China dairy firms hit with fines

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 (S$138.5 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 per cent of its sales revenue in 2012. Mead Johnson was fined 204 million yuan, or 4 per cent of its revenue last year.

The remaining four companies received fines equal to 3 per cent 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 per cent 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 per cent 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 favourable 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