instructed staff to delete communications detailing their involvement in the alleged price fixing.

The investigation into formula prices emerged in late June, when Hong Kong-listed Biostime International Holdings admitted it was under investigation. Companies including Nestle, Danone, Mead Johnson and FrieslandCampina are also subject to the probe.

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Biostime has already admitted its agreements with distributors in China on the price of infant formula could have broken anti-trust rules. Shares in Biostime were halted today pending a possible announcement on the investigation.

The companies under investigation have since responded by cutting prices, some by as much as 20%.

Asked about the reported comments from the NDRC, Nestle declined to comment. However, it said its local Wyeth Nutrition arm had moved to “improve” sales and marketing practices in the wake of the investigation.

“Following this investigation, Wyeth Nutrition assessed its pricing practices and decided to improve certain sales and marketing practices,” the spokesperson said. “Wyeth Nutrition respects all Chinese laws and regulations.”

Danone, Mead Johnson and FrieslandCampina were unavailable for comment at time of press.

Previously, Mead Johnson indicated it expects moves to cut selling prices in China will trim annual sales in China by US$55-65m. Speaking during a conference call late last month, CFO Peter Leemputte also conceded that it could face further one-off costs associated with the investigation. 

Despite the price cuts, Dr Zhan Hao of Beijing-based law firm AnJie said the NDRC is expected to issue “record-high penalties”. Companies found to have broken anti-monopoly laws will face fines of 1-10% of annual turnover plus the confiscation of all illegal gains.

The investigation comes at a time when Chinese competition authorities are increasingly flexing their muscle, he observed.

In January of this year, the NDRC imposed fines of CNY353m ($57m) on liquid crystal display panel makers, including Samsung. This was followed by a decision to fine liquor producers Kweichou Moutai and Wuliangye CNY449m in February.

Commenting on the investigation, Zhan said the NDRC believes formula manufacturers manipulated pricing in three ways.

“Some companies imposed direct pecuniary penalties on distributors that did not follow their pricing policies; Some companies threatened to refund, reduce or halt supplies to dissenting distributors; [and] although they were aware of the legal antitrust risks, companies still instructed their employees not to communicate in writing in order to avoid leaving hard evidence.”

Zhan suggested the investigation could prompt calls for the state to step-up its involvement in the sector.

“The lack of transparency and persuasive evidence to prove the alleged antitrust violations will only spur more calls for state intervention,” he predicted.

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.

At the same time as prices have been driven up, international firm’s have also grown their share of the market. The melamine scandal, when tainted milk powder killed six babies and sickened thousands more, undermined confidence in domestic-made formula. Prior to 2008, foreign companies accounted for around 30% of formula sales. This has risen to 50-60% of sales and up to 80% of the premium market.