Foreign Milk Powder Makers Come Under Fire

Foreign dairy companies under investigation

A new price-fixing investigation looks suspiciously aimed at tarnishing the reputations of foreign milk powder makers like Danone (Paris: BN) and Nestle (Switzerland: NESN), demonstrating one of the many unusual challenges that such firms face when doing business in China. Such negative campaigns against foreign firms are relatively common, and often involve real issues such as product mislabeling or other minor transgressions. The fact that these issues often become big news in the Chinese media reflects a subtle tactic by Beijing, aimed at undermining the reputation of such firms in the eyes of Chinese consumers who often trust the foreign brands more than their domestic rivals.

On a less sinister note, this latest news also appears to show that regulators are getting more serious in their efforts to maintain fair competition in China, seeking to avoid not only monopolies but also this kind of anti-competitive price-fixing.

News of the price-fixing probe comes from the People’s Daily, a fact that immediately raised my suspicions of politics at play since the newspaper is the official mouthpiece of the Communist Party. According to the report, the National Development and Reform Commission (NDRC), China’s powerful state planner, says it has evidence that 5 foreign firms and 1 domestic company have raised prices for their infant formula about 30 percent since 2008. (English article)

The 5 foreign companies include Meade Johnson Nutrition, Abbott Laboratories (NYSE: ABT), Nestle, Danone and FrieslandCampina NV. The Chinese company is Biostime International Holdings. Most of the companies confirmed the investigation and said they were cooperating.

Most China watchers will know that the 2008 date is significant because it’s the year that media first reported on a scandal involving infant formula tainted by the industrial chemical melamine, which left at least 6 infants dead. That scandal went on to taint nearly all domestic dairy companies, with the result that many Chinese now have a strong preference for dairy products made by foreign companies.

As a result of that preference, Chinese often make special trips to nearby places like Hong Kong to get foreign-made milk powder. Stories are also common of people mailing milk powder to China for their friends with small children.

Against that backdrop, it’s certainly not a huge surprise that the foreign brands might try to raise the price of their milk powder in China to take advantage of strong demand for their products. After all, that’s what the law of supply and demand is all about. If demand for a product is strong, then the maker of that product has the right to raise prices to take advantage of that demand.

It’s interesting that this latest investigation is being conducted by the NDRC, which is a bit more political than the Commerce Ministry that conducts most anti-monopoly investigations. China is in the process of trying to consolidate its fragmented dairy industry to create a smaller number of major players that can better compete with the foreign rivals.

With all of that background in mind, it certainly wouldn’t surprise me if leaders in Beijing might want to open this kind of investigation, and then deliberately tell the media to tarnish the foreign brands in Chinese consumers’ minds. I’m not saying the foreign companies are necessarily blameless, as obviously they have made extra profits as a result of the melamine scandal. But at the same time, I feel quite certain that at least some politics is involved in this investigation, which will produce plenty of negative media coverage about the foreign infant formula makers in the months ahead.

Bottom line:  China’s new price fixing probe into foreign infant formula makers looks at least partly motivated by politics, designed to lower the credibility of those firms.

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